AlixPartners report flags companies spending big but inefficiently on digital retail technology
Consulting firm AlixPartners and World Retail Congress, which kicks off today in Barcelona, have published a new report shining a light on actions needed by retailers to prosper in today’s world of increasingly tech savvy consumers.
This reveals that, as online penetration grows, retailers’ profits are shrinking – with the cost of serving customers anytime, anywhere, at any speed not bringing in enough topline growth to best monetise even existing investments in technology, systems, infrastructure, and people, let alone new investments.
For example, analysis in the report of 50 public US retailers across several sectors (including apparel, department stores, hardlines and specialty retail) found that while their average online penetration has skyrocketed from 9.4% in 2012 to 25.6% in 2022, their profitability (as measured by average EBITDA percentage) has in that same period declined from 13.8% to just 8.3%.
As also identified by AlixPartners, customer preference for digital shopping is booming – with 86% of consumers researching a product online at least once in their purchase process. Such trends combine to create a major problem for retailers: higher costs (due to needed digital investments) and lower profits.
“It’s clear that retailers can’t keep operating the same way and expect different results when it comes to getting true ROI out of their investments,” says David Bassuk, Global Leader of the Retail Practice at AlixPartners.
“What we call ‘Digital First Retail’ (DFR) isn’t a programme or initiative, it’s a change in mindset – and in a retailer’s organisation – that places digital at the very core of a retailer’s business model. And that’s exactly where digital needs to be today.”
As part of the report analysis, AlixPartners examined why retailers are struggling with digital efficiency and how they can shift from a traditional mindset to becoming a DFR leader. As such it identified that:
Retailers spend big but inefficiently on digital
Globally, retailers spent $181 billion (£145 billion) on retail technology and digital improvements in 2022, according to Gartner.
Despite this spending, additional AlixPartners research carried out among 150 global retailers has revealed that only 24% of retail executives think their company has above average digital capabilities, and just 36% of executives think their digital teams have the capabilities to meet their companies’ digital strategy needs.
The research also revealed a growing disconnect in company capability assessments between the line managers doing the work and the executives making the decisions.
Digital profitability is not understood, and there is a lack of transparency and common KPIs
AlixPartners research has further revealed that 84% of retail executives believe online delivers cumulative value, but only 48% are measuring the true costs and benefits of an omnichannel approach.
Without a robust means of measuring success, many companies are making digital investments that later prove ineffective. Misunderstanding profitability within and across all channels also prevents companies from correctly computing customer lifetime value.
DFR requires a big shift in investment, says the report, but retailers need to make those shifts if they hope to keep up with their own customers. And, often, it isn’t about spending more but rather spending smarter, more holistically and more intentionally.
Retailers set to increase digital spending
AlixPartners identified that 63% of retailers expect to spend more on digital investments in 2023 compared with 2022. Given consumer preferences for digital, most don’t have a choice, without a strong online experience, they stand to lose customers and market share to competitors.
However, the hope around future investments ignores history. Per the research, 75% of retail executives are confident they’ll get a good return on their digital investments.
Yet 64% doubt their existing digital tools from past investments can support a modern, DFR business. This raises the question of why, if past investments have not met expectations, there is confidence future investments will perform differently?
The report states that DFR is the answer to how to profitably evolve, taking the positive attributes of successful digitally native retailers (including agility and adaptability) and adopting them for traditionally store led enterprises.
“Most retailers are data rich, but insight poor, and most still have a product-centric mindset rather than a truly customer centric one,” says Matt Clark, EMEA Leader of Retail Practice at AlixPartners.
“Retailers must establish new KPIs with a digital-first lens to match their new operating model and operate with a DFR mentality, truly placing the customer first - to turn shrinking profits into customer and shareholder value.”
Ian McGarrigle, Chairman, World Retail Congress, comments: “Coming out of three unprecedented years shaped by the pandemic, retail has gone from accommodating a massive acceleration of online sales to the detriment of stores, to a period of resurgence in store-based retailing and a slowing of online growth. But what is clear is that there is no status quo in this new reality.”
“Transformational retail is now a critical pillar that describes today’s retail world and as such we are delighted to have AlixPartners onboard as a knowledge partner, helping retailers to understand this new balance between on- and offline and more importantly, how they can identify how to deliver not just sales, but bottom-line growth too.”
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