What issues are on middle market retailers’ minds in 2021? From labor challenges to business transformation opportunities, there’s plenty in the cart to check out.
COVID-19 has been a great accelerator of many trends we’ve seen building for years; it has also caused other trends to abruptly end. Spending habits and buying behaviors sit on both sides of that fence. In some cases, these behavioral changes will eventually revert to a pre-COVID-19 state, but others are likely to continue with only minor retraction. U.S. consumers will eventually revert back to buying experiences, but they are unlikely to return to the in-store purchasing levels seen before the pandemic hit. Retailers need to seize the moment to gain back wallet share lost to the travel industry and other experiential channels and they need to do so by intersecting with their customers where their customers want to meet.
Changing consumer preferences: What do they want?
The dramatic increase in online shopping, home delivery, curbside and in-store pick-up, and all other related changes brought on by the pandemic will lead to permanent structural changes across the industry. While lines at storefronts during the pandemic are evidence that brick and mortar is not dead, it is unlikely that we’ll return to 2019 sales-mix percentages. While even the most ardent online shopper will likely always crave the inside of a retail store, the novelty of in-store shopping will quickly give way to the convenience of the online shopping that became a habit during the pandemic. There will therefore be some bounce back to in-store shopping, but a significant permanent increase to online sales percentages.
In 2021, middle market retailers will need to offer a unified and seamless shopping experience across all channels whether online, at store or via third party. To compete effectively in this environment, retailers must optimize their operations across their entire supply chain and through to the customer to adapt to these changes in channel mix. This includes smarter inventory management based on data analytics, organization of the supply chain to optimize product availability, shortened lead times and mitigated transportation and other operating costs, and the use of technologies and emerging platforms to reach their customers and build affinity. According to a 2020 study by McKinsey, social commerce, now prevalent in China, has seen triple digit growth over the last five years. If this is a precursor for what to expect in the United States, social media will continue to expand as a critical retail channel. This will likely create both opportunity and risk in the United States. Soon the retail ecosystem will regain focus on health and wellness as well as responsible and sustainable practices, and retailers need will be very careful about how they interact with customers and influencers through social channels. Those who do so successfully will be able to attract new customers and build brand loyalty across their customer base.
Supply chain disruption: Anticipating the shift
In 2020, most consumer businesses experienced at least some fallout from supply chain disruption created by newly imposed tariffs and supply shortages and/or demand shock resulting from factory shutdowns and government stay-at-home orders in the United States and across the globe. Many retailers have sought new supplier relationships to mitigate centration risk and ensure ample supplies of critical products, but factory shutdowns, container shortages and slow-downs at many ports of entry have increased transportation costs significantly and created backlogs, leaving some retail sectors struggling to meet customer demand.
While some companies have learned and have prepared for the challenge ahead, it will not be easy. Uncertainties related to government regulation, and offshore materials and manufacturing delays, coupled with ever-changing consumer preferences and buying behaviors will pose significant ongoing challenges in 2021 and beyond. To counter, retail companies will need to optimize supply chain efforts; minimizing concentration risk, streamlining shipping costs and addressing overall operating strategies will be essential in order to pivot quickly as demand shifts.
Solving the labor problem: It’s complicated
The labor issue will become increasing complicated in 2021 and beyond. Retailers will continue to experience challenges staffing their stores and fulfillment centers as the economy continues to reopen and employees are slow to return to work. However, the scarcity of labor seen pre-pandemic is likely to be mitigated by operational efficiencies realized during the pandemic, particularly in the area of automation.
While customer-facing automation like self and mobile checkout will have an obvious impact, the greatest benefit long term will be realized in warehousing and distribution centers, which is critical given heightened levels of online sales. In the near term, retailers need to hire to be ready for the pent-up demand that will be released in the second half of 2021 and they will likely be facing higher labor costs driven by government regulation as well as near-term competition for labor, as the labor force is slow to return to work.
Labor policies of the new administration will likely drive up operating costs significantly in some markets. Retailers will need to use data analytics to understand business demands, operations flow and evolving consumer expectations to determine appropriate labor strategies. It is a complex problem, but assessing the data could unlock solutions.
Data management: Serve and protect
Technology is the common solution to many problems faced by retailers, but at the same time it will fuel the evolution of the retail ecosystem in a post-COVID-19 environment. This is not a new trend, but it is a trend that has been proven and accelerated during the pandemic. Retailers with online platforms were equipped to meet the needs of their customers, while those who hadn’t invested paid the price. Even grocers, historically slow to adopt e-commerce technologies, developed platforms and/or engaged third-party platforms to meet the needs of their customers. But this is the tip of the iceberg. Data analysis of customer shopping patterns and high velocity SKUs drove hours of operation, manufacturing schedules and shelf space in grocery stores. The data told an important story and that lesson should not be lost. Building datasets to better understand consumer preferences and customer buying behaviors will be critical to engage with the right customer at the right time with the right products.
The tools behind omnichannel marketing and the big data generated across those channels enable retailers to understand their customers’ behavior wherever they shop. As a result, retailers can create strong, long-term relationships with consumers by building differentiated brands with value beyond price competition. At the same time, technologies create additional risk in the form of data security and privacy. Regulatory measures, such as the General Data Protection Regulation and the California Consumer Protection Act, must be addressed by retailers on an ongoing basis to prevent data breaches and to comply with regulations.
Business transformation: Assess, address and move
As consumers’ preferences shift and buying behaviors change, retailers must also evolve. Whether this translates to enhancing supply chains, modifying product mix, evaluating store layouts and store counts, adjusting the channel mix, or improving legacy processes, retailers will need to be agile and quick to assess, address and move forward—thoughtfully. Using digital strategies will be key to accomplish transformative efforts. In addition, leveraging capital for key investments, weighing tax considerations or restructuring to optimize cash flow will also be essential for retailers to build, grow and adapt to meet the needs of the new consumer.