Retailers don’t necessarily need to spend more on digital, but they do need to spend smarter.
Making digital retail profitable is a problem for many merchants, according to a recent study. In fact, profits shrink as retailers do more business online, suggesting they should rethink their operating model, processes, tools and KPIs for healthier financial performance. An analysis of 50 public U.S. retailers including apparel, department and specialty stores indicates that while average online penetration jumped from 9.4 percent in 2012 to 25.6 percent in 2022, profitability over the same period shrank from 13.8 percent to 8.3 percent.
That’s just one of the findings the “Digital-First Retail: Turning Profit Destruction into Customer and Shareholder Value” report published by global consulting firm AlixPartners and the World Retail Congress. They also found that 86 percent of consumers research a product online at least once in their purchase journey.
“What we at AlixPartners call ‘Digital-First Retail’ isn’t a program or initiative, it’s a change in mindset—and in a retailer’s organization—that places digital at the very core of a retailer’s business model. And that’s exactly where digital needs to be today,” David Bassuk, global leader of AlixPartners’ retail practice, said.
The $181 billion that global retailers spent on retail technology and digital improvements last year might not have been allocated efficiently. That’s because executives making the investment decision and the line managers who are doing the work don’t always see eye to eye, the report found. Digital profitability isn’t well understood, as 84 percent of retail executives believe online delivers “cumulative value,” but only 48 percent know how to measure omnichannel’s true costs and benefits. Lacking the right KPIs, many retail firms forge ahead with digital investments they later find to be ineffective.
“The underlying problem here is that the retailers are lacking an understanding of how to measure the benefits of these investments,” Bassuk told Sourcing Journal in a telephone interview. “Step one is really making sure there’s a clear way to measure the outcomes and the results.”
Bassuk said companies should keep in mind that as digital evolves, so too do the KPIs that measure performance. That’s why retailers must adopt a digital mindset so they can adapt quickly by course-correcting with a test-and-learn approach.
Retailers, Bassuk continued, must establish a connection between what they invest and what they get out of it. But it can be tricky to to understand what’s underpinning performance because investments can be measured in multiple ways. What’s more, money poured into one channel can bear fruit in a separate channel altogether.
“Investments in the online or digital business can have a really nice payback in stores and vice versa, but those types of linkages are hard to measure,” he said, pointing out that some people don’t see how investment directly correlates to sales and profit performance. This means businesses often authorize major investments that drive omnichannel performance, while draining their profits.
Bassuk noted that while the ideal omnichannel experience varies from one retailer to the next, it should be customer-centric and both profitable and easy to execute for the merchant.
He said that as retailers lean on AI to get analytical about their operations, they need to think digitally as well. That mindset dictates how to both operate digitally and drive healthy returns on digital investments. As companies make the right investments in technology and capabilities, then they can become more educated on how to meet their target customer needs, link that into their supply chain and do it in a way that is also profitable.
AI, Bassuk said, “works best when it is provided with a specific question and hypothesis. So you do have to be out testing hypothesis and then it becomes a learning mechanism [where] rather than you teaching it or guiding it, it guides you.” Companies should keep pushing the technologies to stay ahead and differentiated from competitors, he said.