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3 reasons why profitability should be every retail department's focus

25 February 2020

By Drew Smith

Drew is the Director of Product Strategy at Upp and focuses on how technology can help brands and retailers deliver what their customers want.

Margin Retail Profitability

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From the outside, the retail industry looks like it’s in the midst of a boom. Retail sales are growing by an average 15% annually, and this industry alone accounts for as much as a third of total consumer spending in the UK. What’s more, with the rise of online retail stores and global market reach, retailers no longer have to rely on physical locations to achieve the sales they’re after. This is largely behind a revenue that seems to increase year on year. And, yet, when you look into the figures, it’s evident that these revenue increases simply don’t add up to the profitability retailers need to weather the market in the long-term.  

This is a fact that becomes pressingly obvious when you zoom in on some of the top online retailers of our times. Amazon famously struggled to achieve a profit until their 14th year in 2001, despite already being one of the most transformative retailers to enter the market. Equally, online marketplaces like RealReal Inc. are facing the reality of revenue increases of 51% and still dealing with widening net loss. 

Why are so many retailers struggling?

The reasons behind these setbacks are tenfold, including increased information parity, scalability setbacks and the escalating returns that many online retailers face. Most organisations often look at revenue as their main metric for success. While this is a very important KPI to measure, it doesn’t account for the organisation’s costs. Shifting focus towards profitability across departments is the only possible chance that any company currently stands at overcoming these issues. 

To prove the point, we’re going to look at why an increased focus here is such an essential part of any retailer’s plans for 2020. 

# 1 - Metrics are evolving, and retailers need to evolve with them

We’ve all heard the news: Big Data is booming. In fact, we’ve generated more data in the last two years alone than the rest of human history. That’s a big deal, and it’s having a major impact on retail profitability in every way. 

Data, and the metrics retailers use to measure it, is now a leading force for everything from the tracking of key performance indicators (KPIs), through to tailored offers that increase sales across the board. Yet, just 8% of the finance executives questioned in a recent Deloitte survey felt that their organisation’s metrics were properly aligned to address changes in the retail environment, and ultimately boost profitability. 

The information retailers need for success is clearly ready and waiting, so what’s going wrong? For the most part, setbacks seem to stem from both data collation and the way this information is shared across a retail environment. The legacy infrastructure in an astounding amount of retail organisations right now simply doesn’t allow for reliable metric measurements or even full information disclosure where necessary. Instead, retailers are left with missing or mislabelled data that may as well not be there for all the good it does them. 

Focus on profitability is, therefore, key for highlighting this discrepancy and the pressing need to overcome it. Don’t completely disregard revenue though — it’s important that companies find the sweet spot between revenue and profitability in order to gain a greater overview of your business’ overall performance. 

Only by turning their attention to this issue using data centralisation, channel-agnostic metrics, and operational automation can any retailer hope to implement actionable KPIs, align data across their businesses, and ultimately lead to the profits that are proving so tricky to come by. Sticking to outdated methods that restrict the possibility of shifting focus here is certainly set to keep companies in the dark despite their efforts elsewhere.

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# 2 - Departmental focuses are shifting

Departments have played a key role in retail for many years, with even small companies requiring marketing and sales departments to make this business model work. Now, though, as the individual aspects of retail evolve in such major ways, departments are becoming more and more fragmented. And, this is making a unique focus on individual profitability-based KPIs essential.

The simple fact is that no one key performance indicator will cover profit requirements across modern business. Instead, retail organisations need to think about the unique goals their departments should be focusing on, and how each of these can individually work towards the ultimate profitability goal.

Marketing teams solely involved in online operations, for instance, can only guarantee profitability by focusing on performance indicators such as return on investment (ROI) and return on ad spend (ROAS) in relation to conversion success. In the meantime, merchandisers need to set indicators surrounding issues such as revenue and returns, which have spiked by around 95% in the last five years alone.

By syphoning performance indicators with this departmental focus in mind, retailers stand their best shot at a comprehensive profitability picture, all without overloading any individual department. Instead, each member of the retail infrastructure will be able to focus on their unique profit goals with easily-trackable performance that forever brings profitability into the limelight. However, while departmental KPIs focussed on profits are important, this only makes a difference to your business’ performance if there is cross-departmental alignment with goals. A holistic understanding of how every department is working together is vital to improving profitability across the board.

# 3 - Silos are preventing oversight

As much as departmental focuses like those mentioned above matter, retailers should also be aware that this unique focus can continue to prevent profitability in the form of information silos if care isn’t taken. When this happens, certain departments may have to utilise potentially harmful guesswork, and could also be unaware of how to effectively track the way their departmental KPIs are impacting overall profit margins. In fact, 32% of leaders currently feel that their metrics don’t align, a figure which could be enough to stop profits in their tracks single-handedly. 

The good news is that a focus on profitability through automation of actionable insights from a centralised, channel-agnostic system, such as an AI-driven platform, should be all it takes to overcome this. In many ways, this goes back to the metrics mentioned in our first point, but with a highlighted need for cross-departmental processes. Some of the most profitable retailers such as H&M have set themselves up as technology companies rather than traditional retailers. As the retail industry has changed, they have changed with it, ensuring that they have a holistic understanding of everything they do and increasing profitability because of it. 

This increased focus on profitability across departments guarantees that each individual is logging and accessing the correct information for centralised workplace progress at all times. Without compromising departmental focuses or convoluting communication, this technique alone could be behind some of the most significant shifts towards profitability, or at least profit-focused insights, that any retailer could take right now. 

Power in profitability

To some extent, profitability is always at the forefront of business goal-setting and key focuses, but retailers right now should be taking that even further. Forget getting caught up on stats that state revenue increases are changing the retail tides at last, and face up to the truth: even the best retailers in the industry are struggling to achieve the figures they desire, and the chances are that you’re no exception. 

When it comes down to it, the reasons for these issues are easy enough to overcome with improved insights and the right tech to turn metrics into money at last. But, with data generation only set to continue rising and retail competition growing exponentially daily, there’s no time for doubt. Instead, be clear about where your profitability is struggling right now, and implement the AI-driven software and processes that could turn things around to put you on top again in no time.

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