A Value Investor's Approach to Multichannel Retail


May 7, 2017

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"Think about each SKU as if it's a business, as if it's a stock in your investment portfolio."

A few months ago, I was on a call with a successful Amazon seller who shared this profound concept that has changed the way we think about multichannel retail. A week later, we shared the philosophy during an on-site meeting with one of our earliest customers. Just this past Friday, that same customer brought the concept up on a conference call to brainstorm phase 2 of Zentail Analytics. They've taken this concept to heart and used it to focus their merchandising initiatives -- as a result their business is growing remarkably in terms of top line revenue and profit.

While watching a live stream of Berkshire Hathaway's Annual Meeting this past weekend, listening to Warren Buffett explain the way analyzes businesses and industries, I couldn't stop thinking about the saliency of this concept and the parallels between value investing principles and multichannel management best-practices.

Here are some overlapping concepts to consider:

1. Establish Key Metrics: Use Data and Logic in Decision Making

Which metrics are most important to identify, optimize and monitor your portfolio of SKUs? Here are the key metrics used by our most successful customers.

  • Gross Margin (net of marketplace commission and fulfillment)
  • Gross Profit (per day, week, month, quarter)
  • Sales Velocity and Inventory Turnover

As we continue building out the Analytics component of our platform, we're working closely with our most successful customers and asking ourselves the above question.

2. Concentrated Portfolio

Focus on a small catalog of SKUs. The fewer SKUs you have the more effort you can place into optimizing each one. Optimizations include iterations in product design and marketing copy.

Having to manage and oversee too many SKUs leads to mediocrity as underperforming SKUs take your team's attention away from outperforming SKUs.

3. Reinvest Profits for Economies of Scale

As order volumes for each SKU grows, so too does your leverage with your suppliers and manufacturers. This gives you the ability to either:

  • earn higher gross profit and reinvest in your product development, merchandising, support and demand generation operational functions; or
  • pass on your savings as lower prices in order to appeal to more consumers.

We advise our sellers to experiment between the two strategies and let the data and competitive dynamics of their product category guide them to the decision that makes the most sense. A blend of the two strategies is often appropriate.

On this note, we see a virtuous cycle take hold which generates considerable value for sellers that implement this strategy wisely:

virtuous cycle economies of scale

4. Unsexy Industries

There's lots of competition in the glamorous industries (i.e. nutritional supplements, cosmetics, outdoor, fashion). We see much more attractive opportunities in product categories that are more industrial therefore less consumer facing and top-of-mind.

Cumulative Gross Profit

If you were to imagine each SKU as a stock whose performance is displayed on a chart, with cumulative gross profit as the y-axis, and time as the x-axis, you'd start focusing on the SKUs and metrics that contribute to multichannel success.

Cumulative Gross Profit SKU Comparison Graph

In this example above, we have plotted three SKUs over a 7 day period. The y-axis is cumulative gross profit.

  • All SKUs started with 1 sale on Day 1.
  • Gross Profit per order is $5 for each SKU.
  • SKU 1: daily sales grew by 1 unit each day.
  • SKU 2: daily sales doubled each day
  • SKU 3: daily sales remained 1 unit per day.

While it is unlikely its exponential growth rate will continue much longer, SKU 2 is proving to be an extremely successful product with $635 in cumulative gross profit generated in a 7 day stretch. On the other hand, SKU 3's cumulative gross profit is a paltry $35.

So, as a merchandiser, what do you do? You seriously consider discontinuing SKU 3, you invest your profits from SKU 1 into new product design and you attempt to grow SKU 2 by adjusting your listing product data and marketing message.

If the concepts here strike you as rational, it's because they are. Let's refine this idea together, please share your feedback and suggestions.

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