Within retail, the magnitude of disruptive trends typically increases during a crisis, while also speeding up their transformational impact by at least 3 years. For this blog post, IG&H specialist in digital transformation within retail and Piet Coelewij seasoned executive and board member in the retail and consumer sector have exchanged perspectives on how the Corona crisis may further transform the sector and how retailers can use this crisis to outperform their peers. Conclusion: Time to buckle up. In the Corona crisis digitally innovating customer experiences and jumping the curve is imperative to become a retail winner.
Crises accelerate the structural transformation of the retail sector
Reflecting on the 2008 economic crisis and what seems to be happening in the 2020 Corona crisis, we see each crisis accelerate the structural transformation of retail. In 2008, digital platforms proved themselves as a disruptive and superior technology-driven business model. This crisis demonstrated the resilience of platforms like Alibaba and Amazon as their business model is secured against economic fluctuation. In prosperous times they grow as a result of general economic growth, and in downfall they grow as a result of price transparency. Simultaneously, in traditional brick and mortar retail, the crisis set the stage for the further shake-out and consolidation driven by financially strong retailers (for example, the acquisitions of Super de Boer and C1000 by Jumbo). The crisis uncovered the weaknesses of the mid-market, particularly in non-food retailers. More traditional retailers differentiating in either the low-cost segment or the customer value-added segment were successful, whereas retailers that were stuck in the middle, encountered difficulties. Remember the news headlines of major store closures (such as V&D) during the recovery that followed? Since then, non-food retailers with a more differentiated positioning could grow, such as Decathlon, Rituals, and Action. In food, this crisis provided the market conditions for the accelerated emergence of Lidl.
The Corona crisis creates a new transformational wave
In 2008 we saw the end of the mid-market, with the further rise of digital platforms and growth of the differentiated low-cost and the customer value-added retailers. The Corona crisis will cause a transformational shift, very much driven still by platforms, towards true omnichannel.
‘We are now moving into the fourth phase of digital retailing. The first wave was about efficiency, where the capital employed in relation to cash generation of e-commerce was unprecedented. The second wave was personalization and customer experience. The third was the structural use of the network effect where an increase in parties linked to the network results in more value for the customer.’
Parties like Amazon and Alibaba have reinvested most of their profits into expanding their network and leveraging the network effect. Currently, we are in the fourth wave — the move towards omni-channel retailing, which will be accelerated by the current crisis. This means that retailers create (digital) one-on-one relationships with their customers and use the channels in an integrated way. E-commerce will have to become an integrated part of retailer, rather than a separate channel. As a result, we see pure players entering the realm of physical retail in a big way with examples like Amazon GO Alibaba’s Hema, and Amazon buying Whole Foods.
‘The next step in the blending of channels will happen as a result of customer-experience innovations that disrupt traditional customer journeys by integrating retail with other (online) aspects of life such as social media or entertainment.’
An example of this would be telling smart home system Alexa that you would like to purchase the jeans that a certain individual is wearing in a specific Youtube video.
The future is uncertain, but this crisis is more uncertain than others
The current pandemic is different from the 2008 economic crisis in multiple ways. In the 2008 crisis, there was a sudden and sharp decline of liquidity. Current levels of financial liquidity are high and interest rates are low. As a result, large (PE) investors will be driven towards higher risk investments which tend to be more transformational in nature. In addition, institutional financial systems (Central banks, IMF, ECB etc.) are currently significantly more resilient and are responding in a coordinated fashion, resulting a more stable financial environment.
During this pandemic, recovery is dependent on the speed and effectiveness of how we control the virus, making the duration highly unpredictable. In the case of a quick V-shape recovery, retail will experience a crisis, after which we will return to the preceding transformation path, but in an accelerated mode. In the case of an extensive U-shaped recovery, the crisis will be followed by great unpredictability, including the above mentioned opportunities for high risk investments.
‘In a U-shape recovery scenario, the balance in the market will be gone, which creates systems that are unpredictable.’
We see it as an overarching certainty that retailers, in this fourth wave, need to truly shift to a one-on-one relationship with customers and embrace a digital innovation mindset. The main goal, which needs to be worked towards continuously, is creating advantaged customer experiences and higher lifetime value. Speeding up these innovations must be facilitated through the use data and technology such as AI.
’Retail survival of the fittest speeds up during crisis periods’.
To provide some guidance to become an innovative retail winner, we identified several fundamental shifts that you need to strongly consider.
Shift 1: Overall value trends
How to enhance the overall value perception of your customer experience
Traditional retailers must run a different race than the big platforms. Since competing at the scale and price levels provided by the platforms is not realistic, a differentiated angle must be found through providing compelling and integrated value propositions to specific target groups addressing specific needs. Companies like Decathlon, Uniqlo and Trader Joe’s show a way to do this.
- In the Corona crisis, personal hygiene and health trends are getting an instant boost.
The nature of the current crisis has a significant impact on hygiene and health concerns. Not only do retailers need to take precautions in their operation that will impact how they do business, it will also impact what they sell. An increasing amount of health focused products are finding their way to the market. There was already a move towards more health-conscious purchasing behavior, and this will get a sizeable, and long lasting, boost as a result of the current pandemic
- The ’new normal’ will accelerate the shift to convenience 2.0.
New services facilitate the step-change towards next level convenience. In food, this crisis accelerates the shift towards constant and easily available (semi-)prepared meals at any time, offered at decentralized (smaller) stores or food delivery services. At the same time, convenience also means the shift from DIY to DIFM or a subscription form for recurring needs like contact lenses. In order to avoiding crowded places, this crisis increases the movement of customers towards retailers who provide a quick, nearby, and non-crowded environment, with technology as a key enabler. Concepts like pick-up points and stores without check-out (Amazon GO) will get a growth boost. You only need to look at more advanced Asian markets to see the full potential of convenience.
- This crisis makes consumers demand retailers to take responsibility for people and planet.
The Corona crisis accelerates demand for sustainable products, both in terms of planet and people.
‘The youths of today are the first generation who actually changed their buying behavior based on their ideology.’
As a result, retailers need to re-consider topics like value chain responsibility and local sourcing. Retailers now innovating their products and experiences to build on these trends are likely to jump on a new growth curve.
Shift 2: Innovation of business models
How to differentiate customer experience through innovation of business models and services
In this crisis we see an accelerated transformation of technology-enabled customer experiences in retail. This trend was already underway, with platforms often showing the way. Here we reconnect to the fourth wave of digital retail laid out above. For example, marketplaces and platforms are facilitating product and price transparency and customer personalization whilst remaining flexible. This crisis further highlights the weaknesses of traditional players who struggle to (digitally) innovate.
- The Corona crisis will accelerate the shift to personalization and true omnichannel.
Once again, this crisis will shift how consumers perceive value. Where price and quality used to be a differentiating factor, it is nowadays conditional. You cannot compete when the price-quality ratio is no longer competitive. Retail winners of this crisis do not fall back to old ways to manage price and value perception, but rather will seek to customize through individualization and personalization. Retailers must enhance their customer experience through personalization of value to emerge strongly from the current crisis. As mentioned above, this means that as part of the fourth phase of digital retailing, retailers create (digital) one-on-one relationships with their customers and use the channels in an integrated way. E-commerce will have to become an integrated part of retailer, rather than a separate channel. As a result, we see pure players entering the realm of physical retail in a big way with examples like Amazon GO, Alibaba’s Hema, and Amazon buying Whole Foods.
- Acceleration of e-commerce pure players at the expense of crowded retail areas.
Shopping malls and high streets have been struggling with declining numbers that seem to be shifting towards e-commerce, for quite some time. The concerns surrounding the Coronavirus have magnified this trend and we can see fewer consumers going back to crowded retail areas in countries where quarantine restrictions have been lifted, like China. This crisis provides a tipping point for e-commerce, as we discussed in our 3rd blog post of this blog series. It accelerates the position of pure players like Picnic, Bol.com and Amazon, and is likely to be the basis for higher autonomous growth of players with advantaged e-commerce.
- Create digitally enabled one-on-one relationships, become a partner for life.
The relationship between retailers and their consumers was already changing. Brands that were becoming a partner for life by providing services, in addition to their products, that enhance the consumer experience have a competitive advantage in times of crisis more than ever. We see many examples of brands, for instance, in sports, fitness, and food service, who use this crisis to deepen their digital customer relationship. Large amounts of data and the ability to use that data to create personal profiles are needed for this shift. Whereas large platforms are constantly improving on their already existing capabilities in this field, these same capabilities are increasingly more accessible to other parties through means of Software/Technology as a Service business models.
Shift 3: Consolidation and collaboration
How to accelerate innovation of customer experience through consolidation and collaboration
Earlier crises gave way to further industry consolidation to build market presence and scale. This crisis will not be different because the sector is in a transformation towards digital enablement, blurring and moving towards the creation of larger ecosystem. Businesses are increasingly competing with one another, whilst at the same time being dependent on each other. Retailers no longer need to develop a fully standalone business with accompanying scale and capabilities. Collaborations, networks and platforms provide access to new costumers and skills, but also increase the level of direct competition. For instance, Zalando uses Amazon Web Services but at the same time is in direct competition with Amazon. We are moving from a fragmented landscape to interconnectedness. Here, the right to play requires data and technology to be on par. This does not mean every company needs to participate by themselves. Large investments in the in-house development of technology are no longer necessary, since advanced technology is widely available (TaaS). Therefore, ‘the questions retailers need to answer is how to use their own capabilities and how to acquire the capabilities they are missing to enlarge their competitive advantage on customer experience.’
- Leverage the power of collaborations and networks.
Prior to the crisis we already saw large ecosystems forming around the leading platforms. Networks were formed by increasing the amount of connected parties and thereby its reach and proposition strength. To take advantage of these networks and their beneficial effect, retailers need to position themselves within these networks and ecosystems and create partnerships ‘When the number of players in a network rises linear, the value of the network will rise exponentially.’ Examples of gaining new ways to reach customers through collaboration can be found in the institutionalized partnerships between Albert Heijn & Takeaway.com, HEMA & Jumbo, and Wehkamp & BCC.
- Acquiring new digital skills through collaboration or acquisition.
It is a core capability of winning retailers to be able to identify and realize synergies through collaborations or acquisitions. This crisis however emphasizes the need to access new digital skills needed for innovation and different ways to reach your customer. For example, we see acquisitions of digital and data analytics skills such as Lidl by getting into cloud services with the stated intent to compete with Amazon Web Services, Nike acquiring data analytics companies, and brick and mortar retailers operating on the technologies provided by AWS and Alibaba.
- Consolidation through Darwinian evolution
Not all retailers will survive the crisis on their own. For retailers and Private Equity players with financial muscle, this crisis provides an opportunity to raise the game through acquisition and consolidation. Depending on the U or V shaped recovery the consolidation, the impact will differ. The strong will nevertheless eat the weak, yet the weak can indeed be very big. A rationalization in the number of retailers is a Darwinian consequence of the crisis. A very recent example of this is the fall of J.C.Penny, where Amazon has shown interest in (part) of their store network.
Buckle up, now is the time to act
Every crisis accelerates trends and creates opportunities. In that regard, this crisis is no different. However, there is a high level of uncertainty which is fully dependent on the effectiveness and speed of the measures against the Coronavirus. Even so, retail must prepare for the rapid development of one-on-one customer relationships to create a clear customer experience advantage. To be successful in doing so, you need to embrace digital business models and technology.
Jumping the curve is about creating a path of micro-innovations rather than big set innovations that take years to complete. Retailers that are able to integrate these micro-innovations and speed up iterations of improvement will become the winners of this crisis. The biggest challenge in doing so is changing the mindset of management to act now and alter what they are doing, rather than repeating more of what they have been doing in the past. Start now.
‘A digital transformation is a cultural transformation rather than a technological transformation. Just start. Every retailer can start a transformation and will gradually expand, where gradually can go on a fast pace.’
With special thanks to Piet Coelewij,
Partner at IG&H
E: firstname.lastname@example.org T: +31622791962