Reva: You’re listening to Next in Retail from Publicis Sapient. The podcast that shares insights on unlocking what’s next in digital transformation.
These past three years have shaped up to be a wild ride for retailers. The pandemic saw a surge in online sales, and that put added pressure on already eroding margins in the e-commerce space. As we’ve discussed in previous episodes, there are a handful of options retailers can leverage to balance the equation: measures to reduce costs and drive-up revenue. The question looms, though, on where retailers are seeing the most bang for their buck.
In recent weeks, we surveyed senior-level leaders at large retail organizations and dug deeper on this question. Today, we’re going to unpack this research with our Retail Strategy Lead at Publicis Sapient, Hilding Anderson, and Michelle Grant, Strategy and Insights Lead for Retail and Consumer Products at Salesforce. I’m your host for the session, Reva Bhatia. Now let’s dive in.
So, before we dig into the story our research data is telling us, we should start with framing around the hypothesis that really drove our study. Our suspicion was that e-commerce profits were a growing concern for retailers, and ironically, the bigger the struggle that retailers were having, the harder it is for retailers to actually rectify. Beyond this high-level assumption, we had some more nuanced predictions also that we wanted to tease out. Hilding, care to kick us off with giving us a little bit more context on some of these predictions?
Hilding: Yeah, of course, Reva. Hey, great to be on again. Thank you for having me, and I think it’s—and Michelle is so excited to be here with you as well, so this will be, I think, good conversation. Yeah, this research was really exciting for me just because it really highlighted a key thing that we’re hearing from our clients, which is around profitability. Especially, you know, as everybody is taking bets on kind of if and the timing related to a recession might happen here over the next three days or the next three years.
I’ve seen a range of projections on that, and so it’s interesting just as you think about this research, which was done quite recently, Q2 of this year. And what we found is, you know, first of all, a recognition across these senior executives that retail’s forever changed. So, 85% said, “Look, COVID has permanently changed the way that we engage with our customers, and it’s changed the nature of the retail.”
And we really in this research, we grouped into two discrete cohorts; one is focused on e-commerce-only retailers. And interestingly, they were a little less disrupted. And they still were: 72% said, “Hey, this is a major change, forever change.”
And the other cohort was bricks and mortar, which were a little bit more disrupted. They said, you know, 86% of them said, “Hey, look, we’re pretty challenged by this change and particularly in the area of profitability.”
Hilding: And this, you know, to some degree, I think has to be set against the context that we’re seeing, of course, around e-commerce with a huge spike in 20—2020 and 2021 from COVID and that a good bit of a return to the kind of consistent growth. We’re still up considerably across the sectors that we’ve been tracking: Apparel, furniture and electronics, and e-commerce stores. But it’s definitely curved a little bit as people return to the physical stores.
We also have found in this research that, yeah, US consumers are now omnichannel, so one interesting piece we’ve seen is 75% of the US consumers now are kind of fully omnichannel, meaning that they bounce between mobile, in-store, web, curbside—you know, all the different fulfillment channels. BOPUS, ROPIS, and the like.
And we’ve also found that COVID led to a really rapid increase in capabilities for a lot of retailers. In fact, 40% or 39% of retailers actually added curbside from 2020 to 2021, which is—it’s pretty remarkable, you know, kind of standing up an entirely new channel in one year. We’ve lived it. We’ve lived it with our clients. But I think that backdrop is important because when we grapple with this question around profitability, what you find is that a lot of retailers maybe haven’t optimized all these processes, right?
And there are a lot of inefficiencies that need to be addressed. And there is a path forward for retailers that maybe aren’t seeing some of the profitability targets that they want to. And Michelle, maybe you can share what we found on that core question around profitability, and then we’ll go from there.
Michelle: Definitely, Hilding, to echo what you said, right? We lived through sort of this huge acceleration of e-commerce, and it was enabled a lot of the time with these new fulfillment capabilities that the stores took on, like curbside. How that’s really changed consumer behavior, and even though e-commerce has slowed down in growth, it still remains at a higher penetration, and it does vary by category, so you know, we see all these top-line numbers, but you know, there’s very little data about what the bottom line is and what people are doing to improve the bottom line.
And so, in our survey, we asked these retail leaders around the world what their expectations are and where they are when it comes to e-commerce profitability. And unfortunately, the news isn’t great. It is really an existential risk for retailers of all kinds. And when we asked the traditional brick-and-mortar players that have an e-commerce channel, 46% of them said that e-commerce is less profitable than the store.
And even more concerning is that for those e-commerce-only retailers, 44% of them said that they weren’t profitable, and this is, you know, going into this rough macroeconomic environment, higher inflation rates. So, this type of business model where you’re only reliant on e-commerce is a great risk because you weren’t already profitable in probably the two best years for e-commerce from a top-line perspective. And then overall, 37% of retail executives said that e-commerce—that channel is below their profit targets. So, even if it is profitable, it’s still not hitting the targets that the executives set for it.
Michelle: So, there’s this huge disconnect between what we see in top-line revenue from e-comm and then the bottom line, so we really need to, as an industry, figure out how to sort of bridge that gap between the two. And so, we did ask retail leaders, you know, what can you do? Do you know what to do when it comes to improving e-commerce profitability?
And 90% of them said, “Yes, I do know what I need to do to improve profitability.” But—and here’s the kicker—only 44% of those leaders really do struggle to implement those changes. So there is a clear vision of what needs to be done, but there is an execution problem, which is concerning. And it seems that the main reasons for this execution problem are a lack of organizational alignment, difficulty with legacy technology systems, data complexity, and inconsistent priorities.
So, you have two sort of buckets where you have an organization and a prioritization that may be outdated given the state of affairs right now. But then you also have just the complexity of working in today’s environment where you need more flexible, agile, up-to-date systems. And then you get so much data from so many departments; how do you clean, integrate, and then action on that data?
So again, those two are more what I would classify as sort of operational issues in addition to those organizational issues that these leaders are facing in order to make the changes necessary to drive profits through the e-commerce channel.
Hilding: Yeah, I’ve lived that challenge on a whole series of clients in different sectors over the last two to three years, certainly. And it’s, yeah, you'd think we would’ve had the silos figured out by now. But yeah, between technology and the business and the marketing team, between multiple brands working for large holding companies. And another example, you know, companies that are globally situated might have a technology team in Europe or elsewhere, and then you know their business team might be in the US. And trying to span those two and get everybody aligned around, “OK, we’ve got to address these gaps that are driving lower profitability.”
I think one of the really interesting implications of this study is that it does need to have a higher focus than it does now. And as an aside as well, I don’t know if you’ve been tracking some of the news out of Target and Nordstrom and a couple other places; they’ve, they’ve recently announced significant reorganizations and some new leadership. And so, you know, new kind of chief-commerce-type of officers that spans traditional CDO roles and others.
So, I think there’s a recognition. Target created a new chief customer experience officer that they hadn’t had before. So, I think there’s a recognition in boardrooms at these top firms that this is a really urgent need—that the current silos are causing issues. And we’re starting to see some moves to address that. It’ll be interesting to watch how that evolves.
Michelle: Definitely, and I would agree, especially with supply chain being so important, and sort of one of the main things that eats into e-commerce profitability is delivery. And we’ve seen so much inflation in the logistics space that the supply chain experts are now getting elevated into senior roles and senior management.
And so, I agree, we’ve seen a lot of change over at the C-suite of these big retailers, bringing in new talent with different experiences and, in particular, really in that operational excellence part where everyone is sort of preparing for a very uncertain macroeconomic environment but understanding that the supply chain is still under pressure.
Reva: So, what stands out to me as you guys are rattling through the data is, you know, there’s obviously a mix, right? If you talk about the profitability equation, there’s obviously cost and revenue. And it sounds like retailers are getting after tackling initiatives that, you know, in some instances, drum up revenue and, in some instances, cut costs.
I’m keen to understand from the data and the research, like, is there one area in that equation that’s getting more attention than the others? And what kind of trend do we think that that might indicate?
Hilding: Yeah, I mean, you always see an initial focus. Yeah, if you’re focused on profitability, the first move is always in cost because a one-dollar reduction in cost generates 10X what you would get with a dollar in revenue for most retailers anyway.
So, that’s often where you see it starting, and with inflation, I think a lot of the headwinds are in that cost area. Whether it’s, you know, raw material goods coming in or, of course, the supply chain or your cost of talent within the store itself. Or even the cost of the physical space has grown as real estate has exploded over the last couple of years. So, there’s some interesting things that happened in that area. I do think, though, we’re having more conversations now around saying, “OK, what can you do? You know, is there a perfect PDP?
You know, is there a perfect search result page that is the standard that we know in our industry is going to help us deliver incremental value? And I think that jives with some of the work that we’ve seen with the research as well.
So, one of the big outputs of this research is a playbook, and it’s a playbook around how do you enhance the profitability. But before I share the playbook, I don’t know, Michelle, if you have any comment on our people looking at the revenue cost side that Reva asked.
Michelle: Yeah, it definitely has to be both in this type of environment. We have seen that you know, for a while there because of the high demand, retailers and brands were able to push those higher costs onto the consumer through higher prices.
But it seems we’re reaching a ceiling now with inflation at sort of all-time highs in recent history. The macro environment may be weakening as far as consumer sentiment goes, so it’s going to be about how you can’t increase price anymore, so how do you reduce your costs in order to bring that price down and offer more discounts and promotions, which we’ve started to see pick up? Especially in this recent Prime Day, where a lot of retailers, even if they didn’t have a competing sales event, still were in the market, according to our data, with lower prices.
But that’s just the price to consumer and the costs within the whole supply chain. Goods, logistics, labor, real estate, none of that is really abating, so it’s going to put an even greater crunch on margins, and so operational efficiency is going to be a top priority.
Reva: Thanks, Michelle. And a great segue into the playbook, right? So, where do retailers go next?
Hilding: : I think, yeah, it’s really interesting with this research because that’s the question—the big question.
I think the highlight of the research is it’s some direction around what are the five key areas for addressing the profitability issue. And number one at digital customer experience. So that was the number one category: 53% of executives said that that’s the area to focus on—that they're focusing on specifically—to increase profits. Number two is omnichannel commerce, and we’ll unpack each of these.
Hilding: Number three is supply chain modernization, followed by marketing technology, and customer service rounds out the top five. And when you look at each of those, I was a little honestly surprised that CX was number one. I think, though, I’m reassured by it because I think that is right. And if you look at top-performing sites, whether it’s Target or Walmart or Amazon, I think you see a real priority placed on that customer journey and making sure it's easy and frictionless to get through that journey. Still, a lot more work to be done, but it was reassuring. And when we double-click in the research under that, the top kind of areas within CX that emerged. One is a holistic omnichannel experience. The second is the mobile app, particularly when you think about frictionless checkout of the mobile app, even within the physical store.
And the third is social selling, which I think has considerable opportunity to grow from where it is now. So that was the digital CX on the commerce side: the number two kind of move as part of the playbook. Marketplace with the number one kind of area within commerce. So again, we’re seeing a lot of activity around marketplace—no surprise. A lot of diversity of kind of strategic choices around marketplaces still. A lot of nuances around, “OK, do you go for back kind of maximum scale? Are you looking for a very niche-based marketplace strategy? How do you think about retail media networks in the context of that marketplace strategy?”
How do you think about attracting sellers—and the right sellers—as part of that marketplace strategy? Some really interesting pieces there. Also, some questions around how do you stand up in the physical store visibility into your marketplace assets.
That’s another really interesting exploration that we’re having here with some clients. So that’s number one. Number two is under commerce re-platforming. So a cost reduction play typically but also a modernization, often to a more of a headless type of architecture. And the third is the dynamic pricing. Also, something that we’re seeing more of, especially as you combine it with data monetization. The ability to have much more precise pricing becomes a key lever that’s certainly in profitability, right?
And then the final kind of number three area, which is supply chain—the delivery partner optimization, multiple shipping options, inventory visibility —some of the stuff I feel like we’ve talked about before on this podcast, but there are some pretty good solutions out there as relates to supply chain that can help improve profitability and the performance of the supply chain network broadly.
Michelle: And definitely—I think one of the things that has definitely accelerated it through the pandemic was the expectations from customers for fulfillment options that we talked about so that multiple shipping options is really key for the consumer. They want their goods at different times on their need states and in different places, right? Curbside was kind of not widely adopted.
And now it is for many of the big box retailers. You know, Sephora just came out and said that same-day delivery has been a big hit for them because consumers run out of their products, and they want to be able to refill it that day. So being able to offer a variety of fulfillment options that are now frictionless—again, going back to 2020—curbside was kind of just Scotch-taped together for everyone and really making that easier for the consumer and then the employee in the store as well. It has been critical, and by making these things more streamlined, that does take cost out of those types of delivery fulfillment options. So going from sort of scrappy to scale helps the bottom line when it comes to e-commerce.
Hilding: Yeah, and I’d say there are couple other areas we’re hearing from clients that didn’t show up in the research, but I think would’ve if we did follow-on interviews, and certainly we’ve had a couple conversations with the C-suite CEOs and other leaders around retail media networks, both for grocery and nongrocery.
So, I mean—no surprise to anybody who’s listening to this—you know, one of the most talked about areas. But the ability to get, you know, 50 to 150 basis points of your revenue in a kind of either net new or adjacent stream of revenue from your core business is pretty attractive and, in a lot of ways, necessary to fund the kind of opportunity, especially in non-endemic, when you think about products that you don’t sell today, but that your customers have a great affinity for at the particularly interesting area.
We’re seeing a lot of technology, rationalization, and centralization. So a recognition that you don’t need six different commerce platforms across six different brands; who knew? And the shift to cloud is a big enabler of that—to enable that flexibility and the scalability that you need.
And then the only other thing I would add from this stuff is thinking about modern store design and MFCs, micro fulfillment centers, and kind of that physical presence within the store to enable e-commerce at a much more rapid pace to do so at scale and that’s often linked to upgrades to your point of sales systems and other things happening within the store to support more flexible mobile tools, among other things.
So, a lot of focus and investment happening across all of these areas that I think will address this profitability challenge. But there’s no question, as you said, Michelle, it’s an existential threat for all retailers, but particularly, I think, for the e-commerce-led retailers.
Reva: And it sounds like the laundry list of what you know retailers can prioritize to get after it—based on what Michelle and Hilding, both of you just rattled through—is quite long, right?
There are a lot of tools in the tool belt for retailers to potentially leverage in order to start chipping away at this problem, which is the good news, right?
So, again, thank you both for your insights. Any final additions or comments that you guys want to add?
Hilding: I think the only other thing I would add is one additional area that is included in the research—you can find it in the full report—is really about a focus on return to growth.
And it’s a recognition that actually acquiring new customers emerged as the number one area of investment from a strategy perspective for retailers as they kind of sit. You know, if you think about the long arc we’ve been on for the last 24–36 months, a lot of it has been around the challenges of just staying alive during COVID.
And I think that’s now shifting to customer acquisition and growth and profitable growth. And I think that that’s an important mandate that we found from this research.
Michelle: My only addition would be some something that did come up in our research, which is around business intelligence and analytics. And as we go into this sort of uneven, uncertain macroeconomic environment, that sort of data is going to be really crucial to manage.
All of the different levers that you can pull as far as marketing, personalization, fulfillment, inventory, visibility. So really, having those analytics and tools to run the business is going to be key to drive both top-line growth and constrained costs.
Reva: Awesome, yeah. Great point and great addition, Michelle.
Alright, Hilding and Michelle. That was a great run-through of very, very meaty research. I know that it’s not easy to parse out 10 pages of data and insights into a 20-minute conversation, and I think you guys both did swimmingly.
Appreciate you taking the time today.
Michelle: Thank you.
Hilding: Thank you, Reva.
Reva: Thanks for tuning in to Next in Retail. Be sure to subscribe so you don’t miss a beat on the future of digital and retail.