In a world where consumption is increasingly moving online, how should the performance of physical retail stores be measured? What metrics make sense in a retail landscape that is seeing double-digit, compounded growth in ecommerce, while brick and mortar stores struggle to eke out single-digit lifts? Doug Stephens (pictured top), author and founder of consultancy Retail Prophet, argues that brick and mortar stores are worth far more than the bottom line profits (or losses) they generate.
In my book Reengineering Retail, I argue that the industrial-age metrics of comparable growth by store, sales per square foot, and gross margin return on investment tell an incomplete story of physical location’s value and contribution to the business. Judging a store’s performance simply by regarding its most recent sales results is like evaluating a patient’s health by asking what they had for breakfast that day.
It makes no sense.
And the results of wrongly valuing store performance can be perilous. Witness American giant Macy’s annual bloodletting of what appear to be under-performing stores and similar moves by the likes of House of Fraser in the UK.
Like a snake eating its own tail, these businesses will, if they continue on this path, eventually cease to exist. But they are hardly the only retailers falling into this same downward spiral – most do.
In an attempt to tell a somewhat more complete story of performance, some brands are beginning to attribute all or at least a portion of onlie sales within surrounding markets to stores in those markets. And while this gets us a little closer to recognizing the value of a store, this too is speculative at best and fails to tell the whole story about a store’s contribution to the chain.
There is however, another far more relevant, concrete metric that, if reasonably measured, provides a far more complete view of a store’s actual contribution. In fact, in the not-so-distant future, I believe this one metric may ultimately be the only metric that will matter. It applies to department stores, multibrand jewellers and monobrand boutiques.
The key metric companies should use is each store’s media value.
Through the ages media has always been effective wherever people gather in numbers. A thousand years ago that gathering place was the market bazaar, where people socialized, gathered news and information and of course, discovered merchants and must-have products. Then, the printed word became a more efficient means of media distribution and newsprint dominated. Radio then allowed for new levels of both immediacy and reach. Soon after, television became the primary gathering place where consumers received their information. And today, digital channels have largely supplanted all others as the primary social campfire we gather round to know what’s happening, what’s new and what’s next.
But, as any marketer today will attest, the digital landscape has become a very crowded place. Case in point; a recent US study by Merkle, showed that while 2018 digital marketing spending increased by a whopping 34% and cost per click increased by 30%, the result was a mere 3% increase in actual clicks.
We’ve clearly reached a point of diminishing returns on digital ad spend, as consumers swim in a never-ending river of digital content, much of which excludes marketers entirely.
And even if you could easily reach consumers through digital channels, the measures used to evaluate media effect have always been a little squishy. If someone watches 15 seconds of a 30 second pre-roll ad on YouTube is that really a meaningful “impression” and if it is, what’s it really worth to your brand?
So, while people are indeed gathering online, reaching them and doing so in a meaningful way is becoming increasingly difficult.
Yet, there is another place where people today are gathering, much as they did a thousand years ago. That place is physical retail stores. In fact, when I’m asked where the best stores are, in New York, L.A. or London for example, I usually respond by recommending people simply strap on their runners, take to the streets and look for the line-ups – you’ll find them.
Around the world each day consumers are flooding into the stores of brands that that are making it worth the trip. In New York, it’s not unusual to see line-ups at Glossier, Supreme and Kith. As far away as Melbourne, thousands of shoppers packed into a mall for the debut of Sneaker Boy, a growing chain of new-era footwear stores. On a recent trip to Tokyo I witnessed throngs of young shoppers waiting breathlessly outside cool retail stores in Harajuku and Shibuya.
Physical retail stores are not only a powerful media channel; I’d go so far as to argue that they’re now the most manageable, tangible and measurable media channel available to a brand. Unlike digital media where the consumer’s true level of interest or engagement can be debatable, a physical store can validate the consumer’s actual physical presence and participation in the experience. We can connect directly and intimately with them. And, increasingly, we can measure the causal outcome of that physical experience.
And so, it’s my belief that the key to effectively measuring the true productivity of a store is found by focusing on a metric we’re already quite familiar with from the marketing side of the industry but until now have never applied to physical stores. The key metric is establishing a value per physical media impression.
By illustration, I was speaking recently with the Chief Marketer for a major beauty company that operates more than two dozen brands within its house. I asked him how many consumers per year he estimated visited their various branded physical store locations. He guessed roughly 80 million per year. Next, I asked how much he felt it might cost – as a ballpark estimate – to engage a Madison Avenue advertising agency to target 80 million consumers per year but not merely with a 30 second pre-roll ad on Facebook or a series of sponsored posts on Instagram, but with a prolonged (say 20 minute) immersive media experience. A media experience that would allow that consumer to truly internalize your brand story, to understand your products and to begin to feel a part of your community. In other words a truly remarkable and memorable human experience.
He paused a long moment and then said “The cost would be incalculable. It would be astronomical!” he said. And he was right. The cost of such a campaign would be beyond the grasp of even the largest companies.
But here’s the thing: their brand was already engaging an audience of that size with just such a media experience. They’re just not accounting for the value anywhere in their measurement of store contribution.
In the watch world, if a brand is coming into contact with 80 million customers per year in their stores then those stores should be credited with at least an approximation of the market value of those impressions. The point being that physical retail is no longer simply a product distribution strategy – it’s a customer acquisition strategy for which there is an inherent and attributable return of value. We must account for that value.
The question is “what’s the appropriate value to attribute”? It’s a great question and one that requires two components; an agreed upon value per consumer impression and most importantly, a gauge of the quality of the average impression.
The first of these requires some educated assumptions to arrive at an internally agreed upon value per impression. This is not a number that will appear in any quarterly shareholder report, so what’s important is only that it’s internally accepted as an appropriate and realistic figure. For the sake of argument, let’s assume that you agree internally that the value of one positive in-store customer experience is worth 10X the value of a fleeting advertising impression on Facebook. If your Facebook cost per impression is eighty cents then the cost per impression in a store would be eight dollars per customer per year.
The next step is to qualify the degree to which the impressions are positive or negative. In my experience, the best possible gauge to achieve a level playing field is net promoter score (NPS). The essence of which is the answer to a customer survey asking: “How likely is it that you would recommend [brand] to a friend or colleague?”
Respondents are grouped as Promoters (score 9-10) — loyal enthusiasts who will keep buying and refer others, fueling growth; Passives (score 7-8) — satisfied but unenthusiastic customers who are vulnerable to competitive offerings; and Detractors (score 0-6) — who are unhappy customers that can damage your brand and impede growth through negative word-of-mouth.
Subtracting the percentage of Detractors from the percentage of Promoters yields the Net Promoter Score, which can range from a low of -100 (if every customer is a Detractor) to a high of 100 (if every customer is a Promoter).
If a store’s NPS is positive, we can reasonably assume each impression the store generates adds to its contribution to the chain. If the NPS is negative, we can assume that each new impression subtracts from its value to the chain. This value, positive or negative, should then be added or subtracted (at least on paper) from the sales contribution the store makes on paper to the company.
The result? A far truer picture of a store’s true contribution and value.
Consider this example: Store A sells $5 million worth of merchandise in a year but also generates $2 million worth of positive impressions for the brand, meaning that the true contribution of the store – at least from an internal perspective – is $7 million in value. Conversely, Store B generates $8 million in sales but generates $3 million in negative brand impressions, giving it a true net value of $5 million.
Which store would you close if you had to choose? If the decision was based solely on sales the answer would be simple but completely erroneous. However, by including an internally agreed upon media value per customer, we get to a result that more accurately reflects the true contribution of each store.
Put a different way, I’ve been into small stores that generate awesome customer experiences and contribute greatly to a positive brand impression. I’ve also been into elaborate, expensive flagship stores that are absolutely shitty and do nothing but devalue the brand. If you evaluate stores on the basis of sales alone, you’ll never know the difference and even worse, you’ll probably end up closing exactly the wrong locations.
As my friend and STORY NYC founder Rachel Shechtman once said, we have to stop looking at rent as a cost of distribution and begin looking at it as the cost of new customer acquisition. Stores are media, and until we begin measuring them as such, we’ll never understand their true and total value.
This article was contributed by Doug Stephens, author and founder of consultancy Retail Prophet originally appeared on the Retail Prophet website.