The Rapidly Evolving World of American Retail
Trends Magazine
The retail industry has gone through several disruptions since the early 20th century. First, neighborhood corner stores owned by local proprietors were disrupted by supermarkets and by large urban department stores with mail-order catalogues. Then, those retailers were disrupted by shopping malls located in the suburbs.
Next, the malls were disrupted by discount chains, big-box retailers, and warehouse clubs. As a result, of the 10 largest retailers in the U.S. in 1990, only 4 remain on the list.1
Now, the greatest disruption to ever hit retailing is starting to take shape. E-commerce and mobile-commerce technologies are changing consumers' shopping habits and posing a serious threat to the survival of bricks-and-mortar retailers who fail to adapt to the new reality.
Until very recently, a shopper's decision on whether to purchase an item on a store shelf was based on its price, relative to his or her memory of prices at competing retailers; and on his or her perception of the brand quality, which was instilled through mass advertising campaigns.
Today, however, all that has changed. Thanks to the ubiquity of smart phones, shoppers can now:
- Look up the item on Google to see product reviews from experts and other consumers.
- Compare prices for the same item at a vast number of online retailers.
- Take a photo of the item and receive a text from Amazon with links to matching items for sale on its site.
- Post a question about the product on social networks like Facebook to ask family members, friends, and other contacts for their opinions.
Because smartphones are equipped with GPS, leading marketers are using geotargeting technologies to send personalized promotions—such as a coupon for a product that shopper has just walked past.
E-commerce has been growing at 18 percent per year over the past decade, and now represents 8 percent of total retail sales. As technologies evolve that enable smartphones to be used for in-store payments, mobile-commerce is growing even faster. In 2011, it made up just 3 percent of e-commerce sales, but it is expected to increase to 15 percent by the end of 2013.
To anticipate what consumers will want to buy, retailers are increasingly relying on algorithms and predictive modeling to crunch purchasing data and make suggestions based on what individual consumers and their peers previously bought. Currently, more than one-third of Amazon purchases, and three-fourths of programs viewed on Netflix, are based on algorithms that make recommendations.
Retailers are also increasing their spending on social media marketing campaigns, spurred by the realization that consumers are more easily persuaded to buy a product by their friends than by any other factor.
For example, McKinsey's research revealed that recommendations are 10 times more influential when they come from peers than when they are offered by salespeople.
For this reason, companies are expected to spend nearly one-fourth of their marketing budgets on social media platforms within five years.
But technology isn't the only driving force behind the evolution of retailing in the 21st century. Demographic shifts are also playing an important role, and retailers will have to revise their strategies in response.
According to a McKinsey research study, Baby Boomers will generate most of the spending growth in several retail categories, including:
- 92 percent of spending growth in food
- 73 percent in housewares
- 56 percent in apparel
More importantly, Boomers won't just buy mass-market products. They'll demand customized products as well as personalized services and experiences.
The Millennial generation is also increasing its spending. Millennials aged 13 to 30 are expected to provide as much as one-third of retailers' revenues by 2020.
At the same time, Hispanic consumers are projected to double their retail spending over the next decade and to account for one-fifth of the retail industry's revenues. Hispanics spend 150 percent more than other consumers on fresh food, footwear, and children's apparel.
Another dramatic change in retailing is that the traditional boundaries between retail segments are vanishing, as more companies intrude in each other's markets. Walgreens and Target are now selling groceries and fresh foods. Best Buy is selling appliances. The Meijer grocery chain is selling electronics.
If that's not enough, retailers are now facing competition from manufacturers. Companies like Apple and Nike sell their products directly to consumers, not only online but in attractive retail stores.
Looking ahead, we offer the following forecasts:
First, as online retail sales continue to grow, in-store sales growth will slow considerably.
Over the next several years, in-store sales are projected to grow by just 2 to 3 percent annually, while some retailers will suffer decreases of 5 to 7 percent pear year. Moreover, margins will be squeezed as more shoppers use their phones to compare prices.
Second, retailers will compensate for slower growth by acting as brokers for third-party sellers.
Consider that only one-third of Amazon's sales involve selling Amazon products to customers; the other two-thirds are sold on Amazon's site by outside vendors. Walmart and Sears are among the retailers that are now starting to supplement their revenues by following Amazon's lead.
Third, successful retailers will leverage advanced data analytics to understand what specific customers and customer segments will want and how to give it to them.
Whether they are targeting individual shoppers or demographic groups such as Boomers, Millennials, and Hispanics, retailers will have to analyze the mountains of data available from customer transactions and third-party providers to determine how they can create the greatest possible value at the lowest possible cost.
Fourth, successful retailers will deploy multiple new technologies that can give them an edge.
For example, a few years ago Facebook introduced a feature called "Places," which enables users to tell others where they are and where they're going.2 Among the companies that use this service to offer location-specific products are American Apparel, Best Buy, Dell, Macy's, Sears, and Walmart. Walmart is also using an app that enables shoppers in its stores to scan the barcode of a product and see customer ratings and reviews of that product. North Face creates "geo fences" based on GPS smartphone data to offer promotions to customers who enter a zone around a store that sells its brand. Another example is Mondelez International, which owns such brands as Chips Ahoy, Nabisco, and Ritz. The company is experimenting with using Microsoft Kinect sensors on supermarket shelves. The sensors can identify the gender and age of a nearby shopper, and then present a customized marketing pitch for that potential customer.3
Fifth, as more sales are conducted online, retail stores will become smaller and focus on improving the customer experience rather than on displaying products.
Vast showrooms are no longer needed when a retailer's entire inventory can be displayed online. For this reason, in 2012 the average store opened by major retail chains was 25 percent smaller than existing stores. Store layouts will have to be configured to allow shoppers to try out products before they buy and to learn how to use them after the purchase, much as Apple devotes space to Genius Bars where customers can get expert help with their products. Store space, as well as highly trained personnel, will also need to be dedicated to areas where customers can pick up and return items they've ordered online. If that seems like a minor consideration, keep in mind that customers currently visit stores to pick up 50 percent of the items they buy online from Walmart and 40 percent from Best Buy. However, many customers prefer to have their orders shipped—which leads to the next forecast.
Sixth, consumers now expect fast, free delivery of the goods they order online, and those expectations will continue to be a moving target driving innovation.
Offering overnight shipping is no longer a distinctive capability. Today, Amazon is offering same-day delivery in 10 U.S. cities. It's just a matter of time until all retailers are providing same-day delivery in every major metropolitan area, at no charge to their best customers. By the end of the decade, drones may be making same-hour deliveries throughout the country. According to a 60 Minutes interview with Amazon CEO Jeff Bezos, the company's Prime Air service would use small, unmanned aircraft to deliver packages within 30 minutes of purchase.4 The FAA recently announced that it will issue regulations for commercial use of drones in U.S. airspace by 2015, and Bezos plans to have Amazon's drones in the air by the end of 2017. Such a development would clearly threaten the business models of FedEx and UPS, which currently deliver the majority of Amazon's packages today.
Resource List:
- Insights, October 2013, “How Retailers Can Keep Up with Consumers’” by Ian MacKenzie, Chris Meyer, and Steve Noble. © 2013 by McKinsey & Company. All rights reserved.
http://www.mckinsey.com/insights/consumer_and_retail/how_retailers_can_keep_up_with_consumers - Strategy+Business, Spring 2011, “The M-Commerce Challenge to Retail,” by Matt Anderson, Nick Buckner, and Stefan Eikelmann. © 2011 by Booz & Company, Inc. All rights reserved.
http://www.strategy-business.com/article/00053 - Fast Company, October 15, 2013, “The Future of Shopping: Shelves That Track the Age and Gender of Passing Customers,” by Neal Ungerleider. © 2013 by Mansueto Ventures LLC. All rights reserved.
http://www.fastcompany.com/3020041/fast-feed/the-future-of-shopping-shelves-that-track-the-age-and-gender-of-passing-customers - USA Today, December 1, 2013, “Amazon Testing Delivery by Drone, CEO Bezos Says,” by Alistair Barr. © 2013 by USA Today, a division of Gannett Satellite Information Network, Inc. All rights reserved.
http://www.usatoday.com/story/tech/2013/12/01/amazon-bezos-drone-delivery/3799021/
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