The financials of omnichannel retailing

 

Bhupender Singh, CEO of Intelenet Global Services, examines how omnichannel is transforming retailers’ financial function and how a strong operational foundation can be built to sustain critical future business decisions.

Rapid globalisation and the rise of omnichannel have transformed the retail landscape. The onward march of online shopping continues, setting retailers the challenge of meeting customer demand through a multitude of channels and fulfilment models. According to the Centre for Retail Research, online will remain the fastest growing retail market in the UK and Europe, with global ecommerce sales reaching $3.5 trillion within the next five years. To the man on the street, these headline growth figures might suggest that retailers’ current sales concerns have a simple solution. Pursue an ecommerce offering ever more wholeheartedly, and all your woes will be at an end – or so the story goes. By eliminating borders and improving the customer experience, online presents an exponential growth opportunity for retailers. However, it can also catalyse an increase in costs and capital investment, while requiring businesses to adapt their mind set in regards to measuring success and understanding profitability.

Before the prevalence of omnichannel, ecommerce largely functioned as a separate entity to the core retail business. However, as the channels and touchpoints along the supply chain have increased, and the lines between stores and online have blurred, ecommerce has become embedded at the very heart of business. While omnichannel is perceived as a more seamless way of shopping from the customer’s perspective, the retail back-end is still adjusting its systems, processes and operations to cater to the ‘new normal’. To ensure a level of longevity for omnichannel offerings, this must be done in ways that are both profitable and sustainable. Making these strategies sustainable will take much more than implementing options such as click and collect and home delivery. Instead, retailers can increasingly use sophisticated financial planning tools to gauge the viability of pursuing different channels, in order to better direct investment and ensure long term success.

With a complex portfolio of stores, both on- and offline, it is also imperative to understand where and how profit is made. Insights into the costs that accrue at each stage of the supply chain, the cost-to-serve, are an essential part of the armoury of any retail organisation. Cost-to-serve is comprised of all functional areas in the supply chain, and so it requires an approach that encompasses an understanding of cost, revenue and profitability across the business. In order to comprehend the cost-to-serve retailers must understand all the end-to-end processes necessary to facilitate a customer delivery. Having a lucid understanding of how costs accumulate can help retailers make successful trade-offs in both their commercial and operational decisions founded on real business value and profit impact.

In order for omnichannel retailing to be successful, an increased use of software to exchange and make use of information is required across systems, channels and trading partners. With this increased interoperability there is a greater demand for standards across supply chain functions. Supply chain standards allow for a common means of sharing products and activities to facilitate internal and external partners working together more efficiently. While supply chain management is a key enabler to profitability and long term financial success, it is also about achieving internal efficiencies, speeding up deliveries and reducing costs.

While this can prove a challenge on its own, the omnichannel model demands even more: it expects products delivered whenever and wherever customers’ desire. For retailers to remain competitive, they must adjust and offer customers the method of delivery they want. Ultimately, then, retailers need to re-think order fulfilment and logistics operations to meet the demands of the omnichannel customer, which in turn, will aid in enhancing financial capability. Intelligent business processes are generated as a result of automating the supply chain, delivering responsiveness and agility. Through automation, retailers can seamlessly connect and automate sales, forecasting, replenishment, supply, planning, procurement, manufacturing and distribution activities. Reducing the labour intensiveness of the supply chain, allows the business to do more with less. It makes automation an essential component to long term success of the supply chain and boosts revenue in its ability to empower the growth and efficiency of an entire organisation. Predictive analytics – specialised software that analyses data and predicts the outcome of future events – allows retailers to plot their inventory needs accurately and efficiently. Predictive analytics can be employed in the form of a wide variety of technologies and approaches, such as data mining and statistical modelling.

These technologies examine past and present data to predict what is likely to happen at a specific point in time based on the supplies parameters. When used in the retail industry, predictive models exploit trends found in any given data set to spot both risks and opportunities. Models can be designed to identify relationships between consumer behaviour patterns, empowering retailers to recognise the financial benefits associated with recurring trends across multiple channels. For example, using data collected from past sales, a retailer could locate customers who purchased laptops during a sale last summer and then implement predictive analytics to accurately forecast the promotion’s likely effect on laptop batteries this summer, or predict how far laptop sales would rise or fall if a similar sale was held in 2 months’ time. This would allow retailers to experiment with different price ranges to examine the impact each price tag would have during product promotions.

While it is important to place emphasis on data being used to better understand customer behaviour and preference, in order to determine where money is being directed within a business, it is also important to recognise the role data plays in helping a business to recognise and act upon financial implications, both in the short and long term. Take the case of Marks & Spencer, which this year revealed a new store plan, predicted to cost £150m over three years. Whilst M&S considered the move into online grocery shopping and home delivery, analysts predicted that deliveries would cost the company £12 per customer, raising questions as to how much profit would be made.

“Data has a role in helping businesses to recognise and act upon financial implications, both in the short and long term”

Big retailers which are implementing new store plans or introducing home delivery models have complex decisions to make when considering how much profit will be made across different aspects of the business. The application of data science and, increasingly, Artificial Intelligence, provides a transparent and holistic overview of finances. The advancement of cost analysis and financial analytics can contribute to predictive models and more accurate forecasting. To thrive in the digital business era, retailers have to stretch their boundaries. This requires a willingness to rethink their business model and also to make the right technology investments. Having a sophisticated oversight of the cash flow process allows business leaders in the retail sector to create a strong operational foundation to execute critical decisions such as expansion and establishing a strong presence across digital, as well as in-store channels.