Sixty-six million years ago, the Chicxulub asteroid smashed into the earth, ending the age of giant, lumbering dinosaurs in the blink of a (geologic) eye while creating new opportunities and ecological niches for small, agile mammals.1In today’s global business landscape, the COVID-19 pandemic is acting as just such an evolutionary accelerant. And one sector most notably affected has been retail.
Before and after the dust settles and an effective vaccine is universally available, a key question for retailers will be this: What capabilities will they need to survive and expand? From our work with some of the world’s largest retailers and from our recent research, we believe the answer is digital capabilities that make retailers easy to do business with, create ultra-efficient operations and make them highly knowledgeable about the status of products in their supply chains.
In this article, we talk about those capabilities, how to put them in place and how to improve upon those that are already there. We draw on a recent survey we conducted, which included 23 retailers in North America, the UK and Europe, seven of which had revenue of at least $10 billion, and the rest between $1 billion and $10 billion.2
But first we assess the retail landscape created by the pandemic, as well as by the rapid growth of e-commerce merchants over the last three decades.
The Pandemic’s Big Toll on Retailers
The devastating impact of the novel coronavirus on retail cannot be overstated. Global retail sales were projected to decline nearly 6% in 2020 from 2019, a bigger hit on the sector than even during the Great Recession, according to eMarketer.3, 4 This is an abrupt change after years of steady growth.
In the United States, 29 retailers declared bankruptcy through the third quarter of 2020 (10 more than in all of 2019), including such legendary and respected names as Lord & Taylor, Niemen Marcus, Brooks Brothers (after 202 years of operation) and J.C. Penney.5 The recent TCS survey found that since the dawn of the epidemic, revenue has declined at 61% of retailers polled.
The COVID-19 pandemic has truly rocked the sector. Consumers purchasing habits were transformed nearly overnight. This spring, people stopped going to stores, forcing many to close—some temporarily, others permanently.
E-commerce sales soared as consumers moved their shopping online. According to Kantar research, 40% of consumers around the world have “increased or significantly increased” their online purchasing.6 However, at the beginning of the pandemic, people rushed into stores fearing stock-outs. They bought essentials in bulk, leaving even logistically adept retailers such as America’s Costco Wholesale struggling to keep up with demand for basics like bottled water, peanut butter and, famously, toilet paper.7 Digitally adept retailers like Best Buy, Albertsons, Walmart and Kroger managed well by quickly rolling out digital capabilities such as contactless payments and curbside pickups.
40% of consumers around the world have “increased or significantly increased” their online purchasing.
While revenue from digital channels may have saved many retailers’ balance sheets, it also created significant upstream and downstream challenges. Downstream, the huge warehouses that online retailers rely on quickly reached capacity in the early days of the pandemic. That delayed orders and frustrated customers, even as some inventory was essentially imprisoned in stores emptied of employees and consumers.
Upstream, factories closed to slow the spread of disease, and trucks (and drivers) were idled, leading to even longer back-order delays and hits to retailers’ bottom lines.
In short, the retail sector abruptly entered a newly hostile environment of shrinking margins and fierce, almost existential, competition for customers. Only the fittest—the agile, the nimble, the technologically adept—will survive.
Six Key Digital Capabilities
To remain competitive, our survey found that retailers need six critical digital capabilities.
Many retailers have long understood the importance of these capabilities. Our survey found that retailers led 10 other sectors in creating an end-to-end digital CX (adopted by 39% of retailers) and in deeply automating their core business processes (44% adoption). In an era of shrinking margins, such automation can save millions annually in store and operational costs.
However, no more than 30% of the retailers we surveyed had yet to adopt the other four essential capabilities. Fortunately, most retailers are working hard to remedy that situation (see Figure 1). The two most frequently cited areas in which retailers are building digital capabilities are in moving core enterprise systems to the cloud (engaged in by 63%) and developing robust AI-enabled analytics to improve the digital CX (being implemented by 61%). We believe both these investment choices are necessary, but that retailers must develop all six capabilities to thrive after the pandemic recedes.