The retail industry has come under intense scrutiny this year, with high street closures and profit warnings continuing to hit headlines. With the continued growth of online shopping shaping the future of the sector, mixed with the tightening of profit margins and heightened customer expectations, boosting the income of a retail business has never been more important. But just what role can finance directors play in leading the adoption of diversified revenue streams and future-proofing the bottom line?
Diversifying revenue streams
Successful in the airline industry, ancillary revenue streams (known as secondary revenue streams in retail) can help bolster profit margins. The airlines’ ancillary revenue industry is now predicted to be worth $44.6bn globally and it’s clear to see the positive and substantial effect that ancillary revenue has – earlier this year Easyjet reported its highest ever figures for ancillary revenue and Ryanair revealed its additional income streams accounted for 28% of its total revenue.
And retailers are following suit. Diversifying revenue streams in the retail industry is being proven to increase turnover and profit amidst the current tough climate. Our recent Beyond the Core research revealed 46% of retailers now make more than a tenth of their revenue in this way and, among businesses with a turnover of over 100k, nearly four in 10 say secondary revenue is very or extremely important to their business.
For retailers, secondary revenue can range from selling advertising on their websites, to offering membership to third party loyalty programmes. Amazon for example, is expected to generate $10bn in ad revenues this year from companies wanting to sell their goods via its website. Similar to how supermarkets often charge suppliers to display their products prominently in stores, Amazon is bringing in secondary revenue by charging its users to display products on the first few search pages.
Those retailers that have a secondary revenue strategy in place are seeing success – three quarters have reported greater profit margins over the past two years.
The role of the finance director
While there is a question of ownership when it comes to secondary revenue adoption, it actually works best when it’s supported across the whole business. Rather than the responsibility for additional income generation falling with commercial directors or marketing teams, backing should come from all divisions, and finance directors are key to this. Forward thinking CFOs and finance directors will be looking ahead to how profit margins can be future-proofed to overcome industry challenges and grow as a business. With secondary revenue key to supporting financial targets and revenues, Finance Directors are extremely well placed to start the conversation and build a secondary revenue strategy.
Secondary revenue as an economic necessity
Adopting additional revenue streams is key for survival in today’s retail world. They play such a substantial role in bolstering profits and improving yearly financial results that they should be listed on a business’ financial reports, as we’ve seen the airline industry do with their ancillary revenue profits.
Now is the time to innovate and look beyond traditional business models. It’s important to develop a dedicated strategy that aligns with the overall objectives of the business, as well as encouraging the clear reporting of additional revenue on the balance sheet. Secondary revenue is already providing financial return for many businesses, and smart finance directors will be championing the trend to make sure it’s on the board room agenda, ensuring business growth and success.