Just like those in other sectors, retail supply chains have undergone digital transformation, heightened by the e-commerce boom during the coronavirus pandemic. However, while retailers are investing millions of dollars in technology to facilitate the growth, few are profiting from e-commerce, according to a new report.
Digital First Retail: Turning Profit Destruction Into Customer and Shareholder Value, released on Tuesday by the World Retail Congress in conjunction with global consulting firm AlixPartners, found that “(t)he cost of serving customers any time, anywhere, at any speed does not bring in enough topline growth to best monetize existing investments in machinery and technology.”
Over a 10-year period from 2012 to 2022, retail profitability dropped from 13.8 percent to 8.3 percent, according to an analysis of 50 public U.S. retailers, including department stores and apparel companies. During that same period, however, their average online penetration rose to 25.6 percent from 9.4 percent.
Ian McGarrigle, chair of the World Retail Congress, noted in a press release that retail has been on a roller coaster in recent years, managing skyrocketing online sales during the pandemic, he said, “to the detriment of stores, to a period of resurgence in store-based retailing and a slowing of online growth. But what is clear is that there is no status quo in this new reality.”
The upshot: Retailers need to rethink their business strategies, moving from focusing on stores with a website to an e-commerce environment with storefronts, the report says.
Spend and ROI
A prevailing issue, according to the report and AlixPartners’ research, is that retailers aren’t spending wisely on their digital investments, and that more than half aren’t measuring the true costs and benefits of an omnichannel approach.
Additionally, despite retail spending on technology improvements — which topped US$181 billion in 2022 and is expected to rise to $193.4 billion this year, according to global research company Gartner — there is a disconnect between spend and how executives perceive their digital capabilities and potential ROI.
In a survey of 150 global retailers, AlixPartners found that only 24 percent of retail executives think their companies have above-average digital capabilities while just 36 percent of executives think their digital teams have the capabilities needed to meet their companies’ digital strategy.
Still, the report notes, retailers keep investing in technology, with about half planning to spend more this year than last and three-quarters confident they achieve a good ROI. Yet nearly two in three of those executives say the digital tools they previously invested in would not support a digital-first retail environment.
A New Way of Operating
The report defines digital-first retail as digital, not brick-and-mortar stores, being the core business component. Calling it a new way of operating, it “takes the positive attributes of successfully digitally native retailers — agility, adaptability and execution — and adopts them for traditionally store-led enterprises,” it states.
A digital-first approach also changes how retailers look at inventory, ordering and seasonal buys — shifting the focus to customers.
The report outlines the digital-first retail model’s four components: (1) customer, (2) omnichannel journey, (3) product and promotion and (4) network and fulfillment. All are geared to the consumer — and to increasing profits. The omnichannel journey offers the greatest potential for higher profits, as much as 27 percent over retailers not on such a journey, research shows.
Three factors — data-driven decision-making, automation and new KPIs — can help companies build a digital-first retail operating model, the report states.
“Most retailers are data-rich, but insight-poor, and most still have a product-centric mindset rather than a truly customer-centric one,” said Matt Clark, Europe, the Middle East and Africa (EMEA) leader of retail practice at AlixPartners, in the press release. “Retailers must establish new KPIs with a digital-first lens to match their new operating model and operate with a DFR (digital-first retail) mentality, truly placing the customer first — to turn shrinking profits into customer and shareholder value.”
David Bassuk, global leader of the retail practice at AlixPartners, added, “It’s clear that retailers can’t keep operating the same way and expect different results when it comes to getting true ROI out of their investments.” Digital-first retail isn’t a program, he said: “It’s a change in mindset — and in a retailer’s organization — that places digital at the very core of a retailer’s business model.”
That’s exactly where digital needs to be for today’s retailers to compete, he says.