Batter Up: Why Most Retailers Are Confused About Traffic
Whether same-store sales are up or down, analysts and other stakeholders 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 with the “what drove same-store sales” question have narrowed the possible answers down to these two variables: either more people are coming into the store or more stuff is being sold to those shoppers.
The ticket or traffic question is certainly relevant. When analysts ask it retail executives are compelled to answer. Answering the "ticket" part is simple enough. Any point-of-sale system can produce the answer to whether average ticket values have increased. But what about traffic?
While virtually every retailer can provide 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? Because it seems traffic 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 brand's “transaction count,” or what's 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 isn't the same as traffic count.
Transaction Counts (hits) vs. Traffic Counts (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're not proxies — not even close.
Transaction counts (hits) may be up, but knowing if it was a result of an increase in store traffic (at bats) or if the retailer was more effective at converting the store traffic it got is an important distinction. This is not a subtle point.
Why Store Traffic Matters
Store traffic is a measure of all the people who visit a brick-and-mortar store, including buyers and nonbuyers. Traffic is a leading indicator that tells you something about a retail store's sales opportunity — more traffic equals more opportunity. If traffic is trending up, it's clearly a positive sign. The converse is also true. If store traffic is waning, it's disconcerting and 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 store traffic is going up or down. To understand this apparent paradox, you need to consider a retailer's batting average.
Conversion Rate = Retail Batting Average
Store traffic count is analogous to at bats; transaction count is analogous to hits. Therefore, a retailer’s conversion rate (batting average) is calculated by dividing the transaction count by the store traffic count — just like 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, checkout lines are shorter and, generally, it’s easier to buy. The transaction count often goes up despite the fact that there's less traffic in the store. In this case, store traffic didn’t increase. If the retailer only has transaction counts to rely upon, then it reports that “traffic is up.” But it’s not. All parties — retailers and inquisitive analysts — seem to tolerate the ambiguity.
The Enlightened Few
The vast majority of retailers today don’t track traffic in their stores and can’t even calculate conversion rates. However, there's a small minority of what I call “conversion champions” who not only track these critical metrics, but use them to run their operations on a daily basis. These conversion champions couldn’t even imagine not having traffic and conversion data.
One of the very best examples is upscale leather goods retailer Coach. The company reported year-end results on Aug. 2 — another stellar year with same-store sales up 10.6 percent.
The results were impressive enough, but even more impressive was what Lew Frankfort, Coach's chairman and CEO, had to say about how the great results were achieved. According to Mr. Frankfort, “Overall comp results were … driven by significant increases in conversion from prior year while ticket and traffic were essentially the same.” He went on to say, “We were particularly pleased with the improvement in the conversion rate since it is the driver that we have the most control over.”
I find it more than a little curious that a company like Coach attributes a good part of its success to an improved conversion rate, something most retailers today don’t even measure. What does Coach know that most other retailers don’t?
Delivering positive same-store sales is hard and it isn’t getting any easier. Retailers like Coach not only deliver great results, they understand how they achieved them. How matters if you want to replicate it. Retailers who track traffic and measure conversion rate in their brick-and-mortar stores have a significant edge over those who don't.