Retail: Stickiness of Digital Shift Resets Priorities

A new report from the Retail Industry Leaders Association (RILA) and McKinsey & Co. highlights how sticky the digital shift has become over the past year, and how important personalization, supply chain optimization, omnichannel and sustainability have become to ensure survival in the new landscape.

Ecommerce penetration post-pandemic is projected to be in a range of 25% to 40% across categories, the report states, with the highest figure in apparel and the lowest in home improvement.

The report tapped the expertise of more than 100 retail industry leaders, including the CEOs of Home Depot, Target, Ulta Beauty, Ahold Delhaize, the Walgreens Boots Alliance, Ikea, Nordstrom and Dollar General.

Sajal Kohli, a senior partner in the consumer goods and retail practice at McKinsey & Co. and a report author, said the study highlighted shortcomings in retail that made quick pivots to digital and omnichannel difficult to execute in 2020 and into 2021.

“In general, the retail industry tends not to be agile when you’re talking about resource allocation,” Kohli said. “To have a major shift to omnichannel or online takes a certain amount of agility in decision making, and talent and a capable bench from technology, merchandising and supply chain standpoints. A lot of folks don’t actually have a stacked deck with that kind of talent.”

The report identified four broad focus categories where retailers need to excel – in omnichannel and the end-to-end experience, personalization, supply chain and fulfillment optimization and sustainability.

“These imperatives aren’t new: Omnichannel experiences and personalization have been on retailers’ radar for years,” the report states. “However, the seismic impact of the pandemic—and changing consumer preferences that will endure after it abates—requires retailers to redouble their efforts in these areas.”

In terms of delivery speed, over three-quarters of supply chain leaders in specialty retail surveyed in the report said they’ve made two-day delivery a priority, and 42% said they hoped to offer same-day delivery in 2022.

The survey also found that 80% of all retailers plan to concentrate their 2022 supply chain spending on ecommerce-related demands, with fulfillment center automation on addressing at the top of the list for 64% of them. These initiatives will likely cause short-term margin pain, the report stated, given already lean supply chains, but “they nevertheless set up retailers for success in the longer term.”

The changing role of store-based assets was a major focus of the report. Survey respondents said 44% of stores were used partially or fully as fulfillment centers during the height of the pandemic, a figure they expect to increase to 57% by next year, primarily through curbside fulfillment, BOPIS and ship from store. The report noted that retailers are starting to think of stores “more in the context of a market strategy” than a bunch of doors scattered across markets.

“It’s very clear that the pandemic didn’t just put a spotlight on the online channel, but also put existential question on the role of the store,” Kohli said. “The logical conclusion is, it’s not just a store anymore. Each box might play a different role, as a showroom, a fulfillment center, an experience center or the traditional role as we as saw in the past.”

He added it will also mean a continuing rationalization of the store network as well as the physical footprint of each. “A lot of retailers have realized, if a lot of the demographic shift is to digital, do we need a store fleet this big? What is role of each location? Is it a network node, a way to replenish demand, or create an experience?”

With loyalty at a low ebb in 2020 – the RILA/McKinsey survey found 76% of consumers changed stores, brands or channels – personalization, supported by data and analytics, has risen in importance as a loyalty builder, the report concluded. And this was borne out in the metrics: retailers that excelled in personalization saw a 10%–15% uplift potential in revenue and retention, a 10%–30% gain in marketing efficiency and cost savings, a 3–5% increase in customer acquisition and a 5%–10% lift in satisfaction and engagement. Yet the survey found a major disconnect: even though 100% of respondents said personalization was a top five priority, only 15% have fully implemented it across all channels.

Echoing what was observed early on in the pandemic, Kohli said retailers that hadn’t made significant investments in a meaningful omnichannel strategy were caught flat-footed and have had a difficult time keeping up with the rapid pace of change since.

“It has to be a very transformational pivot away, and at a significant pace,” he said. “The challenge with that is, as you’re doing that, you will lose market share to someone who’s been at it longer. There will be some consolidation and casualties in the industry, and it’s hard to make up lost ground once you’ve lost share. On a positive note, I’ve been surprised and optimistic about the acceleration of these decisions vs. what saw 12-13 months ago.”

As far as sustainability, the report noted the growing tendency of especially younger consumers to vote with their wallet based on a company’s environmental position. Gen Z consumers were most willing to pay more for products that support their values and have a less negative impact on the environment, followed by millennials, Gen X and boomers.