Retail revolution: Adapt or perish

by José Luis Nueno
If the No. 1 priority for retailers during the height of the pandemic in 2020 was to stay open, since 2021 it has been how many shops to keep open and where.

“The pandemic’s most enduring feature will be as an accelerant of existing trends,” writes NYU Stern professor Scott Galloway. And one of those trends is what Galloway terms “the Great Dispersion.” Remember the way we used to work 9 to 5, Monday to Friday, and save up shopping for the weekend? We’d make a big trip to a suburban mall or superstore – places referred to as shopping “destinations.” Now, work, shopping and entertainment have been dispersed, unbundled from the constraints of time and place. Faced with this post-pandemic reality, I concur with Galloway that “all brands need to establish a direct relationship with the consumer.” What does that mean?

Innovation. In inflationary times, retailers want to keep their costs under control, so they may prefer not to launch their own brands or experiment with new products. But the crisis has shown that cash-strapped customers who switched to private labels will stay loyal if there is quality. Retailers must balance being conservative in the short term with attracting customers with innovative offers that generate loyalty over the long term.

Inflation. As 2020 supply-chain disruptions led to higher costs in 2021, retailers initially took the hit, especially those who had spare stocks, and consumers didn’t perceive those inflationary rises right away. Not anymore. Retailers are passing those costs on and prices are going up across categories. This is leading to a decline in spending, and recession. By now, retailers should have made their cost-price adjustments, but how long will consumers put up with paying more? Sales volumes are falling. Again, brands that are able to innovate and differentiate themselves – at affordable prices – will be better positioned to ride this cycle out. And eventually, when the Ukrainian crisis gets resolved, the effect on the global economy may be similar to the rebound after vaccines were introduced.

Localisation. Over the past few years, retailers that were able to shift their sourcing locally did so to avoid global supply-chain disruptions. This trend of deglobalisation is ongoing, reinforced by geopolitical tensions and resurgent nationalism, as well as the drive to reduce carbon footprints. Localisation, however, also has to do with the convenience of shopping locally – the dispersion or unbundling of demand mentioned earlier. People want things nearby. They may buy things online, but they want to see, touch and pick them up locally. Recognising the desirability of local spaces, the suburban superstores are moving back into the neighbourhood. And the larger chains need to decide if it’s really necessary to maintain two or three stores on the same shopping street: what might those become instead?

Omnichannel. The answer is to turn surplus stores into redesigned retail spaces. Whereas people used to discover brands online and then go to the store to buy them, now they tend to buy online and use the store to discover and try out new brands. The rise of ecommerce doesn’t eradicate the need for physical stores but rather reinvents them: they are the best way to create brand awareness and shift logistics costs over to the customer. So, these stores become warehouses, showrooms, experience centres, local collection points for online operations, or even dark kitchens. The latter is a trend that has taken off in the realm of food delivery, where food is prepared to order exclusively for delivery via third-party apps to customers living in close radius.

Direct-to-consumer (DTC). Selling via Amazon may expand your reach, but you don’t reap the rich customer data or control the sales process. To be profitable, at least half of your ecommerce should be direct-to-consumer, meaning selling directly to consumers via your own platform. Granted, you may still need to use local stores for delivery/pickup, so some of the gains of cutting out the middlemen are lost by doing your own logistics. But, on balance, DTC gives you better control over your margins and your customer relationships.

In this “never normal” world, retailers must get to grips with this permanent state of disruption. Some of the actions taken to cope with the pandemic – more open-air spaces, pickup zones, spaces redesigned for less crowding and better flows – demonstrate retailers’ quick thinking and are worth keeping. Retailers should build on this spirit of flexibility and resilience. Because there’s only one normal in business: Adapt or perish.

José Luis Nueno is an IESE professor of Marketing and holder of the Intent HQ Chair on Changing Consumer behaviour. He is the author of numerous books, including Never Normal (2022) and Direct to Consumer (2020).This Report forms part of the magazine IESE Business School Insight 162.

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