Sunday, 15 July 2012

Not all channels are equal - at least in the eyes of the finance team

One of the more bizarre obstacles I have encountered when working with clients adding eCommerce as a totally new channel to an existing brick-and-mortar retail operation is the accounting treatment. OK, I'm asking for accountants to use their imagination - not always an easy stretch.

But actually the equivalences between brick-and-mortar and virtual channels are very important for two reasons. One, they are essential to properly understanding the business case. Two, they are even more essential to moving from multiple channel to true multichannel in a later phase of the strategy.

I'll start with the less controversial ones. Of course it's all a matter of opinion, but this is my starter for 10 (well OK, 6):

1. both channels probably have warehouses (strictly DCs - distribution centres - for stores, and FCs - fulfilment centres - for online). Some retailers even manage to combine both operations in one location, despite this being actually quite a tricky blend of operational processes.

2. both channels have a store operations team. In a store, there is a store manager, sales assistants etc. Online, there should be a web-site operations management team, organised in various ways. They perform approximately equivalent roles.

Now the going gets a bit trickier.

3. Brick and mortar has store fit-out. Online has a website. If you are going to compare (and eventually seamlessly blend in true multichannel) they need to be treated similarly from a business case perspective. Quite often this means equating store-fitting opex with IT capex, although as SaaS models such as Demandware increase in popularity maybe this distinction may become less acte.

4. Brick and mortar has stores. Online has delivery/fulfilment costs. In the former case, you operate places on the high street to which you distribute your goods for customers to receive. In the latter, you take them to customers' homes for them to receive. The processes are logically equivalent. Fulfilment costs are typically a high part of the cost of an online channel. Store rental is typically a high part of the cost of a brick-and-mortar channel.

And now for the really controversial part.

5. Standard delivery fee income is NOT sales. It is a contribution to your marketing budget. If you accept that delivery/fulfilment costs are equivalent to store rental costs, then delivery fee income is not a way to reduce the fulfilment budget. Imagine the store equivalent: suppose you could charge each customer a few pounds service-fee to be allowed to use the checkout in your stores. Surely you would not really treat this as "sales", (and count it into gross margins)? In the same way as free delivery is a huge driver of trade on a website, allowing your customers to checkout in stores for free does actually help persuade customers to make a purchase.

OK, you might book it into your general ledger as income. But for business-case purposes, and for targetting the web channel, don't treat it as sales income.

6. Non-standard delivery fees are somewhat different. They fall into 3 kinds. Firstly expensive charges for expensive deliveries such as for pallets or 2-man products. In this case, the fees should genuinely be offset against the delivery cost. Secondly, delivery-related services such as installation. These are sales. You have persuaded the customer to buy an extra (service) product. Thirdly options like express delivery, where you may feel it is appropriate to treat these as a (service) product with an associated cost-of-goods/service and resulting margin.

For most retailers, looking at things through this "equivalence" perspective has a number of major benefits:
  1. it allows a level playing field comparison of channels, and avoids distorting behaviour leading to artificial channel conflicts.
  2. it makes the trade-off between the different capex and opex elements of the business cases for each channel far more transparent
  3. it reduces the sense that margins are being distorted by multichannel
  4. it makes a seamless transition to true multichannel much easier to implement later on, especially for truly cross-channel activities such as click-and-collect
Even if you don't like my particular equivalences, select some that you feel are appropriate to your particular business model.

No comments:

Post a Comment