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Interview

Interview: The Omni Retailer P&L and How It Impacts Brand Profitability, with Chris Perry, Chief Learning Officer & Co-Founder at FirstMovr

During the last few years, retailers and brands have invested heavily in people, process, and technology to create new digitally-led experiences for consumers to discover, buy, and get their purchases. This innovation has put pressure on the retailer P&L, which is naturally having a downstream impact on yours. This is a podcast audio version of a webinar featuring of course Lauren Livak, Director of the Digital Shelf Institute and driving force behind the Digital Shelf Playbook series from the DSI, and our special guest, Chris Perry, Chief Learning Officer & Co-Founder at FirstMovr.

Together, in this second episode of their P&Ls Under Pressure Series they dive into the retailer P&L and talk through some trends and strategies to understand your most important customers’ financial priorities, and their impact on yours.

Transcript:

Peter Crosby:
Welcome to Unpacking the Digital Shelf where we explore brand manufacturing in the digital age.
Hey everyone. Peter Crosby here from the Digital Shelf Institute. During the last few years, retailers and brands have invested heavily in people, process and technology to create new digitally led experiences for consumers to discover, buy, and get their purchases. This innovation has put pressure on the retailer P&L which is naturally having a downstream impact on yours.
This is a podcast audio version of a webinar featuring of course, Lauren Livak, Director of the Digital Shelf Institute and driving force behind the Digital Shelf Playbook series, and our special guest, Chris Perry, Chief Learning Officer and co-founder at First Mover. Together in this second episode of their P&Ls Under Pressure series, they dive into the retailer P&L and talk through some trends and strategies to understand your most important customers' financial priorities and their impact on yours.

Lauren Livak:
All right, hello everyone, and thank you for joining today's Digital Shelf Institute webinar. My name is Lauren Livak. I lead the Digital Shelf Institute. Really excited to be here today and walk you through the second webinar of our series called P&Ls Under Pressure, but the retail version. Like I said, this is the second webinar. The first webinar was done on the manufacturer P&L. I will put the link in the chat so you can watch that recording. And this is also a live experience online to go through the P&L and understand all of the different pieces of it. I am joined today by Chris Perry and I will let him introduce himself.

Chris Perry:
Thank you so much Lauren, and so excited to be back with some of you coming back or for the first time, you won't miss out on either one. You can go in any order. Well, this isn't a part two that's exclusive or connected to part one, but can we definitely encourage you to see both sides of the P&L coin. But my name's Chris Perry. I'm the Chief Learning Officer at First Mover and a fellow nerd and torch bearer in this lovely disruptive digital commerce space, having led e-commerce across Kellogg's Wellness Pet Company and record in the past and having gotten to work with you a lot when I led Executive Education at Edge by Essential before co-founding First Movers.
So I'm just excited to be here to share, geek out on everything profitability and how we can create value together with our retailers.

Lauren Livak:
Thanks so much, Chris. And if you could go to the next slide just to kind of level set on why Chris and I thought that this would be a valuable webinar to have. These days, especially with the economy, the way the world is, profitability is a number one topic and it's something that's really important for brands and for retailers. From a brand side, they need to make sure that they're partnering with their retailers and from the retailer side, they also need to make sure that they're working correctly with the brands. So it's a mutual relationship where the brand and the retailer need to be successful and need to understand where each other is coming from. So the brand needs to understand why a retailer is looking at something specific on their P&L, and that's what we'll talk about today. And from the opposite side, the retailer also needs to understand how the brand thinks about profitability and what's important to them.
So this session as well as the interactive online experience really dives into the profit and loss statement, which is really what profitability comes down to. And Chris and I both believe that it's fundamentally important to understand the basic financials of the P&L. And then Chris is going to walk through some examples of how you can actually affect that change. So the agenda for today's session is we'll dive into what is profitability? What are the primary pressures? And then how does profitability really work from a retailer perspective and how can leaders improve their profitability from a brand looking at a retailer and then from a retailer looking at their own P&L as well?
If you have any questions during the session, please feel free to drop it in the chat or in the Q&A, we will answer along the way and there will also be time for questions at the end. So Chris, what is profitability? What are we talking about here today?

Chris Perry:
So for anybody who didn't join us in part one or may need to catch up on that as their own part two, I promise this is the most boring slide coming next, but it's the simplest one because some of us, we're all tied to profitability, but we don't all own it. Literally on a lot of people's resumes or on job descriptions is like, "Has owned a P&L, has owned a profit and loss statement," because that is an important ability and not everybody's had to do that at full senior scale yet, but it is part of something that we're influencing if nothing else.
And so at least for today, the way we're we're defining profitability, the way many people do it, it is a metric, a measurement of a company's or a brand's portfolio depending on what level of the company you're looking at, of a company's financial gain relative to its operating expenses. And we did put the word loss because unfortunately sometimes we're not all profitable. Sometimes after I earned a $100, I spent $120, on negative $20. So I didn't make something. Hopefully we're getting a gain or we see a path to gain.
And really again, this is just the difference between the amount earned and the amount spent. Obviously it's not that simple or we wouldn't have friends who work in finance and accounting and auditors and everybody else that makes all of this entire industry work, but at a simple level, that's what everyone is actually measured on. Yeah, we want to drive top line, but we have to be actually sustaining the bottom line. Or like many of those unicorn companies out there that don't ever actually make money, they don't always make it. They might make it for a while, but they're living on a prayer. So they've got to make some money at some point and find a way to hit that bottom line.
Now, just again as the scene setter, because we're going to go deeper and if you were with us, we had a similar structure, but we went down that manufacturer point of view. Today we're going to go down that retailer point of view, which is really important for brands especially to understand. But I think if we do have any retail experts out there on the retailer side, we need your help too. This isn't just brands catering to retailers. Retailers have to enable brands to create value together.
We know e-commerce is the number one growth driver globally, locally, as I always say, emotionally, spiritually, whatever a lead that you feel compelled to, this is the number one growth driver. It's not the only growth driver, but it is the number one growth driver. And it was true before COVID-19, we didn't even need the pandemic. I think we could go back in time and tell it to go pound sand. We didn't need you. It was going to happen anyway. It just got accelerated. And when we look at the top growth drivers globally, yes, a lot of them are coming from the Asia-Pacific region where many of those markets like China, Korea, Japan are actually quite advanced in e-commerce and the Alibabas and JDs and Pinduoduos of the world are actually really driving the e-commerce agenda, rising to top five status over the last few years.
But we also have the Amazons of the world and other pure play marketplace players that are rising, and even Walmart and other key omnichannel retailers are doing their part to write the new playbook for omni commerce. I do think it's important to note that Walmart is the only retailer in the top five retailers globally who has the majority of their sales in-store. So clearly, there's something to this e-com that we know is putting pressure and raising opportunities for all stakeholders, but it's not just about e-commerce. It's the influence.
Forrester just put out their latest update. So while 62% of retail sales are digitally influenced today, both in e-commerce but also in-store influenced by e-commerce and digital, by 2027, it's supposed to be 70%. So the vast majority of sales are actually influenced by digital from a shopper perspective, but I think the bottom right one is even more important. I bet you money, if we really went back and attributed every purchase decision, even for those who only shop in-store and never had a smartphone and never went on social, they're going to be choosing products off a physical planogram that was influenced from the merchant's perspective, the retail buyer's perspective, by digital.
So I bet you money, almost 99% of all purchases by 2027 will be digitally influenced because the buyer will make the decision on the shelf based on what's winning digitally as well. It's already happening. So just a matter of how much more it's happening across the board. So even if the shopper isn't influenced, the buyer will give the shopper choices that are digitally influenced. So almost everything will. So we know e-commerce is putting a ton of pressure for change, but also offering a lot of opportunity.
But see, this is the challenge though. When I've talked over the last 12 years in e-commerce about e-commerce, it's always been initially phrased as this opportunity. And when you talk about opportunity, people often don't move this fast because they're like, "Well yeah, I got lots of opportunity," but this is like survival also. You have more to lose as a retailer or a brand not doing this right than you do to gain and you have a heck of a lot to gain. And so we obviously want to get to thriving, not just surviving, but we have to make sure we're doing this because there's a lot of risk to retailer and brand survival. And this is in part, due not to our ability to grow the top line, but our ability to maintain and grow the bottom line too.
And so yes, I did say survival. I don't mean to be the boy who cried wolf, but the wolf is here and he's eating your lunch and you're next if we don't move fast, if we don't move strategically quickly towards some of these best practices. And the cool thing is a lot of brands that we're going to talk to, some of these examples are doing these things. What's always interesting to me, I don't expect perfection, but the pages of the playbooks are all out there and everyone's doing two or three of them. Why isn't someone doing 12 of them or 20 of them? Because they're all sitting there. I don't mean they're easy. Obviously if they were easy, we'd all be doing all 20 of them right now, but why aren't we seeing that we could do 12 of them or 20 of them or whatever the right number is? It's not about quantity, it's quality, but why aren't we doing more than just the two or three that a few of the leading companies are?
So we're going to dig deeper into the pressures on the retail side, but also how to look at the P&L as Lauren laid out, and then examples of strategies from both sides that can help enable value.

Lauren Livak:
So Chris, how is e-commerce growth placing pressure on traditional retailers' profitability? And I just want to emphasize, we're talking about retailers like Amazon, Walmart, Costco, that's how we're referring to it in this context.

Chris Perry:
All the retailers you care about and all the retailers that you care about if you're at the retailer as well. So if we didn't name you, you matter too. There is pressure and we might know that there are pressures, but what's so funny is we can't always articulate this story. I hate the word story because it sounds fluffy, but most people can't tell a story. And if you can't tell a story, you can't motivate a lot of people to move and take action because you can't get them galvanized behind it.
So we don't make up stories, we tell stories, but the story has a hero and a dragon and we fight that and we save whoever needs saving and that might be us and our bottom line. So how that pressure is multifold, and we'll just highlight a few here. We actually talked about the three pressures or three core pressures on brands. They're related here to the retailer, but the retailers that we work with, if we're on the brand side, are under massive pressure, first pressure. They are on a multi-front war. It used to be the war of the armies of Europe in the 1700s.
It was the French and the British and they rolled up and they lined up in gentlemanly fashion and they shot at each other and we went home and everybody was good, somebody won and then we went home. There was an etiquette to it. Now there's just this massive multi-front... This is a Jenga block tower with blocks flying off the tower all over the place. We've got, as we said, all these e-commerce retailers, the marketplaces rising up the ranks and those are just in the top 10 retailers. E-commerce really enabling new retailers, new, to take the Game of Thrones.
But those marketplaces aren't just an Amazon selling, it's all of the millions of sellers out there globally and locally who add assortment, add competition, not just to brands on the platform. It's not just who we compete with as a brand versus a challenger brand but if there's more... if Amazon offers more assortment through a marketplace or Kroger Ship adds more assortment and they capture more share of the business, they're taking that because of the marketplace from someone else which is good for them, not good for the other.
Then you've got all those last milers, all those quick commerce players. Some of them like in Instacart, enable the retailers they partner with, but if I'm loyal to Instacart, I might choose specifically who sells on Instacart. And if you didn't sell on them or you no longer did, I might be more loyal to Instacart, we don't know. But if I'm buying from Gopuff, I'm buying directly from a retailer who just happens to be able to get something to me fast. So that mission is no longer fulfilled by one of the traditional retailers.
And then direct to consumer is still not TBD, but it's evolving as brands, both startup brands, but big brands try to use D2C for all the values it can have. But those are little ankle biters nibbling away at some of the share in the market. So 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, which then creates a cash flow issue knowing that they had fixed costs on the bottom line. So we've got massive competition.
In that competition, we also have that lovely price matching going on. So obviously everyone can see everything. It's the ultimate multi eyes of Mordor. Everyone can see Frodo and Sam and they can see them too, but it's not enough that there's everyday low prices and promo going on. It's that there's automatic and manual real-time price matching on steroids. And what isn't necessarily the issue is that Walmart has a rollback and an Amazon matches it. I'm just making up for information purposes. It's that a Target or a chewy.com or someone else might match at their discretion, Amazon, meaning that when the rollback at Walmart ends, Amazon doesn't end the matching because they'll... What I call, it's the dreaded back follow, right? It's one thing to follow forward then I follow back because someone else was following me. So I just point the gun at them. Well, now everybody just stays low and then Walmart's upset that they went back up and maybe they may rematch.
And so this is all... Pricing is at the sole discretion of the retailer, but when I turn the reins over to an algorithm and to systems that are trying to win the everyday load price, it becomes kind of a race to the bottom. And that means yeah, I captured the sale maybe, but I also lost margin on the sale that I made because now I'm not making the extra dollar or extra 50 cents or the extra $10 depending on how deep it goes on the sale that I actually captured. And there are a lot of retailers sometimes that are just matching, but they're not actually getting the shoppers that buy at that price would've bought at any price. So they didn't even need to match, but they did because their system automatically does. So you've got this... There's competition and then there's the automated margin loss that comes from being that competitive.
And then there's the bottom line cost of all that omni channel transformation. There's a lot of different estimates in the industry around retailers. The cost of the different omni channel models. Without any automation, before there's any real optimization, a retailer that made a decent single digit percent bottom line profit metric on their P&L annually starts losing significant dollars the moment they go to Click and Collect or Home Delivery, and that's what leads to the last milers, which actually pose some of the competitive things. The last milers aren't enemies here at all. They're friends in the industry in many instances, but it gives rise to them because some of our retailers can't afford to offer all of that without partnering or just leaving those shopper missions over to a Gopuff or somebody that owns their inventory outright. This is before we talk about automation and all the things that retailers are trying to do to add new revenue streams, automate the cost out, and this was all before inflation and the recession coming, so before the added cost increases and the consumer kind of depressed spending or more concerned perception on their spending going forward.
So there is a lot of pressure here and understanding that, we have to remember our merchants don't always... They don't know why they're acting the way they are. They're not stupid. If you're a retailer, you're not stupid, you're probably smarter than I am. But the reality is that everyone is what they measure, but everyone has a functional role in the body of an organization. So sometimes the people we work with are under this immense pressure, but they can't articulate it either because they're the Oreo cream filling between the two cookies. So they're just being asked to do something because there's an organizational pressure to do something. They're not in a story articulating their own story either.
So us understanding that makes us a better partner. It's not that we have to educate them arrogantly. It's that we know why they're acting the way they're acting and we can actually speak to their pain points.

Lauren Livak:
So Chris, how does a traditional retailer, how does their profitability really work?

Chris Perry:
So if you got a chance to watch part one, you will see a similar visual structure, but today we're going to break down the P&L of the retailer. We looked at the manufacturer P&L, which many of us on the brand said should be closer to, even if you don't have to own it outright or you're not the one that actually holds the keys to that Excel file that you're updating, we have to understand how the P&L works.
But arguably, especially in sales, I would say a lot of sales leaders may own pieces of the P&L but may not own the whole P&L for their company, but they really need to make sure they own as much of the retailers' P&L as they can because that's where the pain is materializing. And then ultimately waving back over to us sometimes in more of a knee-jerk reaction than it is a proactive way of creating value together. "Hey, I measured on the quarter in the year, I really need to make sure I'm making my profit in that moment. Yeah, being proactive and long-term thinking would be great, but right now I just have to hit a metric." So sometimes we're acting in more of a reactive mode and not a responsive mode. Understanding the P&L can help.
So we've got an interactive experience, so I'm going to keep this relatively quick, but just want to make sure we're all on the same page. You can actually dig into this on our interactive page and it just makes it a little more... Let's be honest, P&Ls is like financial ambient that puts you to sleep, but we're going to make this fun. So understanding the elements and what goes into them. So on a retailer P&L and different retailers may call these different things or have other line items so that we've made that note that you should understand how a Walmart is different from a Target versus a Kroger. They may call things slightly different, but the mechanics of the P&L are roughly the same.
We've kind of got three key metrics or three key KPIs that our retailer, the buyer may be measured on or their full merchant team may be measured on. The first one is often retailer margin or pure profit margin, and that is literally calculated as you can see on the left... I'm making this. Walmart sells something for $5. They bought it from us for $4. Obviously they made $1 right there on just pure profit on what they sold to the consumer versus what they bought from us. Their cost of goods is our gross price. It's what we charged to them. I know many of us are trying to take price increases and that is undergoing some really interesting pushback from the entire industry. We're not allowed to change our own pricing with inflation, but... I'm being snarky but that is their cost of goods and that's what they would make.And generally this is a percentage, but it can be a dollar amount too.
And so you can see how it's calculated. It would be the retail price that $5 or $10 to the consumer minus $8 from us, gives me $2 over the $10 they sold it for, which would give me a 20% retail pure profit margin. And it's important to look at it from a percent and dollars because sometimes depending on the price ring of our product, percentages and dollars can be very different stories. I have a good percentage, but it's not an actual enough incense or dollars to offset all the other things we're going to talk about. So that's the starting one. And to be honest, that's before any of our investments.
There are a lot of next level pressures on that. We talked about competition. Anything that takes dollars away means they don't make margin at all. The price matching and promotions aren't wrong, but that can reduce the price that they make on what they had to... We didn't lower our price just because they dropped the price, so they make less. So that can minimize their percentage in dollar amount. And again, oh by the way, occasionally yes, the cost of the materials and labor actually also increased on our side.
So yes, sometimes we're going to have to take our price up too. It may have to be a collaboration, but our pricing is at the sole discretion of us brands. Their pricing of the consumer is at the sole discretion of them. So everyone has the right to do this, nobody has to like it, but that does put upward pressure on that margin.
Now, we're going to go another layer deeper. Most of us who've managed any sort of joint business partnership also was very familiar with all of the investments we're making with the retailer. And that's where we get to what you'd call net retailer margin or net pure profit margin. And that is the same margin we just calculated, that price to the consumer minus the cost from us, the gross price, plus all of the SKU level offsets that we invest in, the co-ops, the allowances, the accruals, the merchandising allowances, early payment discounts. If they pay early and we give them 1% net 60, damage allowances, freight allowances can be in this bucket. Part of our retail media or paid search can be in that bucket. Not always all of it because there's a cost to that too, and some of our retailers don't give the buyer credit for all of it either. Even if we've invested $10 million in Walmart Connect, the buyer may not get all the credit at every key retailer.
So that's something to understand as well but there's a lot that goes into that and that's what helps make some of our products more profitable. That's what helps float some of those. If that's the only reason it's floating, that could be a problem. That might add an opportunity for us to revisit what we'll talk to today in terms of ways we can create more value, but that is some of the way that we're helping ensure that sure, as I'm trying to drop to everyday low price as a retailer, I could still make some money because my manufacturer offsets this with some additional investment.
And again, that's calculated very similarly. Again, as you can see on the bottom retail price. So I'm making this up, $10 to the consumer minus the $8 they bought it from us for, plus a dollar of offset back would get me $3 over the $10 I sold it for. So now to have a 30% net pure profit margin versus the 20 if I didn't add my dollar back. I can also do all of these on sales too. I don't only have to look at the SKU only. I could do it on my actual retail sales for the period minus my gross sales to the consumer. So I take the units times my gross price, plus the offsets on that same math, divided by the retail sales.
So you do have to look at this on both sides, but each individual SKU increasingly needs to be profitable by itself. In-store, we could worry about category margin. In an online world we need to try to take the lowest common denominator approach and approach it from a SKU level. The retailer may still care a little bit more about the category, but if they're selling items like... Nobody wants lost leaders anymore. They want items that hold their own and that's nice to ask for, that's really hard to get, but that's what they want.
And increasingly, we see Amazon de-listing products or crapping them out as they call it, can't realize a profit is the acronym, win something, can't meet some of these profitability metrics. So it's really important that we're trying to design our SKUs to be standalone on their own, knowing that collectively too on the whole year or on a quarter, on a month, we're also being profitable. Pressures here. In addition to the ones we already talked about that would put pressure on the actual pure margin. If retail media is a way I could offset some of that of the cost but, I'm picking on someone, if Kroger Precision Marketing enticed me as a company to spend more with them and not on Target Roundel, that means Kroger got more money than Target did.
So there'd be less offsets for Target, but Kroger got more maybe, disproportionately more. So the retailer capabilities and asks and partnership levels can change who gets more or less of the offset. Who gets credit? So that's another challenge. The retail media team, and again, I'm picking on, Walmart Connect might get credit for certain investment that the Walmart merchant team doesn't, and I'm making up numbers here, but if one asks for $10 million and the other asks for $10 million and you only have $7 million, you're going to be $13 million short and nobody's talking necessarily without your help.
I'm not picking on Walmart specifically. More and more of our retailers thankfully are having more holistic discussions but understanding who gets credit is important because you may have to be the glue that says, "You should be getting credit for that because I'm doing working media to get you top line. I need some help here because I can't give you extra money I don't have just to float the business. I am investing it where you want it but you don't get credit. So you're asking for more. We got to work out that issue."
And just again, insufficiency in the offsets because of price matching and increased costs can cause issues. And unfortunately some of these are not things you can easily track. What if labor costs and shortages put pressure up on the cost to do business that we're not aware of on a day-to-day basis and thus now we're not profitable anymore, even though our price didn't change. Everything else was fine, but the cost of doing business went up. That's something to think about.
And last but not least, contribution profit or the bottom line profit. I know at Amazon they call it CPPU or contribution profit per unit. So you, again, understand the terms from your retailer. This is all of what we just talked about, but then subtracting all the costs of doing business for the retailer. This is probably the hardest one to calculate on our side as brands because that would actually require the retailer to open the kimono and show everything but it is helpful to understand, try to estimate, work with your retailer, especially if they're actually measuring the business on that.
If they're like, "Hey, everything looks good except your contribution profit, the costs are just too high," Well, thank you. Can you help me understand what's in that cost for you? Because if I don't know, I can't help you and then I'm just throwing you money until hopefully it meets a requirement. But without that insight, I can't help you. I really can't. So again, how you calculate that retail price minus the gross price gets me pure profit margin, plus the offsets gets me net pure profit margin, then minus all those extra costs, fulfillment centered cost, shipping costs, that's where we get into trouble with a lot of SKUs.
We sold cereal boxes at Kellogg's, some of our cereal price to the consumer costs what it costs to ship. But as an individual box, there was no knock to Kellogg's and it's no knock to the consumer and no knock to the retailer. It's what it costs to ship. So no one makes money if the box costs the same amount to ship the box. So we had to come up with something different or use other omni channel models where there was a basket building element to really drive that forward, and leaders like Kellogg's are doing that. But we have to think about that. That's where that's where the last Jenga block can really fall apart if we don't think about those costs.
So again, those pressures can include all of the rising, but evolving shipping and handling costs, all the labor costs and shortages. Honestly, it's hard enough just to... First world problems, but hard enough to get fast food done right today. Imagine all these warehouses and fulfillment centers just trying to keep the lights on correctly at a cost that doesn't break the bank. And then just inventory and warehousing costs continuing to evolve. So some of those are outside our control, but we just have to understand that the retailer has to handle all of these and as a reaction, it might push back through the merchant and the retail media teams that they ask for a lot more from us as more of a reactive solution versus that proactive joint value creation solution, and we may have to balance both of those.

Lauren Livak:
And even more exciting now, what do we do about it, Chris? How can a brand manufacturer improve a retailer and their profitability? And this is like a L'Oreal or a Monlouise working with Target or Walmart or Amazon. How can they actually influence it?

Chris Perry:
No, that's a great question and to be fair, with the time we have today, we have so many more options available. I'll hit a couple, maybe low-hanging fruit, many of which maybe you're doing, but maybe you could ramp up and maybe it's more about talking about that internally and externally as part of the story to help, "Hey, we did all of this and that really did add value here for you." And so we'll look at it, just look at a couple levers. I've numbered them as just some many across each of these levers. So if I want to help with pure profit margin as a brand for my retailer, and this does require some retailer support as well in some instances, we'll talk to this in a minute from the retailer side, but if I want to help them with pure profit margin, arguably designing a best-in-class digital shelf, which is where I know most people eye roll like "Yeah, yeah. I'm supposed to have great content and reviews.
Legit, if you did that and if you could catch more fish in the net that are coming down to that net from your retailer, from your retail media, you're going to drive a lot more. You're going to capture more of the sales. They're so eager to capture right now. That's why retail media has exploded among many reasons. Amazon has 77.7%, at least as of 2021 of all retail media spend in the United States, but they aren't 77.7% of the share and they're not 77.7% of the traffic. They are a big share of it, but they're not that big.
So there's a big line... fair share distribution here, but if we're not doing our part to capture the sale with not just complete content like Target and Sam's Club and Walmart will measure with their own scorecards, but compelling content, and I don't want to say we don't have compelling content, you may have amazing content, but I'm always walking the shelves and seeing even the best brands, how they might be able to do a little bit better, and it's because it's evolving in real time.
So 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 actually, I think it sounds silly, but it's a sign of respect to the retailer that you owned your real estate. No one likes to drive up and down the street where it looks like one of the houses is been condemned and everybody else looks like they care about their property. We need to care about our property, but help them catch those fish. And that will help ensure that they're keeping the sales that they're so... I don't want to say desperately, but aggressively trying to drive to their sites and apps.
We also need to think about, and this is easy to say, I'm not going to say it's easy to do overnight, but in the short-term it's promotion differentiation. In the longer-term it's portfolio differentiation. So online at an Amazon on any.com, we have to consider the fact that there's that shipping cost. And again, a single item might not be priced high enough by itself to meet the e-commerce price pack architecture needs. So we have to think about portfolio that fits e-commerce in general, but because of that price transparency issue and the possibility of the matching, we also have to realize we shouldn't be doing promotions if we can help that we know cause price matching, and if it's a straight discount on the same item that everyone else carries, we're essentially letting this happen. Unfortunately again, pricing is at the sole discretion of the retailer, but we have retailers that match club items that are just a larger size. So it's down to the ounce or the individual each of the item at this point.
And so there's many reasons to differentiate how you go to market. In the short-term, it might just be, "Hey, I have virtual bundles or I put a promotion together, let you build a basket. And it's unique and it's something that nobody else can easily match because it's not on one individual item." I was so pleased during this year's Prime Day in July to see so many brands creating virtual bundles, if not also in some cases some hard bundles that were just slight variety packs, slight variations on the items they sell everywhere. They were price pack architectured correctly for e-commerce, but they were unique.
So when there was a 30% off Prime Day deal, it didn't trigger anyone else to need to match. I'm not saying it didn't create channel conflict, but to be fair for what? 48 hours it's going to be. Okay, so it's an event it ends, but nobody else was going to auto-match that because it was unique items. What we are seeing though is the opportunity to further differentiate the actual portfolio too. I don't want to say this doesn't come at a cost to us, but it does help create value for the retail because it starts giving them something that no one else has. It gives a reason for shoppers to stay with them. It also gives us an incubation platform to create new innovation or renovation.
P&G has been launching a number of brands, at least starting exclusively at Walmart at scale, which is kind of cool. I'm not saying every one of these will be their future global star brands, but that it's a great place to start. Give Walmart something special, give them something Walmart would have anyway. Don't give them the flavor nobody else wants just because you have it. Give them something meaningful as differentiation. But I've seen everything from pet food advent calendars this holiday that are only on walmart.com. What a cool thing.
It's one mission, it's upside. It's also trial and discovery of other flavors of that brand, but it's a way to create something and trial something, but that gives you something you can really drive without causing all of that channel conflict and price matching and price erosion, which then maintains your pure profit margin for your retailer.

Lauren Livak:
And Chris, we had a question that came up previously, but I think it might be a good time to talk about it now.

Chris Perry:
Yeah, please.

Lauren Livak:
How are in-store planograms influenced by digital performance? So ratings, reviews, online sales?

Chris Perry:
That's an awesome question. I've seen many, many stats which all seem to say the same thing, but kind of going back to that point from that Forester general comment of whether it's in e-commerce or influenced in-store by e-commerce in digital, the majority of sales are digitally influenced, and because the majority of sales are still in store, that means that most people are actually using digital at some point to shop in-store. And this is no, not like we love going... We are Target guests, we are Target circle members, we love Target, but when I was in Target the other weekend, I was using Amazon reviews to make my decision at the shelf and maybe Target will not want me to return anymore. But either way, I was using the reviews I knew I could get and some of the content to determine the in-store shelf purchase at a different retailer that I actually made with Target. But I've also just shopped, I don't even know what touchpoints I have at some point. I'm not thinking about that as a shopper. I'm just influenced.
I go back to that point though is the winning the digital shelf though is going to inform what wins in store too for many reasons. If the inventory is being pulled, if you buy something online and it's pulled from store shared inventory like at a Walmart, whatever showed up at the top of the digital shelf that got the most clicks and got the most conversions is then going to be the one that's actually pulled from the shelf. So the in-store velocity will be influenced at shelf by what was bought online. If it's store shared inventory, the retailers are making some of their decisions on the planogram based on what's leading on the digital shelf, where the growth is coming from, whether it's truly new and exclusive brands, if not also choosing the global brand or national brand leaders that they want to keep in store and grow in store based on what's winning online.
I heard from a couple CPGs that their Target buyer had asked that they test an innovation SKU or line online first before earning the right to be in the store. Does that sound crazy? No. Why would I want to give... Why would Costco test a Texas region first before launching everywhere else? Because they want to pilot something before they roll it out and dedicate space. Well, why not test it more easily online only? But online only requires different skills. So the principles are the same, but unlike a Texas region of Costco versus other regions or a northeast region first, that's the same playground. We're trying at two different playgrounds with the same principles.
Again, we've got shopper influence, we've got the actual sales influence of where things are being pulled from, and then we've got that merchant influence. So all in all, I think winning the digital shelf, it is a leading indicator of winning the retail shelf in the mid and long term. And I think the honestly, leaning in ahead of the curve, not irresponsibly but now will help ensure we stay on the physical shelf long-term. I think that's a great question.
Cool. Keep them coming. Let's talk about net pure profit margin. So again, there are lots of things I can do. I'm just highlighting a couple quick things here that we can do to help preserve pure profit margin. But now, what about all that money that I'm driving, I'm giving to the retailer, that's part of my offsets or at least a portion of it? When we talk about retail media and paid search, not all of it always hits my buyer and I need to make sure I understand why and what should?
But one of the interesting things here too is we know most of us are investing in some form of retail media. I think there's always a quick... The first step is my first dollar should go to paid search because that's the point of purchase. I know people are buying there. How much of it should go up into the higher funnel of the full funnel approach? Probably more than you think because there are shoppers always passively shopping and we need to bring them quickly into one click away from point of purchase even though the paid search will help us too.
But what's interesting though is there's still a lot of brands and everybody's trying to crack this code, but we get caught up on some of the metrics available. And so a lot of times we're trying to drive return on investment, which at least initially starts with ROAS, which is return on ad spend, but they're not the same thing and they don't necessarily even capture incrementality, which is really what we want.
And so what I mean by that is if I'm running display ads and I'm targeting people that have already bought my brand before, I will likely see a higher return on ad spend than I would if I went after non-brand buyers. Why? Because they've never bought my brand. I have a little bit of a harder sell. So if I'm looking at within display, I'm going to see a discrepancy between the ROAS numbers. But if I push for a higher ROAS, I might actually be minimizing my incrementality and not see any real growth. The same thing as I show here, I just picked on Pampers as an example and made up some numbers, but the point being is if I'm Pampers, yes I want to invest in my own shoppers to keep them shopping and to defend my brand because otherwise another brand might bid on my keywords.
But I really want to make sure I'm showing up for category keywords and phrases where I might get more incrementality of someone who hasn't made the decision yet. I'm definitely going to want to think about where I can competitive keywords so that I'm conquesting where I'm allowed to do that, and I need to make sure I'm looking at the ROAS correctly. And I use this example, this is not from Pampers, but a real example, but I'm just picking on Pampers here for information purposes. But if I was Pampers and I bid on the word Pampers, I'd probably have a decently high ROAS because I was what they wanted, but the incrementality might not be that high because they were already going to look at me anyway. I was going to show up at the top of the digital shelf generally anyway because that's what they wanted.
And I spent more of my weighted money on diapers where somebody isn't acknowledging they want Pampers yet. I might actually get a lower ROAS which would make that look like a worse investment, but most of that might actually be incremental. And the important part here is that the retailer wants your money and media, but they want your money to do something for them, right? Step one, it pads my bottom line, thank you so much brand. Later on they're going to go, "But it did nothing to the top line either. It did nothing to incrementality at all." Well, that's because we might be chasing the wrong metrics and maybe it's a retailer not giving us the right metrics, but we might be chasing the wrong... chasing it from the wrong angle.
Right now everyone's just incented to get a fair share of the money. They're not necessarily wearing their category management hat and really worried about how much incrementality it drives because they got the money first. When the dust settles, they're going to care about how much that drove. And if you get ahead of that, you not only drive it for yourself, but you suddenly can go back and say, "We're like tripling your incrementality here. I can't see the other numbers from the other brands, but I have no doubt we are leaning ahead of this, that has value." And so our offsets have a greater value than the other offset, the other dollar from someone else isn't making as much. It's offsetting, but it's also growing the top line too. And so that's something to think about. How do we accelerate this in terms of how we measure?
Contribution profit. Again, this might add some cost initially on our end because we're retrofitting our lines and new CapEx and OpEx investments to make this possible. We might have to outsource some of this, but we do need to be thinking about e-com ready packaging. One, it's maybe the right thing to do from a true efficiency standpoint, if not also sustainability standpoint, thinking about how we can remove all that extra packaging and actually make it shippable. Amazon has been incenting and/or penalizing brands for a while to try to progress everyone through their three tiers. And it's actually from right to left going from just prep free packaging that doesn't need to be re-bagged or protected because it might get damaged more easily, to ships and own container where it literally is received new labels shipped out, all the way up to all of those things plus it's frustration free, which a lot of the toy category is done where it's not the blister pack on the shelf, but it's something that's more easily opened and more shopper friendly, as well as ships and own container and prep free.
That eco box from Tide is such a great example of a way to remove the plastic, add ships and own container, and it's actually a very shopper friendly format too. So 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 that are more shipped to home. Remember, what happens when we get to flies and own container? That may need something totally different. I may need something that has a parachute built in, right? I'm going to have to be thinking about these. And so getting ahead of this 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 you talked about.
And last but not least on the brand side, just again highlighting just some of the things is more and more of our retailers are opening up capabilities for what we call drop-shipping. They might have different names for it at different times, but drop-shipping is essentially a capability that retailers enable manufacturers to help them with, where the retailer would receive the order from a shopper and they would pass that through software technology to the manufacturer to ship on their behalf directly to the shopper.
Why is this important more and more? Well, it can be a great way for backup inventory. If the retailer during the holidays, "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. Again, there is a finite shelf in 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. And see this is the point, is at first that might add cost to us, but over time it might actually be something we can balance out with our retailers because what if our warehouse is in the New England area, up in the Greater Boston area and we're actually closer to all of those shoppers than our retailers' warehouse for certain purchases?
It might actually behoove us to be whoever's closest and fastest can deliver. And then we obviously make sure everything's fair on the back end through that software and through that technology. So this is a way leaning into some of those capabilities, and if it isn't through our direct-to-consumer or marketplace capabilities, actually tapping the Targets, the Walmarts, the Amazons, where they'll allow us to pilot these capabilities or mature these capabilities, because ultimately we may be having a direct to consumer channel ourselves, we're going to need some of this anyway, but this agility. But this can help reduce some of those operating costs and show that you're leaning in with key retailers.

Lauren Livak:
So now on the flip side, if any retailers are on the phone and they're thinking about how they can improve their profitability, we put this into the presentation because we thought it would be interesting to hear from the retailer perspective. So Chris, how can a retailer like an Amazon, a Walmart, a Target, a Kroger improve their own profitability?

Chris Perry:
And again, some of these might seem like low-hanging fruit, but what I generally found interesting is... And it's not that a retailer or the merchant team has the power to do all of this with just a snap. They're beholden to their teams and their IT, and their tech and investments being made on the site in the app. And so this isn't just like, "Oh, I want better X, Y, and Z. Why can't it just happen?" But what's interesting is if a retailer brought me something that works, I'm so much more inclined or proposal with reasons to believe it'll work and showed me the data. I'm so much more likely to give them more money, even when they were smaller retailers. And this was true in e-commerce 12 years ago, 10 years ago, there were a lot of retailers who all had the same opportunity and they didn't.
But there were some that got way more money because they leaned into enabling brands to test and learn. And so I know that sounds so basic, but it isn't. The more that the retailer can provide in certain instances, the better brands can equip them to win. And there's a longer version in one of our takeaway PDFs you can download on the interactive page, but two examples. If there is price matching in the industry, which is at the sole discretion of the retailer, why are all the deal structures that I'm allowed to use to promote my products, the same ones that can be matched by everyone else.
And I'm not picking on MVMs and in-club savings events and rollbacks and just straight discounts. I'm not picking on anybody. All of those can be matched by everyone, by all the eyes of Mordor. Wouldn't it make sense knowing that we... And I know it sounds... I'm not trying to be nonchalant about it. I know there's a lot of priorities right now, but I want you to promote with me. I want you to promote with me in a way that's not going to cause everyone else in the world to promote with us too. Why don't I offer or work to offer or beta test something with a brand or two that might be willing to do it? So what I call price matching proof deal structures.
Maybe it's gifts with purchase like Target or value with purchase, building a bundle. Many retailers actually can do some of these. It would just take a little bit of manual work. It might be worthwhile if they get the process down. Maybe it's cause marketing, really enabling brands to partner with some of their charities and causes. If not setting up some sort of white label, whatever your cause is. We promote this, we think this is relevant. I've done many cause marketing campaigns that saw anywhere from a 7% to 15% lift with no promotion at all, but that we would give one when you bought one. I'm not saying you don't want 30% left, but start with 10%, right? Start with 15%.
Alternative value. Actually, Amazon and Walmart have both done several and many brands I've seen doing this is get a video credit from either Voodoo or Prime Video when you buy a basket. So that's a nice way. It's not actually a gift card or a discount, it's a value. You could say it's a gift. And now that there are a lot more membership programs and rewards programs, this would be something for the retailer. How do I enable more rewards based offers or bounce back offers that can't be immediately matched now? And the matching is going to evolve but I always find it interesting, the retailers only have so many promotional levers and those are all the ones that companies have tested and gotten the RGM teams to approve or trade teams to approve, but they also cause the domino effect and then come back to bite everybody in the butt.
And so we can proactively lean in, but the retailer might need to enable some of these or promote some of these, just so we can prevent channel conflict, but also build baskets. Cause marketing is awesome, especially in a world where we're more socially conscious and sustainable conscious. So there's a lot of benefits here. The other thing, and this was my point earlier, is retail media, digital shelf, promotional capabilities, all of these are things the retailer might have to enable for us as brands. It's in your favor as a retailer. I know it's easy to say that, it's in your favor to do this because once you do, I'm inclined to help you. I can now.
And so, I would say having best-in-class digital shelf capabilities ensures that we can bring all that amazing best-in-class digital health content and the reviews to your site to help drive as much conversion as possible. It's not a silver bullet, but it will help us long-term. And I'm not picking on Albertson's and Safeway. They've actually been adding a number of capabilities more recently, but before as many regional grocery stores, they didn't have capabilities. So you were really limited to what you could do to drive and add to cart and get people to stick with them as an experience.
And so again, and we could go down the line towards manufacture offsets, the better data you have, the better retail media and paid search capabilities you have, the better reporting you have on that might help with your net pure profit margin because you're going to be able to capture more of my dollars. The more credit you give internally so that I'm getting as a brand more value from my investment internally as partners will help me want to invest more with you. It really is a pay it forward. It really does come back. It's just everybody's worried about not getting theirs now because of what we're measured on in the short-term.
So we have to really... The long game really does work. It's that Simon Sinek, the Infinite Game. It really is. It never ends if we think longer-term. So I know we've covered a lot and we could go way deeper if we had more time, but as I just would set the scene, Lauren here, we're in the scene here. Our success and survival as retailers and brands in partnership is heavily dependent on proactive, long-term profitability management optimization. As brands, we've got to understand the retailer as well as ourselves, A, because that'll help us find the gaps and opportunities, but B, we may be educating or telling the story the retailer may not know themselves, but will very much appreciate because we'll be helping them hit their metrics short and long-term.
And I just always approach, how do we think? Everyone says category growth, but what if you really design that way? What if you really think, "Yeah, I need to put my mask on first, but I also want to save you too. And so I'm going to think about you as well." And Honestly, you notice polite people, you notice generous people in the world. I'm sure your buyers are going to notice you too when you approach them that way because not everybody does. Everyone's somewhat in it for themselves. What if you weren't? What if you were in it for both? It's amazing.
I've had retailers play back that message. I thought you were going to say this and then you went a totally different direction, not because I was better. It was because I was trying to think about, I realized we're going to have to give and get here to get mutual growth here. We were at a stalemate. I tried to find a different creative opportunity. It worked and they could see that. So I know you all, if you're facing a retailer partner or if you're a retailer facing a brand, I don't need to educate you on ways of working, but I'm just saying honestly, think of the other, it comes back to you in tenfold over and over again.
And if nothing else, you'll get insights too that you can apply to others where you give and use that and then that pays back as well.

Lauren Livak:
Thank you everyone for joining me. We still have time for questions, but just to close out if anyone needs to drop, I put the link to the full P&L experience in the chat so you can watch the recording from the manufacturer P&L webinar. This recording will go up live and you can also use the interactive P&L tool to really get to know each of the different elements that Chris walked through. And for those who are members of the DSI, thank you for being a member. If not, I encourage you to become a member of the DSI and/or reach out to Chris if you're interested in working with him on anything from a First Mover perspective.

Peter Crosby:
Our thanks to Chris for joining us. Make sure you know everything coming your way from the DSI by becoming a member at digitalshelfinstitute.org. Thanks for being part of our community.