The Necessity of Retail\'s Digital Transition

The Necessity of Retail's Digital Transition

Retail Tech Insights | Tuesday, April 18, 2023

Companies must immediately revamp their IT infrastructure and business model to stay up with the rapidly evolving business environment.

FREMONT, CA: Digital technology has become a pillar of all industries, but the retail sector faces several obstacles that have elevated its importance. The pandemic has accelerated many factors that have reshaped the industry, including the rise of e-commerce and omnichannel, changing consumer behavior and hyper-personalization, and growing supply chain complexity. These shifts have increased the burden on retailers' bottom lines: over the past five years, retailers' margins have shrunk by two to three percentage points per year, or up to five to six percentage points per year, depending on the vertical.

To date, most organizations have yet to make sufficient progress and, as a result, are missing out on opportunities. A strong tech foundation can allow retailers to improve performance across the board. Most organizations still need to make sufficient progress and, as a result, are missing out on opportunities. Only some retailers have created genuine omnichannel offerings, leveraged data at scale, and implemented agile working practices across their organizations. To reverse the downward trend of recent years, retailers must undertake a fundamental transformation of their technology function, including its architecture and operating model.

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A coordinated and ambitious technological transformation can have far-reaching effects. In the consumer and retail industries, our Digital Quotient Survey found that digital pioneers generated 3.3 times the TSR of digital laggards between 2016 and 2020. This finding validates the notion that technology will be a primary driver of next-generation retail growth, fueling omnichannel customer experience, smart offerings, efficient operations, and emerging business models like data monetization. Retailers can assess the maturity of their IT landscape and underlying organization and operating model by following a five-step action plan. Then, retailers can make the appropriate strategic investments in technology to boost their performance.

The transformation of the retail industry is driven by technology

In the past decade, the retail industry has undergone tectonic upheavals. Many of these trends were accelerated by the COVID-19 pandemic, leaving retailers struggling to keep up. Consumer activity has shifted from offline to online, and most conventional retailers have struggled to expand their technological capabilities. In Germany, for example, online sales increased by 23 percent annually between 2019 and 2020, while offline sales increased by only 3.6 percent annually.

Moreover, retailers have witnessed dramatic shifts in how consumers browse products and interact with brands. Consumers are becoming increasingly connected, less loyal, better informed, and channel-agnostic. In the grocery industry, consumer purchasing preferences are also transitioning toward healthy, fresh, local, and authentic products and casual and crossover categories in the apparel industry.

E-tailers, who are frequently able to establish direct relationships with brands, have acquired a significant portion of online sales, while online marketplaces have become dominant platforms. These occurrences increase the burden on brick-and-mortar retailers to expand their omnichannel presence.

To be more responsive to these trends, retailers can utilize technology as a central enabler in various areas of next-generation retail. Technology enables the seamless integration of online and offline channels with intelligent digital services that facilitate full-cycle consumer decision journeys. Reliable, personalized offerings optimized through advanced analytics can be updated in close proximity to real-time and are supported by engaging digital content. Supply chain technology solutions include advanced, real-time, cross-channel order management, automated logistics, human resources, and finance. Lastly, a solid technological foundation can extend retail business models beyond their traditional core business to generate additional revenues, diversify customer touchpoints, and increase customer data.

The appropriate investments can accelerate the time to market digital offerings by a factor of three, double the internal skills required to develop competitive solutions and optimize run costs to save up to 20 percent, which can be reinvested into digital-innovation initiatives. These enhancements directly enhance customer service responsiveness, business performance and revenue, and TSR.

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