The shift from relying on product margin
This reversal of how retailers create value completely subverts their traditional business models. It means they’ll need to expand their sole focus away from retail margin to a wider range of revenue streams.
As they combine their capabilities in new ways, retailers have the potential to become portfolio businesses. They could transition from a point-of-sale (POS) portfolio business to one which has multiple profitability sources – some marginal and some not. Over time, only a few lines will relate to product margin and they will have a mix of physical and virtual assets, retail, non-retail, products, advertising and data-driven business models or revenue streams – a portfolio with components that are mutually supporting, and which needs to be sustainable and profitable overall.
This recalibration raises a host of possibilities. Will a retailer look to make money from selling the product to the consumer? Or should that transaction be zero-margin, realizing value instead from the consumer data they have gathered through loyalty programs, for example, which may be worth more to the brand than a one-off sale?
By the same token, an individual component of the portfolio – say the bricks-and-mortar stores – might not be profitable on a stand-alone basis but may be contributing inputs, such as data and relationships, that support the profitability of the other components. So, it’s worth keeping in the mix.
This will work if retailers focus on where they can add value. Leading retailers have several inherent core capabilities – consumer relationships, consumer data, physical spaces, people, online properties, real estate and so on. They need to ensure they have the digital capabilities needed to bring these components together to manage their IP, their back-end systems as well as cybersecurity. They now need to rethink how they can combine and leverage those capabilities to unlock the greatest value for themselves, their customers and their brand partners.