Supply Chain

Making Capital Investment Decisions in an Omnichannel World

For the retail CFO, getting a better return on capital in the omnichannel era requires new ways of thinking.
Josh ChernoffAugust 28, 2017
Making Capital Investment Decisions in an Omnichannel World

Shopping has never been easier for consumers.

But for executives behind the scenes, digital advances have created complexity. Consumers don’t think about channels, they think about what’s most convenient and inspiring in different shopping contexts. Companies require an omnichannel approach to meet those demands, retooling their strategies and operating models in areas such as marketing, merchandising, store operations, and information technology.

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As the world has digitized, the tools and structure of retail organizations have changed dramatically. Numerous retailers have significantly reorganized their merchant and marketing teams to consolidate or coordinate online and store strategies and organizations. Likewise, IT organizations, once considered back-office utilities, have 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 managing the internal competition for capital expenditures amid the migration from historically recognized investments. Instead of more stores, more inventory, and more single-channel distribution capabilities, there is a switch to expenditures that will better support e-commerce and omnichannel enablement.

In the omnichannel era, getting a better return on capital requires a multi-pronged approach — and new ways of thinking.

Creating a Coherent Experience

E-commerce is not just evolving, it is expanding. The growth of digital commerce is far outpacing traditional retail, a trend that seems sure to continue. Yet digital-first brands, subscription services, and peer-to-peer sales and auction platforms are increasing the level of competition and putting additional pressure on margins.

Consumers can now shop through various channels, often using six or more touch points before making a purchase. The term “omnichannel” often sparks debate, but retailers broadly agree that their organizations must deliver a consistent experience across each touch point.

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 these investments’ impact on sales by channel, which then makes return on capital that much harder to calculate — especially at the channel level. There is a growing lack of clarity around performance and management accountability.

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

  • Same-store sales: Online purchases and ship-to-store and ship-from-store omnichannel 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 behavior, 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 touch points. That will lead to more informed decisions of how to deploy scarce capital.

Enabling Omnichannel Strategy

Capital allocation 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.

Josh Chernoff

Josh Chernoff

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 coalesce new digital strategies while providing experiences unique to mobile.

Other investments include customer journey and touch-point mapping; managing web properties for optimal customer experience; global payment and content management systems; and process and technology investments to support cross-channel fulfillment.

The question is, which options are the most advantageous, and how does the CFO measure the impact? The shift from well-documented investments to harder-to-forecast investments makes return on capital and other projections difficult.

Return on invested capital has traditionally been used to measure the attractiveness of store investments. But 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 business case.

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

Taking the Lead

To implement a successful approach to omnichannel, retail CFOs should consider the following strategies:

Adopt a multi-dimensional perspective when making omnichannel investment decisions. This includes developing a channel-agnostic view of the consumer, fostering channel collaboration with shared objectives, and defining the right metrics and key performance indicators.

Enable timely decision-making with the right capital governance model. This includes assembling key operational and commercial stakeholders, gathering data that will support a multi-dimensional approach to investing, and consulting with teams that may be impacted.

Utilize available technology business models by shifting to cloud-based platforms.

Expand the organization’s digital capabilities to be at the forefront of digitization.

The transformative effects of digitization in retail will continue. The finance organization 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 in order to stay at the forefront of this revolution while still delivering attractive returns on capital.

Josh Chernoff is a managing director in the Parthenon-EY practice of Ernst & Young LLP. He has more than 30 years of retail industry and consulting experience, advising on growth strategy, omnichannel strategy and operations, merchandising and marketing, merger diligence and integration, and profit improvement programs. He also serves as an adjunct professor of marketing at the Kellogg Graduate School of Business.