For retailers, profitability requires shift to digital-first mindset: report

As ecommerce sales grew, profits shrank at major retailers, AlixPartners found. It's prompting a call to shift from a store-centric mindset.

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Photo by Blake Wisz on Unsplash

When AlixPartners’ Bryan Eshelman talks to retailers about digital strategy, he asks them a question.

“What if you thought of yourself as an ecommerce business that happens to have stores, rather than a stores business that happens to have a website?” Eshelman, a partner and managing director at the global consulting firm, said. “And if that was the mindset that you took in approaching everything as it relates to the business model, the metrics, and the focus of everything you do, how would that change things?”

That question is at the heart of an approach to retail that AlixPartners is seeking to advance: Digital-first retail. Beyond a program or initiative, it means committing to offering a seamless, connected experience across all channels, and in the process changing how a retailer is built for digital profitability. Importantly, AlixPartners' "digital first" does not leave the store out of the equation in favor of ecommerce. Rather, the shift lies in centering digital at the core of the business model and operations that have long kept the channels separate. In turn, this seeks to inspire retailers to reconsider everything from organizational charts to how a store manager counts a sale.

After a dizzying few years, AlixPartners' framework arrives as a rethink is in order. The pandemic brought with it a massive expansion of ecommerce – both in revenue and digital shopping capabilities added by retailers. But as consumers return to stores with digital habits now more firmly ingrained, a disconnect between ecommerce growth and business sustainability remains.

According to a new report from AlixPartners and the World Retail Congress that analyzed 50 retailers across sectors, average online penetration increased from 9.4% in 2012 to 25.6% in 2022. But over the same period, profitability shrank from an average EBITDA percentage of 13.8% in 2012 to just 8.3% in 2022.

This presents two issues for retail executives:

Now that ecommerce has grown share, how do they rethink the business? As Eshelman put it, a retailer can’t maintain a store-focused team that was 90% of the business and also invest in a massive ecommerce operation. “You can’t have both,” Eshelman said.

And, how do you balance investments in new infrastructure with return on investment that brings profitability? When it comes to technology investment, many retailers still appear to be of two minds. The report found that three-quarters of retail executives are confident that they will get a good return on their digital investment, while 64% doubt that the tools they now have in place from past investments can support a digital-first retail business. Again, you can’t have both optimism and doubt.

Solving these puzzles requires deep work to change how a business is structured. The report and our conversation with Eshelman surfaced three key areas as a starting point:

Don’t just focus on fulfillment. Many retailers focus on building a robust fulfillment operation that can deliver packages quickly and on-time. But digital-first retail requires a broader approach. The report identifies four pillars for digital-first operations:

  • Customer: A focus on growth, built on a data backbone.
  • Omnichannel journey, including customer experience and personalization.
  • Product and promotion priorities for online channels.
  • Network and fulfillment partnerships and expansion to build on investments that have largely fallen short on financial results.

Introduce data-driven decision-making and automation. As models shift, take a science-based approach to decisionmaking and create repeatable processes that can be automated with the advanced technologies that are rapidly developing, particularly in areas like the supply chain. Going forward, the insights and time saved through this process has the potential bring an advantage when applied to a host of areas, such as forecasting and vendor sourcing.

Use new KPIs: Moving from a store-centric operating model to digital-first requires new ways to gauge success. For instance, stores focus on footfall and basket size, while digital-first focuses on customer acquisition, retention and customer lifetime value.

In the end, retailers must remember that they are building for the customer. They likely don’t know what omnichannel is. They may start online, and finalize a purchase in the store. Throughout, all they see is one shopping experience under a single retail banner. Retailers must be built for how they move across it.

"Consumers don't think, nor should they, that the mobile site and the website and the store are three different management teams,” Eshelman said. “To retailers, they are three different P&Ls, and that just drives siloed behavior, which is not what the customer expects in any way. They expect quite the opposite.”

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