Why a Retail CFO Must Embrace Omni-channel Strategies for a Higher ROI

As consumer spending moves to digital, retail CFOs must develop new strategies for managing CAPEX and OPEX.

Shopping has never been easier for consumers. But for executives behind the scenes, digital advances have created complexity. It takes an omnichannel approach to meet these new consumer demands, requiring companies to retool their strategies and operating models in areas such as marketing, merchandising, store operations, and IT.

Omni-channel — the seamless integration of physical and digital worlds to create an outstanding, cohesive shopping experience.

As the Covid-struck retail world has digitized hastily, the tools and structure of retail organizations have changed dramatically. Numerous retailers have significantly reorganized their merchant and marketing teams to consolidate or coordinate their online and store strategies across the organization. Retail software providing information technology organizations, once considered back-office utilities, have concurrently become strategic business partners.

These changes, in turn, have driven multiple new capital requirements. This creates a unique set of challenges for the CFO in migrating from historical investments to expenditures that will better support e-commerce and omnichannel enablement that will help reduce the overheads incurred from having more stores, carrying extra inventory, and relying heavily on single-channel distribution capabilities.

A greater return on capital in the Omni-channel era necessitates the need to adopt a multi-pronged approach and new ways of thinking.

The Seamless Omni-channel Customer Experience is not just evolving, it is expanding.

The growth of digital commerce is far outpacing traditional retail. This trend seems sure to continue as retail emerges out of the pandemic impact increasing the competition and putting additional pressure on their margins. Consumers can now shop through various channels, often using six or more touchpoints before making a purchase. Retailers broadly agree their organizations must deliver a consistent experience across each touchpoint.

Virtually all omnichannel capabilities require technology investments. Most are not channel-specific but instead impact the entire technology infrastructure. CFOs, however, are still determining how to best define the impact of these investments’ on sales by channel, which then makes measuring return on capital that much harder to calculate — especially at the channel level, due to lack of clarity around performance and management accountability.

As channels have blurred, time-tested retail metrics have lost some of their meaning and value. For example:

• Same-store sales: Online purchases, ship-to-store, and ship-from-store omni-channel practices can skew this number beyond its original intent
• Gross margin return on inventory investment: Crossover makes it more difficult to measure the productivity of various inventory deployment strategies
• Returns percentage: Returns are no longer contained within a single channel

Each channel yields data that makes it easier to track customer behaviour, and marketers are using emerging sales attribution models to better allocate marketing spend. These models — single-channel, last-click, multi-touch, multi-channel, and the like — could be adapted for broader use in informing capital decisions as well. By getting more specific about where and how sales originate, finance teams can better estimate the real margins and profits from different touchpoints. This will lead to more informed decisions on how to deploy scarce capital.

Enabling omnichannel strategy through technology and measuring the impact

Capital allocations should align with business strategy, but technology changes so rapidly that it is tempting to take a wait-and-see approach. Delays, however, could put a retailer at a competitive disadvantage. Unified inventory management systems and integrated distributed order management systems are examples of platforms that harmonize order fulfillment, regardless of channel. Mobile investments can help retailers combine new digital strategies while providing experiences unique to mobile.

Other investments include:

• Customer journey and touchpoint mapping
• Managing web properties for optimal customer experience
• Global payment and content management systems
• Process and technology investments to support cross-channel fulfillment

The question is, which options are the most advantageous, and how do you measure the impact? In an omnichannel environment, parsing out returns and costs across the business becomes trickier:

• Sales: Intertwined channels make attribution difficult
• Cost of goods sold: Costs may differ by channel
• Operating cost: Costs spill over to multiple channels due to fulfillment complexities
• Depreciation: Rapid innovation makes it hard to determine how long technology will remain relevant, and it is often unclear whether new digital innovations will have the impact projected in the feasibility study.

The ongoing demand for investment coupled with less predictable returns on capital creates tensions for CFOs that will continue to increase as more consumer spending migrates to digital.

An approach to taking the lead

To implement a successful omni-channel strategy, retail CFOs should consider the following strategies:

1. Build a cost model based on Customer Acquisition Cost: With multifunctional teams and omni-channel, it is no longer possible to focus on channel-wise profitability. Instead, the paradigm needs to shift to the customer as the profit centre irrespective of the channel. This could be then related to customer groups and demographics and then linked to brands arriving at a mix of brand X customer profitability which could justify the investments in those segments.
2. Think “multi-dimensional” when making omni-channel investments: First, a company should lay out a long-range, cross-functional omnichannel vision and strategy. This basic building block is often overlooked and can therefore reflect a problematic absence of a common definition of “omni-channel” among the senior leadership.
3. Enable timely decision-making with the right capital governance:
   • Assemble key operational and commercial stakeholders: Understand interdependencies and downstream impacts, then create a cross-functional team with clearly defined roles to participate in decision-making.
   • Gather data that sustains a multi-dimensional approach to investing: Leverage advanced analytics for insights on how investments will affect the consumer and operating models.
   • Consult with all teams who may be impacted: As channels and technologies become more integrated, so should the team involved in the capital decision-making process. ned within a single channel
4. Shift to cloud-based platforms: Rising IT prices and emerging business models such as SaaS, PaaS, IaaS, and others can reduce the capital outlay and allow CFOs to revisit capital allocations by converting their IT expenditure to an operating expense that is readily scalable with the business and supports an omni-channel environment.
5. Expand your digital knowledge: In an EY survey, 58% of 769 finance leaders from across the world said they need to better understand digital, smart technologies, and sophisticated data analytics. To remain a strategic leader in the omni-channel age, retail CFOs must continually broaden their personal knowledge of technology to be able to show how the technological landscape is evolving and what strategic investments will support growth.

Striking a balance

The transformative effects of digitization in retail will continue in the foreseeable future. The finance teams will need to redeploy capital from stores and inventory to riskier, hard-to-measure investments in new enabling technologies and related processes. As the leaders of finance organizations, retail CFOs will need to develop new tools, techniques, and skills to stay at the forefront of this revolution while still delivering attractive returns on capital.

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