Digital Transformation in Retail

David Stepaniuk

Jan 21, 2021 • 13 min read

The COVID-19 pandemic shattered all digital transformation plans in the retail industry, but at the same time it also showed that having one is absolutely necessary.

Retail companies that had launched digital transformation efforts years ago were equipped with capabilities that enabled them to go through the turmoil of this crisis relatively unharmed. Does it mean it’s too late to join the pack? On the contrary, it’s not a matter of choice now - it’s a matter of survival. Let’s explore the most promising directions of the digital transformation journey in retail in the post-COVID world.

What does digital transformation mean in retail?

Digital transformation in retail encompasses a range of business opportunities for leveraging technology to move from a product-centric model of buy low/sell high mentality to an insight-driven model that is consumer-centric. Building strong relations with consumers helps to better understand their needs, tastes, and value perceptions, and then offer products that will satisfy them in a way that will be convenient and cost-effective.

Target, the 8th-largest retailer in the United States, decided to pursue digital transformation by responding to the needs of consumers who don’t necessarily like the in-store experience but want their products immediately after placing an order. This led to the development of omnichannel capabilities that enable consumers to buy online and get their purchases on the same day either by picking them up from a store (Drive-Up) or having them delivered to their doorstep (Shipt). Years of investment in redefining and redeveloping stores to act as fulfillment hubs paid off tremendously during the outbreak of a pandemic.

On an average day in April, our operations were fulfilling many more items and orders than last year’s Cyber Monday, a day for which we had planned months ahead of time. - Brian Cornell, CEO of Target

In the first quarter of 2020 Target has seen a digital sales increase by 141% year-on-year, while sales on Drive-Up increased nearly 1,000% year-on-year in April alone. Shipt registered 60% growth in membership, growing its order volume three-fold. Overall, in the first four months of 2020 more than 5 million guests shopped on target.com for the first time, adding up to a digital sales surge of $1.1 billion over the same period last year. Target was able to effectively respond to this spike in demand because the company's digital transformation had started years before and included the reimagination of what the role of a retail store is, an extension of fulfillment options that matched consumers expectations, an investment in automation of inventory management, and building a strong e-commerce platform.

Target's example proves that the reductive perception of retail digital transformation as just selling goods online and using the latest technological gimmicks is far from being true. Digital transformation strategy needs to involve the whole organization, redefine the operational model or even the business model, and create new digital capabilities that will irreversibly change how every department of a company works.

We continue to strongly believe that the future of US retail will be based on an omnichannel model, in which quality retailers will serve their customers through both physical and digital capabilities. That’s why we’ve consistently pursued a strategy based on investments to enhance both physical and digital shopping. - John Mulligan, COO of Target

E-commerce - online shopping is the new normal

In April 2020, e-commerce adoption grew more than in the previous 5 years combined. It means $100 billion worth of goods shifted from offline to online channels in the USA alone! The impact of this change goes much further than just buying via a website. It influences changes in the way consumers think about and use payments, fulfillment options, loyalty programs, discover new products, compare prices, and decide which retailer is the most attractive to them.

A Forrester survey of 1,122 online adults in April found that 41% are buying more things online than they have in the past. The number of first-time purchases on traditional retailers’ e-commerce sites jumped 119%. It’s not just a temporary change due to epidemic circumstances. Consumers discover the advantages of online channels, overcome their fears and doubts, and find out how they can benefit from this experience. Few weeks of online shopping is enough to constitute a behavioral change, creating new habits and preferences that are here to stay.

“We have already begun to see it with the expansion of order-ahead and BOPIS (buy online, pick up in store), but that will quickly shift from a nice-to-have service to an expectation,” retail strategist Melissa Gonzalez said in an interview with PSFK. Early signs show that brick-and-mortar stores and restaurants will bounce back to some extent after epidemic restrictions are over, but the growth of sales remains to be dominated by online channels.

E-commerce is much more than just having a digital storefront for collecting orders online. Digital transformation triggered by this trend cuts much deeper than that and needs to take into account many different aspects of business strategy. Online shoppers will compare the company's positioning, assortment, experience, and services with much broader competition than when shopping offline. This might impact marketing and sales budget allocation, the necessity of investments in automation of order processing and fulfillment, and exploration of new business models to accommodate new variables in the value equation. In China, 28% of consumers switched their primary store and half of them do not intend to return to their original retailer after the pandemic is over. Availability and reliability of delivery services, inventory (broad choice, lack of out of stocks), and competitive prices are the most common reasons.

Not every retailer has a means of playing in so many new fields. That’s why considering partnerships to drive necessary changes quickly and leverage technology and know-how will be very important. Studies show that 88% of consumers are willing to pay for same-day (or faster) shipping. This leads to the rise of delivery and fulfillment services that retailers can use. DoorDash and Instacart secured new funding to keep up with rising demand at the record high valuations of $16 billion and $13.7 billion respectively. Even big players need solid partners to keep up with consumers’ expectations. Walmart announced teaming up with Shopify to expand its inventory and compete with Amazon for the title of the “everything store”. This move not only provides Walmart with a broader assortment to lure consumers, but also significantly grows the revenue stream from Walmart Marketplace as Shopify sellers will need to pay a fee to be listed and use inventory and order management services (a completely different business model).

Reimagine the modern retail experience

Digital transformation in every industry blurs the lines between the digital and physical worlds. The same is true in retail - brick-and-mortar stores are not going anywhere yet, but their digital capabilities need to be expanded. It’s not only about online selling, but also online engagement. Consumers discover, try, and discuss products online. Being a part of this process is a huge opportunity for any retailer. Companies can use the collected data to personalize the offer for consumers and provide an exceptional tailor-made experience regardless of where the transaction will happen - online or offline.

Sephora perfectly blends the digital and physical shopping experiences. Its digitally-enabled stores offer all perks of online shopping, plus allow for hands-on experimentation, like sampling the products, watching tutorials, and participating in beauty workshops. With the help of augmented reality, Sephora has built a virtual “Visual Artist” tool to allow the consumers to digitally “try on” products. After uploading your photo through Facebook Messenger, this smart chatbot will help visualize different makeup styles and products, provide personalized suggestions, and offer customized items to purchase. Another similar tool acts as an augmented reality mirror that simulates makeup on the user’s face in real-time.

Flip redefines the social shopping experience. It perfectly fits into the social distancing reality by enabling consumers to get advice from trusted friends without having them around, by moving the fitting room to the consumers’ homes. Augmenting this with AI-powered visual search opens up a completely new way for product discovery, especially in fashion. Being able to take a photo of a dress you see someone wearing on the street, fitting it digitally on one of your photos, and getting opinions of your friends on the final look, will be a primary discovery tool and purchase enabler of the upcoming years.

Similarly, voice search as a function of app-enabled smartphones and smart speakers (Amazon’s Echo, Google’s Nest) is becoming the main way many consumers do their everyday shopping. It gives a lot of power to retailers as people rarely name a specific SKU, leaving a lot of space to maneuver in choosing the right brand or variant of a product to add to an order. But with great power comes great responsibility - knowing the buyer’s needs, tastes, and preferences will be essential for maintaining trust while shopping through the voice channel. Maybe introducing a conversational bot to build an understanding of the consumer will be a good strategy for first purchases. Later on, using AI algorithms on previous orders to guess the correct choices or delight shoppers with a surprise will quickly become a standard.

Recurring revenue bundle - loyalty redefined

Building strong relationships with consumers is crucial in a digitally enabled world. The ease of finding the cheapest offer and ordering a product from anywhere forces retailers to redefine the consumer’s loyalty and rewrite the value equation. The old playbook of competitive pricing, discount coupons, and giving loyalty points for transactions is not attractive enough to make consumers come back for another purchase. The new rules require retailers to offer unique benefits of such perceived value that consumers will be willing to pay for them upfront and keep doing it on a regular basis.

The most prominent example of this approach is Amazon Prime - arguably the most successful membership program to date. Amazon bundled a number of services that its customers might enjoy after paying $119 a year. The offer is centered around the free shipping of purchased products, but also includes free video and music streaming, unlimited access to ebooks and audiobooks, unlimited storage for photos, and exclusive access to live events and product offers. The results are staggering - over 100 million consumers are Prime members, which makes up 64% of all American households, and each of them is spending on average twice as much as a non-Prime Amazon customer. Even though this program was initially losing $11 dollars on each member, it’s role as a loyalty builder cannot be underestimated.

Other retailers are using the same strategy for great results. Restoration Hardware (RH) introduced a paid membership program in 2016 to reduce its over-reliance on discounts. Since then the company’s stock value has more than doubled, while its value to sales ratio reached x2.2 (almost twice as much as its closest competition). For $100 a year RH customers receive a number of benefits, including exclusive early access to sales, advice from interior designers, and an order concierge service. Nowadays almost 95% of RH’s revenues are generated by paid members who are making purchases more comfortably, no longer hunting for seasonal promotions.

Digital transformation helps to create scalable & sustainable services that can be bundled to propose an offering that will make it a no-brainer for the consumer to justify the recurring payment. Analysis of data collected offline and online can unlock an understanding of what consumers already own and what they still need, which is necessary to build a collection of benefits that they won’t be able to refuse. This might be access to limited product offers or special events, professional services (stylist, designer, dietician, etc.), extra delivery and packaging options, status symbols as customized products, or concierge services. This is the way to escape pricing wars and build real loyalty to the brand.

Making the first step

BDO’s 2020 Digital Transformation Survey, which polled 600 C-level executives, finds that 100% of respondents are currently implementing a digital transformation strategy or are in the process of developing one. Retailers building a digital transformation strategy with solid partners that understand the trends and technology behind them, as well as the challenges in driving change across company silos, will have unprecedented opportunities to grow in the post-COVID world. If you are looking for such a partner - drop us a message.

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David Stepaniuk

Senior Innovation Consultant
What's next for retail?  Disruption Forum Retail 2021    Get the recording