The transformation of retail
The process of retail transformation is constant and affects all areas of commerce: from retail formats to the mechanisms operating within retail outlets. This process is influenced by external factors, such as the state of the economy, preferences of consumers, current trends and technological innovations. Responding to the challenges of the time, retail chains react to market changes and the new needs of their customers in different ways. We have analysed which areas of retail are being actively developed today.
Main Vector of Changes
The PwC research company divides retail into five categories: brick and mortar (offline retailers), distance selling (orders from other countries), e-commerce, multi/omnichannel, digital retail..
The first two types will be forced to either change or cease to exist as they will not be able to compete with stronger players who develop new tools for interacting with their customers. E-commerce will continue to develop by entering the offline market: through deliveries carried out by third-party services or through transportation of the goods to pick-up points by themselves (for example, to Wildberries).
Today, omnichannel is considered to be the standard retail format, where retailers offer the services of both physical outlets and online shopping platforms, with the entire format working as a very closed and seamless system (Perekrestok, M.video). Digital retail is represented by online giants (such as Amazon and AliExpress) that have their own goods and logistics resources as well as third-party vendor partners.
Phygital and Technological Innovations
Phygital means the development of physical channels through the integration of digital technology. In today’s context, retailers seek to make offline stores as technologically advanced as possible.
- Contactless technology. NFC and RFID tags are used in retail to facilitate communication with customers and engage them in the purchase process. NFC is used for contactless payment: these chips are an advanced alternative to QR codes that can be used for verifying the authenticity of a product. For example, you can use the NikeConnect app to scan a tag sewn into your jersey, and you will receive access to limited edition purchases,design polls and exclusive content.. Decathlon network in Singapore uses RFID tags instead of bar codes: all you need to do is to put the product you need on a special scanner at the checkout, and the system will automatically read the tag.
- Bluetooth beacons. Bluetooth beacons operate as signal transmitters. They can be used to send notifications and messages to smartphones within range. This technology is utilised by applications of some retail networks: this way, their consumers can receive messages with the latest offers and promotions based on their real-time location. Today, beacon systems are used by such US networks as Macy’s (the application determines the area of the store the customer goes through and sends them personalised offers) and Target (section navigation).
- Voice assistants. The number of purchases made in the US with the help of voice assistants will increase by several times this year: up to 31 million people are expected to make purchases using such devices. In collaboration with Google, Walmart added a new shopping feature to Google Assistant.
- Face recognition and machine vision. Machine learning has started to be used as an e-commerce tool: for instance, in the fashion industry (the British ASOS and the Russian Lamoda have both introduced service for identifying clothes and accessories from photos). In the field of offline retail, Sephora allows its customers to try on virtual cosmetics with the use of special displays: some customers consider using shared samples to be unhygienic.
- Augmented reality (AR). Many regard augmented reality as a ‘toy’, but recently AR has increasingly been utilised in the fields, where it can actually be helpful in some way to the staff and the consumer. Canadian outdoor gear retailer MEC has developed an application that allows you to see camping tents as if they were assembled. You no longer need to unpack a real sample on the trading floor: the programme can demonstrate the product in detail, saving the customer’s time and the salesperson’s effort.
Changes in Customer Experience
- Transparency and convenience. Hema, a network owned by the Chinese giant Alibaba, opens 60 new stores per year and combines supermarkets and shipping locations for online orders. The network is primarily focused on local manufacturers and local product ranges. All digital price tags can be scanned using the smartphone network’s application to find information on the products (nutritional value, quality certificates and place of origin). In addition, this piece of software is also used for payment at automatic cash registers.
- Sustainability. One out of five customers will choose a brand if its principles of sustainable development are specified on the packaging or in its promotion materials: according to Unilever, this amounts to $1.13bn in unused profit opportunities. For example, this year, the British networks Sainsbury’s and Iceland have tested plastic recycling machines that offer small rewards to their users (discount coupons for the next purchase).
- Authenticity. Unique experiences are an important need of modern customers: they want to experience special emotions and visit special places when making a purchase. Retailers satisfy such needs by allowing their clients to customise products and releasing limited-edition products. For instance, the flagship store of Nike in New York has developed a local line of city products and offers a special customisation zone where you can create your own pair of sneakers.
- The multichannel format. Oasis is a British fashion retailer that has created a seamless customer interaction system by combining its website, mobile application and offline stores together, forming a simple shopping experience. At the entrance to the company’s physical outlets, customers are met by assistants equipped with iPads, which allow the staff to provide accurate information on their products. Tablets can also be used to pay from anywhere inside the store. If a product is not in stock, an assistant will instantly arrange the delivery to the customer’s home.
Experience economy is an economy model that is built around the idea that customers are willing to pay more for brand experience. Millennials are the driving force behind this trend, with 78% of them willing to spend money not only on products but on events as well. For them, it is important to receive vivid and pleasant impressions even from an ordinary shopping trip, which is why retailers transform the space of their networks in response to the demand for a special atmosphere or convenience. In 2030, yearly investments in experience economy can reach $8tn: for example, Walmart is planning to invest $11bn to renovate 520 of its stores.
- Building a community. The House of Vans store in London constitutes a cultural space with an area of 2,800 sq. m: the store holds concerts as well as exhibitions on street culture and fashion; it houses a skatepark and a number of cafes. The store simultaneously acts as a sports ground, a gallery and a food court, combining all of these functions into a single cultural cluster for recreation and communication. Members of Generation Alpha (people born after 2010) are likely to spend a lot of time at such places in the future.
- Retailtainment is a direction that combines retail with entertainment, implementing an experimental approach to marketing by using events and various activities held at retail outlets. IKEA Sleepover was an event held at IKEA stores in Australia, the UK and Canada, where the Swedish company organised a pyjamas party featuring yoga classes, a lecture from an expert and bedtime snacks.
- Worth sharing. Another tool to engage the audience is to create a beautiful space that they would want to share on social media. Glossier, a young American makeup brand, which is already competing with Sephora, has opened several spectacular stores in the United States. The company mainly operates online—for Glossier, physical retail is a channel for direct communication with its customers and a way to create an interesting offline experience by providing spaces that are suitable for excellent selfies.
Online Retail and Delivery Posing a New Threat to Offline Sales
Online retail accounts for a large share of sales worldwide and will continue expanding: back in 2017, it constituted 10.2% of all purchases, but by 2021, this figure could grow to 17.5%. This is happening because of large companies. For instance, Amazon is responsible for 45% of sales in the e-commerce segmentof the United States, but this trend extends to other platforms and segments as well.
- Social media is becoming a popular channel for selling and purchasing products.
In March 2019, Instagram introduced a new feature allowing its users to purchase products tagged in posts and offering checkout within the application. . Weitao is a popular social media platform from the Taobao and Tmall retail companies, which allows experts and celebrities to publish content on their lifestyle and review products.. Digital retail associated with opinion leaders will gradually move precisely to social media.
- Food delivery services. This year, one out of ten American customers has signed up for a meal-kit delivery service, which is a 5% increase compared to the same figure in 2018. Online grocery salesare also growing in Russia: the segment has shown an increase of 49% in the number of orders and 40% in their price between 2017 and 2018; this year, this figure will keep rising due to the emergence of specialised companies as well as the efforts of traditional retailers to go online.
- Creating private labels. The share of private labels within retail chains is growing: in Europe, they sometimes make up as much as 50% of products offered at certain chains (in the UK, private labels constitute 60% of all sales in the chilled food products segment and 44.6% in the frozen food products segment). Online retailers are also starting to join this trend. Utkonos is planning to launch more than 200 of its own SKUs. . It takes less time for online stores to adapt private labels for their consumers. FMCG brands should take this into account when developing visual identification: today, packaging should work not only on a regular shelf but also on a virtual one.
The price level remains an important factor in the country—for the past several years, household incomes have stayed the same compared to the prices of products and services. Up to 64% of products in the FMCG sector are sold at discount: the market growth simply can’t keep up with the expansion of retail networks, making promotions the most effective tool for attracting customers. Right now the main role of retailers for Russian consumers is to provide profitable offers; however, the changes that are currently happening to the market are already following the vector of Western trends.
- The implementation of current technologies. Magnit and a number of other Russian retailers are actively equipping their stores with self-checkout machines,which simplify the process of making a purchase. However, such terminals do not always work properly, while shopgoers often seek the assistance of store employees—as a result, customers are forced to spend more time. Innovation can be introduced locally as an experiment, which allows retailers to stay ‘trendy’. However, technology does not always guarantee the improvement of your services; their implementation should be justified by the needs of the customer and the capabilities of the retailer.
- Consumer experience. Today, customers find it important for the stores they visit to provide high-quality service, convenient shopping and the transparency of product origin. Competent use of space, community building and events, the principles of eco-friendly development, the uniqueness of the place—all these features help build up brand loyalty, and Russian retailers understand this. The stores of Perekrestok and Karusel are installing reverse vending machines to collect used plastic containers for recycling, while the Respublika chain holds lectures and other events in their flagship stores as part of the R*UNIVERSITY project.
- Going online. Despite the growth of the e-commerce sector, it only amounts to 4% of total retail sales in Russia. Conventional offline stores are still the main shopping channel, but the country has one of the fastest-growing shares of online shoppingin the world. By 2023, e-commerce will make up 6% of the market in monetary terms. 71% of Russians make purchases online at least once a month, while among millennials this figure reaches 86%. The most popular categories on the Internet include electronics, clothing and accessories, cosmetics, books and products for children. Omnichannel format will remain a promising direction for the development of retailers working in these segments—Wildberries, Ozon, Lamoda and many others prove it.
It is impossible for a modern retail network to stay static in the context of open information space and technological development. They need to regularly be updated and prove their advantages: otherwise, they are risking losing customers to the marketing tricks of more nimble and inventive competitors that offer innovative, more convenient and enjoyable ways of making purchases.
That is why retail is developing today, actively going beyond its traditional forms. Moreover, success depends not so much on investments in advanced technologies, since most companies have access to them, as on the ability to recognise the actual needs of your audience and satisfy them using modern and compelling solutions.
In the context of the country’s complicated economy, expensive logistics and the rather low disposable income of consumers, Russian retailers are forced to seek the perfect balance between the need to introduce advanced technologies and maintain a sufficient range of marginal products while retaining their customers by offering convenience and impressions.
However, it is important to always keep looking for new approaches, go beyond the traditional formats and attract specialists from associated industries. Retailers need to understand that it is they who are responsible for the development of consumer experience in its entirety: after all, brand loyalty to the whole network depends on the quality of service, atmosphere and impressions provided by a particular store or online shopping experience.