Retail
Drivers
All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Climate change and Technology innovation. These trends, the pandemic and now an uncertain geopolitcial situation are changing the industry through five major drivers:
Demand
‘Consumer confidence is already fragile due to the pandemic and is now facing another setback as a result of the cost of living crisis.’
The pandemic has fundamentally changed the world as we know it. People are living differently, buying differently and, in many ways, thinking differently. This created a huge shift to e-commerce (for example online sales rose by 46% in the UK in 2020 – which equates to 31.3% of total retail sales in the UK as compared to 18% worldwide) as well as supply chain shocks as lockdowns and travel restrictions across the global impacted production and transportation. Though post-pandemic demand has shifted back in some segments [3].
The cost of living crisis is causing a slowing demand and a “race to value” – discounters and more selective purchases. Overall retail sales in the UK fell 1.4% in September 2020 to below pre-COVID levels and food sales fell by 1.8% [4, 5]. The looming recession will have a large impact on demand in the next year or so.
Over the medium term the ageing global population will influence demand and product needs as the “grey” market represents a large market demand for retail goods and services (50+ is already 40% of the population in the UK). Asia will also become increasingly important in global retail and by 2050, Asia is expected to account for more than half of global consumer expenditure.
Sustainability
Sustainability is becoming a core element of retail strategy [1].
Retail is one of the worst-polluting industries, accounting for 30% of global GHG emissions, 23% of landfill waste and more than 20% of global wastewater. Around 60% of the industry’s missions came from upstream activities (e.g. beef farming or textile production). The remaining 30% is associated with retail operations, the use-phase and end-of-use activities. This has been driven by fast fashion, constant technology upgrades, out of season produce, packaging and cattle farming.
Packaging is a major issue in retail with only 16% of all plastic waste is re-processed to make new plastics. Consumers are wanting change as 62% of consumers are shopping with their values. Retailers are responding with packaging redesign and refill options [6].
End-of-life is also a major concern, especially with Fast Fashion. Retailers are moving to address these concerns through circular economy approaches such as resale, rental, repair and recycling [7,8,9].
Retailers have also developed complex global supply chains, spread across multiple countries, often centred on Asia. China produces 47% of apparel. These supply chains have been impacted by geopolitical trade issues as well as sustainability and ethical concerns.
Customer Experience
Digitisation has profoundly impacted customer expectations; choice, convenience and value are expected whatever the customer journey starting or ending point. 71% won’t return if they’ve had a bad experience either in store or online.
The convenience sector in the UK is set to grow by more than 7% by 2025 as consumers shop local [2,3]. Delivery is a major battleground.
With the cost of living crisis consumer are prioritising value [4,5].
Pre-COVID there was a shift to prioritising experiences over products, this is likely to return in time.
There is also a growing awareness of the importance of data privacy, which has underlined by high profile data breaches.
Innovation
As a mature industry, retail has shown a lack of business model or service innovation which has allowed new competitors to target market gaps.
Retail is under investing compared to disruptors (IT spend is 1.2% of revenue and on average the top 10 retailers will be putting an estimated $100 billion less into IT than Amazon over the next five years). Global retail technology investment dropped 43% to $13.2 billion in Q2 2022 compared to about $23 billion in Q1 2022 [2].
Retailers will need to move ever faster to embrace e-commerce, omnichannel and digital transformation given the threats of the economic recovery, political change, and changing consumer buying habits could disrupt them at any time. Failure to invest will just continue to open the gap for ecosystem platform players and scale discounters.
The metaverse is an area of early-stage innovation [3].
The pandemic has though shown that innovation can be done at pace.
Profitability
Even before COVID-19 the pressure had been placed on prices by new competition; discounters in grocery, fast fashion in apparel, online players such as Amazon etc. Now profitability is being impacted by rising costs, inflation and lowering consumer confidence. Online retail has been the first area hit as shoppers returned to stores and costs surged [1,2]. Other retailers will follow [3,4].
The ONS said that Consumer Prices Index inflation for September 2022 reached 10.1%, an increase largely driven by food prices, which increased by 14.5% year-on-year – the largest annual rise seen in the UK since 1980 [5]. Energy costs are another area of concern [6]. Cost cutting is likely [7].
This has pressured margins at a time that retailers need to invest in digital technology in order to meet rising consumer expectations and compete. A cost-cutting recovery is likely to allow leaders and disruptors to capture even more of the market.