How Retailers Can Stay Profitable Despite High Inflation
With an inflation rate that’s higher than we’ve seen in years, retailers are grappling with increased costs, reduced pricing power, and decreased consumer spending — a perfect formula for declining profitability. How a retailer responds in these challenging financial times can set the course for its success or permanent decline, so the stakes are high. Digital tools and transformation play a key role in reducing time-to-value and improving profits. Retailers with an increased focus on the following areas will stay on the path to profitability:
Rethinking Ways of Working
Best-in-class retailers have embraced a product mindset, with a focus on outcomes and business value as opposed to fixed deadlines, fixed scope and cost. If teams are still doing annual budgeting, and focused on time and scope, retailers can save millions of dollars by moving to an agile mindset. The quickest way to do this is to bring in agile coaches and reorganize using an agile methodology. By improving development times and increasing digital product quality, new ways of working can reduce costs by millions and help identify and build multimillion-dollar new businesses and products (e.g., AWS, Walmart’s Mobile Apps, clienteling apps, etc.). Agile ways of working even improves retention of some of your highest-value employees.
In these times, retailers must Identify new areas of revenue, particularly high-profit revenue. For example, many grocers today are building retail media networks. But that's just the start of the data monetization journey — retailers can buy, sell and combine data to improve accuracy of the models that run their business, and use this data to drive the creation of new products (especially private label) and inventory holding decisions. To keep costs down, retailers should consider monetizing other areas of data as well — from dynamic pricing and personalized promotions to credit cards offers.
Supply Chain Modernization
Supply chain digital solutions are critical for retailers to keep their cost basis under control. We’re seeing up to 10 percent savings in supply chain costs from digital investments into inventory visibility, control towers and returns optimization. We’re also seeing major new investments in micro fulfillment centers (MFCs) to make physical stores more productive. Target, for example, fulfills 80-plus percent of its online orders through its stores, keeping its costs under control while still fulfilling most products to the customer very quickly given its expansive store footprint.
Research shows that digital experience leaders outperformed the S&P500 average from 2007 to 2019 by 106 percent, and outperformed customer experience laggards by 217 percent. Customer experience is correlated to revenue growth, likelihood to recommend (NPS), and even basket size. A digital commerce platform upgrade that includes superior content, enhanced storytelling, better customer journey management, and an improved mobile app are some of the foundational moves that generate significant return on investment — more than inflation, and they have short payback periods (most will see a return within a few weeks of the launch of the new experience). We’re also seeing more investment in livestreaming and customer support with chat to enhance the solutions.
Reimagining the Physical Store
The physical store — number of stores, size of stores, and how they interact with digital — must be rethought to optimize revenue and profit. Retailers must ask themselves: How can I leverage self-service technology and pickup to optimize the experience? How can I enable my sales associates to tell their story through digital clienteling apps? For example, retailers could have dedicated entrances that allow curbside pickup to operate more efficiently — perhaps even drive-through grocery curbside pickup that's fully automated. It already exists in portions of the world. We’re also seeing more available buy online, pickup in-store (BOPIS) solutions, such as Nordstrom’s Men’s 24x7 pickup in its Columbia Circle, New York flagship.
Retailers must use the headwinds caused by high inflation to their advantage, viewing them as an opportunity to rethink and reimagine their business. Many retailers have emerged from COVID strong financially and with a new set of capabilities. Now is the time to build on this progress to grow and scale for success.
Hilding Anderson is the head of retail strategy, North America at Publicis Sapient, a digital transformation partner helping established organizations get to their future, digitally-enabled state.
Related story: 5 Key Themes From NRF 2022 That Retailers Can’t Ignore
Hilding Anderson, Publicis Sapient’s Head of Retail Strategy, works with Fortune 500 companies and top global retailers to advise them on digital business transformation and how to drive higher performance in the changing digital landscape. Particular strengths are in digital business transformation, retail strategy for the data-driven retailer (CDP, algorithmic retail), engineering modernization, and growth strategy.
Hilding’s 20-year career started as an entrepreneur, founding a technology consulting services firm in Cambridge, Massachusetts focused on the retail and healthcare spaces. After a brief stint at a dot-com, he pursued an MBA at the University of Texas in Austin graduating in 2005 with a 3.8 GPA and specializing in Management and the entrepreneurial growth.
Following graduate school, he joined Publicis Sapient’s management consulting practice, working with boards and CEOs in the retail and financial services industries to transform their business. Partnering closely with clients, he developed digital and omnichannel business strategies, working closely with technologists to define and execute business strategy.
In addition, over the past decade, he has researched and published 5 books that document the changing digital landscape and consumer behaviors for retail. He also conducted annual in-depth evaluations of 70+ retailers omnichannel strategies in North America. Building on that expertise, he now leads the business strategy for Retail North America, guiding 40+ accounts on the right business strategy and path forward. His recent indicative work includes shaping a business transformation road map for a large department store, engaging with the chief digital officer of a top luxury apparel retailer in NY on GTM digital strategy and business justification, as well as partnering with a large home improvement retailer on the East Coast in experience strategy and innovation.