The Retail Think Tank met in London on October 12th to discuss the role of innovation in retail
- Innovators build for the future
- An innovation state of mind
- Skills and tech drive innovation
- Success can only be measured through the customer
- How do retailers successfully innovate?
- Technology is not a panacea
- Moving from business as usual to innovation and usual
- Key areas for investment
“If you’re not innovating, you’re standing still and that is the most dangerous place to be in retail. Perpetual disruption requires perpetual innovation. The most successful today are those that reject the status quo. They foster a culture of innovation and fail fast. Everything they do begins and ends with the customer. They understand that they have to keep moving, constantly evolving their proposition, and experimenting with new innovation, driven through technologies, in order to stay relevant in this digital era.”
Natalie Berg, Retail Analyst and Founder of NBK Retail
Innovators Build For The Future
One of the great ironies of the retail industry is that while the market in which it operates in undergoes constant and rapid change, many retailers are slow to adapt. Evidence of this is widespread, especially in recent business failures. From Wilko’s recent collapse to the demise of Debenhams, Topshop/Arcadia Group, Made.com and Joules, to name a few. The market is now in a more or less permanent state of flux and retailers unable to adapt in terms of their culture, staff roles and contracts, and investment in technology will go out of business. And it is our prediction that the market will see some more major failures in the next couple of years.
“Those [retail] businesses that are around now have a runway for the next 3-5 years, but if they stand still and fail to innovate, they won’t have a runway past 3-5 years.”
Paul Martin, RTT co-chair and UK Head of Retail at KPMG
Smart retailers don’t just think about today and tomorrow, but about three or even five years hence. This is true innovation that, while it does not lose sight of fixing immediate problems, thinks deeply about what the retail business needs to look like in the years ahead. Regardless of resistance from those that are fixated on short- term gains, often a flaw in the public company business model, these retailers will take the tough decisions, even in the face of resistance, to build for the future.
An Innovation State of Mind
Innovation is a state of mind that should be instilled within the culture of an organisation from the very top but with more involvement from the bottom. Retailers need a culture that encourages everyone in the business to challenge the status quo and engage, not just the management, but not many businesses operate like this. Some retailers encourage participation from employees at every level, and invite feedback straight into the CEO. But, as retail consultant Maureen Hinton points out, that being said “culture alone is not enough without the funds to invest and test.”
“Innovation is a state of mind that should be infused in organisational culture from the very top. However, there are plenty of retailers that talk about the need for innovation but then fail to see it through to actual implementation. The reasons are manifold – politics, siloed thinking and management, and a lack of investment in people and tech.
Gary Whittemore, RTT co-chair and Head of Sales, EMEA & APAC at RetailNext
Skills and Tech Drive Innovation
To avoid potential innovation pitfalls, specifically, retailers need to innovate in the skills and technology that will enable them to understand their customers better in terms of how they shop across multiple channels – and even more so when in tough times, multichannel retailers tend to fare better than pureplay or single channel retail formats.
Innovation now has a new champion in the guise of massive computing power, which can provide the data and insight needed to plan, execute and measure activity. Data is becoming even more essential to success given the unpredictability of consumer behaviour and its rate of change in the face of health, geopolitical and cost-of-living crises. Despite a retail recovery after the Covid restrictions were eased and a return of footfall to stores, retail sales are currently under pressure from the effects of inflation. The Office for National Statistics released figures on October 20, 2023 to show that UK retail sales volumes had fallen 0.9% month-on-month in Great Britain in September. This came after a 0.4% rise in August and is worse than the 0.2% decline predicted by analysts.
One of retailers’ greatest concerns now is to gain a better understanding of who is actually in the store, how they behave and what they might want. Innovation will be key to equipping them with the right technologies but there are barriers to enabling this to happen. Retailers want to monitor, gather and analyse data relating to footfall, but also traffic movements, dwell times, behaviour and shrink patterns.
This implies that the hype surrounding Generative AI (Gen AI) is justified for retailers able to benefit from it because of how they are prepared to change their structure, attitudes and culture to embrace it. Many have commented that AI (artificial intelligence) will be the most disruptive trend in 2023 and it is already embedded in many retailer technologies from personalisation and product recommendation online and in-store, predictive stock ordering pre-season and in-season replenishment. It is also leveraged in image recognition for behavioural analytics, stock replenishment and loss prevention, to productivity improvements and task management for sales staff using mobile devices.
While AI can simulate, forecast and predict pricing, promotions, shopping journeys, fulfilment and returns and so on, Gen AI automates the generation of insight from this analysis, surfacing it as actionable intelligence. Crucially, this speed of deployment means that retailers can ‘test and learn’ and then ‘test and adjust’ very swiftly and in ways that are responsive to customers.
For instance, retailers looking to increase gross margins can use AI to dynamically adjust product prices based on billions of interconnected, live data points. Gen AI will then enable them to monitor performance, adjust continuously and automatically, and look for new opportunities. When combined with HII (Human Imagination & Intuition) this approach will improve full price sales and return rates.
Data and the tools to deploy it therefore go beyond optimising staff scheduling and allocation for footfall, to store design, layouts, merchandising, and individual functions around selling, returns, gaming, social media and so on.
Success Can Only Be Measured Through The Customer
While customer experience is often trumped by price in grocery, in fashion, beauty and specialty, experience is more important than ever.
Experience has always been a watchword in retail. But one that may have been forgotten by those retailers that have spent the last few years dealing with the impact of the pandemic and latterly the cost-of-living crisis, a crisis that remains with us, as 100,000 households a month have to refix their mortgages to the new higher rates while renters also face rapid rises in rental fees.
Experience is hard to define because consumers now divide into so many different cohorts and because they operate across so many different channels, making it hard for retailers to reach, track, sell to and retain them.
Those retailers that offer the best experiences can boast the most unified culture, the deepest data sets, the best operational and analytical tools, the most collaborative partners, and the most fearless approach to the innovation that they need to transform all of these capabilities.
Each retailer has a secret to what enables them to do this. Conversely, those that cannot generally have a significant flaw that prevents them from keeping pace, never mind looking ahead. There is therefore no single formula. However, there are several known and definable elements that retailers need to include as part of their own modus operandi.
How Do Retailers Successfully Innovate?
While all companies accept the need to innovate, their approaches to adopting it differ dramatically. The CEO of a retailer that has consistently outperformed over the last 10 or more years, Next’s Lord Wolfson, has explained how the company encourages change, not restricting it to any one department. “Change is everyone’s job… Change and transformation are part of all of our work; we all take on new projects; there is no ‘business as usual’ because our business constantly changes.”
“Necessity is said to be the mother of invention,” according to retail consultant, Nick Bubb, but “often some of the greatest innovations over the years have come from challenging conventional wisdom.” Certainly, Next and others do challenge conventional wisdom, but to get it right they always do it through the lens of the customer – what does the customer want? For example, some successful retailers have enabled their customers to join a community where everyone participates and whose contribution is valued and visible. Others refresh their offer continuously and often, certainly at a much higher rate than is usual, helping them to stand out and generate traffic in-store and online.
“Ultimately successful innovation is about pivoting to address a latent consumer ‘need’ – and doing so ahead of current or future competition. For more established retail businesses, successful innovation is about focus. Focus on the key areas that made the business a success in the first place, but with an eye on the future to ensure new trends and consumer behaviours are fully embraced and accounted for in the product or service offering.”
Jonathan De Mello, Founder & CEO, JDM Retail
Technology Is Not A Panacea
It is thought that omnichannel retailers should be spending between 4-8% of their revenue on technology per annum. However, currently most only spend between 1.5-3%, leaving an estimated best-case of a 5% investment gap based on annual turnover.
However, innovation does not stand alone and is part of a broader strategy; “innovation using new technology is one of the big enablers but is not the end game in itself,” as Mike Watkins, Head of Retailer and Business Insight UK, NIQ, points out.
“Innovation is too often conflated with the introduction and adoption of new technology. Just because a technology may be new, it does not necessarily mean it enables innovation. By definition, only the application, use case or solution that the technology solves can be described as innovative. Retailers have been particularly bad in ignoring this fact. Simply throwing technology at a problem does not necessarily mean the solution will be innovative.”
Miya Knights, Retail Technology Magazine Publisher and Consultant
Instead, as Knights points out, technology should be used to introduce ‘net new’ capabilities, services or products. “Take Gen AI for instance. The adoption of such technology will certainly help retailers do more with less, more effectively, efficiently and productively. But, automatically generating and superimposing clothing sample images onto models, for example, is not in and of itself innovative. The ability to reduce time to market is. More specifically, the innovation comes from the ability Gen AI offers to streamline product onboarding costs and timeframes, so fashion retailers can sell more clothes, more quickly. The development of tangibly innovative use cases should start with the problem and reverse engineer a solution that looks at people, process and technology solutions in that order. This is perhaps why we have seen so much customer-facing innovation, using digital and mobile to enhance the customer experience, both in-store and online. At the end of the day, it’s what you do with technology that will ultimately determine if it’s used in an innovative way. Retailers would do well to remember this when investing in tech.”
“The utopian dream of algorithms and intelligent fridges placing orders and robot delivery is, frankly, a fantasy. Humans are analogue, so companies trying to over-digitise the human life journey must take care in predicting how much of our lives we want to spend engaging with technology. Investment and management time should focus on two key areas of innovation – first, tackling ever intensifying pressure on costs and margins and second, technology which enhances the emotional engagement with brands.”
James Sawley, Head of Retail & Leisure, HSBC UK
Moving From Business As Usual To Innovation And Usual
The challenges to becoming innovative are significant. How can retailers adjust to a world that will not return to what it was for two or more years and longer term the chance that there will less disposable income? How can stores play a better game in an omnichannel world? How can they meet the needs of consumers whose needs always run far ahead of the retailer’s ability to deliver?
There is, as once predicted, no new normal. The consumer markets remain in flux; once predictable behaviours are now in play and fragmenting in ways to defy traditional demographics.
It is clear therefore that retailers will have to not simply adapt to what is in front of them but re-invent themselves for the long term as the way consumers live, work, shop and consume continue to change.
While inflation is falling and set to fall further, it will remain high for at least another year and may not return to the Bank of England 2% target even then.
Right now, the challenge facing retailers is an unwelcome trinity of higher costs, lower demand and squeezed margin, made worse for some by years of underinvestment where they may now never catch up.
Most consumers are now choosing to buy essential goods and are looking for the best value for money. Secondly and looking further ahead, the population is getting older, the size of households is reducing and the attitudes, expectations and preferences of Gen Z are very, very different. These factors will all impact the distribution system, store formats and range and basket size.
At this level and in the face of these weighty challenges, only a handful of retailers can really claim to have innovated in ways that will support their three-to-five-year visions.
Or, as is common, they may be innovating in a vacuum. Individual channels to market will have their own investment schedule based largely on optimisation for their own ends whilst not fully recognising how the whole customer journey across them all needs to be considered. AI holds great promise in helping to solve this problem but if the various channels are not collaborating or no one has oversight of them all, then planning will be difficult.
The Cost of Innovating
For many retailers, the desire to innovate runs way ahead of their funds. Executing well in all the above functions is impossible because it is completely unaffordable, particularly if they are now competing with on emerging retail models such as second-hand retail or investing heavily in ESG.
The cost to borrow has risen and therefore both lenders and their borrowers will be looking for more guaranteed returns, an area where technology has failed woefully.
Taking a chance and failing fast is a relevant tactic for some but is generally less welcome in retail. Investments in technology must focus on the brand, proposition and value.
However, while it is understandable that innovation took a back seat as retailers struggled just to deliver business as usual during the pandemic and then the cost-of-living crises, the call to action now goes out again to retailers to recognise the competitive advantage of differentiating on product and service.
While there is a cost to making this investment, this is about the profits of the future. While it takes a brave retailer to explain all this to its shareholders or the city looking for gains right now, the current relatively benign environment on some of the high-cost areas such as freight is an opportunity to make this leap.
In fact, the panel has been calling for a doubling of tech investment from the current 1-3% of turnover to ensure long-term value creation and business transformation.
Key Areas For Investment
Accepting that each retailer has its own operational model, each will also prioritise innovative investments in different ways. Here is what the panel is seeing.
- Supply chain
More responsive operations and supply chain to improve availability both online and in-store. It is predicted that new warehouses three times the size of current mega sites are being planned, particularly in grocery where it has been shown that getting availability to 80% or over will lead to higher market share for the retailer that can achieve it.
People and property are a retailer’s two most important assets. But it is impossible to optimise their efficiency and productivity without sufficient operational visibility. They must balance their deployment with automation to maximise availability and empower service.
Rethink colleague roles because they lack the flexibility needed to run a store with multiple roles – service, pick for online orders, running back of store warehouses as mini fulfilment centres, or even switching from the store to the DC. Current contracts and training regimes may simply be too restrictive.
Store associates are a retailer’s most valuable asset. Equipping them with the right digital tools means that they can quickly address any customer pain points and cut friction from the in-store experience (i.e. help a shopper to find an item on the shelf, reorder an item that is out of stock, or check a customer out on the spot with a mobile POS device). And, with greater transparency around a customer’s shopping habits across both physical and digital channels, it also enables staff to offer a more deeply customised experience. This is only going to improve as retailers look to AI to power those more personalised recommendations. The tech has been available for some years now but adoption has tended to be piecemeal.
The ultimate user of so much technology as retailers drive forward for greater efficiency to improve productivity and cut costs can be the customer, so often an analogue creature in a digital world. And while they are quick to embrace tech that makes their life simpler and more convenient, they will baulk at having to manage more and more elements in their journey to purchase.
So, while the focus on product returns of late has been on the growing number of retailers that are starting to charge a fee, there has been less focus on making the process easier for the customer. And yet, there is no shortage of tech that can do this.
The customer also expects the right product, in the right place at the right time and while this should be a given in retail, there still a lot of work to be done by many retailers.
- The store
Despite the billions spent on trying to drive consumers online, it is widely accepted that online will never take more than a third of retail spend, probably less in some retail sectors.
The store therefore deserves more attention, but not in ways that simply automate to direct the customer to a self-checkout when they really want to interact with a member of staff, or adding lots of digital signage as a replacement for real people. And yet other consumers want more digital in-store if it enhances speed and convenience, through to information and inspiration.
Before the pandemic, the media was crowded with content about the future of the store, backed up with a host of innovation around design, layout, smart changing rooms, livestreaming, showrooming, staffless checkouts and just walk out capabilities. This is a call to get back to thinking big about what might come and how an innovative frame of mind might shape it.
Rising costs of trading online have clearly worked in favour of multi-channel retailers, as they can spread their risk, rather than pureplayers, even allowing for the economies of scale, security and control afforded by first party data.
Innovation for both types of retailer is focused on bridging the many gaps between the store and online, rather than simply optimising functions that are restricted to a single channel. For example, Augmented Reality (AR), especially in beauty, luxury, footwear and home, virtual shopping consultations connecting online shoppers with in-store staff, and Liveshopping are turning the discoverable into the transactional. People used to find products; today products find people.
Innovative thinking inevitably leads retailers to recognise that they cannot do everything themselves, an insight that has led to a revival, for example, in outsourcing. According to MarketWatch: “the global outsourcing market is expected to rise at a considerable rate between 2022 and 2026, spurred on by the uncertainties caused by the pandemic.”
Whilst the largest retailers have the experience, resources and money to make their own way on innovation, smaller ones do not, but even here there has been innovation, with large retailers offering to manage those smaller retailers’ logistics and store systems.
Some retailers are prepared to think the once unthinkable. Well-known High Street brands running in-store cafes, shop in shop dual branding. These are not all new ideas but we are seeing them being embraced more widely now.
Ultimately, the topic of Innovation should be considered as part of any transformation/change agenda. In depth research by KPMG has demonstrated that 8 key building blocks need to be considered when embarking on a transformation journey and even if the focus is on a specific business function broader cross-organisational interdependencies should be considered. These 8 building blocks are described in KPMG’s Connected Enterprise framework.
This report is based on extensive research among retailers, analysts, journalists, tech industry leaders and economists, all roles that are represented on the Retail Think Tank (RTT) panel. The clear conclusion the RTT came to is that innovation is both a state of mind that should imbue the whole company culture, but also a practical set of actions that need to be taken and now, with more urgency than at any time in the past.
As the industry starts to look ahead after the distractions of the Covid pandemic and its fallout, we can see that the landscape is uneven and the view unclear. And so, the strategies that retailers must now build must only be prescriptive to the extent that this will help to get things done. At the same time, these strategies must be flexible enough to accommodate unforeseen events and trends that we are certain to see over the next 3-5 years.
PART II – Individual Views of the KPMG/IPSOS Retail Performance Think Tank Members
Paul Martin, UK Head of Retail – KPMG
In our publication ‘Retail’s delicate balance’ published in February 2023 we describe the key trends shaping the global retail industry. Retail leaders should be focussing on the 3 overarching themes – People, Planet and Profit. Within these 3 macro themes we describe 9 sub-themes. Under the Profit pillar, Innovation is one of these themes and should be acknowledged as vital for the future of retail businesses.
Innovation is of course a broad topic and is often associated with technology and data, with Generative AI currently the latest hype. The use of next generation AI should absolutely represent an opportunity for retail whilst at the same time the relevant user-cases for this need to be tangible and the return of investment needs to be closely monitored. Overall though innovation should be seen as much broader than that. Innovation is critical for the survival and prosperity of the sector, whilst at the same time innovating for the sake of doing something “new” is not a recipe for success. We have identified eight key building blocks that are crucial when transforming for the future and innovation in these areas is a key component.
- Innovative products and services remain a key driver of competitive advantage – being able to offer the consumer something others do not sell should represent a key differentiator.
- Experience centricity by design is to ensure you innovate all your go to market channels customer journeys with the target consumer in mind.
- Responsive Operations and supply chain should be the backbone for any successful retailer. Currently many retailers are reviewing their network architecture, store footprint and store operating model to ensure efficiency and customer service are at the forefront.
- An Integrated partner and alliance ecosystem is becoming an important component of evolving business and operating models. Many retailers have understood that they often do not have enough human and/or financial capital to evolve parts of their businesses therefore partnering where possible represents an opportunity. This does not just mean business model innovation it also requires innovating your culture and mind-set about how you do things.
- Digitally enabled technology architecture is frequently the obvious choice for innovation with many retailers struggling to reduce their legacy debt in this space. Increased investment in this area (in most cases doubling the % of turnover spent on this) will be required whilst being cautious about the ROI delivered.
- Aligned and empowered workforce – recruiting, retaining, incentivising and developing retail staff remains an important priority for retailers. This will mean though in instances thinking differently than in the past. How to ensure your colleagues are the most important brand ambassadors and insight providers whilst at the same time becoming an atractive employer for example for “digital” talent will require innovation in the way retailers atract and incentivise staff.
- Seamless interactions and commerce means that retailers have to become even more channel agnostic and customer centric. Traditional transformation approaches have often focussed on enhancing functional silos whilst the future must be about the cross-functional organisation. This will require innovation in organizational design, KPI’s and governance models just to name 3 examples.
- Insight driven strategies and actions will require all decisions to be data-led. Currently retailers are swamped with data although often struggle to convert this into meaningful actions. Understanding how algorithms can help bring together functional data pools to answer multi-dimensional exam questions will set up those that
succeed to be the winners.
On top of these 8 areas the Sustainability agenda will increasingly gain in importance. Demonstrating which initiatives will make a financial and societal difference and how these can be measured will require innovation in people, process and technologies for retail businesses.
As outlined above the innovation agenda is broad and retailers need to assess which areas to start with although I believe all 9 need to be priority due to interdependencies between them. Even though survival may seem the most obvious priority in the current trading environment, Innovation is a key component of any growth agenda and therefore retailers have to understand how they can carve out bandwidth to address this topic.
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
Necessity is said to be the mother of invention, but often some of the greatest innovations over the years have come from challenging conventional wisdom. Just as the first supermarket tested the view that food shoppers wanted to go to separate bakers, butchers, fishmongers and greengrocers, so too did the first shopping app test the view that shoppers wouldn’t buy things on a mobile phone.
And some innovations have come from challenging planning restrictions, so that just as it would have been unthinkable not that long ago to see motor car showrooms in shopping centres, so nobody either would have thought that “bulky goods” retail parks would also see food and beverage and fashion stores open there too.
And some innovations have resulted in tremendous long-term value created for shareholders by simply thinking about what customers need or want, eg the creation of the “Warhammer” miniature fantasy wargame 40 years ago has seen Games Workshop grow into a company with a stock market capitalisation of £3.5bn, whilst the constant evolution of its menu has helped Greggs grow into a business with a stockmarket capitalisation of £2.5bn.
Maureen Hinton, Retail Consultant
Innovation is essential in retail. The retail sector is highly competitive and is facing constant change in consumer behaviour and in the retail environment. Those that do not keep ahead of change, such as we have seen most recently with Wilko, are unable to survive in such a competitive environment.
Fostering an innovative culture
Innovation is about continually improving/renewing products, services, operations, the proposition, the brand, to make the business more appealing to consumers, and maintaining growth in the face of these challenging factors. However, being an innovative business requires a culture that encourages everyone in the business to challenge the status quo and engage, not just the management, and not many businesses are like this.
The image below summarises some of the opportunities available across the retail value chain, demonstrating that innovation is not restricted to any one area, but should be embedded in the culture of the company.
An example of this culture is Next. Its CEO Lord Wolfson explained how it encouraged change, not restricting it to any one department “Change is everyone’s job……. Change and transformation are part of all of our work; we all take on new projects; there is no ‘business as usual’ because our business constantly changes”. (2022/23 Annual Report)
Another retailer currently leading the pack, M&S, introduced the “Straight to Stuart” scheme that allows all employees to make suggestions direct to joint CEOs Stuart Machin and Katie Bickerstaffe – which is fostering a culture of change and innovation across every element of the business. That said culture alone is not enough without the funds to invest and test, and this means the largest retailers, such as Walmart and Tesco, tend to be the ones that have the resources to test and develop, or in Next’s case, financially support smaller businesses so they can focus on development.
Role of technology
Undoubtedly technology has been the major driver behind recent innovation in retail, the biggest being the online channel. Amazon was the major innovator in this field, with its Day One culture (every day should be considered the first day in business, therefore always initiating and testing new developments). But the technology that drove the internet was not developed by Amazon – instead Amazon used the technology as a tool to develop its own retail business (and ultimately, with AWS, help others develop theirs).
Technology is a tool that retail uses to make a better business, one that can operate efficiently and grow, and have a better understanding of its customers as well as its supply chain and operations. Technology is already embedded in businesses, in particular powering digitalisation and operations. Typically for example, Inditex uses it for management of operations, from logistics to in-store transactions; to access business data, to speed up decision-making processes, manage inventory, and to improve customer services and CX.
Efficiency in the supply chain can help with labour shortages. For instance, by using AI and robotics Fieldworkrobotics has developed robotics to harvest soft fruits at their optimum, reducing waste, increasing efficiency and smoothing the demand for workers.
Therefore, we are seeing machine learning, artificial intelligence, and more recently Gen AI, being used as tools to learn and quickly process data and knowledge in order to, among other things, speed up processes to become more efficient. But also, to gain a better understanding of customers, because ultimately humans are at the end of the retail chain, and this is the most crucial element of the business – the engagement with the consumer.
The interaction with the consumer buying a product is the pain point in retail – is it the right product, in the right place, at the right time, for the consumer. The current aim is personalisation – but there seems to be a long way to go on this. Tesco’s Clubcard, a well-established technology collecting customer data and buying behaviour, provides industry leading innovative promotions and deals that tap into current consumer demand for value, but even with all this data, the personalisation rarely feels personal or replicates human contact.
The post COVID world, with its return to stores, holidays and leisure, has shown that humans want to live in a physical and social world, not exist solely in a virtual one. The Metaverse and VR struggle to gain traction, but consumers do want to have the mix of physical and digital because it improves convenience and enhances their experience. Innovation in the physical space to improve the experience for consumers (not just the convenience of contactless service and payments) is where we still need more innovative solutions.
Mike Watkins, Head of Retailer and Business Insight UK – NIQ
Retail will have to be re invented as there is a structural change underway in how we live, work, shop, consume and value. For food retailers this has already led to change in shopping behaviour and food consumption. As the result of inflation (which is likely to remain higher than that of the last decade for the foreseeable future) the vast majority of consumers are now choosing to buy essential goods and are looking for the best value for money. Secondly and looking further ahead, the population is getting older, the size of households is reducing and the attitudes, expectations and preferences of Gen Z are very, very different. All of which means there will be an impact on the distribution system, on store formats and certainly on range and basket size. So, to keep up with shoppers’ expectations (and to avoid an inevitable fall in profitability), change will need to be accelerated in food retail and in particular with innovation in 2 key areas: shops and products.
Shoppers are now channel agnostic when it comes to grocery shopping with lifestyle becoming as important as location in influencing where to shop. Omnichannel is the new business model which means smaller food stores, a more modern shopping environment with the in-store experience enhanced by new technology, and behind the scenes a replacement of the many ineffectual legacy systems. Which means more decision making informed by customer data but still implemented by humans.
Large food stores (those over 25,000 sq. ft) have been in long term decline for a while and this shift of spend will quicken without innovation in how retail space is utilised. Supermarkets also need to keep up with the needs of shoppers with inspired mission-based formats and by developing innovative food service and prepared food store models. And a move towards discount retailing which means less mid-market retail brands. The traditional department store has already seen significant change and this will follow for many food stores.
However, when it comes to products, shoppers demand more than just a curated choice based on previous purchasing; rationalised ranges often means reduced choice from fewer skus. For context in France , NIQ analytics show that over the last year there has been a further 3% reduction in assortment and 12% less NPD – just one of many similarities with UK. Predictive demand is the holy grail so more products will need to be nutritious, sustainable, and have a low carbon impact. More of the productivity gains must be reinvested in supporting food security, biodiversity and the different food systems and agriculture (the Agri-Food ecosystem) have to be better planned, more integrated, and made future proof.
Innovation using new technology is one of the big enablers but is not the end game in itself. Change will need to be more than just desperately seeking operational savings. The food retail sector is dynamic but it could be argued that innovation in preparation for these big transformative trends has been lacking and that the real innovation is yet to come.
James Sawley, Head of Retail & Leisure, HSBC UK
The utopian dream of algorithms and intelligent fridges placing orders and robot delivery is, frankly, a fantasy. Maybe my Gen-Alpha nephew will be receiving goods in this way, but it will be 30 years before his generation are a meaningful spending cohort. Look at supermarkets, even now, after billions of people were forced to try internet shopping, 90% of groceries are still bought in shops. Even in store, a remarkable number of people still queue for a human check out.
Human beings are analogue, companies trying to over-digitise the human life journey must take care in predicting how much of our lives we want to spend engaging with screens and technology. For me, investment and management time should focus on two key areas of innovation, 1) tackling ever-intensifying pressure on costs and margins, and 2) technology which enhances the emotional engagement with brands.
Pressure on cost and margin – as a lender we see most distress driven by cost challenges, not revenue. The key areas I see technology driving margin enhancement for future proof businesses are in the fields of pricing optimisation, customer services, returns, buying and warehouse automation. AI technology is still in its infancy but soon will enable retailers to dynamically price products based on billions of interconnected, live, data points, increasing gross margins. AI, when combined with HII (Human Imagination & Intuition), will improve full price sales, and return rates. 3D printing and other ‘made to order’ technology will enable the onshoring of manufacturing, cutting freight cost, reducing inventory risk and working capital. Within warehousing, automation is a significant CAPEX outlay only afforded by the biggest retailers, but as the technology becomes commoditised and cost effective, this technology will be available to all, reducing reliance on and the ongoing cost of low skilled labour.
Technology which enhances the physical experience – COVID has proved that omnichannel customers are more valuable in the long run. Retailers should focus innovation in experiences which entices customers into stores and increases dwell time, where technology enhances the emotional engagement with brands, and helps gather data on customers. For example, Footlocker in the US use VR to put customers in the boots on their favourite sports stars while they try on trainers. Pretty cool. Selfridges are renowned for their in-store innovation, consumers flock there because they know they will experience something different.
What is holding retailers back from being more innovative? As a lender we finance all sorts of innovation, however discussions still mainly centre around the basics. Given the increased cost of capital and tough trading environment, the opportunity cost of spending time and capital on un-proven technology is often too great when assessed against the realities of lacking seemingly basic things like a good ERP platform or a single view of stock across channels. Following the recent devaluation of companies at the forefront of advanced retail-tech, combined with the slow rate of adoption by consumers, I think getting the technology basics right and focussing on brand, proposition and value is where the smart money is.
Jonathan De Mello, Founder & CEO, JDM Retail Ltd
In Retail, we are lucky enough to be part of a sector where new and innovative concepts appear all the time. Some succeed – and go on to stand the test of time – and some fail. Ultimately successful innovation is about pivoting to address a latent consumer ‘need’ – and doing so ahead of current or future competition. For more established retail businesses, successful innovation is about focus. Focus on the key areas that made the business a success in the first place, but with an eye on the future to ensure new trends and consumer behaviours are fully embraced and accounted for in the product or service offering.
A good microcosm for this is currently playing out in the beleaguered UK department store sector. One would assume that, with the demise of Debenhams, the remaining players would see a concurrent uptick in their performance. This however has not been the case, with structural changes to shopping habits and the rising cost of living we have experienced over the past couple of years combining to hamper any growth aspirations the remaining players had. However, out of the failing House of Fraser model comes Frasers – a leaner, visually ‘elevated’ modern department store concept with a clear consumer focus. Frasers’ ‘house of brands’ – most of which they own outright themselves – has attracted a more affluent, fashion forward demographic. Frasers’ have said themselves that most department stores can ‘take the same turnover out of half the space’ – and have created a more modern department store concept around this principle; maximising sales densities. The proof is in the profit – with profits doubling to £660m at the last financial year end.
Frasers’ success is a great example of focused innovation – taking the tired department store format and optimising it for modern retailing. This is in stark contrast to John Lewis however, who have attempted to innovate quite radically, but have not done so in a focused way around their core strengths. Their attempt to become a property developer has faced intense scrutiny over cost/viability. Their plan for c.400 flats above their West Ealing Waitrose will likely generate a negative return for them of £-57m, and their £150m sale of part of their Oxford Street flagship to convert this space into offices appears to be at risk also. John Lewis have stated that they want to ‘generate two-fifths of group profit via non-retail areas by 2030’ – this mindset, whilst inherently innovative – shows a distinct lack of focus, and it is no surprise that they are very far away indeed from achieving this goal. Whilst creative thinking and diversification is generally a laudable approach, extensive due diligence needs to be undertaken prior to engaging in anything non-core such as this. A retail-first strategy, and innovating within this – as Frasers have successfully done – can and should be their sole focus going forward, it they are to turn their fortunes around.
Miya Knights, Retail Technology Magazine Publisher and Consultant
Innovation is too often conflated with the introduction and adoption of new technology. Just because a technology may be new, it does not necessarily mean it enables innovation.
By definition, only the application, use case or solution that the technology solves can be described as innovative. Retailers have been particularly bad in ignoring this fact.
Simply throwing technology at a problem does not necessarily mean the solution will be innovative. Using technology to introduce net new capability, service or product is innovative.
Take Generative AI for instance. The adoption of such technology will certainly help retailers do more with less, more effectively, efficiently and productively.
But, automatically generating and superimposing clothing sample images onto models, for example, is not in and of itself innovative. The ability to reduce time to market is.
More specifically, the innovation comes from the ability Gen AI offers to streamline product onboarding costs and timeframes, so fashion retailers can sell more clothes, more quickly.
The development of tangibly innovative use cases should start with the problem and reverse engineer a solution that looks at people, process and technology solutions in that order.
This is perhaps why we have seen so much customer-facing innovation, using digital and mobile to enhance the customer experience, both instore and online.
At the end of the day, it’s what you do with technology that will ultimately determine if it’s used in an innovative way. Retailers would do well to remember this when investing in tech.
Natalie Berg, Retail Analyst and Founder of NBK Retail
If you’re not innovating, you’re standing still and that is the most dangerous place to be in retail. Perpetual disruption requires perpetual innovation.
The most successful retailers today are those that reject the status quo. They foster a culture of innovation and fast failure. Everything they do begins and ends with the customer. They understand that they have to keep moving, constantly evolving their proposition, and experimenting with new technologies in order to stay relevant in this digital era.
That’s easier said than done in the current climate. Ongoing cost pressures and soft consumer demand mean that retailers must deal with more pressing, short-term challenges. In times like this, innovation can often get put to the back burner.
However, now more than ever, it’s essential that retailers embrace technology as a means of driving efficiencies as well as enhancing the customer experience. I keep coming back to the phrase ‘tech-enabled human touch’. In my view, this is what’s going to separate the retail winners from the losers going forward. Store associates are a retailer’s most valuable asset. Equipping them with the right digital tools means that they can quickly address any customer pain points and cut friction from the in-store experience (ie. help a shopper to find an item on the shelf, reorder an item that is out of stock, or check a customer out on the spot with a mobile POS device). And, with greater transparency around a customer’s shopping habits across both physical and digital channels, it also enables staff to offer a more deeply customised experience. This is only going to improve as retailers look to AI to power those more personalised recommendations.
And things are moving quickly. At a client event in Cannes this week, Manhattan Associates CEO Eddie Capel reminded us that it took Netflix ten years to get to 100 million users. It took TikTok 9 months. And for ChatGPT – just two months.
Generative AI will transform retail. This is an industry that is accustomed to a certain level of disruption, but today technology is progressing at a mind-boggling pace. Many believe we are on the cusp of another ‘smartphone moment’, where an immersive digital world is about to transform our lives.
But will we all be donning VR headsets and living in the metaverse? I don’t think so. When exploring these new disruptive technologies, it can be difficult to separate the hype from reality. When it comes to the metaverse, there is much scepticism and general befuddlement. What is it? How do you enter it? Is anyone even there?
It’s difficult to define right now because it’s still being built. And if you ask those who are building it what the metaverse is, you’ll get a ton of different answers. This means that to the layperson consumer it can be a difficult, almost impossible, concept to grasp.
However, just as retailers have digitised their physical stores, they must now turn their focus to making our digital experiences more immersive. Today, online shopping is still fairly one-dimensional. It’s transactional. But it’s moving in the right direction – it’s becoming more engaging and discovery-led. For example, retailers are increasingly using video and 3D images (often AI generated) to create more contextual experiences for online shoppers. Augmented reality (AR) is bridging the gap between physical and digital retail, especially in beauty, luxury, footwear and home. Virtual shopping consultations are connecting online shoppers with in-store staff, again harnessing expertise to elevate the customer experience. Liveshopping, too, is picking up momentum and social commerce is taking the discoverable and making it transactional. People used to find products; today products find people.
If we look even further into the future, we won’t know where the physical world ends and the digital one begins. Our AI powered shopping assistants will make our lives easier and more connected than ever before (Bill Gates even thinks they will kill off Amazon and Google search). Virtual showrooms will never replace the physical store but they will become the next best thing. And spatial commerce has the potential to completely redefine the online shopping experience.
The future is wildly exciting for retail. Don’t get left behind.
Gary Whittemore, Head of Sales, EMEA & APAC at RetailNext
Arguably, almost all parts of the UK economy could benefit from a dose of innovation. While we accept that the world has changed, in so many ways forever, there is often a lack of vision or will to lay out what needs to be done, an inertia that runs through politics as much as business. And so the need for innovation has never been greater.
This is even more true as we look ahead to see that, even if inflation continues to fall, it is still very high and millions of people are faced with higher mortgage payments, higher costs on almost everything else, and therefore lower disposable incomes. The impact will be made worse by the rising cost of fuel, a fact that the media has been pretty quiet on.
This will go on well into the new year, so on our three measures we can confidently say that demand will fall, costs may fall but will still remain high and margin will continue to be squeezed as retailers fight to attract customers. Costs of introducing ESG will also suppress margin although retailers can be forgiven for wondering how important their transition is given how the Government has rolled back on some of its Green commitments.
It is reasonable to expect surges in demand around Halloween, Black Friday and Christmas, but it is likely that there will be very little left over to smooth out the spikes.
Making predictions is tough because of just how much uncertainty there is right now, made worse by the fact that there will possibly be an election next year.
Retailers continue to deal with high costs, not least now that the minimum wage has gone up to £11 p.h., but they continue to pay higher wages in a continued tight labour market.
Many of our clients have been seeing a fall in footfall for some years now so their greatest concern is to gain a better understanding of who is actually in the store, how they behave and what they might want. Innovation will be key to equipping them with the right technologies but there are barriers to enabling this to happen.
There is no shortage of discussion about innovation in the media, but it is dominated by AI and what it promises to bring. However, simply overlaying smart tech onto organisations that are not structured to use it wisely, or who may be actively resistant to it, is unlikely to deliver significant benefits in the short term. So, we may be dreaming about the mid to long term whilst ignoring what needs to be done right now.
For me, innovation is a state of mind that should imbue the culture of an organisation from the very top. However, there are plenty of retailers that talk about the need for innovation but then fail to see it through to actual implementation. The reasons are manifold – politics, siloed thinking and management, and a lack of investment in people and tech.
Specifically, retailers need to innovate in the skills and technology that will enable them to understand their customers better in terms of how they shop across multiple channels, more so because in tough times, multichannel retailers tend to fare better than unichannel ones.
Individual channels continue to be optimised for their own ends whilst not fully recognising how the whole customer journey is structured. AI holds great promise in helping to solve this problem but if the various channels are not collaborating or no one has oversight of them all, then planning will be difficult.
What this means is that the hype around Generative AI is justified for retailers able to benefit from it because of how they are prepared to change their structure, attitudes and culture to embrace it. Many have commented that AI will be the most disruptive trend in 2023 with the reality that AI is already embedded in many retailer technologies from personalisation and product recommendation online and instore, predictive stock ordering pre-season and in-season replenishment, image recognition for behavioural analytics, stock replenishment and loss prevention, to productivity improvements and task management for sales staff using mobile devices.
In store, this is about being able to monitor, gather and analyse data relating to footfall, traffic movements, dwell times, behaviour, shrink – in the context of not just the store but across channels. This goes beyond staff scheduling for footfall, to store design, layouts, merchandising, and individual functions around selling, returns, gaming, social media and so on. While customer experience may be trumped by price in grocery, in fashion, beauty and specialty, experience is more important than ever.