In a recently published report, Deloitte challenges modern retailers to abandon the ineffective retail metrics of yesterday like sales-per-square-foot and same-store sales and embrace a set of new parameters that complement one another.
For the last two decades, retail has been in a state of constant disruption due to the proliferation of the internet and online shopping. Though some feared that the digital era would spell the end of brick-and-mortar stores, it has only lead to a change in business and profit models.
As more retailers adopt an omnichannel approach, the industry is no longer torn between players with physical and online stores. Retailers and competitors from other consumer-focused companies have developed additional profit models like variations on subscriptions, marketplaces, fulfillment as a service, in-house ad and media networks, web and cloud services, licensing internal technologies, and venture funds.
In many cases, these new profit models help businesses maintain or expand their customer base. However, determining their actual value has proven extremely difficult with existing retail metrics.
“While retail continues to evolve and adapt to changing consumer preferences and new technologies, it is increasingly critical to develop newer, more relevant metrics to accurately value and measure retailers. The current suite of metrics was built for a time that no longer exists,” Matthew Shay, president and the CEO of National Retail Federation affirms.
Looking to present both retailers and stakeholders with new ways to measure performance and define marketplace success, Deloitte has come up with a series of holistic and balanced metrics. They are presented in the report titled The Future of Retail Metrics: Measuring Success in a Shifting Marketplace.
Five New Metrics
After surveying retail CFOs and executives at leading retail companies, speaking with representatives of retail trade groups, reviewing annual reports, and spending time with internet-based and online start-ups, Deloitte defined five new indicators of retail performance.
The first two metrics focus on how retailers create value by acquiring customers and capture value by sustaining ongoing profitable relationships.
Retail profit per transaction. This metric measures the profitability of a company’s retail operations, on a per-transaction basis. It provides a common way of looking at all retail activities across all channels.
Sales per unique customer. It addresses how much wallet share retailers can drive across their consumer base, through multiple purchases per year or through less frequent, large-scale purchases.
The remaining three, more traditional metrics compare top- and bottom-line performance with investment efficiency.
Revenue growth. It provides a top-line view that accounts for how a company is growing across its various operations and revenue streams, including both core retailing and auxiliary models.
Return on invested capital. This focuses on the importance of investing in the modernization of current operations to keep up with industry changes.
Free cash flow. It provides insight into an organization’s controllable cash flow reflective of its current investments. This helps identify how much money is available to return to stakeholders and invest in future operations.
“These value-creation metrics, combined with revenue growth, free-cash-flow, and return-on-invested-capital, give us a better way to analyze any retail business. Everyone needs to start asking questions about the retail profit thesis and get to this level of detail. Every retailer needs to be held to the same standards,” Rodney Sides, Deloitte vice chairman told Forbes.