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“There's a multi-front competition going on from so many more angles than there ever was before, and that obviously puts a lot of pressure on the retailers’ top line.”
— Chris Perry, Chief Learning Officer and Co-Founder at firstmovr
Similar to brands, it’s getting more challenging for retailers to eke out a significant profit in today’s omnichannel retail environment. Rising labor costs, dynamic price matching, and competition from direct-to-consumer (DTC) brands and online marketplaces are all putting margin pressure on retailers.
So, what can retailers do, and how can brands work with them to drive their own profitability? To help retailers and brands carve out a path forward, the Digital Shelf Institute (DSI) recently hosted a webinar with Chris Perry, chief learning officer and co-founder of firstmovr, a consumer packaged goods (CPG) and ecommerce strategy firm.
Perry collaborated with Lauren Livak, director of the DSI, for the webinar, “P&Ls Under Pressure: The Omni Retailer P&L and How It Impacts Brand Profitability.” Here’s their take on how brands can help retailers grow their margins and boost their own in the process.
The conventional definition of profitability is a company's financial gain relative to its operating expenses, but in omnichannel retail, the meaning of profitability is a bit more nuanced.
Perry breaks profitability down into three categories:
A retailer’s pure profit margin is the price at which it sells a product to a consumer minus the price it paid to the manufacturer.
Product Price - Price Paid to Manufacturer =
Retailer’s Pure Profit Margin
This figure is often expressed as a percentage, but Perry says it's also important for retailers to view this figure in the form of a pure dollar amount to really understand how much they net after their own operating costs.
A retailer’s net pure profit margin is their pure profit margin and any additional manufacturer offsets, such as damage allowances, early payment discounts, promotion and discount redemptions, and retail media and paid search investments.
This number is also expressed as a percentage, but Perry again argues that understanding this margin on a dollar-for-dollar basis is critical for retailers to gain insight into profitability not just on the category level, but also SKU level.
Contribution profit is a combination of a retailer’s net pure profit margin and all of its operating costs. Like net pure profit, retailers need to understand profitability at the SKU level, factoring in all their offsets, fulfillment, inventory and warehousing costs, and other expenses.
Whether it’s a retailer’s pure profit margin or contribution profit, retailers’ profit & loss statement (P&L) looks a lot different today than it did even a decade ago. That’s because ecommerce growth is driving P&L pressure in unprecedented ways.
Ecommerce is simultaneously a growth driver and a margin reducer for today’s retailers.
Perry says ecommerce is enabling the emergence of new retail channels, such as pure-play marketplaces.
“Those marketplaces aren't just an Amazon selling [products]. It's all of the millions of sellers out there globally and locally who add assortment, add competition,” Perry says.
Then there are the Instacarts of the world, or what Perry calls “the last milers.” Some of these last milers actually drive business for retailers, while others create more competition — especially among consumers who shop based on price rather than brand loyalty. Retailers also have to contend with a growing number of DTC challenger brands that are gradually eating away at their market share.
“There's a multi-front competition going on from so many more angles than there ever was before, and that obviously puts a lot of pressure on the retailers’ top line.”
— Chris Perry, Chief Learning Officer and Co-Founder at firstmovr
Retailers also have to deal with other margin pressures, such as:
In this environment, retailers need to refine their strategy, and brands need to partner with them to ease some of the pressure on their respective P&Ls. Perry outlines several strategies that could be beneficial to retailers, starting with what brand manufacturers can do to help.
Here are Perry’s suggestions for driving retailer profitability.
Perry says designing a best-in-class digital shelf is one way brands can help retailers boost their pure profit margin.
Designing for both a complete and compelling product detail page (PDP) helps brands’ omnichannel sales and search visibility, but it also helps retailers convert and influence more sales online and in-store for short-term sales, gain greater share of voice, and drive long-term shopper loyalty.
“If there's ever been an incentive to do digital shelf beyond the obvious, it's the online influence, it's the in-store influence, but it's really a sign of respect to the retailer that you owned your real estate,” Perry says.
“No one likes to drive up and down the street where it looks like one of the houses has been condemned, and everybody else looks like they care about their property. We need to care about our property, but help them [retailers] catch those fish. That will help ensure they're keeping the sales they're so aggressively trying to drive to their sites and apps.”
Because of rising fulfillment costs, brands also need to rethink what items they sell online. For example, single items might not be profitable enough to sell online. However, they may deliver a better margin in-store.
Brands must focus on promotion and portfolio differentiation online and launch and promote unique SKUs for each retailer that help to combat price matching and limit margin loss.
Perry says build-your-own-basket promotions and virtual bundles that are slight variations of a brand’s standard variety packs are some ways brands can differentiate and boost margins for both themselves and retailers.
Measuring and designing retail media campaigns around incremental return on ad spend (iROAS) versus overall return on ad spend (ROAS) can ensure true growth.
Focusing on ROAS may hurt incrementality, Perry argues, so it’s important for brands not to chase the wrong metrics. For example, Pampers investing in its own branded keyword, “Pampers,” may boost ROAS, but a stronger investment would be the keyword “diapers” since that would capture a broader swath of consumers who are specifically looking for this product rather than a particular brand.
“The important part here is that the retailer wants your money in media, but they actually want your money to do something for them [in terms of incremental sales]” Perry says.
Ecommerce-ready packaging is one lever brands can pull to increase contribution profit for retailers. Packaging that’s tailor-made for the digital fulfillment process can improve ship-to-home operational efficiency, speed, and the shopper experience, as well as drive sustainability.
Amazon has incentivized brands to move in this direction with an emphasis on prep-free packaging that reduces its own shipping preparation time; ships-in-own-container packaging that’s designed to ship to the consumers in the same package it arrives in at a fulfillment center; and frustration-free packaging — or the Holy Grail when it comes to ecommerce-ready packaging. Frustration-free packaging meets Amazon’s Tier 2 requirements and is more sustainable, easy to open, and involves minimal packaging.
“There's an opportunity to move on this — not just because Amazon pushed us too — but because it is the right thing to do for select SKUs,” Perry says. “Getting ahead of this [is important] so I'm not just penalized to do it, but I'm incented and inspired to do it, because it may actually benefit me long term and it may help with that differentiation we talked about.”
With dropshipping, retailers receive a shopper’s order and then use software to pass this order along to the brand manufacturer to ship on their behalf directly to the shopper.
For retailers that allow manufacturers to ship orders on their behalf, dropshipping capabilities can drive incremental sales via new assortment and backup inventory. It also can lower retailers’ operational and inventory costs. Perry says dropshipping can help brands test new products, pilot and mature potential DTC capabilities, and show they are leaning in with important retailers.
“Why is this important more and more? Well, it can be a great way to move backup inventory. If the retailer during the holidays says, ‘Hey, I ran out of all those TVs, but Samsung was right there to back me up with some extra ones.’ It could be a great way to launch new products or test those new products without the retailer having to carry all of them,” Perry says.
“Again, there is a finite shelf in a warehousing space. It might be a way to add that endless aisle that we all want but may need to help with. It can reduce distribution costs overall. At first that might add cost to us, but over time it might actually be something we can balance out with our retailers.”
The bottom line is that omnichannel retail will continue to evolve, which means that brands and retailers must remain nimble to increase their margins. Retail success — and survival — for both parties depends on proactive profitability management and optimization. Brand manufacturers must better understand their own P&Ls and that of retailers to identify opportunities for improvement and to combat ongoing price and operational pressures.
As the saying goes, a rising tide lifts all boats. Both brands and retailers’ fortunes now depend on each other, so where the tide takes retailers, brands likely will follow.
To learn more about P&L optimization strategies, listen to the full episode.
