Path to profitability: From retailer to ecosystem operator

The situation: The retail landscape is constantly evolving and has been under pressure globally for the last 2.5 years. Success at the shelf no longer depends on the depth and breadth of the assortment, but on creating engaging experiences. The Ukraine war, inflation and increasing fears of gas shortages are pushing consumer spending to new record lows. Senior executives have either already begun or are planning cost-cutting initiatives, while struggling with the uncertainty of which marketing measures to cut first.?

Find profitability: Change and agility are the new paradigm. Retailers today are changing at high speed to become more consumer-centric and more efficient. However, retailers have never thought about the need to adapt their strategy or business model. If you look at the P&L of a traditional retailer, there is usually only one source of revenue and gross profit, which comes from the sale of merchandise or products (with additional trade marketing income related to buying volumes per supplier). Increasing profitability by managing indirect and direct expenses is difficult today, as almost all cost items are increasing due to the current economic situation worldwide, and squeezing the last Cent out of suppliers is not necessarily the Holy Grail.

In my opinion, this is not the only way to go. Although many retail executives have already focused on the above, I believe it should still be a combination of profitability and growth through new business models, I would call it "quality growth".

The opportunity: I believe retailers have many opportunities to drive growth and, more importantly, increase profitability. Here are a few examples...

• Why not sell services to your customers that are related to your products or even to completely different categories or industries (like insurance, travel, repairs/installations, technology support, the list can be very long). Many large companies already do this very successfully, and selling services is usually a highly profitable business.

If we take a look into B2B sales:

• For example, a retailer could offer marketing services to its industry partners (suppliers). The relationship then becomes more of a partnership (a retailer becomes a supplier) rather than a traditional supplier-retailer relationship. This could be in the realm of a marketing agency providing services to industry partners (e.g., content creation or digital marketing services, to name a few ideas).
• One of the most profitable revenue streams may be media advertising or "retail media." Selling brand advertising on the retailer's website or app to industry partners and their marketing departments can be an extremely lucrative business for a retailer. However, #retailmedia must be viewed and managed as a business in its own right; it's a new business - it's B2B. There is plenty of evidence to support this: media advertising is a high-margin retail business. Major players like Amazon and Walmart are already generating highly profitable revenues that can translate into EBIT margins of up to 30% and change a retailer's P&L. Just listen to the latest quarterly results of these companies.

The golden opportunity: One of the key enablers of creating new revenue streams is customer data or, more broadly, consumer data. I believe this is "the golden opportunity in retail": retailers have a unique opportunity because they are sitting on a golden pot of customer data. The end of third-party cookies plays into retailers' hands, and first-party data will be the new currency in the consumer, retailer and industry ecosystem. Monetizing these rich data assets through retail media can be one of the key levers to unlock new high-margin revenues.

From retailer to ecosystem operator: If we combine the above-mentioned new business areas in B2C and B2B and think more holistically, retailers can become ecosystem operators. What's my point? As I said before, retailers have a huge asset, which is their first-party data about their customers and consumers. Through social media and social commerce, retailers can even extend their footprint and knowledge of consumer needs to the social ecosystem. This can make a retailer a serious thread to the Googles and Facebooks of the world, as they can get a piece of the pie of these giant marketing machines by offering new services, such as advertising. But not every retail company should and needs to go in this direction, as the space might be quite limited to the leaders in their industry segment, i.e. Douglas might become Europe's largest Beauty Ecosystem Operator or MediamarktSaturn might become the Electronics Ecosystem Operator).

To achieve these ambitious goals, the c-suite needs to fundamentally rethink their business and operating models. Finding the right business area to grow, the right way to organize, manage and employ will be the key factors for success