Measuring the New Normal: Retail’s KPI Challenge

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The media has been busy proclaiming the coming death of both the store and experiential retailing in a voice that has grown progressively louder over the course of the last decade. The scourge of Covid-19 is now being touted as the cataclysmic event that will signal the coming of a dramatic shift in the channel mix of retail. Some even have predicted that the penetration of digital sales could reach 40-50 percent of total sales by 2021.

[callout]In order to better serve their customers, retailers need to rethink how they internally measure channel sales performance so that it accurately reflects a customer’s real intent.[/callout]

But what if the metrics the industry typically uses to measure channel performance are wrong? This 50 percent digital sales projection would be out of sync with reality — and just about every key strategic and operating decision that a retailer makes would be adversely affected by distorted information. This would include investment decisions, labor scheduling and inventory placement. Worse, continuing to use an asset based focus on channels causes retailers to not pay enough attention to what really matters — namely the customer.

In order to better serve their customers, retailers need to rethink how they internally measure channel sales performance so that it accurately reflects a customer\’s real intent. That will require a KPI measurement system that focuses on how a customer intends to take possession of the merchandise versus the traditional approach of measuring demand at the point of sale.

Customer Preference

News flash: Customers could give a rip about channels. They just want to buy products from brands they like and trust. Unlike the days of \”Madmen flogging Tide,\” today\’s customer is an active participant in the selling process. Armed with their smartphone of choice, today\’s customer co-creates their shopping experience with a brand. They choose where and how their order will take place and they also choose how and where that order will be fulfilled.

KPI Confusion

If you buy off on the idea that sales KPI\’s should accurately reflect a customer\’s intent of how they want their order to be fulfilled, then the way we are currently measuring channel sales performance is becoming obsolete. Leading retailers have been aggressively pursuing omnichannel convenience strategies such as buy online/pick-up in-store and curbside pick-up for a while now, most notably Target and Walmart.

Target\’s most recent sales report shows that the convenience strategy, particularly in response to Covid-19, has accelerated omnichannel transactions.

  • In April digital sales grew by $1.1 billion
  • $950 million of that $1.1 billion came from store fulfillment
  • Two million customers tried Target\’s drive-up service for the first time
  • Drive-up transactions increased by 1000% (WWD 5/21/2020)

Operational Chaos

As the volume of omnichannel transactions increases, continuing to measure sales at the point where the order takes place will pose significant challenges to a retailer\’s operational capabilities. Two key functions that will be impacted are inventory management and store operations, both critical to servicing customers well.

  • Inventory management. Keeping merchandise in stock in each location is one of the most fundamental inventory management practices. But what happens when the customer makes a sale online and picks it up in store? What typically happens is increased stock-outs in the location that fulfilled the order because of a poor sales and inventory forecast built from KPI\’s that don\’t measure customer intent all that well.
  • Store Operations. Think about how store operations are impacted by omnichannel purchasing. For many retailers, store labor budgets are tied to percent of sales and most scheduling tools build staffing models using sales. Moreover, most store incentive programs are sales-based, which means that store associates actually get penalized every time they fulfill an online order.

Without leadership intervention to connect inventory management with store operations, the likely result will be stores that are out of stock, understaffed, and with an unrewarded staff serving customers.

Having an accurate understanding of how and where customers want to take possession of their merchandise becomes critical to strategic investment decisions. Currently, 4-wall store profitability derives from measuring channel sales. Is this still the best way to understand a store\’s strategic viability, considering the uncertain future of retail during this post-coronavirus period? To add complexity to establishing meaningful measurements, much of the growth in digital is being fueled by omnichannel transactions that conclude in stores.

A New Way to Measure

Successful retailers have found new ways to measure omnichannel performance to guide investment decisions and better serve its customers.

  • Crediting a sale to how a customer wants an order fulfilled might be the best path forward. This approach better measures customer intent and simplifies the information flow that drives key inventory management and store operations decisions. It also better aligns fulfillment channel incentives to better serve the customer.
  • Better still, would be to measure retail sales in the aggregate not by channel. Wholesale would still need to be separated because of the different margin structure, but this approach would best align with how customers see the world. A new KPI that tracks the fulfillment of orders would need to be created and used to drive investment decisions, inventory management decisions, store operating decisions, and channel incentive programs tied to service.

In my opinion, rethinking how channel performance is measured needs to become a priority for retailers. The right information systems and feedback loop need to be in place to drive the next wave of innovation when business resets in the wake of Covid-19.

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