While retailers say they are gaining sales from omnichannel initiatives, it’s unclear how profitable they are in the process, as total costs cannot be easily ascertained, according to a new report from Retail Systems Research LLC.
In the report, based on a survey of 100 retailers, respondents say serious business challenges make it difficult for them to track what is actually going on in the execution of their omnichannel strategies.
While the majority of retailers reported being in the black on omnichannel – with 73% saying it was very profitable or profitable – RSR questions this claim. That number changes in enterprises north of $5 billion in annual sales – the ones most directly competing with Amazon and its Prime machine – with 25% of them saying omnichannel operations are simply a cost of doing business.
“For an operation that piles costs on top of costs, from labor to inventory investment, to holding costs and shipping expenses, it’s startling to see that retailers believe their cross-channel (or omnichannel) operations, which are often strung together with a lot of manual processes, are really that profitable,” the report stated.
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Just because retailers are bringing in sales that would have been lost if not pulled from another channel, doesn’t make them profitable, the report found. “We find that retailers indeed may think they are running a profitable operation, but in reality they just don’t know,” RSR stated in the report. “And their intuition tells them that they are still leaving a lot of money on the table.”
“Retailers are not keeping good track of the costs they incur while saving the sale from cross-channel demand,” says Nikki Baird, managing partner at RSR Research and co-author of the report. “They say they’re making a lot of money, but what they really mean is they are capturing a lot of sales that might otherwise have been lost. In the meantime, they have no idea how much it’s actually costing them to fill these orders.”
Some key findings from the report:
- Retailers acknowledge they have some serious business challenges that make it difficult for them to track what is actually going on in the execution of their cross-channel strategies
- While retailers say there is more money to be made on the revenue side of cross-channel orders, they are more concerned about managing the cost side as order volumes grow
- Retailers believe the way ahead lay in greater investment in inventory visibility, even before cost visibility.
Baird said RSR found in its research that many retailers were losing profitability in omnichannel fulfillment through split shipments, i.e. orders fulfilled from multiple locations such as an ecommerce DC and a store, or multiple stores.
“Ship from store might be profitable if it’s one order per store, but if you add in more stores and multiple shipping points per order, all profitability goes away,” she said. “To avoid this scenario they need to control the availability of what they show, or allocate more of their inventory to ecommerce DCs, so they don’t run into out-of-stocks there and have to tap stores like they’re doing now.
The next level, Baird said, is better inventory planning in the first place, so it’s placed where the demand is actually originating from. “That’s the most efficient way to do it,” she said.
While it’s good that retailers are incenting store associates to fulfill online orders by giving them partial or complete credit, Baird said this can have the unintended consequence of creating inventory imbalance, as demand is transferred behind the scenes from an accounting perspective.
“By giving the store credit for the online sale, they can hurt themselves by losing track of the demand origination,” she said. “Inventory planners say, we need to send more merchandise to stores next year because we sold X amount of goods, when it’s actually how much they fulfilled, not what they sold. It’s like sending good inventory after bad, putting it in the wrong place to begin with, pulling from somewhere else.”
The better solution, she said, is to more closely match inventory with where the demand actually originated from so planners can say for example, online sold more than they projected this year, so let’s allocate more for next year.
In terms of greater inventory visibility across channels – which would make omnichannel operations more efficient and thus more profitable, or at least not a cost center – Baird said she didn’t understand why most retailers hadn’t solved this conundrum after decades of effort.
“RFID, especially for apparel retailers, can get you there with the visibility you need,” she said. “At NRF’s Big Show there were lots of smart dressing rooms, and the business case is there for RFID in the store. With it they can make store inventory available to online shoppers with a high degree of confidence. And the more they know they have available, the more they can sell. If they don’t know, they have to have more (safety stock) buffers in place so they don’t promise what they don’t have.”
While the cost of RFID tags has come down considerably, the cost of RFID scanners is still a concern, Baird said, although new Android and iOS-based devices are more affordable and easier for associates and DC personnel to use.