Traditional retail organisations facing the implementation of a multi-channel retail strategy have a number of complex issues to overcome. Steve Smith, Senior Vice President, EMEA, Manhattan Associates, discusses synchronising internal processes across operational silos and the challenges that need to be addressed, a task that requires internal collaboration.
Back at the turn of the millennium retail organisations with established high street stores were reluctant to venture into developing online shop-fronts for fear of cannibalising their core business. The growth of online shopping, in line with broadband uptake, and the impressive market grabbing capabilities of pure play online brands, such as Amazon, caused traditional ‘bricks and mortar’ retailers to reappraise their position.
Over the intervening ten years, high street brands have moved fast to develop their own online channels in order to combat the threat of increasingly visible pure play Internet retailers. The initial thinking being: better to open up in competition with yourself rather than have someone else take the business from you.
However, the unfolding market positioning of traditional retailers with online channels vs pure play Internet brands has highlighted the tremendous opportunities that traditional retailers have when they develop multi-channel strategies. Shoppers are now able to experience and interface with these multi-channel brands in many different ways, from purchasing online and having the product delivered to either their home or a nearby store for pick-up, to ordering in-store for a home delivery. Research prior to purchase may be undertaken online at home or now, increasingly, via a mobile device - perhaps in the store itself. Catalogue, TV and telephone sales are further channels that feed into the mix. Providing a cohesive and consistent offering to the market across all these varied channels presents a set of challenges. This is in terms of increased complexity and it drives a need for cross-channel inventory visibility, order management, fulfilment and, importantly, the breaking down of organisational silos to create cross-channel functionality.
Achieving and maintaining a high level of customer satisfaction across multiple channels is not easy. According to research undertaken in the USA by analysts, ForeSee Results, in the lead up to Christmas 2009, pure play online retailers had an aggregate customer satisfaction score of 81 on a 100 point scale, while store based retailers had an aggregate score of 77. ForeSee Results concluded that ‘in general, websites for multi-channel retailers significantly under-perform Internet pure plays, which makes sense since they have more channels to divert corporate attention and focus.’
Multi-channel organisations have the potential to deliver much richer customer experiences and higher levels of satisfaction than pure play online brands but they have the challenge of complexity to overcome. Integrated, cross-channel IT can deliver inventory visibility, coordinated order management and orchestrated fulfilment via the required channel. However, there are issues within the organisation that have to be addressed first – silos have to be broken down. The only way forward is through internal collaboration.
Achieving organisational change is difficult and requires the motivation and cooperation of key members of staff. ‘In a company where you’ve got classic functional silos and strong ‘Barons’, if you say I’m going to set up an online business in competition with the established retail business and I’m running that retail unit… you’re going to meet resistance, or at least reluctance to cooperate,’ says Martin Christopher, Emeritus Professor of Marketing and Logistics at Cranfield School of Management, Cranfield University.
Consequently there has to be a mechanism put in place to incentivise key individuals and that requires a view of how profit and loss accounts are run. Understanding how retail organisations attribute cost and profit across a multi-channel operation is critical to redefining the way cross-channel retailing should work – to deliver the greatest benefit to the enterprise as a whole.
In most companies there are separate organisations for the direct business vs the bricks-and-mortar retail operations and that includes everything from assortment planning to demand forecasting; from buying and inventory management to distribution and logistics; and from labour in the stores to labour in a direct-to-consumer distribution centre. These are siloed today and a lot of the metrics tend to get aggregated independently. Companies tend to analyse costs and profitability by channel but the shopping environment is changing and customers don’t interact with the retail brand that way. Some of those divisions and boundaries are actually artificial, when considering the retail business overall.
For example, if someone is going to buy something online and pick it up in store, who should get credit for that sale? To who is going to accrue that revenue? In its most natural form the sale would be accrued to e-commerce, yet the labour, the facility order and the inventory to satisfy the order, were essentially, a cost that was born by the store operation. This is the best case scenario for e-commerce and the worst case scenario for stores.
Some retailers are starting to gain better visibility when monitoring what’s happening, by taking take all e-commerce transactions (whether they get shipped directly to a customer’s home or whether they get picked up in store) and associate those sales with the nearest store to the customer. That store gets credit for all the sales for e-commerce. There is still a need for a double balance sheet because companies still have to aggregate to e-commerce to understand the growth of the business. At the same time it allows the stores to participate in online growth because in fact, they’re not separate – all sales contribute to the company’s growth.
At a management level, although financial analysts may look at it at the corporate entity level, in terms of overall profitability, senior managers within retail are incentivised and compensated based upon metrics that are mostly channel specific. Incentive schemes are going to drive certain behaviours and influence willingness to participate in cross-channel transformation.
Another option would be to apportion a percentage of the sale to all the channels involved. For instance, a pick-up in store may accrue 30 per cent of the sale to the store and 70 per cent to online.
Writing in a recent issue of The Harvard Business Review, Morten T. Hansen, Professor at the University of California at Berkeley expresses the view that internal collaboration can deliver tremendous benefits (innovative offerings, new sales). However, it can also backfire if its costs – including delays stemming from turf battles – prove larger than expected. To establish good collaboration from bad, Prof. Hansen suggests estimating three factors:
He also goes on to outline how in most companies, it is difficult to get people in different units to work together effectively because: People don’t want to share resources or customers; they resent taking on extra work if it provides little recognition and no financial incentive; or if they have conflicting priorities. As Prof. Hansen puts it, ‘these tensions create problems that, combined with opportunity costs, can eat into the collaboration’s potential and produce a collaboration penalty’.
According to Martin Christopher, a change programme of this nature ‘has to come from the boardroom and once a decision has been taken to develop these channels, a multi-disciplinary team has to be put in place that is responsible for putting the initiative into action.’ But a champion needs to drive this action.
Executive teams within store operations are starting to realise the importance of the direct scene and how it plays into their business. It has to be somebody at merchandising, marketing or store level with an SVP title, or the equivalent, pushing these transformations.
To run a well a synchronised and balanced multi-channel retail operation, a company requires an order management system and inventory visibility layer that speaks across channels. It must understand that orders can come from anywhere and be fulfilled from anywhere. Companies need a system that is built from the ground up, it has to happen over time and to be broken into phases. The good news is this will ensure high ROI.
If traditional retail organisations are to compete in a market where a rich source of channels and service options are available to the consumer, then those retailers have few options. The complexity surrounding the adoption and implementation of a multi-channel strategy will have to be pursued and conquered. Otherwise, consumer demand will determine the inevitable outcome.