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The future of retail metrics

Guidance for CMOs in a changing marketplace

The evolution of the retail landscape has changed how marketers drive growth and measure success.

The evolution of retail

Disruption has upended every corner of retail. Cashierless stores, mixed-use malls, and brick-and-mortar locations doubling as e-commerce hubs have dramatically transformed the shopping experience. For professionals in charge of defining and measuring the performance of these channels, keeping pace with the sheer number and diversity of companies competing for wallet share has become the ultimate test of business acumen.

Convergence in retail is here to stay, and emerging operating models call for new ways to measure the performance of these businesses. Creating value for consumers and other stakeholders is familiar territory for the CMO—and, thanks to new perspectives on retail metrics, marketers have new tools to drive growth as consumers demand seamless experiences across shopping channels.

The marketplace has long been channel-agnostic, avoiding reading too much into physical-versus-digital habits in favor of viewing the customer experience more holistically. As convergence has accelerated, this approach has proven to be prescient. For instance, analysis of a recent consumer shopping survey showed that as of November 2017, 75 percent of in-store retail spending was digitally influenced during the shopping journey.

More recently, a Deloitte survey of retail CFOs and finance executives found that they are searching for metrics that better reflect the realities of their business. The survey revealed that 88 percent of respondents are rethinking the metrics they need to accurately align to cross-channel operations. Yet only 32 percent of those leaders said their internal metrics “really align” with how they measure themselves externally. What’s more, just eight percent believe their organization’s metrics are properly positioned to address changes in the retail environment.

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Those are strong signals that retail CMOs should be thinking about developing new ways to measure performance and define the underlying profit propositions as in-store and digital commerce operations converge.

New models, updated metrics

A proliferation of new business and profit models focused on enabling consumer choice and fulfilling demand has helped create a need for new ways to measure performance and stay relevant. These models include subscriptions services, online marketplaces, and fulfillment-as-a-service platforms, to name a few.

Deloitte recently took results from the survey with retail CFOs and finance executives and spoke with representatives from retail trade groups, reviewed annual reports, and spent time with leaders of digitally native retailers to better understand the metrics that matter most to each group.

The research revealed that measures of marketing, pricing, and promotional effectiveness and returns on investment align with a newly proposed set metrics that allow the groups to be more data-driven in a way that resonates across the business. The metrics are meant to be holistic, inclusive, value-driving, operational, and balanced. What’s more, the measurements are supported by research showing that retailers need a new set of tools to yield a more comprehensive and transparent view of performance.

One of the newly proposed metrics, sales per unique customer, addresses how much wallet share retailers can drive across their consumer base, through multiple purchases per year, or less frequent, large-scale purchases. Another popular measure is a top-line view of revenue growth that accounts for how a company is growing across operations and revenue streams. Return on invested capital (ROIC) also rates highly. This helps companies measure the importance of investing in modernization of current operations to keep pace with changes in the industry.

Interviews with retailers revealed that marketers are in search of better insights to help drive profitable interactions and increase sales per unique consumer. Viewing retail profit per transaction, for instance, captures the profitability of companies’ retail operations on a per-transaction basis. It is channel-agnostic and applies to all methods of fulfillment. This measurement allows for a like-to-like comparison across companies to see which organizations are most and least efficient in managing retail profitability in each consumer interaction.

In addition, free cash flow (FCF) provides insight into an organization’s controllable cash flow that incorporates its current investments. This helps identify how much money is available to return to stakeholders and invest in future operations.

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Measurement in practice

Consider the experiences of three consumer-facing companies at different stages of maturation, and three distinct approaches to retail sales that are all succeeding amid increasing industry convergence.

The first is a traditional, large-format retailer with 90 percent of sales originating through a significant number of physical locations that are invested heavily in digital operations, and the company is considering a platform for third-party sellers.

The second company is a digitally native, vertically integrated company with a direct-to-consumer model and subscription models that recently opened several small-format stores. This company also introduced products at select mass merchants.

Finally, there’s an online-focused retailer generating 95 percent of their sales on the web. The company has multiple profit streams, including financing, subscriptions, third-party sales, advertising revenue, and consumer services. It invests heavily in supply chain, and is now looking to create a physical presence.

The companies in the examples are all competing for the same consumers, yet have different approaches and performance in the marketplace. Having a comprehensive set of metrics helps observers better understand how each of these companies are performing based on their resonance with consumers and their profit models.

“Consumers have more choices, competition is increasing, and convergence across industries has changed business dynamics,” says Rodney Sides, vice chairman, US Retail & Distribution leader, Deloitte LLP. “In the past decade, traditional retail has faced unprecedented disruption. To remain competitive, many retailers have shifted investment strategies and are looking for new ways to drive growth and profitability. As an industry, it is important that we evolve the way we measure retailers to be relevant and accurate to new retail realities.”

Indeed, consumers today have more choices than they ever have. Fortunately, so do the retailers that serve them. Adopting a new set of metrics for retail can help marketers adapt to this evolution without losing sight of the fundamentals—driving growth and profitability.

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