The future of Retail in a post pandemic world
If someone had described to me the world we all have endured since the begining of 2020, I would have said that it would have been improbable that we would be living through such a crisis. However, It’s not the first time I’ve been wrong, and probably not the last. Back in 1992, when I was working for Rowntree Mackintosh in the UK (later to become part of the Nestle group), we launched water in bottles! Now I could see the potential sales demand from ‘flavoured’ water for sure, but plain water, who would buy that.. oh, how wrong I was. Many reading this probably haven’t lived in a world without bottled or canned water.
I would like to outline some of my views and the views from other well-regarded industry leaders on the retail trends we are seeing pre-covid, current, and expectations post-Covid and some tools on revitalising Retail for the future.
It’s not the first time humankind has been through turmoil, its a first for me though, and many reading this. Think of the Spanish flu back in 1918 how it took the lives of over 50 million human beings. Humanity also survived two world wars and more recently SARS, H1N1, MERS, Ebola, and now Covid-19, along with several market crashes and a deep global recession in 1920. All these had an impact on both humankind and “retail.” Could it have been the Spanish flu in 1918 that caused the global recession in 1920? Could the same thing happen post-Covid-19? Many have views on this, but no one will honestly know until post the event. However, what we know was that the 1920 recession lifted in 1921, paving the way for the roaring ’20s. The point I want to make here is that whatever the world throws at us, we always seem to get through it and come out stronger and more resilient, and in many ways are forced to find new ways or enhanced forms of retailing, albeit my view is the internet was the game-changer in how we now purchase in our current generation.
Many are trying to predict the future of Retail. Generally, we look back at history to try to get a feel for the future, and we attempt to look short term rather than long term. We look at the short-term critical questions rather than looking into the long-term relevance and impact. Post Covid-19, many will ask questions like whether consumers will remain germaphobes or will we eventually go back to normality and covid being just a distant memory. Likely, we will all be conscious of germs and transmission. Having worked and lived in both Europe and Asia, its common to see people donning masks when they had a cold so as not to pass this on to anyone else. Less so in Europe, it would be a rarity rather than the norm. As people are now more conscious of the effects of transmission, I’m sure habits will change across the world and many people will remain conscious and cautious. Seeing what some companies are now doing in preparing to counter & reduce transmission of Covid-19 in stores, we see many retailer putting in new protocols, systems, and equipment for the long term. For example, some well-known retailers are installing air purification systems based on NASA technology to rid the air and surfaces of pathogens and contaminants to make indoor environments safer. I’m sure this will become standard in all buildings and international stores in the near future.
We have seen data during 2021 that suggests consumers are currently being more frugal with their disposable income. Although things will ease in the future, consumers will be adapting their buying habits for sure. As such, retailers will have to adjust their value propositions to meet consumer needs. Pre-covid, we saw a surge in the rental and re-sale category, this will continue to grow, covid-19 partly drives this, but more to do with the change in habits from the emerging generation of consumers as renting, rather than buying, is now the preferred option, owning less and experiencing more.
We have seen tremendous growth in online sales around the world over recent years, catapulted more so during Covid, and yes, although we may not see the same growth rates in 2022 and beyond, we will, however, continue to see consumers buying online more in nearly all categories, which retailers will need to adapt to, ensuring that they have both the capacity, structure, and resources to match demand. We will go into more detail over the coming parts of this symposium. These are just some of the trends that we are seeing. Yes, they are a part of a change in Retail, but for media articles to say “stores are dead” and that all Retail will be online in the near future is just media-grabbing headlines.
Some of the other reasons why we get the future wrong if due to our tunnel vision and being sidetracked with our personal views and feelings. We can look at a narrow picture of our own industry or category. I often have a habit of doing this myself. It’s a natural response to look for the danger on your doorstep or to have a view on the future of your industry or category, but doing this gives you little insight into the momentous changes coming from society, consumers, and the broader retail and consumer market. The other reason for getting predictions wrong is that the present is infinitely more comfortable than the future. Generally, people don’t like change, especially dramatic change.
Just think about some of the changes we have seen over the past two years. The press has reported on the great migration with many leaving cities and moving to the countryside or out of town. Many companies offered the flexibility of working from home. In some cases companies and employees had no choice to work from home (WFH) as governments implemented travel restrictions and lockdowns. In many countries, children have been educated online as schools were closed.
In many cases, consumers only could purchase online, other than for essentials, as shopping malls and stores were forced to close. These situations have all dramatically changed our behaviours since we were forced to change our behaviours. The question is will we see these as a new normal, or will we as humans go back to our default behaviours. Behaviours become habits; according to a study published in the European Journal of Social Psychology, it takes 18 to 254 days for a person to form a new habit. The study also concluded that, on average, it takes 66 days for a new behaviour to become automatic. It’s safe to say that shopping habits have changed dramatically over the past 21 months, and many are now automatic and default behaviour.
So with behaviours and habits changing, how does this affect retailing? The issue with these kinds of questions is that they are binary and never absolute. The key here is that to predict the future of Retail and revitalise it, we have to accept that changes have happened and behaviours are changing. They will continue to change, and the impact of these is yet to be fully realised, and there is no one answer covering all countries and categories.
The point I want to make before we go into the next section is that no one will be able to predict the future of retail 100% with absolute certainty. Still, we have seen changes through history, and we have seen changes in behaviours during Covid-19. The acceleration of trends in Retail that were already underway gained momentum during this pandemic, consumers are demanding change in how they shop or how we offer our goods and services in Retail, and whether we agree on what the future of retail looks like, what we all can agree on is the impact of this pandemic, for sure has changed Retail! In my view and the views of other leading industry experts, we are at a revolutionary turning point, allowing some retailers to start revitalising their business and scaling up, where others will not weather the storm and will either close down or be acquired.
Before this pandemic, we saw many distressed legacy brands disappearing or being acquired by larger groups. New brands and companies started life using the DTC route (direct to consumer), avoiding traditional ailing distribution formats. Companies and Brands have seen the continuous erosion of margins, shopping malls and department stores have been shutting their doors with consumers demanding a fully integrated online-offline retail experience, plus the demand for personalisation, experiences and, amongst other things, eco-friendly and socially responsible products.
Many companies and brands have indeed started making changes, for example, the amount of space given to F&B (food and beverage) as well as entertainment in shopping malls have increased dramatically, yet we still expect to see many shopping malls cease operations, some industry leaders have predicted at least 50% of malls to close and be repurposed in the USA in the next five years alone. We have all seen the demise of non-relevant department stores worldwide over the past few years, and this trend will continue to grow. There will, of course, be some exceptions, department stores that offer something unique, experiences for consumers, and an online offering, these will still have relevance and can survive and prosper.
Going into the pandemic, we needed to think about the changes happening in consumer behaviours. We can attribute this somewhat to the consumer generations. Millennials (born between 1981 to 1996) were well behind the preceding generation regarding wealth, income and assets having less disposable income. Gen Z (born after 1996) find themselves similar to millennials; they face struggles in paying off student loans, getting onto the housing ladder, and finding a rewarding career to practice their new founding skills and knowledge. My generation or Gen X (1965 – 1980), is generally more stable financially. Our parents drummed into us to find a good job, work hard, spend wisely, and save something for a rainy day. For many, this certainly paid off, and now have disposable income; however, our generation won’t be able to revitalise the current economy and retail alone. I’ve read many articles about the Baby Boomers (1946-1965) being the wealthiest of all generations in developed countries. As a generalisation, this may be true; however, they face many challenges ahead, many haven’t saved enough to support themselves in their retirement, markets are volatile, and pension funds may not be able to sustain them fully, their skills in many cases have become outdated and no longer in demand and as developments in medical care continue, many are living much longer requiring them to work longer than expected or planned. With the Baby Boomer generation living longer, many may require a larger than planned retirement fund and in turn may be working loner or spending less than planned. The point here is that many governments worldwide have supported the economy during the pandemic with fiscal stimulus. As we start to see this come to an end, there is an expectation that consumers will start spending again. For sure, we have seen some ‘revenge’ purchasing happening in some markets. Still, there is frugality in buying plans for many as uncertainty looms on the horizon.
During a crisis, Money is regarded as a safety net; it’s figured more prominently in people’s minds alongside material possessions. During an emergency, consumers seek and acquire products and services as well as experiences that support their values. This pandemic will bring a period of significant short-term spending increase. Still, shopping habits are changing, and consumers will use the current channels and services available to them. This may not be their preferred option, it’s just what is currently available to them. Companies will need to take this into consideration when planning their growth strategies; as consumers start flocking back to the malls and stores, retailers that react with a growth strategy that relies just on store expansion will defiantly feel the pain later. Store design, format, locations, operating hours, staff structures, and revenue models are built on an ailing foundation crumbling in a digital era.
In the first section, I talked about the WFH (work from home) trend during the pandemic. This was significantly higher in developed countries and generally across the white-collar workforce. There was a great migration of workers moving from cities to out-of-town locations where they had more space to work from. WFH element is here to stay, and covid has forced many HR (Human Resources) and business leaders to change how they engage with their employees. A recent McKinsey research study estimated that more than 20% of the workforce could work remotely three to five days a week as effectively as if they were working from an office.
If remote work took hold at that level, it would profoundly impact urban economies, transportation, and consumer spending. More people will leave cities and move to rural towns; the concentration of wealth will be redistributed, meaning less office space and less spending in cities. If you think about it, entire economies have been built and molded around the flow of people moving to and from offices. Trains, subways, buses, restaurants, bars, and stores depend on workers traveling to and from cities for their survival.
Interestingly several companies in the service industry have been analysing the performance of their employees since the started working from home versus the office. Most found that productivity in all cases was up, many in the double digits with a reduction in fewer breaks and sick days as well as a drop in attrition. If these workers are preferring to work from home and their productivity has increased, then why would the leaders of these industries force them back to work?
It’s fair to say that the WFH culture is here to stay, maybe not 100% WFH in all cases, but many white-collar workers are now demanding flexibility in both their work hours and location and to attract the best talent, companies and HR directors have no choice but to change and offer flexibility.
In the next part of this article, we will look at some of the specific changes in retailing and how the more prominent retail groups are changing and revitalising retail.
Ecom or online retailing has been growing ever since the first online transaction in 1994. Ecom is a mainstream part of our lives and will continue to grow and expand. Ecom giants like Amazon, ebay, Alibaba’s Tmall/Taobao, Shopee, and Lazada to mention a few, will continue to dominate the digital space. They will continue to expand into new categories and offerings to touch every aspect of our lives, like Insurance, Travel, Healthcare, Real-Estate, Education, Automotive, and Banking
As a group, Alibaba’s annual revenues amount to over U$1 trillion, and their collective active customers reach into the billions. Unlike traditional brick-and-mortar stores, big online players have no geographical or category boundaries.
In the online world, excellent market segmentation exists catering to consumers’ needs and tailoring to their shopping demands. Take the Chinese group Alibaba as an example; Alibaba is a B2B (business to business) platform that connects manufacturers and brands from all around the world to buyers and consumers. Tmall is a B2C (business to consumers) marketplace for local and western brands to reach an estimated more than 780 million consumers in China. Taobao (Chinese for searching for treasures) is the largest B2C business with more than 2 billion products on offer. Most western brands will operate on Tmall as this guarantees genuine products on the platform for brands. Taobao frustratingly has counterfeit products available. AliExpress was created to cater for small and medium-size Chinese domestic businesses to sell outside of China. AliExpress allows international purchasers to get everything needed at a fraction of the retail price, circumventing the need to pay importers/retailers for the same products. This platform allows the manufacturers to reach consumers directly, a strategy that is clearly working. Interestingly AliExpress is now the most popular Ecom platform in Russia.
Many luxury Western brands have avoided marketplace platforms and relied solely on their own online platforms. Anyone who has worked on foreign brands in China knows that you need to be on a local platform to succeed. Yes, it’s also good to have your own website for communication and control your brand image, and yes, you will get some traffic, but nowhere near as much as a local one like Tmall or JD.com. The Alibaba group recognised this and responded with Tmall Luxury Pavilion. This is a by invitation-only site for both brands and consumers where brands have 100% control and can offer the level of service they want to their customers. With over 250 luxury labels on this site and growing, this strategy is clearly working. It’s well reported that the average consumer spend on this site is over U$159,000 per year; what was a surprise to me was the number of consumers that spent over U$1m per annum on Luxury Pavilion. I guess this makes even more sense during the pandemic where some Chinese consumers would typically travel out of China to experience the brand directly and make those purchases, but with travel restrictions, it was only possible to purchase locally.
With continued Ecom growth, digital spending per person was up 60% in 2021 compared to the previous year in Asia. With the shifting of sales from Bricks and Mortar stores to online, this has a negative effect on retailers’ margins, as online sales generally have a higher cost per transaction. With margin erosion, retailers will need to adapt their strategy and framework accordingly.
Total Retail “online & offline” integration puts the consumer at the centre of this ecosystem. This new retail process integrates all formats, platforms, social media, and experiences. This ecosystem connects consumers fully from their habits and experiences to their buying process, social media engagement, and payment solutions. This includes anything from social to augmented or virtual reality shopping. Chinese online players have been paving the way with new technologies, often referred to as technology companies that sell products. Alibaba and JD.com are the two most prominent players in China. Alibaba holds 50% and JD.com holds 30% share of the Ecom business in China. The difference is that Alibaba is a platform-only solution containing no warehouse, whereas JD.com has one of Asia’s most advanced and efficient logistics networks. Doug Stephens, the founder of the global advisory firm Retail Prophet, shared an interesting fact regarding how JD.com can serve almost the whole of China with a same-day delivery service; the answer is 2.7.
JD.com discovered through research that whenever a shopper clicks on a particular item and surges above the norm in a given market area, a corresponding echo of orders from that product would follow like clockwork. These orders, on average, tended to occur within 2.7 days of the click surge. The company also noticed that also the order volumes usually amounted to about 10% of the incremental volume of clicks; in other words, if there were an incremental increase of 1000 clicks over the mean of a specific item, 100 incremental units of that item would be ordered precisely 2.7 days later. The 2.7 day time frame JD.com determined was the average amount of time necessary for the customer to weigh their alternatives or do more research. In response, the company redesigned its logistics systems to monitor click surges. When surges were recorded, orders were then triggered and during the 2.7 days between clicks and buy, the goods are then moved to the markets where the clicks came from, allowing same-day delivery service.
We have seen many pure-play online retailers start to move into the bricks-and-mortar space; as i write this article, JD.com has just launched two ‘Ochama’ stores in Leiden and Rotterdam with two more branches planned in Utrecht and Amsterdam in the Netherlands. The store provides online orders for both food and non food items picked by robots and delivered to these stores as well as a home delivery option.
The future of retail is what we referred to at the beginning “Total Retail,” taking this ecosystem as described and adapting it to suit consumers’ needs. As mentioned in previous parts of this symposium, not all countries and all categories are in the same status of this journey. Still, the key is that consumers’ demands are changing. All retailers online or offline or both will need to have a clear strategic plan to make changes and implement it. Some will, some won’t, some will fail, and others will expand, grow and succeed.
Retail is not dead, just bad retail is. In the next section, we will look into the new era of Total Retail and how this is revitalising retail.
In 2018 I was fortunate to visit Mango’s new automated logistics centre in Llica D’Amunt, Spain. Every item of clothing sent to Mango’s >2,000 stores across 110 countries worldwide first passes through the Spanish fashion label’s new logistics centre. Approximately 600 people work six days a week at the highly automated facility, where around 400 operations are machine-driven to process products for store deliveries. So far, the company has invested €232 million in the 186,000-square-metre facility, which can stock up to 7 million hung garments and 20 million folded garments and accessories at the same time. As soon as hung garments arrives, they are unloaded onto one of nine automatic loading bays, processing 27,000 garments an hour. Each bay is equipped with a classifier that separates the garments by size and style. They then travel along a 24-kilometer rail to be shipped out to stores or held in the warehouse. According to Mango, its hanging garment installation is one of the most automated in Europe. The point here is that Robotics is taking over manual processes, 400 in this case usually done by humans. Humans get sick, make mistakes, and expect to be paid more each year, and robots don’t.
Mango is one of many retailers testing and using robotics. For example, in 2019, Walmart began testing robotic grocery order picking. The system can pick & pack over 800 products an hour, ten times that of a human being. Robotics is the future of manual work; consulting firm Roland Berger estimated back in 2016 that the global market for retail robots will grow to the value of U$52 billion by 2025.
During covid, we saw the growth of virtual online sales platforms. Shoppers can virtually walk around stores using voice and gestures encountering products and media experiences; they can do this on their own and experience it with family and friends with the option to speak live with sales assistants. Shoppable media is providing opportunities and growth for retailers. The view now, buy now shoppable fashion shows are gaining traction worldwide and mixing experiences with technology as part of this Total Retail ecosystem.
In part three of this article, we talked about online retailers expanding into new categories and offerings to touch every aspect of our lives, like Insurance, Travel, Healthcare, real estate, automotive, and Banking. Seven years ago Alibaba’s Ant financial didn’t even exist. Prior to Ant’s failed IPO it had a valuation of U$150 billion. As a separate business it’s ranked within the top 15 banks in the world. Ant offers credit cards, credit scoring, loans, and wealth management, and It came out of an online platform business! JD.com invested heavily into Allianz China, making it Allianz’s second-largest shareholder. Amazon likewise expanded into new categories like transportation, insurance, and healthcare. As we move into an era where the giant online marketplaces can control and offer huge solutions to our daily lives, it would beg the question of where those traditional companies offering banking, insurance, and education stay relevant to us? In turn, large companies and brands like Costco, Tesco, Carrefour will constantly be battling these giant online players as they continue to grow to feed their insatiable appetite for world dominance.
Online retail has always been essential for brands to connect with consumers directly, collecting data, utilising it to make the online experience more personable, using the same data to predict future sales and inventory management. Having a direct online presence also allows brands to build brand loyalty, membership and maximise brands margins. However, gaining and maintaining customers is becoming ever-increasing more costly with constant challenges from the pure play online players. As the Shopify president Harley Finkelstein puts it, if you’re trading on platforms, you’re basically renting space in someone else’s shop. If you’re using their platform, you have to abide by their rules, your basically a Tennant in their house. Terms can change and data can be used against you. Remember the story of Amazon analysing the best-selling products on their site, then manufacturing and selling the same products under their own label, and then using algorithms to place their products in the first rankings. Think of all the marketing dollars that brands and business would have spend on the platform knowing that they are helping to build the platform and consumer base, at the same time, knowing that the customer is not yours, its theirs.
There has historically been a need for bricks and mortar specialist retailers to exist with the big international players and online options. I would challenge that this is less of the case now. The online players have the resources to not only offer anything that they wish to sell, but they also have the desire to do so. Specialist retailers have always had the creative abilities as well as the human connection with consumers, however with new ways of purchasing and the introduction of virtual and augmented retail, these boundaries are more blurred. Independent specialist retailers have always been great at offering a point of difference by telling stories about their products. The companies and brands that create these products are able to go direct either themselves or through platforms at such ease as well as through social media channels giving the brand or company the opportunity to tell their story themselves. Is it not better for a brand to tell their story themselves with passion and precision and as their story is constantly being refreshed, rewritten, why not control that directly with the consumer rather than letting someone else do it like a specialist retailer.
As I mentioned in previous parts of this article, pure-play online retailers have moved and continue to move into the physical store space. DTC native brands are also doing the same, viewing physical stores as a way to communicate directly with consumers and as an effective marketing cost rather than a need for retail sales. This approach is also revitalising retail with new brands entering the physical retail presence creating the Total Retail ecosystem.
I’m still of the view that humans require and need physical connection and interaction. I’m often quoted that I believe I’m living in the best time of mankind’s history. The past was tough, maybe fun if I listen to my parents about the 70’s, but today has got to be one of the best periods of mankind evolution (excluding covid). I’m not so convinced for the future. The younger generation for sure have everything available at the touch of their fingertips, but the pressures they face today versus other generations? I’m sure i stole the phrase that we are living in the most connected but disconnected world ever. This is why I believe their is an opportunity for specialist retailers. Retailers that can create theatre and experience for consumers. Offering something new on a regular basis, allowing customers to discover new experience, events or new products on a regular basis. Can retailers monetise this through instore ticket sales, for sure, its been done, it can be a major part of a stores retail revenue stream. Specialist retailing is all about focusing on the experience rather than selling products.
When I first started shopping for myself, one of my highlights was visiting our village independent menswear retailers to purchase something new. Initially they catered for the older deserving gentleman, but soon started bringing in cooler (younger) brands that were not available from the more traditional high street retailers. They got to know me, knew my tastes new my style and low an behold, every month, usually around pay day i would get a call from the store owner to say that new items have come in and they have put one of each to the side in my size for me to come in and try. Of course i did and yes i purchased, maybe a little because of the product, but mainly because of the service. Technology advancements have created such an amazing opportunity for online and offline retailers to capture and predict customers needs and preferences and desires, where specialist retailers continue to build on the human connection, but will need to offer the same levels of service to survive.
When i was CEO for the Al-Futtaim group of companies managing the sports, fashion and lifestyle business, we were running many of the Nike stores under franchise in Hong Kong. One of my objectives was to increase the conversion rates (converting customers into purchasers) in stores. We tested amongst other things the zoning the store by the team members by their sports interest, for example if we had a team member that had a passion for basketball, they would be zoned in the basketball area, be given the latest basketball outfit and clear KPI’s for that division. Same for someone that had a passion for running and so on. Does this work? absolutely! passion is infectious. Having a connection with someone that has the same interests and understanding that product or hobby, passion makes the world of difference. Many retailers divide labour so that the sales person will never depart to the stock room and leave the sales floor. Personal interaction and connection with consumers in stores remains super important. Generally speaking in my experience the difference between a top performing store versus a poor performing store was the store team. Great store managers build great store teams. Great store teams deliver retail excellence and have a higher than average conversions rate as well as UPT (units per transaction).
We know that consumers are demanding more retail experiences, and may traditional bricks and mortar stores have followed. Every company needs to become an experience company. Companies that excel at creating and delivering great and relevant experiences outperform their competitors. Take examples like Nike that offer great personalisation options in their flagship stores, or Camp the most unique toy store in New York that uses the majority of its floor space for events to entertain customers that leads to purchases. The focus being designing and creating experiences rather than selling products. Technology is available now to gauge our size, be it online, through your smart phone or instore and recommending products with many retailers offering a no quibble return policy. The running machine and gait analysis that were in sports stores have now been developed to use VR (virtual reality) to provide an even better service and experience. Many international stores are now WI-FI enabled so that staff can service customers through mobile POS, or provide instore online shopping as well as mobile payment checkout as well as free Wi-Fi. Facial recognition usage is growing, be it ordering your McDonalds or asking the interactive Mall directory for directions of services. Beacons (for sending data to consumers smart devices), NFC (near field communication) and QR codes (quick response) are now commonplace. Smart Mirror technology continues to develop for an even better experience for consumers. Technology is constantly advancing and allowing retailers to create better and more tailored experiences for consumers both online and off.
As we come to the end of this article focusing on revitalising retail, i want to concentrate on five key trends it seems that retailers are focusing more on. The first one being store experience, we covered the trends of focusing on experience rather than sales in stores.
Pre-covid we saw numerous challenges facing companies, brands and retailers like decreased brand loyalty, growth in online shopping, political instability, increases in tariffs, declining margins, supply chain bottlenecks and a demand from consumers for environmentally friendly & sustainable products. retailers had to adapt to there customer needs and as stores were closed, to get consumers back into stores, there needed to be a reason, or incentive for consumers to go back.
Secondly, cash is king, or maybe better framed liquidity is king, companies with healthy cash flow and liquidity have options. This can be as simple as acquisition opportunities, or investment into the digital space. Companies that need to change, require liquidity to help maintain and grow their business for long term success.
Thirdly, retailers are having to adapt their strategy to new consumer behaviours. Where appropriate they need to build digital competence to give their consumers a full omni-channel experience.
Fourth, rightsizing the store footprint. It’s fair to say that older traditional retailers have too many stores or are over spaced. Retailers that deliver a remarkable consumer experience, that have purpose in their product or company regardless of channel are closing very few stores, in fact some are expanding their Bricks & Mortar footprint, but it’s about rightsizing the portfolio whether internationally or locally by way of location, size and footprint.
And finally we are seeing more retailers connect & build communities with consumers. Successful companies are doing this, consumers will support companies that have purpose, provide the right products at the right time and are seen by their actions of doing the right thing for the planet!