Designing Digital Retail (Part 1): Challenges Faced by Retailers in the 2020s

This is the first in a series of articles that explore how traditional retailers can move through the challenges of digital transformation. You can see all the articles in this series here.

The next post will discuss the academic research into the question of ‘what is good customer experience?’.

The importance of digital transformation for traditional retail

In the past few years, the UK retail industry has experienced poor profitability, store closures, business failures and job losses (Deloitte, 2019). There are many reasons for this, including the social and political context, falling demand, rising costs and new technologies that are changing the way people shop. The market has been disrupted in recent years by new entrants such as Ocado and Amazon who are leveraging new technology capabilities to gain competitive advantage.

Traditional ‘brick and mortar’ retailers such as John Lewis, Marks and Spencer’s, Sainsbury’s, Argos and Tesco are struggling to compete in this new technology environment. Every one of these businesses is currently going through a major digital transformation as they build new technology infrastructure so they can compete with Amazon, Ocado and other competitors entering the market, in terms of both customer experience and operation costs and efficiency. However, encumbered by decades of historic ways of working and archaic legacy I.T systems, none of these organisations have yet developed to digital maturity.

The initial ventures into the digital space by these retailers have proved worthwhile. Digital channels represent the fastest growing sales channel across the sector. For instance, according to market research organisation Mintel, UK customers spent £12.3 billion on online grocery shopping in 2018 (Mintel 2019). This is a 9% increase on online revenues from 2017. However, many businesses have not fully anticipated the scale of digital disruption, so have not prepared for a future in which digital channels represent more than 50% of revenues (Global Data, 2018).

What are the challenges?

There are four main challenges that traditional retailers face in their digital transformations.

• First, they must transform their leadership and culture. Successful digital transformation will require a huge cultural change, led from the top. The mix of skills at board level needs to balance traditional retail with technology, digital and data capabilities/expertise.
• Second, retailers need to change their organisation structure and activies towards becoming more digital. Too may retailers remain in large, siloed organisations, often with an ‘IT department’. This puts them at a fundamental disadvantage versus the new tech-led businesses that are disrupting traditional retail markets.
• Thirdly, alongside this is the challenge to attract and retain digital talent as there is a significant supply / demand imbalance for the top skills, particularly engineers, developers and data scientists.
• All legacy incumbent organisations have old and complex IT systems. It’s will take significant time and capital to migrate to more relevant technology.

Until very recently, few mature ‘brick and mortar’ retailers have had digital expertise in the ‘C-suite’, leading to a lack of coherency and direction in digital activities, with new digital channels being established as siloes within the business. One of the primary reasons for this has been that digital has not been at the core of the business strategy. According to McKinsey, “software strategy is often determined three to five layers down the company” (Mckinsey, 2017, pg 3). As is the case for many traditional businesses struggling with the demands of digital transformation, technology has long been seen as a functional vertical of the business (the I.T. department), rather than a necessary fundamental feature of the corporate DNA. Furthermore, the modern thinking and approaches that are required to address the challenges of digital, such as Agile (Pilcher, 2010) and Lean Enterprise (Humble et al, 2015) do not fit well with the cultures of conservative efficiency that have been developed within the large retailers.

In the past 4 years, the large UK retailers have begun to appoint Chief Digital Officers, Chief Information Officers and Chief Technology Officers to their boards to help steer their digital strategy. These positions have effectively been a promotion of ‘Head of I.T.’ roles, as digital has been elevated from a vertical function of the company, to a core strategic interest. However, it is only in the past two years that retailers are aligning their digital strategy with their wider corporate strategy, or rather are slowly pivoting their corporate strategy to meet the demands of the new digital world they find themselves within. These retailers now find themselves in a position to develop and implement digital strategy from a corporate level. This requires new thinking and new approaches, in terms of management approaches, and the development of digital operations and culture.

Where do they begin?

Traditional retailers must start everything with the customer. Retail isn’t dead. But bad retail is dying quickly and will continue to do so. Each retailer must decide what they mean for the customer, creating a clear value proposition, such as convenience, inspiration and/or value for money. Writing in Forbes, Baird (2018) explains that retailers must “move from a buy low/sell high model that is product-centric, to an insight-driven model that is customer-centric”. In order to become truly customer-centric, retailers must develop their data-gathering and data-analysis capabilities to gain insights into the actual behaviours of customers. It also requires developing empathic approaches to understanding the motivations and experiences of customers.

Retail isn’t dead. But bad retail is dying quickly and will continue to do so. Each retailer must decide what they mean for the customer, creating a clear value proposition, such as convenience, inspiration and/or value for money.

Retailers must develop an ecosystem of digital capabilities, including software enginnering, architecture, experience design, data analysis. They must learn how to deliver and evolve digital products and services using product development approaches such as Agile, Lean and DevOps. They must cultivate the role of Product Managers understanding they are fulcrum points between technology development and the business. It is not possible to immediately develop these specialisms within the business, so they must find the right balance between investing, partnerships and M&A.

As they move from a traditional brick and mortar business model to one that is customer-centric and multi-channel, organisations must learn how to design and deliver compelling experiences through both physical and digital channels. Retailers must develop an understanding of how to integrate and utilise their channels to best enable their customers to meet their goals.These retailers must also re-think their store estate. Any traditional retailer with a large physical presence still has a huge asset, if dealt with in the right way. Finally, they must embed innovation as a core competency. A leadership mindset, organisational design and speed are critical to implementing new customer-centered initiatives.

Perhaps the greatest challenge however, is for retailers to learn how to carry out product and technology development at scale, in a coherent and consistent way through the organisation. The retailer must learn to manage dependencies between products, and between products and the underlying tech of the business. Retailers will also have to cultivate organisational structure, culture and practices that overcomes the silos and enables communication and creative problem-solving.

Next up: Designing Digital Retail (part 2): Customer Experience Strategy

References

Baird, N (2018). What Digital Transformation Actually Means For Retail. Forbes, March 13, 2018. Available at https://www.forbes.com/sites/nikkibaird/2018/03/13/whatdigital-transformation-actually-means-for-retail

Deloitte (2019). Retail trends 2019. Retrieved from https://www2.deloitte.com/uk/en/pages/consumer-business/articles/retail-trends.html

Global Data (2018). E-retail in the UK, 2018–2023. Available at https://www.globaldata.com/store/report/vr0130ch--e-retail-in-the-uk-2018-2023/

Humble, J., Molesky, M. & O’Reilly, B. (2015). Lean Enterprise. How High Performance Organizations Innovate at Scale. O’Reilly

McKinsey (2017). An Executive’s Guide to Software. https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/an-executives-guide-to-software-development

Mintel (2019) BRITS SPENT £12.3 BILLION ON ONLINE GROCERIES IN 2018. Mintel press office https://www.mintel.com/press-centre/retail-press-centre/brits-spent-12-3-billion-on-online-groceries-in-2018

Pichler, R. (2010). Agile product management with scrum: Creating products that customers love. Pearson Education India