Study says investment approach a strong predictor of flameouts

A recent answerthink/IBM Global Services study offers a surprisingly undervalued predictor about retailers with online channels that will make it through this holiday season. At greatest risk are retailers who operate with a short-term focus, primarily using measures from a mature business model, such as short-term profitability or ROI, to benchmark their performance. This leads them and their investors to mistakenly focus on immediate results and recouping their investment as quickly as possible, and avoid making investments beyond any projected positive cash flows. They treat online initiatives as an extension of existing sales channels, resourcing the activity with borrowed or part-time staff. "The study makes clear that companies with a short-term ROI focus are mortgaging the long-term health of their brand and their existing channels by exposing them to risk from a poorly executed online presence," says Richard Roth, managing director of Hackett Benchmarking & Research, the research arm of answerthink, which designed the joint study.

On the other hand, retailers operating with a path-to-profitability perspective view web initiatives as a classic start-up investment. They recognize that the investment must be planned and measured differently than a mature business, and are using metrics appropriate to start-ups like growth of customer base, sales growth and brand awareness. They and their partners have accepted that web investments may not be profitable in the short term, and are charting a path within a two-year-or-less timeframe. Importantly, they are deploying initiatives with dedicated staff and other resources, often creating separate business units so that they may be nurtured appropriately.

The study shows that barely a third of online retail initiatives from traditional and pure-play retailers show a long-term, integrated approach to investment and measurement. Veteran retailers such as The Limited Inc., Neiman Marcus, The Bombay Co., Value City and TJX Cos. Inc. took part in the study, as did a range of newer pure-plays and traditional discount stores, department stores, superstores and other retailers with catalog and online channels as well as physical presences. Companies participating in the study have annual revenues ranging from $100 million to more than $8 billion.