Top trends and issues for retail in 2018
The retail holiday season finished strong and it’s projected that U.S. retailing will continue on an upswing in 2018. According to the National Retail Federation, sales in 2018 are expected to grow between 3.8 and 4.4 percent over 2017. Online and other non-store sales, included in the overall number, are expected to increase between 10 and 12 percent. However, despite this expected growth, the industry will continue to evolve and retailers will face challenges as they address a highly competitive marketplace and adapt to changing consumer preferences and expectations. Successful retailers will need to have a keen eye trained on a variety of issues affecting the industry and their businesses.
Watch Tom Anderson, President and CEO of The Paper Store, and John Nicolopoulos, RSM’s restaurant and retail practice leader, as they discuss the key trends affecting the retail industry.
Consumer buying behavior is continuing to evolve as new technologies gain popularity and new demographic groups enter the marketplace. Convenience, experience and price will weigh heavily on buying decisions. Consumers want access to affordable products on their terms and will develop lasting relationships with those who meet these expectations. Successful retailers will continuously find ways to expand relationships with their customers, regardless of that customer’s preferred channel. Retailers need to leverage technologies to better understand existing and target customers and maximize their omnichannel effectiveness.
Consumers in Generation Z, who already represent an estimated $143 billion in annual buying power, will require additional attention from retailers. These consumers tend to value authentic interactions with their brands, require competitive pricing, demand access to a vast amount of product information, and wish to see social responsibility and commitment from retailers. They are also more receptive to social media influencers than traditional advertising. Retailers who understand these expectations and build trust with Gen Z will create lasting relationships and brand loyalty.
Branding today is as much about how a retailer does business as it is the logo on the product they’re selling; in today’s competitive retail environment, differentiating a brand has never been more important. Successful retail brands understand who their customers are and build a community with them. Relationship building will be essential as younger generations, who value brand authenticity, begin to dominate the marketplace. Retailers who model their operations to accommodate the expectations of their customers will develop brand loyalty with today’s empowered consumer.
Nonetheless, brand risk in the digital age is significant. Brand awareness and loyalty can take years to develop, but can dissipate quickly if retailers don’t have appropriate safeguards in place to protect their brand. As retailers become more reliant on technologies that collect data to better understand their customers, they must be mindful of their responsibility to safeguard that data. Hackers will continue to wage cyberattacks on retail organizations on several fronts. Appropriate controls aimed at preventing cybersecurity issues, and well-designed and well-communicated incident response plans, will help mitigate, but not eliminate these risks.
Labor and workforce shifts
Labor will continue to be an issue for retailers. Minimum wage increases, labor shortages, and consumer demands for convenience and enhanced experiences will challenge retailers. The retail industry is being radically reshaped by technology and the employment model is changing with it—from top to bottom. At the corporate level, data scientists and digital marketers are in high demand and are eclipsing traditional buyers or merchants in importance in retail organizations. This trend will continue, but retailers will likely compete mightily as these converted resources are in high demand.
There will also be significant workforce shifts in the trenches as well, as brick and mortar locations continue to close, downsize or redefine themselves. The growth of online shopping will continue to change retail delivery models. Displaced sales clerks will be replaced by mobile/websites equipped with interactive chat bots and new jobs will be created in expanding distribution centers. Redefined brick and mortar retailers will place a greater emphasis on customer experience. While technology will play an important role in enhancing in-store experience, store personnel will need to embody the brand. This will likely require a higher skilled and higher cost employee to be successful. Finding these skilled employees, training them and retaining them will be a major challenge for retailers this year.
Technology will continue to play an increasingly important role in retailing. Interactive apps, chat bots, augmented reality, beacons and robotics are at the forefront of newer customer-facing technologies in retail. While the bells and buzzers of cutting-edge technology can be initially impressive, it’s important for retailers to utilize the right technology for their business and customers. The most successful retailers in 2018 will continue to maximize the effectiveness of technologies related to their core infrastructure while also looking for ways to support their omnichannel efforts to ensure that all channels are integrated, provide a positive customer experience and enhance the brand. Smart retailers will also collect and analyze consumer data to drive decisions such as tracking sales and inventory.
Data security will be increasingly important as retailers collect more data on their customers. Appropriate controls to minimize cybersecurity risk and well-designed and well-communicated incident response plans will help mitigate, but not eliminate, these risks. Cyber insurance products may cover certain remediation costs, but reputational risk is not insurable. Brand awareness and loyalty that takes years to develop can dissipate quickly. Retailers need a formal process to ensure they have implemented appropriate safeguards, are in compliance with all related regulatory standards, and have well-developed and well communicated and tested incident response plans should an issue arise.
Real estate is likely to continue to be an albatross for some retailers and an opportunity for others. Formal real estate strategies are more important than ever—even for online retailers, who need to consider labor markets, distribution costs and tax ramifications of where they locate.
For traditional omnichannel retailers, physical store or showroom site selection will be dependent on their customer. They will use data analytics to understand their customer base and where they like to shop, and they will bring the products to their customer, rather than expecting the customer to come to them. They will locate where their customers live, work, exercise and travel and they will negotiate shorter lease terms to provide greater agility in the future. They will look for neighbors who offer complementary retail concepts that will attract similar customers to maximize traffic and make shopping more convenient.
Regional malls are evolving. Large anchor tenants will continue to close or downsize stores and developers will find other ways to drive traffic to retain and attract tenants. Malls will become entertainment venues where people spend large chunks of time. As malls are repurposed, they may once again become desirable for retailers, but savvy retailers will look to the data to tell them whether their customers are there, rather than looking at high-level traffic counts across broad demographics.
Capital, finance, reform and growth
U.S. economic data points to an acceleration of growth in 2018 driven by solid consumer spending and improvement in outlays on capital expenditures. Retailers are expected to benefit from continued low unemployment, higher wages and lower tax rates as shoppers find more dollars in their pockets to spend on goods and services. That said, competition for disposable income is likely to continue as spending trends toward services and experiences over tangible consumer goods.
The Tax Cuts and Jobs Act is also expected to fuel growth, as companies take advantage of lower tax rates and tax incentives aimed at driving further investment. Customer-facing technologies and infrastructure are likely to benefit from additional investment, as companies fund accelerated omnichannel strategies with tax savings resulting from tax reform.
Despite the challenges, investment interest in the consumer space is strong. Considerable capital has been raised by private equity funds and remains available for investment. Private equity investors are likely to be more selective with their investment dollars and look for retail concepts that are on trend and have a digital component to their operations. While some retail segments remain out of favor, multiples for strong companies are expected to continue to grow as competition for high-quality assets remains robust.
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