‘I’ve been tortured by my inability to see why investors have championed new, disruptive models’

Over recent years the retail industry has been thrown into the shade of disruptive and overlapping future business models – all of which have been championed by investors as the next nail in the coffin of ‘traditional retail’.

I’ve spent a lot of time attempting to forensically prise apart and categorise the differences between omnichannel retail, marketplaces, platforms, consumer brands and D2C brands.

At the same time, I’ve often been tortured by my inability to see why investors have been so quick to champion new disruptive models. Be it the belief that ultra-fast food delivery would shake the supermarket to its core when it serves such a niche set of consumer needs, or why when Amazon announced its plans to launch ‘4-Star’ the same people that had been so bearish about Argos got so excited about a customer offer that felt clearly worse – and subsequently proved it.

Amidst investors’ desire to covet the shiny new thing and bash retail as ‘so last season’, they are missing the virtues that great quality omnichannel retail increasingly holds – providing customers with what they actually want, how they want it and making money while doing it.

This dynamic is currently coming to the fore in relation to D2C, a model that on average has commanded a 3x EBITDA higher valuation multiple by investors over omnichannel.

There is lots to like about the D2C philosophy. It cuts out the intermediary, offers brands control and connects them straight to consumers – often with lower requirements for capital investment through pureplay models. In the US alone, D2C models raised $10bn (£7.8bn) across 420 deals between 2018 and 2020.

On paper the model sounds great, but it has often struggled to live up to the hype. Many D2C players have found a digital-only footprint overly constraining, customers have rebelled against forming lots of fragmented direct relationships with single brands and subscription fatigue has set in.

At the same time, the swarm of D2C players has led to growing promiscuity and increased customer acquisition costs. For many D2C brands that has meant that each customer’s value ends up less than the cost of acquiring them and the growth model stutters.

What is the antidote?

It might look more like the best bits of omnichannel, able to drive higher customer value by serving their full needs across channels with a carefully constructed product range unconstrained by narrow brand allegiances. All while lowering acquisition costs by building customer trust, loyalty and affiliation, and lowering the costs to serve by leveraging the distribution network of physical stores.

There is a risk that I have painted an overly stark picture. There are plenty of D2C models that will be successful and, if omnichannel is to step up and deliver on its potential, then for many, material investment and innovation is required.

To speak in the language of the investors that have so underappreciated the model, there are three core assets that winning omnichannel retailers will nurture and demonstrate.

First, it is – as it has always been – all about the customer. Loyalty and tribal affiliation have never been more important, building recurring revenue without the need for subscription.

“Loyalty and tribal affiliation have never been more important, building recurring revenue without the need for subscription”

We’re seeing dynamism and reinvention in loyalty schemes as retailers focus on how to build enduring relationships through either compelling real-time functional advantages (for example the Tesco Clubcard price approach) or fostering a stronger emotional bond (like the Very Important Pets scheme at Pets at Home).

Second, the product assortment needs to be a ‘differentiated asset’. Future omnichannel winners will not just be resellers. Their product needs to contain a sizeable exclusive and differentiated component.

That will require stronger relationships with the very brands that tried to disintermediate them through their own D2C efforts, and rethinking the commercial model to build mutual incentive and equity to support differentiated product access, rather than just promotional support to offer the same product for less.

Third, while omnichannel retailers have an underlying cost to serve advantage over D2C counterparts, this will only be realised if they have an operating model that can harness it – rethinking the store’s role, driving automation and efficiency, and building agility and flexibility into the critical path. The challenge may not be in building customer appeal or securing product advantage. It will be in profitably and reliably supporting and sustaining it, often facing into some creaky old systems, processes and talent gaps along the way.

These aren’t trivial areas. Not every omnichannel retail business will succeed. For those that do, the returns will be significant and enduring – and, you never know, for the investors that spot the opportunity it may be that eventually the term ‘retailer’ gets the kudos it deserves.