How would you describe retail in 2017? For some, it’s the year that marked the sector’s true transformation. Think of the Booker-Tesco deal that shattered formerly untouchable barriers, Amazon’s Whole Foods acquisition that gave the US giant a supply chain advantage that edges even closer to the customer, and brands like Dyson and Smeg who opened up their first ‘direct to consumer’ stores, affording them unprecedented access to customers and their data.
Others would argue these changes have been coming for years; the push to vertically integrate, the signs of a fickle consumer with limitless choice of where, how and when to spend, the rise of social media and influencers in the shopping journey, and the continued growth of online are not exactly new news - but under the backdrop of growing economic uncertainty and with Brexit looming, what does 2018 hold for retail?
1. Technology the customer can’t see
Digital transformation has been the go-to strategic phrase across the industry for years and has traditionally focused on opening up front end channels to customers.
Websites, mobile apps, in-store technologies and social media presence have all fallen under the digital transformation umbrella.
It’s far more than that.
The winners will rebalance their investments to focus on things that truly impact the customer experience, but often go unseen. Having a shiny front-end website may delight customers on the surface, but if it takes six weeks to upload a product or if search and returns are a pain in the proverbial, the shiny exterior quickly loses its lustre. Customers might not see the technology at work, but they’ll certainly feel it. Creating a digital business means internal digitisation as much as it does external. Removing layers of bureaucracy, reducing drawn-out decision making and automating manual, error-prone processes creates a work environment that more closely resembles employees’ digital lives.
2. The splintered definition of retail
noun “the sale of goods to the public in relatively small quantities for use or consumption rather than for resale”.
Retail used to be a simple-enough model: Purchase a large quantity of goods, split into smaller quantities and sell them for more than the cost of purchase and cost of operations. Manufacturers would deal with wholesalers and distributors who then sold goods at bulk to retailers. Retailers often traded on credit with wholesalers and distributors and received cash immediately from consumers - a true credit business.
With recent news that lines of credit for retailers are starting to be cut, a different landscape is emerging for those who own and control the manufacturing and wholesaling parts of the chain. The opportunity to own the customer and sell direct gives established brands a real opportunity as well as new challenges around marketing, distribution, allocation and to some extent, even merchandising.
Take Nike as an example, their “Consumer Direct offense” significantly reduces the number of partners it works with - the reasons for this are many, but primarily:
“[...] fulfilling demand through NIKE.com generates nearly twice the revenue and significantly higher margin on each transaction and over time, we see the growth of digital as accretive to NIKE's bottom-line profitability.”
The financial benefits are clear. Brands will continue to push the direct route to have tighter control, as well as demand more from their department store and real estate partners.
3. GDPR will get someone - but who?
The most important change in data privacy regulations for the last 20 years comes into force in May 2018. Fines are either €20m or 4% of annual turnover - whichever is greater - and the legislation applies to any organisation processing data on citizens of the European Union. The main changes centre around the right to access, and the right to be forgotten and although planning has been in place for the past few years, I would imagine that the regulatory committee will be looking for a high profile breach quickly after it’s implementation. This is one to keep an eye on as systems with customer data have grown exponentially in the sector over the last decade.
4. Forget too big to fail
An obvious statement when you look at the fate of BHS, Woolworths, and ‘almost but not yet’, Toys R Us. But Winter isn’t over. Many legacy retailers continue to struggle with large store estates that are no longer fit for purpose and tie up huge capital sums.
The cost to repurpose these into experience destinations can be prohibitive. Couple this with technology architectures that are slow and expensive to evolve to meet new demands, there are retailers who are just unable to keep up. Given the obscene discounting we saw from Black Friday onwards in the UK, I hope I’m wrong but unfortunately I think we’ll see at least one retail mega casualty this year. To avoid this, retailers should be considering taking their considerable skills, and the invested space they already own, and creating new and exciting business models. Look at Cookwell by Waitrose as an example, the inclusion of vets at Pets at Home, or coffee shops in almost every department store - take the space and create new visions.
5. The tech talent battleground
Most retailers have lived through the painful experience of a large technology project. Implementing a large ERP or a website replatform. Startling research from The Standish Group shows that only 16.1% of these projects finish on time and budget. For large companies this drops to 9%, and, even worse, the successful projects only have on average 42% of the features promised at the outset. More staggering, of every 100 projects started, 94 will have a restart at some point in their life-cycle.
Is this the year organisations break away from the annual capex process of sinking millions into restrictive software that limits possibilities and hampers differentiation? It’s tough to deliver something new when everyone else is using the same package.
Flexibility and freedom to control their own destiny are critical for retail success. The race for engineering and development talent to move away from legacy systems and toward flexible, stable and secure architecture will be hotly contested.
6. Stores in two formats: Experiential and convenient
The lines between retail and entertainment are already blurred, and this is set to level up in 2018. With larger organisations owning greater quantities of leisure and retail real estate the options for entertainment destinations grow. Single views of inventory across shopping centres could be a realistic option, the ability to book a restaurant or a beauty appointment across many different touch points should all be possible, and where does it stop? Click and collect across an entire retail park, booking priority parking in advance. If the landowners and property developers can drive digital traffic through their operations, they can start to provide unique customer experiences driving footfall to these centres and through a single touch point - the fight for the customer then goes to an entirely different paradigm.
We will also see these landowners partnering with retailers to trial new store formats. Customers have long been ‘time poor’ but now retailers are getting serious about ultra-convenient formats. As an example Uniqlo’s airport vending machines, soon WeWork will likely get into retail to blend work and shopping, and Walmart patented an in-home store! Expect 2018 to be the year retailers get creative with formats and ways to buy. We will see a blend of experience formats with convenient formats.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.