The Future of Retails
Prior to the outbreak of COVID-19, the retail industry had a relatively good year in 2019 and was expected to continue to grow--thanks to innovation and technology. Below is a summary of key findings on trends that will affect the future of retails and insights into the future of the industry.
Trends Affecting the Future of Retails
e-Commerce Continuing to Grow and Changing Traditional Retails
- The biggest trend in the retail industry for more than a decade has been online shopping. Oliver Wyman predicts that this trend will continue to grow over the years.
- According to the consulting firm's survey, 70% of those in the United States, United Kingdom, France and Germany say they either shop online regularly or would switch if user experience is improved.
- With its steady growth, e-commerce makes up for more than three quarters of all retail growth. The global sales are projected to reach $3.9 trillion in 2020, with 42% of e-commerce transactions now taking place in China.
- While 2019 was a good year for overall retails, eMarketer projects a moderate growth in 2020--a forecast prior to the outbreak of COVID-19. The forecast puts U.S. consumer spending on e-commerce at $666.28 billion, a 12.8% growth rate from the previous year.
- For an example of the rise of e-commerce, one needs not to look further than Amazon, which has become a trillion-dollar company.
- The rise of e-commerce also means the rise of international sales. According to co-founder of Shopify Plus Alex O'Byrne, brands that are expanding need to develop an international strategy. He suggests that technology has never been better in assisting businesses in making the challenging move to selling internationally.
- It is projected that international sales will make up for one fifth of global e-commerce by 2022.
- To improve international transactions, Shopify, for example, employs a multi-currency payment system, which allows merchants to sell instantly in 10 different currencies.
- The rise of e-commerce also gives rise to subscription e-commerce. According a McKinsey report in 2018, 15% of online shoppers had signed up for "one or more subscriptions to receive products on a recurring basis, frequently through monthly boxes."
- Examples of these e-commerce subscriptions are Dollar Shave Club, Blue Apron meal kits, and Stitch Fix.
- According to the report, subscription is an increasingly common lifestyle, particularly among "younger urbanites with money."
- In a five-year period from 2011 to 2016, the e-commerce subscription market grew by more than 100%, with the sales of the largest retailers grew from $57 million in 2011 to $2.6 billion in 2016.
- The market is fueled by venture-capital investments, with start-ups launching in a wide range of categories, from meal kits to beauty products.
- Traditional brands are also entering the market. For example, Sephora and Walmart have launched their own subscription businesses--Play! and Beauty Box, respectively.
- Unilever acquired Dollar Shave Club in 2016 for $1 billion while Albertsons struck a deal with meal-kit subscription company Plated.
The Rise of Technology Driving Customer Expectations and Demands
- Thanks to technology, customers are better informed on products with improved access to online reviews, from specialist sites to user-review databases.
- According to Forbes, customers today want the ability to compare prices, styles, delivery dates, recommendations, etc. all on one screen.
- With the evolution of technology, consumers are becoming more demanding than ever. According to Salesforce's "State of the Connected Customer" (2019), a survey of worldwide consumers, 73% of consumers expect companies to understand their needs and expectations while 67% say they expect companies to "provide new products and services more frequently than before."
- The survey also finds that 75% of customers expect deployments of new technologies to improve their experiences and 67% believe that "the way a company uses technology reflects how it operates in general."
- Furthermore, 62% say they are open to the use of artificial intelligence (AI) to improve customer experience, an increase from 59% in 2018.
- Chico is an example of a retailer deploying AI to improve customer experience. In order to connect customers to the merchandise they want, Chico uses SAS Customer Intelligence. The technology allows the retailer to analyze customer data to develop targeted marketing campaigns with more personalized offers.
- AI, through technologies like visual search, is also impacting social shopping, which is on the rise.
- Social shopping is a hybrid of social media and e-commerce, where customers use social media to find products and reviews in order to help them make a purchasing decision.
- Levi's is an example of a retailer using a social shopping strategy. In what it calls "friend store," customers can see what their friends liked or purchased via Facebook. As a result, 30% of its web traffic reportedly comes from Facebook, where the brand has over 2.6 million fans, an increase from 180,000 in 2009.
The Surge of Direct-to-Consumer and Emergence of Brandless Brands (Private Labels)
- Among the top 10 trends in retails identified by eMarketer is the rise of direct-to-consumers (D2C) brandless brands.
- eMarketer expects D2C sales in retails to reach $17.75 billion in 2020, an increase of 24.3% from 2019.
- With the surge of D2C popularity, consumers today are less attached to brands and instead are looking for value.
- In the past, private labels used to mean lower quality. However, brandless brands today are increasingly perceived as having better quality while maintaining good value.
- Growth in the grocery space, for example, is driven by discount supermarkets such as Aldi, which sells mostly private-label products.
- Target, for instance, introduced its own private label Good & Gather in 2019. Good & Gather, Target's brand for high-quality food, is reported to attribute to the company's strong performance in the third quarter of 2019.
- Brandless brands are, of course, not without brands. But the explosion of D2C and social media allows brands to have direct conversations with customers, meaning barriers to entry are extremely low and brands no longer have to rely on being a "brand" to claim shelf presence. In fact, shelf presence is no longer necessary.
- However, due to its low entry barriers, the D2C space is overcrowded leading to higher customer acquisition costs.
- According to eMarketer, the most successful brands have a combination of "modern-day aesthetics, high-quality product design and experience and differentiated positioning within their category."
Brick-and-Mortar Not Disappearing but Growing With E-Commerce and Technology
- Despite the fact that e-commerce is on the rise, retailers such as Target, Costco, Sephora and TJX are still expanding their storefronts. While online sales are growing fast, brick-and-mortar sales are also growing--although at a slower rate.
- Some categories are more resistant than others. For example, over 70% of fashion purchases are still made offline.
- In fact, 30% of D2C brands cite opening stores as a "present priority."
- For example, the Hudson Yards of New York City has what it calls "Floor of Discovery" entirely dedicated to digitally native and established innovative global brands.
- A report by McKinsey suggests that e-commerce is projected to account for only 21% of retail sales by 2023, meaning that there is still a future for physical stores. The report also notes that Amazon and some key internet players are developing their own brick-and-mortar networks.
- Amazon Go, the checkout-free stores of Amazon, is an example of e-commerce going brick-and-mortar combined with technology that which identifies products picked up by customers and bills them directly on a smartphone app.
- According to McKinsey, "several new technologies have reached a tipping point and are set to spill over onto the retail floor."
COVID-19 Changing the Future of Retails
- All the previously mentioned trends are projections prior to the outbreak of COVID-19, which has severely disrupted the retail industry.
- The post-pandemic retail industry may be affected by three forces: consumers permanently adopting pandemic behaviors, a new economic reality and significant consolidation.
- Among the behaviors that are likely to be adopted permanently is digital transformation, which was already on the rise prior to the pandemic. The outbreak is accelerating this transition.
- For example, Amazon North America sales increases by 29% in the first quarter of this year.
- The second force is a new economic reality, where gross domestic product (GDP) has suffered severely. In the United States, for example, an annualized drop of 24% in the second quarter of this year is projected by Goldman Sachs.
- Even when the economy recovers, this pandemic economic reality may have lingering effects on future spending as evidence from previous economic crises have shown.
- The third force brought about by the pandemic is the possibility of consolidation, changing the future competitive landscape in the industry.
- With many retailers (especially non-essential ones) struggling due to the economic impact of the pandemic, some specialty and independent businesses may no longer exist while stronger retailers may emerge with increased leverage over their manufacturer partners.
- Forbes notes that this was already a trend prior to COVID-19, citing that the industry was already experiencing significant consolidation between 2017 and 2019, and the pandemic will only accelerate it.
Insights on the Future of Retails
Five Retailer Models
- One of the retailer models suggested by Bain & Company for future retails is referred to as ecosystem players, which are companies that provide "one-stop shops--places to browse, buy, read, chat, play and more."
- Amazon is an example of an ecosystem player with a wide range of offerings, from retailing to logistics and cloud computing.
- The second retailer model is called scale fighters. According to Bain & Company, few retailers can become ecosystem players. Those falling short of that will aspire to be scale fighters, which are companies that "have access to absolute scale as well as local relative market share leadership."
- Scale fighters employ omnichannel and data analytics, as wells as M&A and partnership strategies.
- Examples of scale fighters include U.S. food chain Giant, British chain Tesco and France's Carrefour.
- The third retail model is the value champions, which are low-cost chains focusing on passing the saving to customers. Bain & Company projects that these companies will grow largely through store openings.
- Bain & Company further predicts that these companies "will need to broaden points of distribution in markets with lower penetration, reduce their supply costs and innovate to make their product range and value proposition even more appealing."
- Examples of value champions are Aldi, Costo and T.J.Maxx.
- The fourth retailer model is called hitchhikers, which are relatively small, specialized retailers. Because they lack the scale to invest in technology, logistics, analytics, etc., "they borrow scale by partnering with other companies—effectively 'hitchhiking' with them."
- Example of these are Levi Strauss & Co. and Adidas, who are currently borrowing scale by selling through Amazon.
- The fifth and last retail model is called regional gems. While also lacking absolute scale, these retailers have strong local positions, which give them an advantage.
- However, with the rise of data analytics assisting in understanding customers, local advantages may be at risk. While digital tools may help some regional gems overcoming this, Bain & Company suggest that some will have to switch to the hitchhiker model.
Technology in Retails
- Gartner predicts that, by 2025, "at least two of the top 10 global retailers will establish robot resource organizations to manage nonhuman workers."
- Retailers such as Walmart and Target have already announced deployments of robots for "inventory checking, store cleaning, and product assistance and delivery."
- Another prediction is that "the top 10 retailers globally will leverage AI to facilitate prescriptive product recommendations, transactions and forward deployment of inventory for immediate delivery to consumers" by 2025.
- "Generation AI" refers to those born after 2010 who have never lived without AI influence. In the future, this generation is predicted to expect offerings pre-selected for them through AI technology.
- Gartner also predicts that "[t]ier 1 retailers in North America and Europe will reduce inventory carrying costs by 30%, dramatically improving free cash flow for digital investment, while revamping balance sheets" by 2024.
- AI is predicted to be deployed for more accurately forecasting demands to tailor inventory and maintain flexibility.
- Other technologies, such as RFID, computer vision, smart shelves and electronic shelf labels (ESLs), may be deployed in stores to improve on-shelf availability.
- Another prediction is for the fashion retail. In order for fashion to thrive, fitting rooms must also transform to digital as customers who try on clothes in stores, despite disliking the process, are seven times more likely to purchase. This is where smart mirrors come in.
- An example of smart mirrors is Neiman Marcus's Memory Mirror, which is "a camera and screen that records an eight-second video to provide a 360-degree view of how a piece of clothing... looks on [the customer]."
- Another prediction by Gartner is "at least two of the top 10 global retailers will create a sharing economy service for store-level associates to address workforce challenges" by 2025.
- Employees at retail stores fulfill a wide range of services--for instance, around half online orders from several large retailers are fulfilled in stores.
- Thus, retailers will have to "identify how roles in the store are changing and how they could be supplemented by labor sharing or contingent work."
- Furthermore, it is predicted that "at least four of the top 10 global nonfood retailers will establish a recommerce program as part of their global targets for zero carbon and sustainability" by 2025.
- Recommerce is the selling of previously owned products. With 73% of consumers saying they are willing to change a behavior to reduce their impact on the environment, recommerce is already gaining popularity.
- The global market for apparel recommerce is estimated to be $24 billion in 2018 and is projected to reach $51 billion by 2023.
In order to carry out this research, we collected information from market research reports as well as industry insights by prominent consulting firms. We selected and regrouped trends based on the frequency they are cited by experts. We added the impact of COVID-19 to the report as the retail industry is believed to be among the most severely hit by the pandemic and many of the trends projected earlier might have changed due to that. Unless otherwise noted, data cited in this report is based on the U.S. population/market.