Merged channel's maddening paradox, Bed, Bath & Beyond style

Increasing digital sales doesn't mean you need fewer stores. Paradoxically, it can mean you need a lot more of them.

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In the earliest days of e-commerce, retail execs envisioned a Utopian merged channel future. As the percentage of retail dollars ever so slowly creeped toward digital storefronts, they dreamed of ever-increasing profits — on the rationale that online operations have lower overhead than bricks-and-mortar.

Alas, retailers have discovered that increasing mobile and e-commerce purchases do not necessarily support the shutting down of physical stores. This week's example: Bed, Bath & Beyond.

In its latest quarter, the $12 billion chain saw physical sales drop 1%, while digital sales grew more than 25%.

BB&B CEO Steven Temares told an investor call that the 2015 realities of allocating merged channel revenue and costs is awfully complicated. "These numbers, in and of themselves, are directional in assessing the productivity of our various channels for reasons such as: when an item purchased online is returned to a store results in a reduction in stores sales; or when an item is being shopped for in the store and concurrently purchased on a mobile device, it is treated as a mobile sale; or when an item is reserved online and picked up in a store, it’s recorded as a store sale," he said.

Here's another mind-blowing stat, courtesy of the CEO. The chain took a hit on gross profits. Why? The answer is the tool so beloved by retail marketers everywhere: coupons.

Explaining his coupon problems, Temares used a mathematical term in front of a virtual room of Wall Street analysts. He attributed the gross profits hit to "an order of magnitude" increase in coupon expenses resulting from exactly what marketers say they want: usage. Temares spoke of an increase in the number of coupon redemptions "and a slight increase in the average coupon amount" along with an uptick in the chain's inventory acquisition costs.

And all of those ship-from-store-to-home worked — sort of — but that increase in those customer shipping costs also hit gross profits, he said.

Want more bad news, courtesy of merged channel? How about $400 million in capital expenditures, many merged-channel-related. "Our technology related projects continue to represent a significant portion of our planned capital expenditures for the year and include the deployment of new systems and equipment in our stores, enhancement to our omni-channel capabilities, ongoing investment in data analytics, the continued build out and utilization of a data center in North Carolina and the continued development of a new point of sale system," the CEO noted.

Here's the kicker, which brings us full circle. With digital sales soaring and in-store numbers actually in the negative, merged-channel goals require (pause) more physical stores. "In addition to our technology related projects, capital expenditures also include the opening of approximately 30 new stores companywide, including the 12 we have opened to-date and our new customer service contact center," he said.

Bed, Bath & Beyond is one of the best-run chains in the U.S. (despite having one of the most unfortunately named brands, the ever-so-bafflingly-dubbed Buy Buy Baby which, as a parent, I find to be a rather repelling name). And it is successfully making merged channel strategies work. But they are an ideal example of the non-linear nature of merged channel.

To do merged channels properly, a chain must continually feed all of the channels simultaneously. It is not a matter of following the dollars and investing more heavily where the revenues are greatest. No, it's a matter of following the customer and supporting the channels that they most want.

Put another way, this is all about truly being customer-centric, instead of merely saying it.

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