Almost 10 years ago, in the wake of the last financial crisis, consulting firm McKinsey & Company published a report entitled The promise of multichannel retailing. As e-commerce started to gather pace, the authors of the report argued that the only way for retailers to emerge successfully from the ruins of the financial crisis was to pursue a ‘multi-channel’ business model. This meant broadening out from physical outlets in strip malls and shopping plazas, and funnelling more investment into online wholesale, licensing and even catalogue commerce. The idea was that a diversified revenue stream – based on offering customers different ways to shop, and businesses new ways to earn money – harnessed the power of the internet, rather than yielding to it. It represented a pragmatic approach at a time of industry flux, but almost a decade on has the approach really insulated retailers from the upheaval of the sector in the passing years?
Doing multichannel well
McKinsey was right when it warned in 2009 that “capturing the full benefits of multichannel retailing in its true form involves much more than simply publishing a catalogue or replicating an in-store product assortment online and assuming that consumers will click and buy”. Even truer still: “The kind of multichannel retailing that fuels sustainable growth and margin expansion requires a tightly integrated strategy across all channels, including physical stores, catalogues, the internet, and mobile – and even homes... Each channel needs to play a clear (and often quite distinct) role in supporting and reinforcing a retailer’s overall brand equity.”
As online behemoths like Amazon took an ever larger share of the global market, multichannel models became the default setting for many retailers – especially those bound to the UK high street. Some have had a natural head start: clothing chain Next (NXT) made use of its well-established catalogue business early on to help fulfil online orders via its existing distribution and logistics operations.
Others, however, ran into problems, many of which had to do with transitioning their businesses from predominantly offline entities with extensive store estates into something better equipped to serve modern shopping habits. Marks and Spencer (MKS) is still fighting this battle. The high-street stalwart is set to close roughly a third of its stores, which should help free up cash for more digital innovation. So far, online success has been slow to arrive, although new chief executive Steve Rowe – with support from chairman Archie Norman – seems determined to push the juggernaut firmly into the digital age. A new joint venture with Founders Factory aims to give M&S greater access to new technologies, as well as more creative thinking around its digital strategy. That follows news of a new tie-up with Microsoft, which is hoping to utilise artificial intelligence (AI) technologies to enhance the shopping experience.
Multichannel to omnichannel
For other retailers, multichannel retailing has been the strategy for many years. Take recent market newcomer Joules (JOUL), which ran a retail, wholesale and online business long before its arrival on the London stock exchange in 2016. The motivation behind multichannel retailing is usually to build an ‘omnichannel’ business. This means consumers can cross-shop between channels; in the simplest terms, a customer who walks into a shop might also log on to the company website to purchase items on a separate occasion. To maximise sales, companies should have as many channels open, to acquire as many customers as possible. It also helps give customers a sense of autonomy, as prices may differ depending which channel they choose to shop through. For example, promotions run by department store concessions might offer a discount that is not matched by the brand itself in its own stores and website.
But does it work?
Nowadays, you would be hard pressed to find industry consensus on the efficacy of the strategy, although it does have its advocates. Joules chief executive Colin Porter says he “absolutely” still believes in the approach, while Ted Baker (TED) states that it aims to “become a leading global lifestyle brand, based on three main elements”, including “controlled distribution through three main channels: retail; wholesale; and licensing”.
The latter retailer has often been hailed by City analysts as a resilient, solid performer – with its multichannel business model often credited for its success. Following a trading update in June, analysts at Liberum praised Ted’s “mix of retail, wholesale and licencing, [which] means there is no over-reliance on any one channel and tougher trading in one area can be compensated for by stronger growth elsewhere”. This, essentially, summarises the entire rationale behind multichannel retailing.
But more recently half-year figures from Ted Baker prompted widespread disappointment. Softer retail sales, coupled with a provision against potential losses from the recent House of Fraser collapse and tough conditions on the high street, meant the shares took another tumble on results day, taking the share price down by roughly a quarter over the past 12 months. That’s despite consistent overtures from Liberum, which argues that the company remains “resilient and agile” in tough markets.
It’s not the only multichannel retailer that investors are starting to doubt. A shock profit warning from fashion retailer Quiz (QUIZ) has taken the stock – now trading at just 56p a share – down by more than two-thirds compared with its IPO price of 161p. Management has blamed lower online sales to third parties – which include groups such as Next – as well as the previously announced £0.4m provision it was forced to take against House of Fraser for the profit shortfall.
Why the model could be broken
As much as multichannel retailing can help spread the risk and diversify the revenue stream, it also creates a much more complex business. Managing stock, fulfilling orders and working with different suppliers becomes more complicated when selling across multiple platforms. Managing different systems also necessitates more delegation from company bosses, but this increases the risk of errors.
Equally, selling via wholesale accounts to concessions within department stores risks damaging or diluting the brand. This has been a problem for luxury group Burberry (BRBY), which has curtailed the number of partners it works with abroad – particularly in the US – to ensure promotional activity is limited, thus protecting the exclusive nature of the product. Similarly, as illustrated by the collapse of House of Fraser, selling to other retail partners is a leap of faith with respect to their financial health. With the likes of John Lewis and Debenhams (DEB) struggling in the current retail climate, brands selling to department stores also risk losing out in the event of an insolvency. And even joining forces with Amazon to sell via a marketplace arrangement – like Shoe Zone (SHOE) or supermarket chain Wm Morrison (MRW) – means the online behemoth is entitled to a percentage of sales.
