Exploring Omni-channel with Mega Retailers
Thinking through the financial implications of starting or expanding relationships with mega retailers like Wal-Mart and Target
The email from Target asking to meet is exhilarating. You can’t help but envision the explosion in sales as your product graces the shelves of over 1900 stores. It may be the thing that takes your brand to the next level. But it also comes with financial challenges. This post is about the financial implications of a mega retailer distribution channel and aims to help you understand the types of analyses and tools you will need as you build this channel. We break it into 5 sections:
- Sales projections
- Cost projections
- Inventory projections
- Cash and capital needs
- Future questions
Models can get complicated quickly as they strive to describe ever more variables in ever more detail. Initially, a very simple model for revenue that allows you to play with the number of doors (i.e. stores), unit sales per door per week and your wholesale price per unit over time will suffice. You are simply trying to get a sense of the level of sales, your wholesale revenue and the number of units you will need to support those. In time, your wholesale business will reach a level of complexity that requires either a larger, more custom model or a specialized model (such as Drivepoint).
Your analysis gets a little more complex. You will want to think about and have a model that helps you with:
Wholesale unit costs
- How do you price your product to Target and Wal-Mart?
- Will your DTC prices match the on the shelf prices?
- Margins across channels
Wal-Mart, Target and other mega retailers have watched Amazon closely and the size, growth and profitability of Amazon’s ad business has them envious. The margins on ad revenue are incredible for a low margin retailer. For Target, even a modest amount of revenue as compared to their sales can become a big contributor to earnings given the margins.
That means Target and other retailers with ad businesses are going to push their brands hard to advertise on their retail media. There will be increasing pressure on you (the brand) to spend on their platforms. The good news is that spend should drive sales. The bad news is that you need to think about ad budgets for your mega retailer partners, figure out whether you will manage that spend in-house or outsource to an agency and eventually decide how you will attribute sales to your ad spend. Regardless of who manages the spend, you need to factor in the cost of managing the ad spend so you get an accurate fully-loaded CAC.
As you may have already experienced if you are doing Amazon, managing the channel requires domain knowledge, high responsiveness and time. Someone has to do that work to make it pay off. As you add channels and scale them, that work increases, so factor in the cost of an experienced person in your analysis.
If you are pure DTC, you have inventory that’s in your 3PL, inventory on the water and inventory that’s being made. Stocking inventory in stores requires different timing assumptions and it’s committed. You can’t grab it back to fulfill an order you just made online.
To maximize volume discounts from suppliers, you will want to combine DTC and in-store inventory, but will then need to manage the delivery and timing of the inventory separately so make sure your model allows you to separate these different inventory endpoints for forecasting as well as accommodating different sales velocities by channel.
Cash and Capital Needs
Forecasting future cash needs (and the capital needed) is critical. A good model will help you not only plan the future outlays for inventory and then ad spend, but also help you better understand revenues and the subsequent cash inflows.
You also want to run sensitivities or ‘what if’ scenarios so you can see what happens if sales are slower or faster or shipments are delayed so you can prepare in case performance does not match plan.
Matching cash needs to capital is also important. Equity is the most expensive form of capital (remember: founders pay for equity while the company pays for debt). So you want to avoid selling equity in order to buy inventory.
Further, taking big loans to just have the money sitting on your balance sheet for months means you are paying for money you can’t use.
While cost of capital is important, having enough cash to fully take advantage of potential sales is your most important criteria. Dig in further with our Field Guide to DTC Capital.
In the earliest stages, you can use simple models and analyses to understand the revenue, margin, inventory and cash impacts. But you will quickly have questions:
- How profitable is this channel?
- How does this channel rank against my DTC?
- How does this channel rank against other channels I could do?
- Is there crossover between customers in retail and my DTC? Am I gaining customers? Am I cannibalizing my DTC? Can I convert customers acquired through Target to DTC or subscriptions?
- Which products work best in which channel?
You will also have issues that need to be resolved:
- How do I handle pricing across channels?
- How do I handle discounting across channels?
- Is placement in the retailer helping or hurting my brand?
- How do I handle attribution of ad spend in the retailer media with my other media?
The world of mega retail gets complicated quickly. The boost in sales and brand awareness could be awesome, but don’t squander the opportunity by being unprepared to scale it. A little thought into how you answer the questions above will enable you to move faster to take advantage of the opportunities mega retailers can bring. And if you have questions, please book time to talk with our team!