It’s easy to get distracted by retail’s shiny, new digitally-enabled customer experiences — the personal shopping apps, digital fitting rooms and virtual showrooms. But are these “nice-to-haves” really translating into increased consumer spend? For some retailers, yes, but for others, they’re failing to deliver the transformational returns expected.
While many retailers have taken an experimental approach to digital, those that have invested just to “keep up” in the digital race usually find their efforts are more akin to “digital window dressing” as opposed to a core strategic move.
Accenture’s analysis of several large retailers found that those who focused on digital window dressing saw a 36 percent decrease in share price over the past five years, driven by a 17 percent decrease in sales and a 31 percent decrease in Earnings Before Interest & Taxes (EBIT).
These companies touted themselves as “going digital” with a flurry of market announcements around click-and-collect services or social network partnerships. Shoppers tried these programs, but few stuck. The issue is that most of their loyal customers spent money at these retailers for reasons these initiatives had nothing to do with – namely, one-stop shopping and low pricing – which varied by retailer.
With EBIT margins eroding by 65 basis points per year, many retailer’s profits will be negative within the next six years. No company can afford digital window dressing when facing such a bleak outlook.
Don’t do digital for digital’s sake
Instead, what’s needed is the adoption of select disruptive technologies across a retailer’s entire business — front, middle and back office — that align to their customers’ specific needs. Only then can retailers be truly competitive.
A brand that has taken a smart approach to digital strategy — ensuring new experiences align to customer needs — is Rebecca Minkoff, which partnered with eBay and Magento to create a digitally connected store. Connected glass shopping walls and digital fitting rooms guided shoppers through the experience, while collecting data about their preferences and trends. Within six months of implementation, Rebecca Minkoff saw a six-to-sevenfold increase in ready-to-wear sales, which it attributes to enhanced in-store experiences.
Success came down to a smartly tailored in-store experience that was well received by Minkoff’s customers.
Digital profitability: look behind the scenes
Investing in digital across the business, rather than in siloed pockets, is the smartest move retailers can make. For example, Amazon has made investments across its value chain in Artificial Intelligence (AI), robotics and drones to drive operational efficiencies and a consistent customer experience that builds trust and market share.
Using digital technologies to drive operational efficiencies also tends to improve a company’s competitive position. Accenture’s analysis of multiple retailers that invested behind the scenes found that on average, they saw a 104 percent increase in share price over the past five years.
One of these retailers invested in digital sampling. Rather than flying buyers to Asia to meet with vendors, they started using digital means to review product samples. Using technologies such as 3D imaging provides huge opportunities to improve productivity and shave costs.
Navigating strategic digital investments
While in vogue, wise retailers only invest in a digital strategy that first fits their customers’ specific needs, rather than one that includes all the latest bells and whistles. Those that want to make their investments more strategic need to:
Challenge conventional investments: Conduct primary research to understand what matters most to your customers. Determine how well you’re performing relative to competitors on key dimensions, in both physical and digital channels. Customers want consistency but their wants may vary online versus in store.
Make digital investments that align with your company’s purpose: Only make digital investments that truly serve your customers’ needs in a differentiated way. This will vary by retailer. For example, some retailers may need to make operational investments to reduce costs so they can lower prices, rather than spending on showier digital investments.
Ensure digital strategy incorporates the front, middle and back office: The cost equation is becoming an increasingly critical lever for enabling growth. Our research has shown that a 1-point increase in a retailer’s profitability index correlates with a 1.3 percent increase in revenue. Without looking across the business, you will struggle to bend your cost curve and create fuel for growth.
While many flashier digital investments usually only cover the customer experience and front office end of the retail equation, companies that neglect back office and the remainder of the value chain risk missing a major component of digital profitability.
Industry frontrunners are competitive because of differentiators enabled by digital investments that span their entire business, from competitive pricing and hassle-free delivery to broad selection and shopping made simple. Avoid tunnel vision when it comes to your digital investments.
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