The Year of Customer Profit: What 2018 Foreshadows for 2019’s Retail Reality

The good news is that 2018 showed progress for retailers in several significant ways. DynamicAction’s Retail Index: 2018 Year in Review & 2019 Outlook demonstrates North American retailers exercised more restraint on promotions and improved their inventory value and consumer-driven curation in 2018. It’s a big step in the right direction, but it's just one of many they'll need to take this year.

There's a consensus that retailers understand radical change is required to be successful in this present era of retail. However, the challenge comes with lack of certainty in exactly where to begin on their journey towards transformation. It's necessary for retailers to confront today’s reality and take steps to shift the direction of their operations in order to achieve profit in 2019 and beyond.

Facing the Reality of a Reduced Customer Base

According to the Retail Index, although North American marketing spend increased 32 percent year-over-year in 2018, retailers and brands struggled to gain new customers (down 6 percent 2018 vs. 2017). Moreover, having those new customers become repeat customers in 2018 eluded retailers, as first- to second-time purchasers decreased 3 percent in 2018 vs. 2017. Amplifying the intensity of this hurdle is the antiquated notion that the 11-plus time "loyal" purchaser is the most profitable. In truth, those savvy shoppers have learned to spend only when promotions, markdowns and free shipping are offered, and they return often — which led to this group of customers being the least profitable customer segment in 2018.

In 2019, retailers will face the daunting task of being compelled to generate more revenue and more orders from a smaller first-time customer group, which are showing early signs of shopping at a lower frequency. To make aggressive revenue and net income targets, retailers will need to laser-focus on their most valuable customers, as overall customer profitability, from first-time to 11-plus purchasers, is trending either flat or down early in 2019. With less new and repeat customers across the board, it's clear that customer profitability is the common dimension the industry is racing to fully understand. When retailers view customers through the lens of profit, high-performance organizations will begin to comprehend how to line up their assets and actions to guide the business towards higher strategic ground.

Striking a Balance for Promotions, Markdowns and Profitability

In 2018, DynamicAction’s Index shows that orders with a promotion were down 11 percent from Cyber Monday through the end of the year as compared to 2017. At face value, that's good news. However, when we look deeper at fewer orders using a promotion, the overall negative impact to margin from promotions on orders was nearly 4 percent greater than in 2017. “Doing less with big promotions” definitely caught the consumer’s attention. Thus far in 2019, the promotional drum is beating at a higher frequency, with orders with a promotion up by 14 percent. Consumers also benefitted handsomely to markdowns on specific products, with orders using a markdown increasing 3 percent vs. 2017, which decreased order level margins by 11 percent in 2018. Moving forward, it's imperative that North American retailers use promotions strategically and keep a close eye on how they're impacting both their bottom line and enticing profitable consumers to transact more frequently.

Free Shipping and Margins

Free shipping continues to be “table stakes” for consumers, and North American retailers are eagerly answering the call, but at the detriment of their margins. With free shipping costs increasing by nearly 13 percent YoY in 2018, and margins per order being squeezed by reduced prices, retailers and brands will need to pay specific attention to higher logistics costs that could further reduce profitability. In 2019 thus far, orders placed with free shipping have continued their upward trend, registering an increase of 9 percent.

Getting Inventory Right

Inventory management was a high note for retailers in 2018. Not only was unsold inventory down 43 percent for North American retailers in 2018, it was coupled with a 22 percent increase in inventory value going into the holidays. It appears retailers and brands are more accurately forecasting the proper assortment of offerings to satisfy their customers. Inventory held in stock that customers sought out online was better in 2018, with a 2 percent YoY increase in the availability of viewed merchandise. In 2019, inventories are already up 9 percent, as well as the availability of products consumers are viewing, up 3 percent compared to the same time period in 2018. Retailers and brands are doing a much better job of holding stock in products consumers are interested in purchasing.

It's not easy to break business silos and get people who have spent most of their careers in a specific function to collectively operate differently. Everyone is weary of change, but the wearier option for a retailer is the failure of not evolving. In 2019, successful retailers are learning from key industry trends. The journey isn't going to be easy, but taking the first steps toward understanding, acquiring and investing in the most profitable customers will put retailers on the right path. With clear hindsight and a strong sense of the near future, they can build a strategy anchored in their customer’s lifetime value and business profitability.

John Squire is co-founder and CEO of DynamicAction, a decision intelligence application that analyzes data dependencies across a retailer's organization and presents immediate, detailed actions to drive profitable growth across the business.