With data revealing retailers’ shrinking profits as online penetration grows, AlixPartners and World Retail Congress have identified the need for shifts in mindset, operating model, capabilities, processes, tools and KPIs to successfully service today’s ever-more tech-savvy consumers.
“What is clear is that there is no status quo in this new reality,” said Ian McGarrigle, chairman of the World Retail Congress. “Stores will have to continue to evolve and innovate if they are to win footfall but also that online channels are probably just gearing up for a new resurgence based on the next wave of technology.”
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For the firms’ analysis, researchers looked at 50 public U.S. retailers across several sectors including apparel, department stores, hardlines and specialty retail. The data found that while these businesses’ average online penetration has gone from 9.4 percent in 2012 to 25.6 percent in 2022, profitability declined from 13.8 percent to just 8.3 percent in that same period.
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Authors of the report cite the cost of serving customers anytime, anywhere at all speeds, saying it is “not bringing in enough top-line growth to best monetize even existing investments in technology, systems, infrastructure and people, let alone new investments.”
At the same time, AlixPartners has identified customer preference for digital shopping continues to grow, with 86 percent of consumers reaching a product online at least once in the shopping journey. These trends, said the report’s authors, can create challenges for retailers with higher costs due to necessary digital investments and lower profits.
AlixPartners research shows that 84 percent of retail executives believe online delivers cumulative value, but only 48 percent are measuring the true costs and benefits of an omnichannel approach. Without these measurements, many companies are making investments that are ineffective in practice. The company’s digital-first retail approach requires a big shift in investment but finds retailers need to make these changes to keep up with their own customers.
“It’s clear that retailers can’t keep operating the same way and expect different results when it comes to getting true ROI [return on investment] out of their investments,” said David Bassuk, global leader of the retail practice at AlixPartners. “What we at AlixPartners say ‘digital-first retail’ isn’t a program or initiative, 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. And that’s exactly where digital needs to be today.”
Matt Clark, retail practice leader at AlixPartners for the Europe, Middle East and Africa region, added that while most retailers are data-rich, they are also insight-poor. “Most still have a product-centric mindset rather than a truly customer-centric one. Retailers must establish new KPIs [key performance indicators] with a digital-first retail lens to match their new operating model and operate with a digital-first retail mentality, truly placing the customer first — to turn shrinking profits into customer and shareholder value.”
While 75 percent of retail executives reported they are confident about getting a good return on digital investments, 64 percent doubt their existing digital tools from past investments can support a modern digital-first retail business. The survey also found that 63 percent of retailers plan to spend more money on digital investments in 2023 compared with 2022 given consumer preferences for digital.
With this in mind, AlixPartners asks, “if past investments have not met expectations, why is there confidence future investments will perform differently?”
To profitably evolve, the report says that businesses must “[take] the positive attributes of successful digitally native retailers (including agility and adaptability) and adopting them for traditionally store-led enterprises.” A digital-first retail approach, they say, has to be the answer.