Next-Gen Store Solutions Providers: How To Be Believable
By now you’ve probably heard about Amazon’s most recent earnings report, and the reason the company gave for its soft earnings: investments the company is making to enable one-day delivery were higher than expected. While there’s really a lot to unpack in the Amazon earnings report, for now let’s accept the explanation that one-day deliver is harder and more expensive than Amazon planned for. CEO Jeff Bezos believes it’s an investment in the future: “Customers <have>… already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers.”
So, what does this have to do with store solutions providers? In RSR’s July 20129 report on the state of the store, we noted, “It’s not surprising to observe that so many retailers perceive the speed of online competitors’ (read: Amazon) innovations as a serious business challenge. Let’s face it. It is a real issue.” The response from over-performing Retail Winners in the store study was telling. They identified the top-3 opportunities as (#1) “More store fulfillment options”, (#2) “A store experience that’s more like online shopping”, and (#3) “More efficient instore fulfillment of eCommerce orders”.
In other words, retailers are trying to make the store experience their key differentiator from the likes of Amazon, but in a positive way. Store solutions providers clearly see that as an opportunity, and are clamoring to share their vision of the Next-gen Store with retailers. But here’s the issue: exciting and beautiful though that vision may be, when it comes to store solutions, getting a retailer from “here” to “there” is going to be a heavy lift. The retailer will have to absorb all the new costs associated with integrating the new technologies with the existing portfolio, implementation, and staff training.
There has to be an offset. But RSR team is surprised how unaware many technology providers are of the dynamics of the store-level Profit & Loss Statement. The truth is that there’s very little “room” for new costs in most retailers’ store-level P&Ls, and new costs of any kind can undermine the profitability of a store very easily. That in essence is what is happening even at Amazon as it tries to absorb the new costs associated with one-day delivery.
When pitching their solutions to retailers, technology providers often fall into the trap of focusing exclusively on the potential sales lift associated with the new solutions. They believe in the old adage that “new sales covers a multitude of ills”. When my RSR partner Paula Rosenblum and I were CIOs, we both heard this all the time, and we both had the same jaundiced view of those kinds of promises.
A more believable pitch is one that speaks not only to revenue lift, but also speaks realistically to the cost side of the ledger. Solution providers need to talk about what costs will be eliminated, what costs will be optimized or redirected towards sales-building activities, and (finally) what new costs will be additive. To do that, sales teams will have to make some assumptions about three big numbers: per-store sales, gross margin, and the store labor ratio.
All of that can be figured out by looking at the retailer’s financial statements (available on websites like finance.yahoo.com). From there it’s possible to guess per-store sales based on some crude math (for example, dividing total revenue by the # of stores). Figuring out the gross margin is easy – look at the cost of goods sold compared to revenue. And a “swag” estimate of the store-level labor ratio can be calculated by looking at the corporate SG&A.
But that’s not enough. Here’s a tip: tech salespeople should “test” their assumptions by visiting some (more than one!) stores. Look for certain clues: is the tech in the store old or recent (old tech has probably been fully depreciated for years and so any new tech is purely additive)? Can you see evidence of instore wireless techs (for example, a customer portal or employee mobile devices)? How many employees do you see? Are there employees on the sales floor assisting customers? How many point-of-sale checkstands are open? Is there any customer-facing tech on the sales floor?
Finally, take a quick look at the target retailer’s nearest competition. How do they compare?
Getting a sense of the store really helps the sales team to be credible when presenting the costs and benefits associated with the new solution, and it’s not hard to do. Ultimately, retailers aren’t looking for something that is “earnings neutral” from day-one, but they do need to know when a new solution is accretive, that is, adding to the bottom line rather than subtracting from it.
Jeff Bezos has shown a willingness to take an earnings hit in order to create a new competitive wedge (and don’t forget that Amazon also has a profitable web services business to help underwrite innovation of the retail side). Traditional retailers are up against a competitor that is aggressive, creative, patient, and has deep resources.
Solutions providers can really help – but they will only get the chance if their pitch is grounded in reality. It’s not hard – it just takes a little bit of homework.