Why a Digital-First approach to retail will turn profit destruction into customer and shareholder value

By Matt Clark, head of the EMEA retail practice at AlixPartners.

  • 3 months ago Posted in

Digital commerce has been the key driver for retail’s growth over the past decade. Retailers have invested nearly $1tn (£800bn) in digital over the past five years alone, according to Gartner, as companies threw money at the channel to keep up with competitors.

Now digital is in the spotlight for different reasons. Retail analysis for a new AlixPartners report that launched in partnership with last month’s World Retail Congress in Barcelona shows that as online penetration grows, most retailers’ profits shrink. The cost of serving customers anytime, anywhere, at any speed is simply not bringing in enough top-line growth to best monetise existing investments in machinery and technology.

But unfortunately for most companies, customer preference for digital is still booming. 86% of consumers research a product online at least once in their purchase process, according to our 2022 Holiday Shopping Survey.

We believe retailers need to embrace a Digital-First approach to turn the tide and improve digital efficiency. What our firm terms Digital-First Retail (DFR) is a complete shift in mindset, operating model, capabilities, processes, tools, and KPIs.

To better understand digital transformation, we conducted a global study of retail executives and line managers and found:

1.Retailers are spending big, but inefficiently on digital

Globally, retailers spent $181bn (£145bn) on retail technology and digital improvements in 2022, according to Gartner. Despite this, our study revealed that only 24% of retail executives think their company has above-average digital capabilities, and just 36% of executives think their digital teams have the capabilities to meet their companies’ digital strategy needs.

There is a growing disconnect in company-capability assessments between the line managers doing the work and the executives making the decisions.

2.Digital profitability is not well understood, indicating a lack of transparency and common KPIs

Our 2022 Digital-First Executive Survey found that 84% of retail executives believe online delivers cumulative value, but only 48% are measuring the true costs and benefits of an omnichannel approach.

Without a robust means of measuring success, many companies are making digital investments that prove ineffective. Misunderstanding profitability across channels also prevents companies from correctly computing customer lifetime value.

DFR requires a big shift in investment, but we believe retailers need to make those shifts if they hope to keep up with their own customers. And often, it isn’t about spending more but rather spending smarter, more holistically and more intentionally.

3.Retailers are set to increase digital spending, but do not ensure positive ROI

We identified that 63% of retailers expect to spend more on digital investments in 2023 compared to 2022. Given consumer preferences for digital, most don’t have a choice – without a strong online experience, they stand to lose customers and market share to competitors.

However, the hope around future investments ignores history. Per our research, three-quarters (75%) of retail executives are confident they’ll get a good return on their digital investments. However, nearly two-thirds (64%) doubt their existing digital tools from past investments can support a modern DFR business. This raises the question of why, if past investments have not met expectations, there is confidence future investments will perform differently?

How to unlock value

It’s clear that retailers can’t keep operating the same way and expect different results. Instead, a DFR approach is the answer to how to profitably evolve. It views digital not as a channel but the core of your business model, which is a completely new way of operating. This takes the positive attributes of successful digitally native retailers – agility, adaptability and execution – and adopts them for traditionally store-led enterprises.

It’s also a shift in company behaviour and culture from focusing on in-store elements like minimum display quantities, planogram compliance and whole season buys to prioritising user experience. When retailers think Digital-First, they move from a product-centric mindset to a customer-centric mindset. Using data from digital touchpoints, retailers can make better decisions throughout the entire organisation about everything from product and inventory to marketing and logistics.

There are four elements to a DFR approach: the customer; omnichannel journey; product & promotion; and network & fulfilment.

Customer: Leverage the rich customer data you gain from digital channels, browsing histories, and email interactions to improve all operating decisions.

Omnichannel journey: An easy-to-navigate site, app and store experience are critical. Personalised experiences for consumers are now table stakes.

Product and promotion: You must decide whether you’re driving for traffic or margin. Use promotions as an opportunity to drive sell-through.

Network and fulfilment: According to our research, customers care most about free shipping, not about speed – retailers have overinvested trying to keep up with Amazon.

In order to get the four pillars right, retailers need the right internal operating model.

Firstly, ecommerce and stores must align on a shared view of the customer, brand proposition, inventory and financials. A single platform is also vital to ensure consistent data management processes across your organisation. In such a framework, all pricing, ranging, promotions, margins and other product data is safeguarded by sturdy controls and rules.

Clunky, legacy store-based systems can only be transformed into flexible, customer-led online businesses with robust technology and platforms. Even retailers with strong digital capabilities that scaled at speed are finding their first-gen IT no longer does the job well enough.

The answer is not always a complete systems rebuild over many years with a £100m price tag. An intelligent alternative to bring a retailer up to a modern Digital-First model can align any tech investment more closely to a business value proposition, and ultimately lead to a better tech stack both now and in the future. Retailers also must establish new KPIs with a Digital-First lens to fit their new operating model.

Every retailer should prepare to recalibrate the business to meet Digital-First demand. Those that do will reap the benefits. Those that don’t change will continue to watch their profits shrink as online penetration grows and lose out to the winners.

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