The Trouble with Traffic
by Mark Ryski
Whether same-store sales are up or down, analysts want to know what drove results. If you've listened in on an earnings call for a major retailer lately, undoubtedly you've heard the question: was it ticket or traffic?
It seems Wall Street analysts who poke and prod retail executives during the sometimes contentious Q&A sessions have distilled the “what drove same-store sales” question down to these two variables – either more people coming into the store and/or selling more stuff to the buyers.
The “ticket or traffic” question is certainly relevant, so when analysts ask, retail executives are compelled to answer. Answering the "ticket" part is simple enough – any POS system can produce the answer to whether average ticket values have increased or not. But what about traffic?
While virtually every retailer provides an answer to the “was traffic up or down” question, here's the rub: most retailers don't actually measure traffic in their stores. How’s that possible? Simple: traffic, it seems, has more than one meaning.
When a retailer is asked if traffic is up or down, there’s a very good chance that the answer provided actually refers to the chain’s “transaction count” or what is sometimes ambiguously referred to as “customer count.” No one seems to probe on this so, by default, transaction count has become an acceptable proxy for store traffic count. But there’s another rub: transaction count is not the same as traffic count.
Transaction Counts vs. Traffic Counts – Hits vs. At-Bats
To say that transaction count represents a reliable proxy for store traffic is analogous to saying that hits are a reliable proxy for at-bats in baseball. Yes, the two stats are related, but they are not proxies – not even close.
If baseball statisticians only tracked hits, without considering at-bats and batting average, how much less would we understand about the greatness of players like Ty Cobb or Babe Ruth? A lot less. The same is true for retailers. Transaction counts (hits) may be up, but knowing if it was a result of an increase in store traffic (at-bats), or that the retailer was more effective at converting the store traffic it got is an important distinction. This is not a subtle point. Here’s why.
Why Store Traffic Matters
Store traffic is a measure of all the people who visit the store, including buyers and non-buyers. Traffic is a leading indicator that tells us something about a chain’s sales opportunity – more traffic, more opportunity. If traffic is trending up, this is clearly a positive sign. It suggests that the brand is in favor and opportunities abound. The converse is also true. If store traffic is waning, this is disconcerting and it could indicate that the banner is falling out of favor. The number of sales opportunities is decreasing. The problem with relying on transaction counts as a proxy for traffic is that they could be going up regardless of whether actual store traffic is going up or down. To understand this apparent paradox, you need to consider the retailers’ batting average.
Conversion Rate – Retail Batting Average
As mentioned, store traffic count defines the sales opportunity and is analogous to at-bats. Transaction count represents buyers only and is analogous to hits. So, then, a retailer’s batting average, or conversion rate, is calculated by dividing the transaction count by the store traffic count – just like in calculating batting average.
Store traffic and conversion rates tend to be inversely related. When store traffic falls, associates are able to deliver a higher level of service, check-out lines are shorter, and generally it’s easier to buy. The transaction count often goes up, despite the fact that there is actually less traffic in the store. In this case store traffic didn’t increase, but if the retailer only has transaction counts to rely upon, then he reports “traffic is up”. But it’s not and all parties – the retailers and the inquisitive analysts – seem to tolerate the ambiguity.
Don’t Ask, Don’t Tell
One Wall Streeter told me that you can’t ask a retailer about traffic counts if they don’t track traffic in their stores. True, but you also can’t have two definitions for this basic metric either. If you want to ask about transaction counts then ask for transaction counts; if you want to ask about store traffic, then ask for store traffic. This shouldn’t be open to interpretation.
There is a simple way to inject clarity into what has become a convoluted question. Instead of asking retailers if it was “ticket or traffic” that drove results, analysts should ask if it was “ticket, traffic or conversion”. While most retailers don’t track store traffic and so won’t be able to answer, at least it will be clear that they don’t and you will know they mean transaction count – which on its own tells us little about what drove results. As for the retailers who do track store traffic and measure conversion rates, you will have a much deeper insight into what actually drove sales results.
Retailers, and Wall Street, need to take a page out of the baseball playbook.
Mark Ryski is author of Conversion: The Last Great Retail Metric and When Retail Customers Count and founder of HeadCount Corporation. For more information, please visit www.headcount.com.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.