Digital transformation in retail
The potential benefits of retail digital transformation (seamless customer experiences, automated operations, data-and AI-driven marketing and sales activities, and increased intimacy with customers … to name just a few) are compelling but knowing where to start and identifying the challenges ahead will help you achieve your goals.
Accelerate digital transformation in retail
Retail digital transformation can seem complex and daunting. Here are some steps that can help accelerate your transformation:
- Enlist retail consulting to gain an experienced, external perspective that can open your eyes to the opportunities, the low-hanging fruit, and the potential benefits of retail digital transformation.
- Assess your omnichannel strategy and the competitive landscape, propose future scenarios on sales volumes, customer behavior, most-viable sales channels, most frequented and profitable product categories, overall profitability, and market share.
- Don't strategize too long. Sketch a project portfolio, assess benefits and cost, decide on priorities, plan with a MVP mindset, and nominate a cross-functional team.
- Execute your next project by starting with a product-market validation of a prototype or MVP to ensure customer requirements are met.
- Learn and adapt. If a new product or feature resonates well with test customers, double down on it and scale. Adapt to customer and market feedback and don't be afraid to pivot quickly if needed.
Obstacles to digital transformation in retail
Despite the perceived benefits, embarking on retail digital transformation might require a re-evaluation and changes to inventory management software, ecommerce platforms, point-of-sale software, retail merchandising operations, payment processing software, and much more. It can be daunting. Based on Netguru experience, some of the obstacles to retail digital transformation are:
- Low profit margins and innovation budgets. Retail markets can be extremely price competitive (e.g. the grocery segment). The cost of investing in digital transformation (not to mention some of the new business activities it could imply, such as new fulfilment options) can be perceived as prohibitive or unlikely to deliver sufficient benefit.
- Silo-based structures. Silo-based IT structures and business functions are based on ‘pre-transformation’ business processes and ways of working. This can prevent the ‘big picture’ from being seen and embraced fully by organizations.
- Lack of internal capability and capacity. Transformation requires new skills and viewpoints to identify opportunities and to move towards action. Accustomed to the ‘old’ way of working, it’s natural for retailers to lack the skills needed to bring about transformation, or simply lack sufficient capacity within the business to enact significant change.
- Legacy technology, facilities and processes. For established retailers that have been operating in a similar way for years (if not decades), legacy technologies and processes might serve as expensive barriers to innovation.
- Cultural caution. Retail digital transformation can be a scary prospect for established retailers and their staff. It can result in new ways of working, new skills being needed, and a greater reliance on technology than ever before. Not everybody will be ready to embrace this change and yet reluctance can be a potential barrier to progress.
Read more: The future of retail
Technology and software in the retail industry
Technology and software are vitally important to the changes currently taking place in the retail industry, and to the efforts of any retailer to successfully transform.
‘Contactless’ customer journeys are not possible without modern payment devices and retail point-of-sale software. Compelling ‘remote’ customer experiences are not possible without websites, mobile apps, and ecommerce platforms. New, convenient fulfilment options require integrated inventory management software and ecommerce platforms. Efforts to provide differentiating, engaging in-store experiences will be enhanced by IoT, beacons, augmented reality, virtual reality, smart mirrors, and mobile apps.
The chances of building intimacy, trust and loyalty with customers will be greater if you are able to personalize offers and content according to audience – Artificial Intelligence (AI), mobile apps, CRM and custom retail software solutions can all help in achieving this goal. And in today’s cost-conscious times, is any retailer able to hold more stock than it really needs? Business Intelligence (BI) and AI can be used to optimize and automate supply chain, logistics, and staffing.
These are just a few examples, but they demonstrate how almost every current retail trend or retail business objective is largely dependent on technology and software. The challenge for retailers is to deploy digital solutions for retail in ways that help them achieve their business objectives and stand out from the crowd.
Tech Trends in retail
Changes are taking place in retail that affect all aspects of the industry – from the customer experience, to supply chain and logistics, all the way through to back-office IT.
Major (tech) trends in retail
Netguru has identified the 7 top technology trends in retail as:
- Click & Collect
- In-store & in-app AR shopping experience
- Real-time recommendations
- Customer-centered shopping
- Social commerce
- Robots as assistants
- Demand forecasting using machine learning
Check them out in detail in this Netguru blog about the top technology trends in retail for 2021.
Elsewhere, in its Top Trends in Retail Digital Transformation and Innovation for 2021, Gartner identified the following retail digital transformation and innovation trends: touchless interaction, fulfillment execution, algorithmic merchandising optimization, associate enablement and effectiveness, collaborative ecosystems, cost optimization, and values-driven consumption.
Trends in retail IT modernization
It’s easy to think exclusively about the devices and tools that customers interact with. Indeed, it’s easy for websites, mobile apps, chatbots, virtual reality, IoT, beacons, and new point-of-sale and fulfilment options to grab all the attention. However, these are only part of the equation. To facilitate and accelerate retail digital transformation, retailers must also embark on broader retail IT modernization efforts.
Retail IT modernization can relate to both the technology strategies adopted by retailers and the way retailers align technology activities with business activities.
Digital retail transformation is typically accompanied by a review and modernization of the tech stack used by the company. This modernization typically involves a higher degree of modularization. It’s popular for retail organizations to embark on a shift to cloud platforms and increase adoption of SaaS solutions, as these enable the scalability and agility that retailers increasingly require to navigate the constantly shifting retail landscape.
Furthermore, many large organizations are making concerted efforts to break up legacy monolithic architectures in favor of approaches based on microservices and APIs. Such approaches further increase agility and enable companies to add new services and features to their existing offerings quickly and easily (imagine, for example, adding a new fulfilment option, onboarding a new logistics partner or opting to sell goods and services on a new marketplace).
These actions facilitate the migration to a DevOps setup, where product teams are responsible for the development and operation of their products.
Not all of the above can happen at once. It’s common for retailers – perhaps with the support of retail consulting services – to identify those areas that can deliver highest value and to focus on those first.
Many of these changes go beyond technology decisions and relate to how organizations are structured and the interaction between IT and the business. In this area, there are several important trends happening:
- Shift away from system-focused IT support functions to product teams.
- Enthusiasm for creation of ‘tech chapters’ within organizations to ensure healthy skillset development and meaningful knowledge sharing.
- Assigning product ownership responsibility to the business so that technology solutions are not simply matters for the IT department to worry about.
- Assignment of specific KPIs (e.g. transaction cost of website visitor or % of search results that result in sales) to help focus efforts and investment, and to demonstrate the value of specific tech developments.
- Sponsorship of tech projects by top management levels to reflect the growing importance of technology to the business.
Check out the supporting McKinsey article ‘The end of IT in retail?’.
Digital retail solutions
There are a variety of digital solutions for retail that can be deployed by retailers of all shapes and sizes to improve customer service, optimize operational efficiency, increase sales, reduce costs, and identify new opportunities.
Popular digital retail solutions
There’s a plethora of digital retail solutions available to retailers.
In terms of ecommerce platforms and ecommerce solutions, retailers can enhance their online presence by building or optimizing websites, increasing their activity on social media, expanding their sales channels to include third-party marketplaces, and enhancing their fulfilment capabilities to include options like Click & Collect, curbside pick up, and home delivery. They can also invest in enhancing their content marketing strategies, enhancing the USPs in online descriptions and focusing on SEO.
To cater to COVID-19 restrictions and altered customer preferences, retailers can accelerate the adoption of contactless payments to include closed and semi-closed digital wallet options (such as Apple Pay, PayPal, Mastercard, Masterpass, Visa Checkout, etc.). Payment flexibility can be further enhanced with mobile cashiers, mobile POS and self-checkout solutions.
Augmented reality (AR), virtual reality (VR), smart mirrors, IoT and beacons can also be used to enhance in-store experiences and empower customers to comfortably and autonomously explore product collections and store layouts.
Artificial Intelligence (AI) can be used to enhance all different types of retail activities, from online chatbots and in-store robot personal assistants for customer service, through to algorithmic merchandising operations, and advanced marketing activities like dynamic pricing, customer segmentation, churn prediction, and more.
Data science and data analytics in retail
The volume of data being generated across retail customer experiences continues to grow. Online ads, social media, loyalty programs, web content, interactions with mobile apps, contact via email or telephone, in-store purchases, redemption of vouchers, fulfilled orders, customer reviews … all of these interactions can be captured in the form of data. When you apply data science and data analytics, and you add ‘back-office’ data (e.g. sales data, stock orders, staffing) and external data such as weather, time of year, time of day, and even rival pricing, it becomes possible to build informed predictions about which people will buy which products at which prices and at which times of the day/week/month/year. In an increasingly competitive retail landscape, the quality of insights derived from data can be the difference between being a market leader and a market laggard.
With data analytics and data science, it’s possible to harness multiple different sources of data – proprietary and third party – to improve your customer segmentation, personalized marketing efforts, in-store operations (staffing, product location and assortment, staffing), pricing, supply chain, logistics, and much more.
Equipped with the insight generated by data science and analytics, you can make decisions about how to optimize your investment and strategy, save money, better understand and improve your results against sustainability targets, and identify opportunities for new products, services and customers.
Check out the Netguru definition of Data Science.
Artificial Intelligence (AI) in retail
There are a variety of Artificial Intelligence (AI) use cases in retail already, although they are at different states of adoption.
Most brands have invested in chatbot development to provide an easy way for customers to get answers to their questions on web pages, within mobile apps and also on third-party services (like WhatsApp messaging, Facebook Messaging and within Google Maps). This can be taken a step further with AI-driven in-store personal assistant robots, which can be used to provide answers and assistance to customer requests (as well as capturing images of shelves and other areas of the store to identify units in need of replenishment, etc.).
AI (more specifically, machine learning), can be used in conjunction with ecommerce platforms to recommend additional or alternative goods and services based on historical buying habits or combinations that have sold well. The quality of these recommendations can positively contribute to order values (sales), stronger relationships between brand and consumer (intimacy), and greater customer satisfaction (advocacy and loyalty). Taken further, AI can be used to gauge buyer intent and identify the channel, moment and price that is most likely to result in conversion, and apply the appropriate sales or marketing tactics automatically.
Amazon is using AI to enable its Amazon Go stores and “Just walk out” technology, whereby conventional points of sale and retail point of sale software are replaced by a powerful AI engine that is able to identify products picked up by customers, detect the customer passing through a virtual checkout and exit from the store, and then deduct funds from their preferred payment option accordingly. In this way, AI provides the potential for ‘game-changing’ market disruption.
AI and facial recognition technology are also being used to determine sentiment of customers in stores and other locations. Individual instances of shopper discontent (as detected by AI), when identified, can be used to trigger staff intervention and improve customer service and satisfaction. When large volumes of customer sentiment data are integrated and analyzed alongside other sources and types of data (e.g. stock levels, queue lengths, staff on duty and even weather, time of day, etc.) retailers can benefit from high-quality insight to finetune their in-store operations.
AI and automation based on AI can also be used for price optimization, price and demand forecasting, and to improve supply chain management and logistics operations.
Augmented Reality (AR) and Virtual Reality (VR) in retail
Recent advances in Augmented Reality (AR) and Virtual Reality (VR) technology have made it possible for brands to dramatically enhance customer experiences and bring customers closer to products and services, regardless of pandemic-induced restrictions or concerns. The area of ‘virtual try-ons’ is especially popular, and is typically based on using apps or tools that make use of smartphone cameras and AR-enabled overlays to show customers how they (or their homes) might look with the addition of specific products. This technology is also being brought into stores, with the introduction of smart mirrors that enable customers to ‘try on’ as many products as they like, regardless of their physical availability in store. The deployment of this digital solution has the potential to trigger multiple cross-selling and fulfilment opportunities.
Augmented Reality (AR) and Virtual Reality (VR) can be used by fashion brands, clothing and footwear retailers, as well as sports apparel brands, to empower customers to ‘try on’ clothing or footwear, customize products, and create entire outfits. Skincare and beauty brands can enable customers to ‘sample’ products and experiment with new looks. Furniture shoppers can ‘see’ how items will look in their own homes. All of these experiences enable customers to ‘experience’ products in a way that is comfortable for them and inspires confidence.
Virtual Reality (VR) technology enables users to enter simulated or ‘virtual’ experiences and often relies on dedicated hardware (e.g. VR goggles). Retailers can use VR to create entire experiences for shoppers to enjoy. Imagine, for example, being able to walk around an entire store and ‘interact’ with products, or exploring a virtual fitted kitchen, an entire property or the inside of a car. With the COVID-19 pandemic having created distance between shoppers and brands and their products, Virtual Reality and Augmented Reality can help to create new product experiences.
Virtual Reality and Augmented Reality can help retailers at multiple points on the customer journey and sales lifecycle, from product discovery and consideration, through to cross-promotion, through after-sales support (think product care or assembly), and even in logistics and warehouse environments (e.g. goods picking). When deployed effectively, VR and AR can be used to elegantly blend virtual and in-store experiences, extend brand presence into a new space, increase sales, reduce product returns, and improve overall customer satisfaction.
Beacons and IoT in retail
Internet-of-Things (IoT) sensors and beacons can be used as part of broader solutions in many different retail scenarios, including guiding customers around stores or malls, and to notify them (via their smartphones) of new products, special offers, and content that is specific to their location within the store (e.g. product videos). Over time, and with increased information about customer profiles, IoT-enabled technology can be used to create personalized experiences that alert customers to products that they have previously bought (and might have run out of) and new products that (based on previous preferences) are likely to appeal to them. In this way, IoT and beacons can be used to build trust and intimacy between brands and their customers, while still facilitating the ‘touchless’, autonomous experience that is important to many shoppers in the pandemic-affected world.
Data generated by beacon activity and IoT sensors can be integrated with other online experiences (e.g. customer response to online ads, consumption of content on web pages or mobile app content) to improve attribution, and optimize proximity marketing efforts and omnichannel strategies.
Retailers can also use the data generated from beacons and IoT to understand the movements of customers within stores and generate heatmaps. IoT devices and sensors can also be used to indicate merchandise gaps (i.e. empty shelves) so that it’s easier for staff to replenish. Equipped with this data, retailers can optimize store layouts and product location within stores, stock ordering, and even staffing, to improve the overall efficiency of operations and sales.
Elsewhere, IoT can be used within warehouse, delivery and fulfilment operations, and integrated with retail management software (such as inventory management software, ecommerce platforms, and point-of-sale software) to track orders, and provide better visibility on inventory and fulfillment operations.
Assist-bots and chatbots in customer service
Chatbots are not new and it has become common for retailers to deploy off-the-shelf chatbot solutions or invest in chatbot development. Chatbots enable retailers of all shapes and sizes to be present and available to online customers 24/7, at relatively low cost.
Although chatbots are not new, the level of consumer comfort with chatbots or live online chat features continues to grow. Forrester research reveals that "42% of US online adults said that it was important for retailers to offer live online chat on their websites, up significantly from 27% in 2019”.
Chatbots can be deployed for a variety of purposes and in a variety of different ways. They can be used to provide customer service support before, during and after sales. Depending on their sophistication, they can be used to answer simple requests such as store opening hours or product availability, all the way through to providing detailed information about product specifications or how to resolve issues.
The main benefits of using chatbots are that customer service costs are reduced, more customers can be served simultaneously, better and more consistent service can be provided, and human assistance is reserved for only those requests that really warrant it. A good chatbot will use natural language processing (NLP) and should also make use of machine learning (ML) to ensure that the quality of answers provided – and thus customer satisfaction – improve over time.
Chatbots can be deployed to third-party platforms, like WhatsApp, Facebook or Google Maps, or onto proprietary websites, or within mobile apps.
Fulfilment options in retail (Click & Collect, Home Delivery, Curbside Pickup)
- Click & Collect. The customer places an order online and collects the ordered goods from a designated location. This location could be the entrance to a store (which could also be a dark store), from specified parcel lockers, or other supporting locations, such as courier company branches. The majority of large retailers have already adopted this concept. Amazon Hub Locker, as well as Walmart’s Pickup Towers, allow their customers to choose the exact locations they want their products to be delivered to from a selection on a map. Zara's click-and-collect pop-up store even allows customers to make returns and exchanges using this method.
- Home Delivery. This is perhaps the best-known and most-common way for online retailers to fulfil orders. The customer places an order online (web or mobile app), specifies the delivery address and awaits delivery of the product at the specified address, which is typically the customer’s home address. Despite the relatively straightforward nature of this fulfilment option, retailers like Amazon are pushing the envelope with free-and-fast delivery as part of Amazon Prime subscription (the benefits of which continue to expand into a broader range of services, such as video on demand). Other retailers, like Zalando, are making it super easy to return items – return documents come with each order and collection can be arranged via the Zalando mobile app. Such measures help to increase order value and buyer confidence.
- Curbside Pickup. The customer places an order (online, through a mobile app or over the phone) and then travels to a designated location (store, warehouse or dedicated collection point) where the order can be collected (often the order is awaiting collection or placed directly into the customer’s car). Payment is typically made at the time of placing the order, meaning that the collection can take place quickly and without contact. This option is convenient for customers who prefer a ‘contactless’ experience, who are often not at home during standard delivery hours, who pass by collection points as part of their daily commute, or who simply prefer not to divulge personal data (such as home address).
- Parcel lockers. The customer places an order and opts for delivery to specific locker facilities. Once notified of arrival, the customer can open the locker using a short numeric code, a QR code or using a mobile app. Like curbside pickup, parcel lockers offer a contactless and convenient customer experience and can reduce last-mile delivery costs for retailers.
Challenges in retail
Due to the rise in popularity of online shopping, the pace of change in retail was already fast prior to the COVID-19 pandemic. The pandemic has accelerated existing industry trends and brought new challenges.
Build trust and customer loyalty in retail
Consumer behavior changed dramatically as a result of the COVID-19 pandemic. According to research by McKinsey, 75% of US consumers tried a new shopping behavior and 36% tried a new product brand. With consumers’ eyes opened to different shopping experiences and products, retailers now face a fight to gain, regain, and retain customers. There are several ways retailers can do this:
- Convenience. Build an omnichannel strategy in which your online and in-store experiences complement each other to provide customers with maximum convenience and the possibility to order, pay for, and obtain products in a way that suits them. This is easier said than done and requires slick customer-facing websites and/or mobile apps, integration between ecommerce platforms and retail Point-of-Sale software, as well as work to optimize fulfilment operations.
- Contactless experience. Deliver experiences that cater to pandemic-induced restrictions and concerns to keep customers feeling safe and assured. This can mean online ordering and home delivery, or it could mean digitally guided in-store experiences (IoT, beacons and apps), and contactless payment. It can also mean bringing products ‘closer’ to customers with smart mirrors and augmented reality (AR) and virtual reality (VR) so that they can ‘experience’ products from the comfort of a preferred location and minimal face-to-face interaction.
- Personalization. Use Artificial Intelligence (AI) to gauge customer intent and sentiment and personalize actions and offers to improve conversion rates and customer satisfaction.
- User experience. Craft differentiated user experiences with slick, user-friendly websites that build positive brand association; chatbots that provide meaningful and useful answers; and immersive mobile apps that incentivize conversion with easy access to personalized or ‘app exclusive’ offers and loyalty programs. Build the right user experience and the customers will come. Continually refine and optimize the experience, and they will stay.
Optimize retail supply-chain operations
In today’s retail climate, most retailers can’t afford to procure and store more stock than they will be able to move in a short period of time. Technology and new retail strategies can help to optimize supply-chain and logistics operations. Some examples of this are:
- Turning stores into mini-fulfilment centers and using them to enable localized Home Delivery or Click & Collect options.
- Improving demand forecasting using Business Intelligence (BI), Artificial Intelligence (AI) and Machine Learning to better forecast demand (e.g. based on historical data and data from third parties), and then automate ordering and delivery activities. This can relate to both merchandise and staffing.
- Optimizing prices and conversion probability with algorithmic merchandising optimization to make goods and services available at different prices depending on circumstances (fulfilment option, stock levels, external factors, etc.).
- Using IoT sensors and AI in robots and in-store surveillance software to identify empty shelves and notify appropriate parties and systems to replenish and re-order.
- Creating heatmaps of stores with IoT and AI to promote sales of specific products and improve speed of merchandise movement.
Off-the-shelf software vs. custom retail software solutions
In a dynamically changing retail landscape, technology has the potential to be a key differentiator in the fight for market share and mindshare. Retailers are often faced with a dilemma – should they buy ‘off-the-shelf’ software solutions (e.g. from a retail software company) or should they invest in custom retail software development?
Advantages of ‘off-the-shelf’ retail software solutions include:
- Lower initial cost. Established and clear pricing models mean that initial costs are likely to be lower than if developing all-new software.
- Stability. Off-the-shelf software will have been developed over time and tested extensively in the real world. As such, stability and performance should not be in question.
- Support. In addition to vendor support, most established software solutions have third-party support providers and communities of enthusiasts willing to share knowledge.
- Rich features. Most software solutions benefit from years of development and, as such, feature a rich range of functionalities and features.
Advantages of custom retail software solutions:
- Unique to your business. Every business is looking for differentiation and software is one way to highlight and emphasize this differentiation.
- Facilitates industry disruption and innovation. If you have a disruptive or innovative idea that ‘off-the-shelf’ software can’t support, custom software helps you deliver faster.
- Pricing that suits you. Your software, your pricing and usage model.
- Technology aligned to business. Not business constrained by technology.
- Scale and upgrade at your speed. Don’t be constrained by roadmaps of companies that don’t know you.
- Retain your Intellectual Property (IP). Your idea for software might be relevant to many other businesses and there could be opportunities to create an additional source of revenue.
When shaping a retail omnichannel strategy, it’s important to consider the competitive landscape, potential sales volume scenarios, customer behavior, most-viable sales channels, most-frequented and most-profitable product categories, overall profitability and market share.
Retailers also need to consider the potential opportunities that can be generated if they make bold, innovative moves during downturns. BCG research on retail demonstrates that companies that increase their investment in innovation during times of economic downturn greatly outperform the market during economic recovery.
Omnichannel strategies also need to consider changes in customer behavior. The pandemic has resulted in many first-time online shoppers, a global increase in ecommerce spending (as per the UN), changing expectations towards in-store experiences, and increased likelihood to change brands. Omnichannel strategies need to consider all of the above and look at how different channels are evolving, how to maximize each channel, and how to blend different channels to provide a customer experience that helps gain, regain and retain customers.
Omnichannel strategies should also consider their product portfolios and analyze which products perform best, on which channels and at what margins. Equipped with an understanding of this, retailers can optimize their strategies and operations accordingly.
Check out the Netguru blog on how retailers need to question their omnichannel strategies.
Retail consulting is a service that can help retailers optimize their strategies, maximize the value of their investments, and help them accelerate their digital retail transformation efforts. In today’s fast-moving retail landscape, retail consultants can assess a retailer’s readiness for the post-pandemic world, assess digital maturity, help build or refine an omnichannel strategy, advise on the right technology (e.g. machine learning) solutions, and much more.
Retail consultants are experienced professionals that work predominantly or exclusively with retail clients. As such, they are intimately familiar with retail industry trends, best practices and legislation. Retail consulting services can relate to everything from brand management, sales and marketing channels, customer experience, fulfilment, supply chain, in-store operations, and technology.
Advantages of retail consulting
A key advantage of using retail consulting services is that retail consultants will have experience working with multiple different companies from the retail industry. They will have examples of best practices from different segments (and even geographies) and they should be able to open their clients’ eyes to opportunities and new ideas by sharing these best practices.
From a retail technology perspective, retail consultants are familiar with the retail software company landscape, the latest retail software solutions (e.g. ecommerce platforms, inventory management software, point-of-sale software, retail erp) and other retail software developments). This broad and deep understanding of the retail industry and retail technology is used to help clients make informed decisions on how to shape, optimize and deliver on their business and technology strategies.
COVID-19 impact on retail sector
The impact of COVID-19 forced the entire retail sector to change dramatically in a very short space of time. With lockdowns and restrictions in place, there was a significant shift from in-store shopping to online. This naturally resulted in a greater emphasis on the online customer experience and focusing on providing greater convenience, personalization and choice to shoppers. These efforts go beyond the virtual storefront and require retailers to optimize their back-office operations, including logistics, supply-chain and fulfillment operations.
As restrictions eased, the onus was on brick-and-mortar retailers to provide safe, confidence-inspiring in-store experiences and blending these with online experiences and new fulfilment operations (e.g. Click and Collect) to cater to changed customer preferences and habits. The way in which brands have adapted to – and embraced – these changes has affected their success in these turbulent times. Today, retailers are accelerating their transformation efforts in order to be able to adapt to the constantly evolving retail landscape.
According to Gartner, the COVID-19 pandemic prompted a dramatic acceleration of retail digital transformation, fast-forwarding consumer and digital business adoption by five years in just eight weeks.