Retail: Why Your Profit Isn’t Increasing In The Same Way As Digital

Retail: Why Your Profit Isn’t Increasing In The Same Way As Digital
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Digital is no doubt the realm retail is clamouring to make sure it’s doing well, but David Mann, managing director of strategy service Accenture Strategy in Australia and New Zealand, gives the low-down on why digital-only businesses aren’t seeing the profits increase like they used to?

The retail landscape in Australia has entered an age of unparalleled global access, connectivity, and personalisation. Today, the ease and flexibility of the digital retail realm has pushed more and more consumers online. Recent data reveals that 88 per cent of consumers currently use at least one online channel to search for merchandise, compared to 78 per cent only five years ago. This trend is only set to continue with four in 10 demanding even more digital interactions than what is currently on offer.

In an effort to chase customers, retailers have been quick to respond with new and innovative multichannel offerings. Consumers can now source, browse and purchase products via a plethora of online platforms; from their social media accounts to their personal smartphones through to workplace tablet apps.

In Australia, top retailers such as David Jones and Myer have made the transition and dominate the online retail market. Australian outlets in the electronic games and toy sector record the country’s fastest annual growth rate with larger retailers dominating online sales. As a result of these changes, Australia’s online retail spending has increased to $16.9 billion.

2014 recorded a particularly high growth rate with a 30 per cent spike in digital sales by multichannel retailers. However, it must be noted that in the same year, overall sales both online and in-store grew by only 2-5 per cent. Accenture analysis reveals a ‘digital disparity’ whereby digital-only retailers have grown by 15-20 per cent but delivered zero per cent net additional profit. This raises the question; as droves of retailers shift to the multi-channel realm or go digital-only, why aren’t profits following?

While there is speculation regarding the reasons behind this low profitability, it is clear that the price pressure and information transparency offered by the online sphere is a contributing factor. Consumers have more power in the digital age, utilising their position of strength by shopping around and comparing their options. Retailers have become wary of ‘Show-rooming’ whereby customers price shop online after visiting physical stores, and ‘Web-rooming’ whereby customers research products online and then visit a store to make a purchase.

Despite the shift to online shopping research out of the US claims that ‘Web-rooming’ is more prevalent than ‘Show-rooming’, indicating an unrelenting preference for making purchases in-store. These findings, combined with the fact that Australian online retail spending still represents only seven per cent of traditional retail spending, highlight the false sense of comfort felt by multi-channel retailers.

This is compounded by the belief that the cost to serve through digital will be less than in-store, and that an exclusively digital focus will be profitable when a certain audience size is achieved. In reality, multi-channel retailers are disadvantaged because not only are they footing the bill on store and supply chain costs, but also IT.

The delicate balance between online and in-store shopping is set to challenge the Australian retail industry for years to come. In addressing this challenge, Australian retailers can learn from international industry leaders. Beyond market leaders, retailers should reflect on the following considerations in order to overcome the ‘digital disparity’ paradox and get back on track to profitable growth:

1. Consider the whole picture

Retailers need to re-think investments in conjunction with one another and consider the harmony between digital and store fronts. Taking a collective, holistic business view can unearth new ideas for how to maximise gains and save costs.

The US retail giant, Macy’s, has integrated the use of digital as part of its in-store experience and re-imagined the use of bricks-and-mortar retail real estate. Instead of closing underperforming department stores, Macy’s turned them into distribution centres to support their digital channels.

Businesses also need to be realistic about when and where to invest, as digital is not always the best way forward. Take international retail giants like Aldi, H&M and Zara. These companies continue to maintain retail success, even in the absence of Australian online stores.

2. Get money smart

Cutting costs does not guarantee agility and competitiveness. Success relies on reinvesting in technology and wider activities that drive competitive advantage and revenue growth. Improved operating models, enterprise-wide process excellence mechanisms and leading edge capabilities all help to deliver products to customers how they want them, when they want them.

3. Partner up

Retailers should use the broader industry ecosystem to their advantage. Forward-thinking retailers tap into networks of partners to help keep costs low while simultaneously enhancing the customer experience. A recent example of this is the partnership between top eateries in Sydney and Melbourne and the new Suppertime app, designed to deliver restaurant quality food to people in their homes.

By partnering, restaurants and cafes avoid managing complex logistics, while the customer benefits from the convenience of home delivery. Maintaining strong relations with suppliers is another pathway to partnership success. Suppliers can make all the difference to business success and should be accountable for their performance, offer volume-based pricing and help retailers get products to customers faster.

New digital channels offer a source of growth and competitiveness, but they may also lead to a highly complex cost structure that has an impact on profitability. In a retail landscape conflicted by ‘digital disparity,’ the differentiator between industry leaders and industry followers will be decided according to who takes the right steps.

Channelling smart investments to drive growth, making cost reduction more sustainable, and finding the right partners to improve the customer experience, all represent pathways through this digital disruption.

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