The Growing Pains of Accelerated Retail Transformation

And what retailers and brands can do in response to mitigate their impact

Richard Yao
Feb 25 · 9 min read
Photo by Harry Cunningham on Unsplash

It is now common knowledge that the pandemic has significantly accelerated the adoption of ecommerce and related digital shopping services. U.S. ecommerce sales grew by 44% y-o-y in 2020, nearly tripling the 15.1% increase in 2019, according to the latest data from DigitalCommerce360. 25% of businesses surveyed by Software Advice in June reported having launched an ecommerce sales channel due to the pandemic. Overall, the pandemic has accelerated the shift away from physical stores to digital shopping by roughly five years, per IBM US Retail Index.

Less commonly addressed, however, are the unexpected consequences and new challenges stemming from hastened retail transformation. They resulted in some growing pains that are forcing retailers and brands to rethink their retail strategies. In order to address these new issues and capitalize on new opportunities, brands will need to reinvent offline stores for new purposes, embrace new forms of shopper media, and evolve the retail experience to become more compassionate to customers’ elevated needs.

The Growing Pains of Rapid Retail Transformation

As with most industries, retailers mobilized quickly to change their operations and services in response to the pandemic and its impact on shopping behaviors. 40% of U.S. consumers have now chatted online with a brand, up from 9.1% in 2019, partly thanks to the increased availability of digital channels. When asked about increasing the use of digital channels already in place as a result of Covid-19, retailers surveyed by Twilio said they boosted live chat by 52%, video communications by 46%, and SMS by 49%. However, not every retailer was ready for the accelerated shift in shopper behavior. Per a Deloitte report, only three in ten retail executives rated their organizations as having mature digital capabilities to keep pace with shoppers.

Shipping Delays Expose Logistics Shortcomings

Throughout last year, shipping delay may be one of the most pronounced growing pains, and it points to how unprepared retailers and their logistics partners are to handle the sudden increase in ecommerce orders. Due to heavy holiday delivery load, FedEx and UPS had to cut off new delivery orders for some retailers, rerouting surging mail volumes through the overwhelmed postal service. Even Amazon, the king of ecommerce logistics, was overwhelmed and had to pause the intake of “non-essential” items for a couple of months at the beginning of the pandemic. As a result, some retailers realized how ill-equipped they are to anticipate and meet increased consumer demand, and have started to invest in better supply chain and logistics management. Order fulfillment, including last-mile delivery and curbside pickup, will see the heaviest investments, followed by warehouse management and procurement, according to the aforementioned Deloitte report.

Expanding Ecommerce Experience Beyond Convenience

Beyond the shipping delays, the accelerated shift also highlighted the lack of online shopping experiences. Most brands have been focusing on the utility and convenience part of ecommerce but neglected to reinvent their shopping experience online. Part of that is simply responding to consumer’s demand during the early stages of the pandemic, which is understandable but not sustainable in the long run. Competing against Amazon on fast-shipping and convenience alone is not the best strategy for most retailers, as these aspects have become table stakes to shoppers. What will differentiate retailers from their competitors still lies in the shopping experience they offer, which encompasses far more than mere convenience.

Another unintended consequence of this lack of enjoyable shopping experience for retailers and CPG brands that rely on retailers for distribution is the disappearance of at-shelf browsing and impulse purchase at the check-out. Ecommerce essentially has an entirely different user interface than brick and mortar retail. There are no long aisles of shelves to browse and deliberate. No one has fully figured out how to digitally replicate the fun of window shopping with friends. Ecommerce is not made for browsing; often customers search for what they already have in mind. As a result, things like shelf placement and end-caps are no longer an advantage that legacy brands can count on, forcing many to explore new ways to reach shoppers at the point of sale.

The Ecommerce Margin Question

This accelerated shift also effectively changed the fundamental economics of retail and raised the question of profit margin via ecommerce vs. brick and mortar channels. As analyst Benedict Evans astutely points out, Ecommerce’s cost structure differs from brick-and-mortar, which means brands will need to reconsider their distribution strategy.

For retailers, fulfillment for online orders is an extra cost added to the fixed cost of stores, which does not decrease when in-store traffic goes down. For big CPG brands, however, fulfillment via ecommerce is cheaper than the 50% profit margin that retailers usually take. This left brands and retailers weighing between “the cost of marketing + direct fulfillment” vs. “the cost of marketing + retailer margin.” The money spent on shopper marketing will need to shift from traditional, on-premise shopper media to online channels that can reach and target shoppers directly.

That resulting shift in shopper marketing also points to the gradual assimilation of the DTC model by the legacy brands. Over the past few years, some successful DTC brands adopted traditional practices like opening stores, whereas some big brands, like Nike and Under Armour, started touting the benefits of focusing on their direct-to-consumer channels over wholesale to boost profitability. With recent examples such as Hum by Colgate and the two D2C sites that PepsiCo launched, exploring the D2C model seems to be part of the answer to the ecommerce margin question.

Those Who Are Excluded from the Digital Economy

It is also important for retailers to be mindful of those who got left behind in this accelerated shift. Some of the most vulnerable people in our society, such as the unbanked and seniors who are likely less digital-savvy, have less access to the myriad of digital services and purchase channels that are getting attention. For example, non-white communities are statistically more likely to be unbanked and therefore cut off from using the kind of services that requires digital payments. To counter this, retailers should make an effort to improve the accessibility of their services via both online and offline channels.

How Brands Can Address These Growing Pains

Retailers already changed a lot during the pandemic as they adapt to new hygiene standards and social distancing measures. In response to the accelerated shift, retailers and brands will need to keep evolving their front-end and back-end operations to support the kind of omnichannel strategies that most brands implement today. Here are some good places to start in terms of high-level strategies to address the new challenges.

Integrate Digital Services as Logistic Option

At this stage of retail transformation, it is no longer productive to treat ecommerce as a siloed sales channel that runs separately from the rest of the brick and mortar operations. Instead, it may be better to view ecommerce as a logistic option for getting products to customers, and its implementation varies across different product categories. Some categories would require the kind of cardboard boxes/parcel delivery, whereas some would require hand delivery from stores via last-mile delivery services.

Sometimes, different product offers from the same category could require different approaches. For example, consider the difference in delivery methods between pre-packaged meal kits vs. delivery of fresh perishables from local grocery stores. This means that integrating ecommerce as a logistic option requires retailers to figure out the right product-delivery fit and dispatch them accordingly through agile logistic operations.

In order to achieve that, brands with multiple retail locations may want to consider turning some of their stores into local fulfillment nodes to boost their logistic operation. Despite increased investment in regional distribution networks, brands are faced with customers who are increasingly reliant on retail partners to offer same-day or on-demand product deliveries. In response, some retailers have even opened dark stores to solve the last-mile delivery challenges. Whole Foods, for example, opened a store in NYC in September that only handles online orders. Since it is designed expressly for order fulfillment and pick-up, it is closed to all walk-in shoppers.

Explore New Shopper Marketing Channels

As consumer touchpoints expand and shopper journeys become more fluid, shopper marketing is also evolving to keep up with retail transformation. In-store shopper media are being reinvented, as the need for touchless experience drove demand for mobile-based interaction. Many brands defaulted to QR codes for activating digital coupons and at-shelf experiences, but emerging technologies AR and wearables offer future-proof opportunities for engaging shoppers via interactive experiences.

In addition, retailers have been trying out new ways to reach shoppers online and at the curbside as they become the new points of sale. For example, in 2020, click-and-collect sales in the U.S. jumped by 106.9% year-over-year. per data collected by eMarketer. This opened new opportunities for retailers like Walmart and Target to move in-store shopper marketing efforts outdoors, setting up event booths in parking lots and at curbside to engage shoppers.

As shopper marketing becomes increasingly digital, it will operate more and more like a media business. And as in any media business, content is king. Shoppable content, deployed at the right moment & in the right context, will be key to drive purchase. Online shopper marketing also offers brands unique opportunities to personalize their messaging by working with partners in this space. For example, Attentive is a startup that provides personalized text messaging for shopper marketing.

Deliver More Compassionate Retail Experiences

As we recover from the collective trauma inflicted by the pandemic, there is a real opportunity for retailers and brands to improve the shopping experience by making it more considerate to the reprioritized needs and demands of customers. This customer-centric approach also helps to extend the focus of online shopping beyond convenience and adds a real human touch that connects shoppers with brands.

Sustained demand for high hygiene standards aside, there are many areas of empathy that brands can address. Many are experiencing economic hardship as a result of the pandemic, so integrating a service such as Klarna that enables installment payment at the checkout for online shoppers could help people make the big-ticket purchases they need. Real-time inventory is also a feature worth implementing, for it saves customers the headache of checking multiple locations for the product they urgently need.

Accelerated online orders also means more returns, which sparks new opportunities for brands to work with partners to simplify the process. For instance, Dressbarn, a fashion retailer, partnered with reverse logistics platform Happy Returns to simplify the returns process. Through the QR codes they’re given, users can complete immediate refunds or exchanges by dropping off their items at one of over 500 drop-off locations, often housed in retailers like Bed Bath & Beyond and Paper Source.

Compassionate retail is not only about the customers, it also encompasses the need to treat retail workers with the same level of compassion. As essential workers, consumers are increasingly taking their work conditions and welfare into considerations. Per a Morning Consult survey, 90% of consumers said it is important to them that brands take care of their employees and treat them well, even in tough times, and 49% said they consider whether or not companies take care of their employees as one of their top five purchasing considerations. Only by foregrounding compassion and aligning brand value with the retail experience can companies truly walk the walk and make meaningful connections with shoppers.

The Long Road to Recovery, A Fast-Track to the Future

Although U.S. retail sales have rebounded compared to the lows of last year, there is still a long way to go until the industry will reach recovery to pre-pandemic trajectory levels. PYMNTS research indicates that 54 percent of consumers who have moved a minimum of one of their routine activities online since the start of the pandemic are very or extremely interested in getting vaccinated, but also finds approximately three-quarters of them still don’t plan to return to shopping in stores the way they did before March 2020. This means the ongoing transformation won’t be slowing down or backtrack, and it is in brands’ best interest to start addressing the resulting growing pains today.

The future of retail is dynamically developing and we here at the Lab are keeping a close eye on all the innovations that are popping up to change the way we work. If you wish to start a conversation around the trends highlighted in this article and discuss how your company can best address these growing pains and future-proof your business, please reach out to our Group Director Josh Mallalieu at josh@ipglab.com.

IPG Media Lab

The media futures agency of IPG Mediabrands

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