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05/10/2021

Finding Profit in Omnichannel

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New fulfillment options, safety protocols and digital order volumes are squeezing retailers' margins. While the overall retail industry continues to grow, specific segments, such as fashion and consumer electronics, struggle under reduced sales and profits.

For 2020, McKinsey & Co. projected a 93% drop in profitability for the fashion industry. With revenue still below 2019 levels and rising fulfillment costs, retailers need to improve margins and become more profitable through omnichannel investments.

After retailers slogged through 2020, many found a renewed energy around advanced AI solutions that focus on efficiency, effectiveness and sustainability. To achieve these, retailers must first get ahead of the customer by constantly anticipating and responding to market shifts. And today, that has become more complicated with the omnichannel dimension. Hence, it's not surprising that most retailers lack this capability — fewer than 10% as revealed by a recent Forrester study.

In an omnichannel business model, a store isn't merely a selling location but a showroom, experience center, sales, fulfillment and return location. Each store serves a role in the overall retailer's ecosystem and demands hyper-local treatment through the assortment, allocation, pricing and fulfillment decisions.

Because customers don’t think in channels, retailers can’t continue to separate between them. They must evaluate how they can work in harmony. Doing this with intent by anticipating customer demand throughout every stores and channel, produces better inventory utilization, margins and profitability.

Traditionally, stores are assorted by classifications assigned by prior performance and format. These A, B, or C store classifications rarely consider the nuanced role of the store in the omnichannel ecosystem. As an alternative, retailers should consider what these stores will sell and fulfill so assortments will be aligned to the actual demand, plus a lower-performing store could be the preferred fulfillment location for regional customers instead of pulling inventory from high-performing stores.

Additionally, fringe sizes have a greater online demand than in store — by some analyses 10-15% more, according to conversations with several retailers. As stores shift their role more toward fulfillment, they should carry some of this inventory in stores for omnichannel demand, even if that inventory isn’t displayed. Finally, enhanced assortments should include items that are sold together to reduce split shipments.

Improving the upstream processes will increase profitability through markdown reductions, sell-through gains and lower shipping costs. Regardless of the setup, however, retailers can still improve decisions at the time of fulfillment.

With assortment changes considered in the stores' roles, retailers can shift their inventory allocations across their stores and distribution centers. More importantly, with advancements in AI they can continually forecast and anticipate customer demand. This constant realignment of inventory ensures inventory will be in the ideal location at the right time — creating fuller store presentations, fewer markdowns and lower shipping costs. 

Omnichannel pricing is another opportunity for improving profitability. For years, price optimization has improved margins and sell-through, but with the added dimension of omnichannel store inventory is now used for fulfillment. After all, if you are making the described adjustments, you are allocating quantity for that purpose. And even if you didn't, online demand still exists. To avoid deep discounts, retailers must incorporate local demand, online demand and potential returns when making pricing decisions.

And finally, there is the fulfillment issue. Improving the upstream processes will increase profitability through markdown reductions, sell-through gains and lower shipping costs. Regardless of the setup, however, retailers can still improve decisions at the time of fulfillment.

These decisions are currently based on a combination of shipping costs, labor capacity, inventory availability and distance from the customer. In other words, they are made based on cost and ability to execute. Another element needs consideration: opportunity. Imagine a customer buys running shoes online for $100 and requests 2-3 day shipping.

  • You have two stores (Store A and Store B) that can fulfill the order, and the shoe is priced at $100 at both locations.
  • Both stores can meet the fulfillment request timeline.
  • But at Store B, it will cost you $3 more to ship.
  • Decision made. Go with the lower cost at Store A.

But that decision ignores the opportunity of those shoes. Imagine if you knew that to sell through all your inventory at Store A, you would need an average discount of 20%. But at Store B, you are going to need an average discount of 40%. Remember both are currently priced the same. But by predicting the future price requirements to sell-through your inventory, you can make a more profitable decision today in fulfillment. 

Increasing profitability for omnichannel requires rethinking and retooling the merchandising and supply chain operations. The previous examples each improve margins through better inventory utilization and lowered shipping costs. However, there is a cascading effect that leads to each planning, execution, pricing and fulfillment improvement building on the previous ones to create positive momentum with each cycle.

Yogesh Kulkarni is the chief operations officer of the merchandising and marketing business unit at antuit.ai.

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