Fazle Rabby, Research Assistant
2018 was relatively good year for the retail industry. Upbeat consumers, coupled with the long-awaited payoff from some slow-burn investments in e-commerce and supply-chain capabilities, finally helped them demonstrate they aren’t doomed. So what will shape retailers’ fates in 2019? According to The Deloitte Center for Industry Insights is the research division of Deloitte LLP’s Consumer practice. Here are some key points are mentioned for World Retail Outlook 2019.
The Market- at an inflection point:
As retail collides with adjacent consumer-focused sectors, it continues to undergo constant disruption. And amid the disruption, one thing remains consistent: Consumers are becoming more powerful, with expectations of “having it all.” The next 12 to 18 months will likely see an industry in transition—an industry managing through uncertain times and placing bets on what will separate the winners from the losers. Those who can synchronize their investments to profitably empower the consumer will likely find themselves on the right side of the tipping point.
The year ahead is poised to be a major inflection point for the retail industry. 2018 left the industry with a lot to digest—a strong US economy, a record-breaking holiday season, mixed retail earnings, some high-profile bankruptcies, along with global trade and economic tensions. Bolstered by a strong labor market, growth in disposable personal income, and elevated consumer confidence, 2018 experienced strong retail sales—projected by the National Retail Federation to exceed 2017 sales by at least 4.5 percent. For 2019, however, the economy may face some headwinds—making the year one of transition for retailers, who may need to make bold moves if they want to set themselves up for success in the future.
Navigating disruption in retail:
The nonstop disruption taking place in the retail environment is challenging many of the norms of retailing, creating opportunities for new entrants, and making transformation an imperative for incumbents. Retailers should stay ahead of the changes driving the marketplace in 2019.
Consumer: Consumers realize they can have it all. Today’s digital consumer is increasingly connected, has more access to information, and expects businesses to react to all their needs and wants instantly. Many shoppers have an increased desire for personalized services, and they are starting to think more about privacy in the wake of high-profile corporate and social data breaches.
Competition: The retail market is negotiating a change in the competitive structure of the industry. A myriad of newer, smaller, and tech-enabled competitors are stealing share while players from other sectors are developing their own retail platforms. The result? A marketplace in which more brands have exposure.
Climate: The 2018 economy of strong growth, high consumer confidence, and low unemployment may be showing some cracks in the foundation. The United States is facing a flattening yield curve, rising asset prices (and possible market corrections), and tightening monetary policy—all common indicators prior to a recession. Combined with geopolitical uncertainty, the changing business and economic climate means retailers should plan for a variety of scenarios.
Configuration: The value chain across retail is becoming increasingly compressed. Many companies are accelerating their merchandise cycles, moving supply chains closer to the consumer, and deploying advanced technologies that can better connect them with consumers.
Convergence: The lines demarcating industries and sectors have often blurred or disappeared. Retailers are increasingly bleeding into other consumer sectors, while those offering retail experiences are growing. It is becoming difficult to tell retail and technology companies apart. Media and advertising are no longer a one-way street. And like retail, health care is becoming more consumer-facing.
To stay competitive, many retailers have shifted their investment strategy over the last 10 to 20 years. They have moved from growth via new stores to growth via big investments in all areas of the business—for example, launching new digital sales models, acquiring other businesses, or transforming their fulfillment processes. As a result, the cost to increase market share continues to grow, and many retailers find themselves in a precarious position.
New Challenges on the horizon:
Look at return on assets (ROA)—a common view of profitability and efficiency of retailers—and you will see a striking pattern that began in 2012. During a growth period in the economy, retailers started seeing drastic reductions in their ROA. In fact, as of 2017, median ROA in retail is at a point lower than the dips that took place during the Great Recession in 2008 and 2009 (see figure 1).
But why has this change happened? Unfortunately, for many mainline retailers, the ROA decline represents a confluence of competitive factors that place significant pressure on the profit model. Retail is at an all-time high in total sales, but it often costs more to execute and deliver than it has in the past. Retailers often need to compete with:
- Digitally native businesses offering advanced product features that are more expensive to develop.
- Online-only retailers and marketplaces that offer advanced and more consumer-friendly fulfillment options.
- Discount players and off-price companies with vastly different business models that allow for market-leading prices.
• Business models that are not as profitable from retail operations alone but are supported by ancillary services, subscriptions, memberships, and external funding.
ROA is declining because profitability is being compressed across the entire value chain, as many retailers try to figure out how to win battles on multiple fronts.
Loyalty: Emotional Vs Transactional:
Retailers would do well to look beyond tiered programs built around traditional loyalty and benefits—points, dollars off, gifts, mailers—that at best elicit “transactional” loyalty. In an industry shifting toward experience-based models, retailers can seek to make emotional connections, not just transactional ones.
With a genuine approach to driving consumer loyalty, retailers can optimize their programs and make them even more valuable. Aligning the program with values and the consumer conversation is imperative. Recently, loyalty programs have been expanding to focus on convenience (with home delivery or issue resolution) and experience (with exclusive events and limited-edition products).
Digital startups and funding:
Digital startups are no longer playing in the shadows. They’re addressing chronic issues faced by the retail industry through innovative offerings, personalization, authentic engagement, differentiated fulfillment, and more. And the amount of capital flowing to retail tech startups is allowing these companies to realistically compete with established players.
To help offset the early gains made by these startups, traditional retailers will have to push ahead, blurring the lines between business development and corporate strategy. To acquire the next big idea, they might have to seek out guidance from specialists or through a scouting approach.
Leadership lessons from China:
To build a competitive advantage, retailers can consider looking at global cross-industry trends and build capabilities that can shape consumer experiences. For example, in China, consumers and the retail market have skipped a generation of technology: Next-gen technologies in the United States are often yesterday’s technologies in China.
Retailers can look to the leaders in China to better understand the art of the possible in emergent areas such as online-to-offline, last-mile delivery, supply chain as a service, and social commerce.
Supply chain as a differentiator—and a profit driver:
The adage that you can’t sell what’s not on the floor is no longer accurate. Many companies are funneling money into supply chain design, transformation, and improvements. The supply chain is quickly becoming a way to offer the consumer a differentiated service. Making the supply chain faster, more predictable, and cheaper is a difficult triad to manage simultaneously.
The profitability question
It is a significant challenge to remain profitable offering endless fulfillment options with distributed inventory that is simultaneously available for sale on the shelf. New consumer-focused offerings typically require duplicative labor and time-consuming shipping/delivery processes, which are much more challenging to manage. For the supply chain to remain a differentiator, the industry should reassess where profit is derived. Retailers should reset expectations for profit, require savings from forward-looking supply chain investments, and identify other ways to offset increases in expenses.
Supply chain through the consumer lens
There is no shortage of investment opportunities in this area. While current capabilities dictate what is possible in the near term, the following pacesetting ideas also can help address the profitability challenge:
- Automation beyond warehouses: Supply chain automation is not new, but it has not been as successfully delivered to stores. Increasing store fulfillment and shrinking physical footprints can foster opportunities to automate the backrooms. Many retailers are exploring store redesign so that underperforming stores can be easily transformed to mini “dark stores” through automation, to save costs. Retailers can store vertically, pick and pack efficiently, and then ship quickly and cost-effectively.
- Autonomous delivery fleets: Seamless movement of freight is critical to the success of any supply chain. But increasing distribution costs and rising labor shortages (i.e., trucker and delivery executive shortages) can put tremendous pressure on retail supply chains. The scenario will likely push retailers to increase investments in more reliable and autonomous solutions, such as self-driving vehicles.
- Reverse logistics: With e-commerce growing at a 15 percent compound annual growth rate, and retail foot traffic slowing, returns will grow. It becomes critical, therefore, to have a reverse logistics strategy—versus a reverse logistics process—to offset any impact on long-term profitability. Allocating returns to the optimal channel can boost operational profitability and improve customer experience.
- Smart packaging: Going beyond the intrinsic supply chain elements, retailers should investigate smart or active packaging—to bring in additional efficiency improvements that can help bolster the bottom line. Smart packaging solutions such as RFID-powered product labels and computer-vision-friendly packaging design will be crucial to retailers seeking to enable frictionless, connected stores.
- Inventory orchestration: Retailers should be more like conductors, with a unified vision of all inventory across an orchestra of stakeholders—manufacturers, vendors, third-party logistics companies (3PLs), distribution/fulfillment centers, and stores—for order execution in the most profitable manner. Retailers should understand all demand streams and consolidate into a single approach to enable the best use of inventory, powered by a digital core that can help them understand inventory movement from a bird’s-eye view.
- On-demand supply chain: While 3PLs offer flexibility, retailers may consider investing in truly on-demand support. This approach can allow for special or regional promotions and seasonal demand spikes. By flexing the supply chain as close to the customer as possible, retailers can speed fulfillment and remove some overcapacity and under-capacity concerns.
As retailers buckle down and prepare for potentially challenging times ahead, supply chain improvements can be a significant growth driver. Rather than just investing in these trends in reaction to competitors (like in a game of checkers), retailers also should think about accumulating long-term competitive advantages through wider supply chain strategies (more like a game of Go). Without a supply chain that can deliver on the brand promise, even the leading and most innovative companies may find themselves quickly replaced. With median industry ROA at a 20-year low, retailers should place additional weight on supply chain investments. Investing for growth is a must. At the same time, profitability should remain top of mind as margin compression can quickly hit dangerous levels.
Ending up on the right side of the retail tipping point
2019 is likely to bring increased disruption, competition, and economic uncertainty. The industry should view the upcoming year as a time of transition for moving to the right side of the tipping point. Retailers should make a series of investments, knowing that the industry is in a precarious place.2019 will require synchronization of investments and synchronization of data. In the year ahead, are you ready for the clouds on the horizon? Where will you place your bets, and how will you ensure that they are integrated to maximize benefits for your organization? Addressing these questions effectively will help separate tomorrow’s winners from tomorrow’s losers—and ultimately shape the future of retail.