The role that Chief Financial Officers play in retail has evolved tremendously in the digital age. Once accountable for the already-challenging tasks of optimizing supply chain efficiencies, manufacturing partnerships, and maximizing real estate investments, today’s CFOs must now play a strategic role in technology investments that drive innovation, working with their counterparts in merchandising and marketing to drive revenue in both digital and physical environments. With technology-based interactions accounting for 2.2 trillion USD in revenue, CFOs face an increasing pressure to fuel and foster innovation for major retailers.
One of the major investments they make is in the often ill-defined “innovation lab”. While companies like Walmart and Lowes have seen their investments in innovation pay huge dividends, most retailers are still struggling to figure out how to build the store of the future while still effectively managing their balance sheets.
For financial officers - whose primary role is to manage investments responsibly and drive ROI - knowing where to invest and how much to put in can be a fine line to walk: invest too much too fast and an organization can become wasteful or fail to adopt new technologies effectively. Invest too little and a brand can fall behind rapidly against more innovative competitors.
To strike the right balance, CFOs need to play a larger role in creating a paradigm for their organizations that drives innovation, and these officers must make their voices heard in the design of the innovation labs. Here’s part one of our two-part series about how the modern CFO must approach these investments:
Focus on Specific, Actionable Wins
The innovation lab needs to be seen as a place for experimentation and risk-taking, but the CFO must ask the question: “to what end?”
Labs must be tasked with a clear set of objectives that produce measurable results. Sephora’s lab provides a great example of bringing focus to a major investment. Their lab was tasked specifically with driving client education in their physical stores. To do this, the brand employed smartphones, augmented reality, and advanced visualization technologies to help customers create a tailored cosmetic regime specifically for their individual faces.
Sephora’s technology personalized the buying experience and enabled retail employees to teach customers about the nuances of their face, along with which Sephora products address each customer’s unique needs. The program eventually spun off a subscription service called SEPHORA Play! This offering allowed the brand to make huge strides in capturing the all-important, financially stable recurring revenue stream.
Learning from this experience, the CFO should help challenge the innovation lab with key questions like:
- How does this project work to enhance the customer buying experience? The keyword is “buying,” not simply shopping. Customer education is a critical component in building trust in a brand, and higher trust leads to more sales. An ambitious goal is to ensure every innovation project actively works to proactively guide the customer through the buying cycle. Setting goals like these encourages technologists to think creatively and pragmatically.
- Can this project open up new revenue channels? Sephora hit a homerun by creating a recurring revenue stream in a market that is dominated by one-time transactions. It’s critical that innovation labs work with marketing and finance executives to identify and capitalize on revenue opportunities, whether by developing new technologies that can drive subscription services, or delivering new tools to build effective consumer rewards programs. The bottom line is dollars, so while experimentation is absolutely necessary for innovation, the ideas being tested should first be understood by the business including how to implement and execute them at scale.
- How does this project meet the changing demands of the market? Consumer and market demands have changed retail to its core, and CFOs have unique insights into those market fluctuations and trends. When you think about where the retail industry is moving, it’s clear what basic expectations consumers have: 1) a better omnichannel integration, 2) more personalization in their experience, 3) greater interactivity with products, and 4) stronger, bidirectional relationships with brands. Sephora, again, exemplifies success in this area, leveraging augmented reality to offer greater personalization and interactivity, while driving engagement by creating a richer relationship between in-store associates and customers - a relationship we know drives value and meaning for both consumers and employees.
While not all investment-worthy innovation projects will have great answers to these questions, those that do will have a significantly higher likelihood of delivering immediate, tangible value to the organizations sponsoring them. It’s a safe bet that innovation focused specifically on driving these kinds of business goals will not only produce great returns, but establish a strong paradigm and precedent for future technology investments.
The Devil’s In the Details
Sephora’s innovation team is demonstrably creating value for the organization through its work, helping to deliver a double-digit growth in profitable, organic revenue. Their approach to innovation provides lessons every brand can learn from, specifically in how their finance team backs, encourages, and guides technology initiatives that focus on specific, actionable wins. While not expected to be a technical or marketing expert, the CFO can play a critical part of an innovation strategy simply by asking the right questions and doing what great CFOs do best: always keeping an eye out for opportunity.
In part two of this series, we’ll be examining how finance executives can shape the role of innovation labs further by ensuring a brand’s innovation strategy is keeping an eye on the bigger technical and market landscapes. When bringing a market-level view to innovation labs, CFOs can drive advancements in data analytics, omnichannel sales, and back office efficiencies by helping to construct the culture of innovation through investments and acquisitions. Come back next week to learn how.