The pandemic is having a devastating impact on private lives and businesses all across the globe. According to leading research, two scenarios are most likely: a delayed recovery or a prolonged contraction. However the future will play out, we can observe a significant impact on consumer behavior and product demand, as well as on production and supply chains in the retail industry. This text is a motivational letter to the retail leaders that want to leave the economic downturn in a strengthened position, and outperform their competitors.
Your retail business may have been hit hard by the total closure of stores – which is true for many non-essential retailers in clothing, home furnishings, electronics, and beauty. Or your business may be experiencing a boost in sales due to solid market positioning and a thorough omnichannel strategy. Either way, now is the time for retail incumbents to address the increasing opportunities in retail technology and find answers to the challenges in their current business strategies and operating models.
Why invest now? You have to protect your employees and customers, secure your business continuity, and manage the constant ups and downs in demand and supply. These are the first and most urgent priorities for every retail business. But there is no time to waste if you want to win. The speed of technology adoption is accelerating heavily. Looking at history, it took television 13 years to reach 50 million users, Apple's iPod took four years, Facebook took one year, and it took Twitter only nine months to gain that number of users.
Analysis of data from the last major economic downturn in 2007 supports the imperative of investing now. Research shows that companies that invested significantly in innovation during the economic downturn outperformed the market as soon as the economy recovered. The future of the retail industry relies heavily on technology.
Can you, as a leader, really afford not to ask the question of whether this moment presents an opportunity for bold strategic moves and investments?
Consumers will increasingly have more choice and control than before, which is why customer experience, engagement, and loyalty are more important than ever. As choice increases, loyalty becomes more fragile, and retailers need to act. Consumers will continue to demand price and quality transparency along with a wide range of convenient fulfillment options, but customer experience gains high importance now too.
Why? The spread of COVID-19 introduced a paradigm shift in consumer behavior and demand. Although data on consumer sentiment during COVID-19 shows strong differentiation in local markets, the following changes seem to be predominant:
Historically, the consumer equation was Consumer Value = Cost + Choice + Convenience. It remains to be seen which of the new consumer patterns are here to stay and to what extent after the crisis, but acting early can only play to your advantage. It can be expected that the consumer equation will change and that consumers will not only factor in the evolved cost, evolved choice, and convenience, but also control and experience. The current crisis entails challenges as well as great opportunities to win in the future market of retail.
Playing the facts, retail will not be dominated by online sales in the next few years. But the value proposition of physical stores will evolve from being a distribution channel to that of a platform for discovery, engagement, experience, and interactions with products and services. A leading omnichannel strategy fueled by state-of-the-art retail technology enables this and will influence the future of shopping.
The global retail market was expected to hit $25 trillion in 2019, while overall growth has slowed down. On the other hand, ecommerce sales went up to $3.5 trillion, increasing by 18% from last year. Sales in ecommerce are expected to double by 2023. So this means that ecommerce is indeed growing faster than retail. But with an ecommerce share of 14% and growth projections of +2% a year through 2023, it is still a minor share.
Looking at these numbers, some retail incumbents may not feel inclined to invest in technologies that seem to be the future of shopping. But let's remember, these are the sales figures only, the consumer equation, on the other hand, is already shifting.
The internet will play an increasing role in driving sales in-store. Consumers collect more information online before making a purchase and have an increasing choice. Leading retail companies will differentiate themselves by offering a stronger online presence, superior customer experience, and better retention strategies.
In general, legacy retailers with a large brick-and-mortar footprint have to carry higher fixed costs in their accounts due to the cost of real estate, workforce, etc., and some have been struggling with profitability for quite some time. Legacy retailers struggle to accelerate ecommerce and offer their customers the possibility of online shopping due to a number of factors, including:
Low profit margins are the key reason why some retailers are cautious with ecommerce. For example, strong price competition underlies the grocery market in Germany. This means that the average basket size of a grocery shopper carries low profitability for each retailer. Delivering products to the customer’s doorstep means an additional cost that needs to be built into the pricing structure. In a price-driven market, the cost of last-mile delivery presents a challenge because consumers are also price-sensitive and may make another choice. This aspect may play a role in the future of online grocery shopping.
Unlike Germany, research shows that the UK and France have more consolidated grocery markets, showing less price competition and therefore easing the introduction of online grocery shopping.
The UK market is leading the pack with major players like Tesco, Asda, Sainsbury's, and Ocado adding up to an annual online grocery sales volume of $4.6 billion, which is $110 per customer.
As we see the numbers in online sales rising, customer behavior changing, and emerging future retail trends, shopping in-store or collecting items will no longer be a chore but rather an engaging experience enabled by innovative business models. Winning in tomorrow's retail business means having a leading omnichannel strategy, while the boundaries between online and offline will become more blurry.
Traditional brick-and-mortar retailers such as Macy’s, Nordstrom, and Walmart are expanding their online capabilities and introducing delivery or in-store fulfillment of online orders. Pure online players, on the other hand, such as Amazon and Zalando, are opening brick-and-mortar stores.
Retailers with a high degree of vertical integration such as Nike, Burberry, and Bose are using both online and offline to expand their businesses and to adjust to the future of the retail industry. The future market will be dominated by business models that understand the future trends of retail, get the omnichannel strategy in their markets right, and find the sweet spot.
There are a number of well-known and also new technologies that retail leaders should have on their agenda. The internet of things (IoT) and artificial intelligence (AI) top future retail trends, followed by augmented reality (AR), virtual reality (VR), solutions for digital traceability, robotics, autonomous vehicles (AV)/drones, 3D printing, and blockchain. The following solutions powered by technology, enable retailers to execute on their digital agenda:
So how do you choose the best digital solution to support your retail technology strategy and keep up with constantly changing future trends in retail? Retailers will have to decide on the best tech solution and model based on their objectives and customer preferences, and then evolve and adapt. Hesitating too long may mean losing market share to your competitors. Acting quickly, starting with experiments, learning, and evolving are the key success factors.
Some retailers may have little time to respond because the pace of change is fast, while others will need to push their innovation and IT teams to stay ahead of the pack.
Leading retailers are actively seeking partnerships along their own value chain with production or fulfillment partners, and with innovation and technology partners. Relentlessly focusing on technology and making investments should be done with a realistic assessment of their costs and benefits. Today’s legacy retail companies have grown into complex global systems that impose a potential complexity in calibrating your omnichannel strategy and technology roadmap.
But incumbent retailers also have strategic opportunities in leveraging their market power and dense store networks, which allow for high proximity to their customers. Start small, start with experiments that are focused on the customer journey, and execute rigorously.