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Stopping the E-Commerce Margin Bleed

Unpacking how retailers can beef-up their profitability

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Reva: You’re listening to Next in Retail from Publicis Sapient. The podcast that shares insights on unlocking what’s next in digital transformation.

Reva: Retailers and consumers are experiencing seismic shifts from offline to online commerce. Especially in the wake of the pandemic, more consumers than ever purchased goods online. The challenge with this? Many retailers have long been struggling with being as profitable with online sales as they are in store. Frankly, many more established retailers simply aren’t yet built for this shift. Today, we’re going to discuss the challenge retailers are facing, discuss specific areas retailers should look to invest and unpack some examples of retailers who are actually getting this right. Joining me today is Andy Halliwell, Retail Strategy Lead for Europe and Asia at Publicis Sapient and Hilding Anderson, Retail Strategy Lead at Publicis Sapient for the Americas. I’m your host for the session, Reva Bhatia. Now let’s dive in.

So, Hilding, I’m going to start with a question for you. Can you unpack the issue that retailers are actually facing when it comes to making money online?

Hilding: First of all, costs so costs when you’re doing ecommerce specifically shipping costs with ecommerce up 100% what do you think shipping capacity has grown over that same period. It is simple supply and demand, and if you’re shipping out products the shipping capacity itself has grown in the US around 16%. And so you know you just have this huge gap between demand and your costs are going up and so prices are going up that’s a key part of it.

You know the last mile of components are some of the most expensive elements of that shipping cost. Returns another element of costs that are increasing. So for many retailers now returns or another major issue at the 40 or 50% level of orders, which is just crazy especially when you think about the costs there. And there also you around costs you know new expectations around shipping speed from consumers. So we know from research we recently completed with the digital lifestyle index 45% of consumers prefer BOPIS or same day delivery for apparel and household, so there’s a there’s a new kind of expectation of either same day good being able to go to the store and pick it up or have it in my hands very quickly that we’re seeing. And all of that I think are driving on the cost side.

And then of course on the revenue side, there’s considerable headwinds as retailers really grapple with this question of how do I do a better job online in terms of using personalization doing better targeting and from many retailers they’ve really looked at a five-year road map now and if said look we’ve got to get this done in the next 5 months and that’s the driver behind that is often this question around profitability.

The only other aspect that I’d highlight for profitability too is that one of the big growth areas we’re seeing is this shopper marketing opportunity where you can actually get significant incremental revenue by buying and selling ads on your existing properties as well as third party properties. And so given some of the recent news there’s been some pretty interesting stuff happening around there. We can talk more about Andy and Reva overtime.

Reva: Cool. Well, that’s a really good snapshot, Hilding, at the cost revenue analysis of what’s going into profitability for retailers online. Andy, that begs the question for you then where should investments be made by retailers in order to address some of the challenges that they’re facing?

Andy: Hi, Reva. Thank you. There’s a number of different areas where brands need to be investing in order to address some of the challenges that Hilding was kind of alluding to. I mean the number one area where many companies are investing right now is just industrializing some of the changes that have been made because of the global pandemic that we’ve seen over the last 12-18 months. Once you through some of the kind of operationalization of your COVID response, you then start to focus on areas like consumer data, inventory, logistics, reverse logistics and then finally the story state itself so if you just pick up those as I go through so starting with consumer data, being able to construct a single view of consumer behavior and then being able to move your supply chain in order to react to that demand.

Secondly in order to support that demand chain you need a really robust review of your inventory so what’s inbound what’s in warehouses what’s in your stores you know understanding and exposing your different parts of inventory to all of your different selling channels so not just being able to expose store stock online but also understanding what’s available in your warehouses.

And then you know talk about supply chain so you then start looking at things like reverse logistics so you know Hilding and talked about the massive increase that many of these retailers are seeing in returns if you reverse logistics is not up to scratch then it’s going to be really tough to hit the levels of profitability that most retailers are used to and retailers in my experience so just not paying attention to you know the cost of returns and managing that cost and you know making active decisions about whether you know is this product something that I want back can I make a profit on this or should I actually be telling the consumer they should just keep it or they should recycle it locally or something like that that heads off some of the cost of transmitting products back to the central warehouse.

And then finally, stores you know what is the store of the future going to look like is a is a question that I think a number of retailers are wrestling with and certainly I’m talking to a lot of them at the moment about what is going to be the blend between you know consumer missions which are more omnichannel focus so coming in for curbside or click and collect or they just want to come in grab something and then walk out versus consumers who are really coming into a physical store for an experiential kind of you know product discovery journey. So designing your stores to be more flexible you know in investing in the way in which they are laid out and making sure that you’ve got the ability to do things like you know mobile pause, which is going to help you with the flexibility of your layouts the little things like that are going to be really important for retailers to invest in over the next couple of years.

Hilding: I’m curious like I feel like there’s so much more the store questions specifically right and I feel like it’s just sort of hanging out there is like what are we going to do with her freaking stores if we continue to grow ecommerce at 150%? And we’ve been talking now for a couple of years like OK you need smaller stores, you need more of them and they need to be more about kind of fulfillment so curious if you’ve seen I guess I haven’t seen a clear recognition and a discussion around OK this is the what our new model like just a an assertion from CEO at scale saying this is our plan here. And I’m curious if you’ve seen that in Europe?

Andy: So I’ve been doing a lot of research on this topic and we’ve been talking to a number of clients about it and a lot of people will posit the idea that stores need to change and that they’re going to need to be redesigned and there’s going to be a lot of investment, but I haven’t seen anybody come up with a firm perspective on exactly where things are going to land I have my opinion which is that I think you’re going to see a lot more of these stores move to actually slightly bigger spaces rather slightly smaller spaces but fewer of them. And these spaces are going to become more like flagship stores so you’re going to see more companies adopting a bit more of the sort of Apple model where it’s a slightly bigger store in one corner of the store you’re going to have the experience or the theater where people can really engage with the product and they can go through a discovery journey. You’re going to have a click and collect desk off to one side where people can just come in and out maybe even a separate entrance and exit. You know I think you’re going to see a lot more flexibility about how people use the space so I think you know you’re gonna see it subdivided up a little differently you’re going to see very clear missions laid out and there’s a lot better signposting around kind of where you go if you just wanna do this versus if I’ve booked in for an unboxing with my girlfriends for like a beauty experience for example you know they’re going to be dedicated spaces for that in in future stores, which are really going to pay off in building that affinity to the brand and really helping with the product discovery journey.

Reva: So it’s interesting to think that a part of the cracking the case on being profitable on ecommerce is actually making an investment in your physical space and harnessing it more effectively to act as a mechanism to more efficiently fulfill product to people who are buying stuff on line to more efficiently return product from people who are buying stuff online. And so I think you know a lot of people treat their physical footprint and or a lot of retailers treat their physical footprint separately somewhat still from their digital footprint in some regards, and I think what you guys are describing is really that amalgamation of the two worlds and the fact that retailers need to start seeing how they better harness their full ecosystem to drive value rather than just look at it in singularity.

Andy: Yeah, I mean well this is something that we’ve been talking about where the number of clients we’re calling this Unified Commerce. This idea of a single model a single technology platform that enables all of your selling channels regardless, which allows you to create that single view of the customer across all of your selling channels. And kind of says look you’re a customer I’m going to say this product and I can sell you all of my products regardless of the channel you’re in regardless of the physical store that you’re in regardless of all of these different things that is the core concept because it really supports this idea of treating your customers in a much better way or heightened service level. You know it supports client telling it supports it Omni channel experience it supports the, you know, the immediacy of buying right here right now and yet being able to stitch all those kind of customer journeys together and build up a holistic picture for your business. So yeah, Unified Commerce I think is going to be critical for the future of retail.

Hilding: Yeah, it gets into like building this idea of a mesh architecture almost on top of your customer data to enable that type of unification and we’re doing a lot of conversations and an even builds now of custom points of sale system for example so that when you are trying to check out you can surface offers, you can do digital promotions, you can and bring those physically into the store, you can better manage returns as well as kind of one interaction pattern and it becomes one kind of seamless digital omnichannel ecosystem that we’ve been talking about, but haven’t been able to deliver.

In that lens though, where does it leave the kind of cashier-less checkout new store of the future side of things? Cause I, I link it to the profitability question right here, because so much of that is capital expense and requires a big, a big lift. But I’m curious Andy how you’re thinking about that.

Andy: I mean, there’s a, there’s a lot of talk about the cashier-less checkout here in the UK at the moment, because Amazon Go Grocery has just launched. They’re opening their first store here, and there’s been a lot of discussion about, is this the store of the future? And how is this going to, you know, how’s this model going to work?

In grocery. I think it’s, it’s really interesting cause it solves for a bunch of problems around shrinkage. For example, which you know, is, is a straight bottom-line cost for many of the, kind of the big four supermarkets here in the UK. And, and they’ve wrestled with that a little bit over the last few years, when it comes to other formats of stores, though, people go shopping for the experience they go for that human interaction.

They go to trial something out or to test something or to talk to somebody who knows more about the product than they do. And to get advice. And to, to really…

Hilding: Especially post COVID. Yeah. Especially right. I mean.

Andy: I haven’t seen anybody except for the guy that makes my coffee in like five months. So, I’m desperate.

Hilding: You can imagine. You can imagine.

Reva: It’s interesting because as we unpack these examples, it sounds a lot, like we’re talking in metaphor, you know, like X client is considering doing this. And Y client is considering doing that, which, I think serves as a useful transition for our audience to hear some real-life examples, right? Like these solutions, Andy, that you’ve teed up around returns optimization and Hilding, you’ve teed up around data monetization. You know, they sound perhaps to some it’s kind of pie in the sky, but there many, many retailers who are investing in an aggressive way in this space and they’ve seen fantastic returns on investment in many of these solutions.

And so. With that being said, I’d love to now transition into a brief discussion on some case studies. So, who’s actually getting this right. And who maybe could use a little support, right. Investing more in these solutions. And so, I’m going to start with a glimpse at the good with you, Hilding.

Let’s double click into Target and talk about what they’re doing. So people can have a sense of what works in this space.

Hilding: Yeah. And for context, I think you, you know, so we, we think about big box sector, obviously the biggest winners probably from COVID in terms of there being a kind of in the U.S. a required business, they were able to stay open.

They sell grocery and they sell apparel. So, they’re well positioned as a sector coming into this. And we saw pretty strong performance from most of the players in that sector. Um, but you know, Target’s results, which were, you know, just, I was just over a week ago. Were pretty remarkable. You know, frankly, they crushed Q4 and full year 2020 as well.

So, you know, their ecommerce growth just in Q4 was up over a hundred percent their full year ecommerce growth. I shared earlier, which is 145%. Their profits were roughly twice the average of their industry peers. Uh, so they were over 6% or just over 6% of revenues from a profit perspective.

And we really view Target as a leader in digital for big box retailers, the kind of combination of profitability, ecommerce growth and this kind of micro fulfillment solution they have in store. I think points to a paradigm for big box retailers as well, perhaps as the broader retail sector. They, I think have really aggressively responded to the changing consumer behavior we talked about earlier. They’re doing some interesting things with data and, their advertising business as well, uh, which they call Roundel.

And, uh, I think the question really is can they hold onto these customers in the future, uh, as these other stores open, can they keep the growth up? Can they continue to invest in some of these emerging technologies like AI and ML to stay competitive?

Reva: Quick question on Target. So, do you think, do you think a lot of their growth has come from net new customers who are choosing to do their shop at target because of convenience product array?

Or do we think it’s basket growth of existing customers? Is it a mix of both? Has there been any indication on where they feel this is largely coming from and you know, that being an indicator of whether or not it’s sustainable?

Hilding: Yeah, I think they have absolutely benefited in terms of net new customers.

I mean, just given the volume of growth, there’s clearly some basket and vocation. So overall in the space, we’ve seen larger baskets, actually fewer orders, uh, which is kind of what you’d expect in, in some ways, but people are cashing a little bit more. That makes again, make sense if it’s, if you view it as a risk, anytime you go out the door, you want to minimize that risk.

And so consolidating orders, is something that, Walmart and other players have seen. But I think they’ve gained a significant share from retailers that are closed as well as I think from some of the online players because of the convenience of the shipping. And the fact that you inside, especially in the holiday season, it was, in some case you couldn’t get the, some of the stuff longer than a week or two out.

Reva: Great. Well, that’s a good glimpse at somebody who’s at least investing in getting it right. Now Andy, I’m going to give you the difficult task of unpacking, a quick case study on somebody who could use some help. So do you mind just diving into maybe a manifestation of some of the challenges that retailers are facing with a quick example?

Andy: Sure. I mean, you only have to look at the high street in, I mean, most countries and there is a plethora of examples. So, uh, here in the UK, uh, Debenhams and Arcadia are kind of fundamentally linked actually, because Debenhams operates, a lot of department stores here in the UK.

They had more than a hundred locations across the country. And they stopped a lot of Arcadia product. Um, so Arcadia owns brands like Topshop, Topman, Burton, Dorothy Perkins, which are, you know, very well-known high street brands here in the UK. And Topshop specifically has always been known as the fastest of fast fashion.

These organizations have struggled really badly over the last 18 months, and Debenhams has already balanced in and out of administration a couple of times and they’ve now gone into liquidation. Arcadia was a bit more of a surprise when they went into administration and liquidation just before Christmas.

And what was interesting about that was the timing around that was particularly bad, both for Debenhams, who was actually looking for suitors to buy them out, but, for Arcadia as well, it was surprising to see them go into liquidation literally before Christmas and before they had the chance to sell through stock that they had in some of their stores and they had in their online warehouses. 

They’ve both as organizations really struggled to make the transition from, you know, high street brands to the online world. They’ve not invested in the right tools and in the right infrastructure in order to make their digital presence work more successfully.

Debenhams had done a better job of this and, having built out their kind of ecommerce presence and invested heavily in their mobile platform over the last couple of years. But behind the scenes, their systems were antiquated, and they were really struggling with the core business of moving product from manufacturers into warehouses, and then moving it through, into either stores or warehouses so that it could be fulfilled.

So they were having some real challenges with their inbound supply chain and just managing the process of hang on that as a customer, I’ve just bought a product, why hasn’t it turned up? Right, there’s simple stuff like that. With Arcadia, it’s a little bit more difficult. They had a number of challenges with both their online presence, but also given that they were so heavily dependent on their B2B and wholesale business with Debenhams and was having so many challenges, obviously that meant they were seeing a suppression of their wholesale business.

They struggled with online, they had a pretty poor online presence that they actively spoken about. The fact they didn’t see online as important for their business model moving forward. So they were struggling with some of those challenges. And then you just, hadn’t invested again in the infrastructure to support their organization in both B2B commerce and supply chain and managing the high levels of returns.

For example, that you’re saying. And if you contrast that actively with the brands that actually ended up buying these businesses, once they went into liquidation companies like ACE or some booboo, and also Next has done very well by picking up a couple of brands that have been struggling over the last sort of 12 months.

What those more successful brands have seen is, you know, their early investment in digital has paid off, their early investment in actually owning their strategy, building out their own digital capability and being, you know, much more oriented about owning the technology and being a technology company rather than just being a pure retailer has paid dividends.

Reva: That’s great, Andy. Yeah, it’d be easy to dismiss some of the challenges that the Debenhams of the world are facing by saying, “Oh, it has to do with the product,” right? You can’t compare Debenhams to Target, but when you unpack the success that Next and ASOS are seeing against that of say a Debenhams, it becomes abundantly clear that early investments and investments in digital in general are critical in order to drive profitability here.

Hilding: Yeah. And I think we’ve seen that recognition now. I think everybody, like the demand spike that has happened in the last couple of months has been pretty remarkable, because I think everybody is, and I think I said this earlier, you know, everybody had this five-year ecommerce roadmap. That made sense if I was at 15% annualized growth and now, I’m at 150%.

So, I need to do that in the next five months. And what we’re finding is, you know, one of the challenges for a lot of retailers, you don’t have the talent in-house to necessarily scale at that speed. And so, you have this kind of core question of, okay, well, how do I best deliver against what we need as a business?

It’s driving a lot of the conversations that we’re having, uh, as well as a lot of hiring, frankly, from retailers internally to say, okay, yeah, we’ve got, you know, we do need to have a core team here. That’s more robust than we have today. It’s one of the interesting things I see here and the other wrinkle, as you think about profitability that we haven’t really talked about is the cut in marketing and promotional spend in Q2, Q3, especially Q3, Q4 as part of a, Oh crap COVID happened. We need to, we need to have a good bottom line. 

And so, you actually saw across the industry as a jump in profits. Even if they weren’t seeing the same strength that we saw with Target, but a lot of those profits are, you know, kind of short-term gains because you, you know, you push out even Target, frankly, announced they, I think they pushed over a billion dollars’ worth of capital investment and enhancements to their physical stores out, you know, another year basically. 

And they’re going to have to pay that at some point. And so I think it’s going to be really interesting how this all plays out, uh, from a profitability standpoint, because on the one hand, I think the U S economy that OACB just lifted the projections of a growth to over 6% in the second half of this year.

So, I think we’re gonna have a pretty strong economy, uh, but retailers are going to have this backlog in the physical store, and I’d have to balance that with their read on are our ecommerce numbers gonna stay high and we have pretty high comps obviously year over year. How do you balance the investment in e-comm versus traditional store? So…

Andy: I also want to say that it’s not fair to say the product is not important, right? I mean, one of the keys to being a good retailer is you need to be good at retail. I mean, it sounds dumb, but like, if you don’t have the right product and if it’s not in the right place for the right consumer. Then you’re going to fail regardless of how great your website is or how much you’ve invested in your mobile experience or whether you’ve deployed mobile polls across your stores.

And actually, this is one of those areas where I think you’re seeing the larger businesses who have got the more diversified portfolio of products, different categories, and those kinds of things they’ve been able to be successful because they’re not, you know, they are not Brooks Brothers who only sell suits or Ted Baker that only sells formal wear or Cara Mellon that only really sells ballgowns.

Right. I mean, of course those businesses were buggered this year, because like nobody bought a ball gown cause nobody could go to the ball, you know, you’re stuffed and it doesn’t make sense…

Hilding: Except Reva. I’m sure Reva made it to a ball.

Reva: All of my Zoom calls I’ve been in ball gowns and it really, I think introduces a sense of formality to the discussions.

Hilding: Me too. Actually I, every Zoom call I’m on with you, I’m actually in a ball gown, even if I’m not on video.

I mean, I think about Costco in a separate example of a company that still doesn’t have any ecommerce site of any quality. I would argue going with a partner who is basically, you know, Instacart, I think. Reported as part of their IPO. I think it was 20% of their revenues all from one, one client from Costco alone.

It’s crazy – crazy numbers.

Reva: It’s because you don’t need a membership to shop Costco on Instacart.

Hilding: Well, regardless, I mean, when you think about that profit, so that’s another data point on like, why are you anyway, not to bounce around too much, but I think what you’re seeing is one totally agree, Andy, merchandising matters, too.

What, you’re leaving on the table is, uh, is that incremental revenue and market share? And I think I will get it from Costco. I think about it from this other client, which I won’t name that they could be doing so much more if they had the digital platform that they needed and moved away from Instacart and built, you know, build a solution that customers loved.

And then you can use that to kind of build a deeper relationship dot, dot, dot, right? All this stuff. Everybody probably who’s listened to this podcast before and sort of say, but like, there are still a lot of retailers that are quite successful. But that are successful because they have not invested in ecommerce or rather because they have focused on that, remained focused like a laser on their core business.

And that’s a viable strategic position in the marketplace.

Reva: But is it sustainable?

Andy: We’ve got Primark here in the UK that’s has done exactly that. They refuse to have an ecommerce platform. They decided they were just going to shut their stores. They were just going to minimize their, their outgoings and their costs.

Last year they have publicly stated they’ve got no interest in investing in ecommerce at all whatsoever. It will be really interesting to see how they perform over the next two years and whether they do decide to back away from that decision to forsake ecommerce for the sake of cheaper in-store prices for consumers. I actually wanted to also touch on the grocery side of this equation as well, which we’ve kind of not talked about too much just now. But if you look at what you were saying, Hilding about ecommerce and the ability to steal market share. This is exactly what’s happened in some markets in Europe.

More one of our clients in France has seen their position in the marketplace for, from number one to number two, purely because. You know, their, their stores were comparable and the revenue in stores was comparable, but because they fell behind in ecommerce, they dropped from the number one position to number two.

And it was purely because their number two competitor had just lent into ecommerce and it’s seen it as an opportunity of stealing market share away from the other big three competitors. 

Hilding: And I think that’s, you know, when we talk about this concept of a digital mode, that is that’s the core aspect. You know, if you look at what Berkshire Hathaway has talked about for 30 years or 40 years, it’s about, you know, they look for businesses that have a durable, competitive advantage and in the digital age a durable, competitive advantage is going to be eroded if you don’t have a robust digital channel.

It just is and you see leading players, even players like Netflix and others that have had a durable digital moat now under attack, and perhaps have lost that moat and have, you know, made the moves. They’ve tried to make in terms of acquiring content, do some other things, but don’t have the product and their core business is I would argue under threat.

So they’re interesting analogs as you look across other sectors and look at leaders who are now being challenged by new players that have come in.

Reva: Cool. Well, we covered a lot of ground today. I appreciate the both of you joining interesting and compelling stuff here. Right? Thanks for joining.

Andy: Yeah. Thanks very much.

Hilding: Always great, Reva.

Andy: Cheers, guys. Thanks.

Reva: Cheers.

Reva: Thanks for tuning in to Next in Retail. Be sure to subscribe, so you don’t miss a beat on the future of digital and retail.

Hilding Anderson
Hilding Anderson
Head of Strategy, NA Retail
Andy Halliwell
Andy Halliwell
Senior Client Partner at Publicis Sapient, Retail and Consumer Products