Competition from Online has Hit Bricks-and-Mortar Retailers Hard
The retail sector is struggling. Competition from online has hit bricks-and-mortar retailers hard. Environmental concerns have led customers to question packaging and farming practices. And the preference of many consumers to favour "experiences" over stuff has eaten into overall demand. That said, some retailers are well positioned to appeal to millennial customers and their values.
In the FMCG sector also there is a new reality: the rise of challenger brands. Pitching themselves as greener, more local, more authentic or healthier than mainstream products, these upstarts often sell directly to consumers via online channels and use social media to attract attention. Often they start out by using manufacturers that produce packaged foods under contract, often for big food companies or retailers. This outsourced manufacturing capacity has been an important factor. Without it, few would have be able to turn their ideas into real products at scale.
There is a danger, when forecasting the future of retail to only look at technology or to only look at Amazon. Naturally both will have to feature heavily, but there will be more to the future of retail than just Amazon.
It is a straight line, from the technological to the economic to the social, then the political. It makes sense to take a step back and look at the wider picture.
For the next years we are forecasting:
In the political sphere we are pessimistic about there being more trade wars, tariffs, and the roll back of globalisation in future. In this context a post Trump president might be able to save a lot of broken porcelain. Retailers (and all other economic actors) will need to watch currency movements and their impact on supply chain and therefore cost of goods, ranges and inflation. All this could change radically going forward.
In the economic sphere the polarisation of big becoming bigger and radical bifurcation means for the big players that scale demands increase, in other words, the winners will be the discounters Aldi/Lidl and the big online platforms Amazon and Alibaba. Another point follows from this. Only the biggest players will have the means to invest into new tech at scale (AMZN drones, Go stores or Google and Facebook etc) This will only increase the competitive moat between the winners and losers. Coming cost pressures and tech innovation will mean a rise of automation in the supply chain, again driven by the platform players and their growth requirements.
In the social sphere the impact of social changes on retail is immense. As the mass market erodes, new consumer "tribes" appear and demand new products, services and means of communication. There is a shift to radical individualism, and the question for retailers is how to serve this best?
Coupled with this uncertainty is the fact that everything is becoming a lot more short term, trend/fashion cycles become ever shorter, so that clothing retailers will all need to copy Zara’s model of onshoring to varying degrees. Vertical integration (especially in combination with digitalisation) will become the watchword.
The technology impacts on the retail/FMCG sector over the next coming years will be massive it is safe to predict. There will be big impacts from technologies such as shelf edge pricing, solutions for replenishment & OOS management.
In terms of store formats Amazon Go stores will set the new convenience standard, but there is a tight use case for these types of stores as well. We are not convinced a "just walk out" technology environment would be a success in a more service heavy store - such as a luxury boutique (or department store Harrods) for example. Secondly such a new template always opens up new space for the "antithesis" as well. In this case his would be a tech free organics retailer, with a USP of being as "natural" as possible. (Funnily enough Amazon could cover both ends of the market through its ownership of Whole Foods)
We are convinced that the tech impact will be massive at the back end: voice will be used in warehouse operations, robots in every stage of the supply chain, AI in pricing, mark downs, staffing scheduling and OOS management etc. And lastly there will be a huge impact on last mile innovation (from drones to delivery robots) and more, stretching all the way to driverless vehicles.
In the legal sphere we foresee the following issues impacting retail over the coming years. One issue could be the so called tech lash, which could result in the break up of Facebook, Amazon, Google etc. A completely unrelated topic also in the legal sphere is the coming cannabis legislation and liberalisation across many western states, with Canada in the forefront at the moment.
On a different note, store opening hours in the bricks and mortar world are set to see liberalisation. On the one hand in an environment where online is open 24-7, restrictive store opening hours seem to be an anachronism. On the other hand automation will give rise to many new opportunities, with stores being operated staff less or in other words glorified vending machines.
In the environmental sphere there is a concerted move from activists all the way to the UN to tackle plastic waste not just in the oceans and eventually a move to ban plastic packaging. This could result in a boom for loose pick and mix style dispensers in stores and of course reusable nets for fresh fruit and vegetables and baked goods.
What is clear is that health & wellness, organic, vegan are all trends that will continue - and the environmental sphere is perhaps the biggest driver for tech innovation in coming years.
Environmental concerns around vehicle emissions and carbon footprints will affect online (grocery) deliveries, with many cities and towns in the affluent West at the brink of collapse as far as delivery vehicles and gridlock are concerned. Shared infrastructure could be one solution. This would also make sense from a cost perspective. Going forward online retailing will also ask for a different logistics set up we believe - with one solution being hubs set up outside towns to be shared by retailers.
Table of Contents
1. Executive summary
- Politics: Trump, Brexit and China’s social credit system
- The future of loyalty: data sharing all about convenience?
- The past: moving beyond clubcard
- Personalisation - impact on shoppers and retailers
- Moods and emotions
- Moods and emotions - future tracking, AI, machine learning, use cases
- Politics: Impact on Retail
- Politics: impacts on retail, future of privacy
- Economics: the next slowdown is coming, world trade forecasts
- Economics: polarisation, the big pull away
- Why Now?
- Why now: the return of vertical integration strategies, PESTLE framework
- Why now: vertical integration as risk management
- The Champions of VI
- Global Top Ten, US$bn sales, 15 years ago
- Global Top Ten of Retailing: assessing the importance of range, decline of loyalty
- Global Top Ten of Retailing: the platform players and their VI strategies
- Global Top Ten, US$bn sales 2016/17
- Economics: Impact on Retail
- Economics: cost pressures, tech innovation, rise of automation, find a new way
- Social: Green/health & wellness, Craft/artisanal, maker movement
- Social: the turn away from the mass market
- Social: Urbanisation challenges and declining car ownerships
- Shopper behaviour change
- Social & Tech, the innovation intersection
- Social: Digitalisation, social media, voice and unreal expectations
- Foodservice/grocery hybrids, NL, DE, UK, IT
- Social: winning in convenience, fresh and foodservice
- Biohacking - the future
- Social: Silicon Valley, a new challenge
- Social: Impact on Retail
- Technology solutions in retail
- Technology: digitalisation, logistics, loyalty and in store experiences
- Technological innovations (in-store)
- Technology: just walk out technology, the 4 star store, advertising
- Technology solutions (Hema)
- Technology: Alibaba’s Hema - the difference to Amazon GO
- Technology: Amazon’s Go store, financial data, sales density
- Technology: costs and the potential to license the tech, Key/Nest
- Drones: Presence throughout the value chain
- Outbound - drones?
- Drones: Amazon, Google, Facebook
- Drones: legal, ethical issues, and is there an economic case?
- Retail examples: Airbus and SignPost
- Hypermarkets: urban farming and opening up roofs, City Farm Systems
- Hypermarkets: drones for agriculture and drone helipads
- Inbound logistics/order picking
- Automation in DCs: general benefits and Amazon stats
- Robots: the AI transformation of backend and logistics
- Amazon: online grocery on the backend, Fresh operation bottlenecks
- Amazon: a solution to high wastage?
- Ocado: the MHE solution
- Ocado: productivity and fulfillment benefits, highly modular and flexible design
- Ocado: embracing automation from the beginning
- Ocado: the problem of human hands and grip
- Technology solutions: Voice
- Technology: Voice as the future? driverless cars, robot DCs
- Technology: Impact on Retail
- Technology: future impacts for retail in the backend, Go stores, last mile
- The implications, tech-lash, cannabis and store opening hours liberalisation
- Banning plastics, carbon footprints
- City Consolidation centre
- Environmental: shared infrastructure for deliveries? Innovation
- Radical change to come, but not one magical bullet
Chart 1: Global Top Ten Retail, US$bn sales 2016/17
- Go Stores
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