NRF to retailers, and Wall Street - we need better metrics to assess retail health

Profile picture for user jreed By Jon Reed January 16, 2019
Summary:
Amidst all the next-gen tech at NRF's Big Show 2019, a different and vitally important debate ensued: are retailers even measuring the right things? Here's what I learned about NRF's push to broach a dialogue on new retail metrics.

NRF-2019-retail-panel
NRF's consumer outlook panel gets underway

During NRF's "Big Show" for retailers, I can always count on a vigorous panel on the future of retail. This year didn't disappoint.

A day three consumer outlook panel for media and analysts, moderated by NRF's Director of Retail and Consumer Insights, Katherine Cullen, provoked an important discussion on the need for new retail metrics.

After the panel, I got in a quick 1:1 with NRF on why metrics matter, and the case NRF is making to sell side analysts. NRF also uses this panel as an occasion to share their latest Consumer View quarterly research.

This quarter's data comes on the heels of a decent holiday retail season, especially for e-commerce (though not not for all retailers). The holiday retail season was bolstered by a high (though volatile) degree of consumer confidence and low unemployment rates in the U.S. (I'd argue our perceived economic health is on fairly thin ice, a debate I won't dwell on here).

It adds up to a winners and losers retail market. That beats a retail-apocalypse. But it means brands that don't excel at Amazon-like logistics, experience, and data savvy are in for rough sledding. NRF's latest quarterly data points to why retailers must keep up, as online and storefronts blur into one so-called "customer experience":

The survey found that 70 percent of consumers who are aware of buying online and picking up in-store had tried it, and the top reason for doing so was to avoid paying for shipping. Picking up at the cash register is still the most frequent practice, done by 83 percent of those who have bought online and picked up in-store.

Good news/bad news for retailers: consumers are willing to get in a car to pick up items, but: they expect those logistics to be free.

"Consumers want free delivery, and they’re willing to meet retailers halfway to get it,” NRF Vice President for Research Development and Industry Analysis Mark Mathews said. "If we can get their purchase to the store, they’ll come pick it up if that’s what it takes to avoid a delivery charge."

Retailers are under pressure to turn that in-store pickup into something more, before Whole Foods their competition does. Matthews adds:

Once they’re in the store, they are very open to seeing what else the retailer has to offer. This is part of the growing evidence that consumers see retail as retail regardless of how they make their purchases and get them.

Retailers have been addicted to top-line growth

During the panel, Accenture's Jill Standish argued that retailers need to shift from a top-line growth obsession to focusing on their most profitable customers:

This year was kind of a mixed bag. We haven't seen all the earnings come out from all the retailers yet. But I think the big thing here is we've been in the industry, very much addicted to top-line growth and showing revenue growth year on year, comp store sales, etc.

I think the shift is going to be: "Yes, you need growth because that's going to show a legitimate business, but it's going to be on profit - profitable growth."

Retailers crave foot traffic, to the point that they cater too broadly:

I hate to say this... but not every customer is a good customer. There's those that actually buy on deep discount or clearance and then return.

If I look at the pivot in the industry right now, it's starting to happen. How do you know who your consumers are - that are driving the most profit? How do you maintain them, and how do you go out and acquire customers that have that same type of behavior?

During the panel Q/A, an audience member picked up on Standish's comments, and took them further:

Mark, you mentioned how companies are thinking about measuring themselves and looking beyond top-line growth to brand new metrics. This is something NRF has been talking about for a while... what really drives success for a company in retail?

Panelist Jay Sole, Executive Director, UBS Securities LLC, answered first.

The pressure on public companies particularly, to deliver top-line growth, to deliver revenue growth and at the same time, profit margin expansion is very high. The market is very demanding and to Mark's point, one public company can deliver results maybe slightly below expectations, but stock can go down 10% or more.

That's frustrating for a lot of retailers... But [investors] want top-line growth and they want a margin improvement. As much as companies want to focus on improving their margins, maybe at the expense of top-line, there's always kind of an ebb and flow to that. If you want to be valued at a higher multiple, they have to deliver both.

NRF's Mark Matthews - retailers need new metrics

Mark Matthews chimed in next, pointing out that old school metrics are limiting our ability to assess modern retailers:

I think this is a really, really important subject for the industry - changing the metrics for how retail companies are valued. We actually did a session in October where we invited some retail CFOs and the analyst sell-side community to talk about this subject.

Honestly, if you're measuring modern retail businesses on same-store sales, that might work for some, but for a lot of these businesses, that just doesn't work. We are in a new age of retail, and we really need to come up with ways to measure what is success and what isn't success, whether that comes down to measuring lifetime value of a customer or other metrics.

But if retailers want Wall Street to shift their investment criteria, retailers must make the case. Matthews:

Retailers need to provide the data to the analysts for them to be able to this. But it is very, very clear that we need to rethink metrics. Retail is changing, and it's changing form, and unless we begin to be in a position where we're able to value these companies properly, that's problematic.

After the panel, I cornered Matthews for a quick 1:1. He told that October session on metrics was the most heavily attended session at the event, because "everyone in that room recognized we need to do something different." So what would these new metrics look like?

Lifetime value of customers is not a new concept, but it becomes much, much more relevant, because the cost of consumer acquisition has increased so dramatically. Your ability to justify whether or not that's the right investment rating - is that customer providing you value over time?

Subscription-based revenue models are forcing lifetime value front and center:

This is a subscription box model. If you're investing a lot of money, and bringing a lot of people in, are they sticking around? Are they making that investment worthwhile?

Unit economics for e-commerce is another new metric, especially up against Amazon, which is infamous for taking losses for e-commerce market share:

Another thing is understanding unit economics around e-commerce, because frankly, not every e-commerce sale is profitable, a lot of them are unprofitable. You see companies making a land grab and competing against Amazon, and growing their top-line, but at the expense of their bottom line.

Matthews emphasized that all of this is a non-starter if retailers can't provide analysts with the relevant data. He's hoping NRF can help to push this conversation forward in 2019:

That's going to be a major undertaking for us, this year, figuring out the right metrics, figuring out how to get the data, and convincing all the analysts that this is what you need to know to [measure these companies properly].

I told Matthews I see parallels in the enterprise software industry, where the metrics for how software companies are measured have shifted dramatically due to SaaS. But we don't always value the right things. Matthews:

I read a report not more than a few months ago where the basic assumption was that this retailer had to grow in-store sales by 2% annually, or forget about it. But you don't necessarily need to do that, because the store serves a completely different function nowadays, and how do you account for BOPUS? (Buy online, purchase in-store).

There's good evidence that shows that when you open up a store in an area, it doesn't just create traffic in the store, but it grows e-commerce in that area as well. So there is less demarcation between online and in-store. Therefore, we need to measure stores in a very, very different way.

My take

This strikes me as a much more important discussion than most of the banter I heard on the NRF show floor, which focused on gee-whiz tech like intelligent vending, augmented reality shopping, robotic assistants, retail-as-theater, and other next-gen jingles.

But as it turns out, next-gen tech does actually converge with this metrics debate. Neither will go anywhere unless retailers build an effective data platform, and measure the right things. As Matthews told the audience, this topic has urgency. If retailers can't earn fair valuations for their transformations-in-progress, they won't keep up:

Retailers have to invest. We just released a report with IBM on artificial intelligence... and that's ramping up quite dramatically. Honesty, if you're not getting a decent valuation on Wall Street, that is impacting your ability to invest in some of these new technologies - and that's a real challenge.

A challenge worth tracking in 2019.