All changed in the retail landscape
The transformation of the retail sector began long before anyone had heard of coronavirus, but the Covid-19 pandemic has served to accelerate it
What we are seeing is an evolution to consumer commerce where consumer-facing businesses offer products and services without the need for a physical store legacy.
While some people have questioned the future of traditional bricks and mortar retailers in an increasingly digitised world, the reality will be far more nuanced than a choice between physical and virtual offerings. This is among the key findings of the KPMG Future of Retail report.
“There will always be people who need to buy things,” explains Niall Savage, retail and manufacturing lead with KPMG in Ireland. “How and where they buy is what’s going to change. It will be a combination of bricks and mortar and online. If a retailer has a large property portfolio and doesn’t have a complementary online offering, they will face challenges. Globally what we are seeing is an evolution to consumer commerce where, increasingly, consumer-facing businesses offer products and services without the need for a physical store legacy.”
The response to changing market forces and consumer behaviours is going to be far from uniform. “Retailers are going to adopt different strategies in terms of how they go about their business,” says Savage.
The first of these is the platform model employed by Amazon and eBay. “These companies are more than retailers, offering a service to existing retailers who want to add another virtual channel. But market research is showing that people like to be a little more local and to identify with where they shop. But platforms remain hugely important and businesses who never thought they would, are partnering with the platforms because of their need for scale.”
The direct-to-consumer strategy sees companies with powerful brands effectively by-passing the traditional retail model with many making heavy use of platforms. “This is where you get brands like Adidas, Bose or Dyson which have the name recognition to attract customers to their online stores going direct to consumers,” Savage explains. “This can also work for local brands and we see it in Ireland with Dubarry and Magee who have a brand and product that people will go to them for. They may still need a combination of direct to consumer and the retail channel, but it works particularly well for premium brands.”
Next on the list is the value retailer. These include the discount stores like Aldi and Lidl who offer groceries and other products at a low price and make profits through high sales volumes.
After that comes the category specialist. “This includes Irish businesses like 53 Degrees North for the outdoors, Smyths for toys and others such as Harvey Norman for consumer electronics. They are brand aggregators and people know they will likely find what they are looking for if they go to those retailers.”
Retailers are going to adopt different strategies in terms of how they go about their business
Interestingly, there will still be room for independent retailers in the new world. “What we’re seeing anecdotally – and it’s early days – is that as retail reopens, high streets around the country have more potential footfall as a result of people working from home. Local high streets could become more profitable as people spend more time in their own communities rather than commuting to work every day.”
This is likely to persist at least to some extent with many organisations moving to hybrid working models and other flexible arrangements when the pandemic ends, he adds. “The evidence from the UK indicates a trend in increased spending in smaller towns and villages around the country since the start of the pandemic. That is a source of hope for independent retailers.”
They also enjoy a particular advantage in the marketplace. “Neighbourhood retailers also have the unique ability to directly gather and respond to changing community needs and are often experts in showcasing their values to the communities they serve,” he adds.
Ireland like many markets has its national heroes. “In Ireland we have national champions in grocery retailers like Dunnes and Super Valu, in France they have Carrefour, in the States there is Wal-Mart and in the UK they have Tesco. They have fed people for generations and have built up great customer loyalty. They still have to do the right things in-store and online to survive and come under increasing pressure from value retailers and direct to consumer businesses.”
Regardless of the strategy chosen, retailers still face challenges. In retail, things have changed hugely. In the past you just got in the products, put them on the shelves and people came in and bought them. Now they need the ability to sell across all channels. That brings a whole new set of capabilities that retailers didn’t need to have in the past. Getting the logistics of an online offering together can be really challenging.”
There is a future for retail in the transition to consumer commerce
It’s all about getting the goods to the customer. “It is becoming more difficult to be profitable in that last golden mile,” says Savage. “Moving to a platform will take a significant chunk out of your margin. The reason Penney’s didn’t go online was because it is a low margin, high volume business. And I don’t know how sustainable free returns for online purchases is. These things will cost the consumer in the end. The service levels of some retailers are unsustainable in the new environment. They are at a disadvantage if they have existing bricks and mortar stores and have to invest in an additional online presence, the online only operators can beat them on cost.”
That also raises questions on where best to deploy resources. Retailers with a bricks and mortar estate still have to spend money on it just to maintain it while online rivals can invest that money in technology to become even more competitive.
That might raise some doubts in relation to the future of flagship or showroom type stores in signature locations like Grafton Street or Oxford Street. “The rents have been so high on those streets because it has been seen as essential for major retailers and brands to have a presence on them,” says Savage. “This may change in future.”
Ultimately, there is only a finite amount of money people have to spend and if people are buying more online it means they are buying less in bricks and mortar stores. “Online spending is at 17 per cent overall at the moment. It is already at 30 per cent in some segments and it will reach 25 to 30 per cent by 2024. Clearly, there are too many stores and there is going to have to be a consolidation. That is going to be challenging. But there is a future for retail in the transition to consumer commerce. It won’t be one or the other. It’s all about balance.”
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