How A Responsible Reset Will Drive Retail’s Pursuit For Growth – Since the official declaration of COVID-19 as a pandemic in March 2020, consumers, businesses and entire industries have become accustomed to “disruption” as the normal state. Australia is no exception to this rule, and retail as a sector is grappling with an increasingly challenging operating environment.
Australian retailers must respond quickly to challenges related to changing consumer behavior and preferences, disrupted and unpredictable supply chains, evolving models, organizational gaps and talent shortages, and cost inflation, among many other issues.
How A Responsible Reset Will Drive Retail’s Pursuit For Growth
As we begin 2022 in earnest, our goals in writing this vision are twofold: (1) to share insights into retail-specific trends that inform the “next normal” and (2) outline key strategic and operational implications. Who follows our customers.
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This vision paper only scratches the surface of the trends emerging today, and how companies can successfully position themselves for comparative advantage. We welcome the opportunity to unpack trends and strategic implications in conversation with your leadership team.
Like other industries, Australian retailing is affected by a confluence of factors that continue to evolve as new forms of COVID emerge and, as a result, consumers, markets and regulators respond.
Despite this volatility, it is positive that seven key trends will serve to structurally change (or in some cases continue to change) the retail landscape in 2022 that are important for our customers to understand. See Figure 1 for an overview of trends.
COVID-19 has created many new buying behaviors among consumers and in many cases has accelerated and cemented the adoption of existing behaviors 2-4 years away (eg, online share of overall retail sales in Australia has reached 15%, accelerating in 3 years). We argue that if the pandemic forces structural changes in consumer behavior, these new behaviors will continue even after the challenges of COVID-19 have subsided.
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Personalization has been a popular topic in boardrooms and retail management teams for nearly three years. However, we made an important observation
Acceleration of consumer expectations for simplified, clear and highly value-added personalization offers and communications over the past 24 months.
Digital advertising has become a $10 billion+ industry in Australia, and the influx of mainstream information and advertising has increased consumer frustration and reduced overall engagement with content.
In this context, leading retailers are 12-24 months into the personalization journey – as shown in Figure 3 – with end-state capabilities that include capabilities such as dynamic and targeted 1:1 offers, customer experience and communication – content and offer. Personalization, dynamic pricing and promotions, advanced customer information and identifiers, and real-time range curation. The need for investment has become more urgent, with 75% of customers now expecting retailers to understand their needs and expectations.
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By 2022, the gap between new retailers and laggards will widen rapidly. In fact, more than 80% of innovation efforts in Australia today are digital and customer-driven (including personalization use cases).
On a relative basis, Australia lags behind other mature markets (US, UK) in e-commerce adoption and expectations of seamless omnichannel offerings. However, COVID serves to increase consumer expectations of an integrated online and offline experience supported by seamless fulfillment through click and collect and/or home delivery.
Australian retail is beginning to shift from a single-channel approach to a multi-channel offering, helping customers meet the people they want to transact with (see Figure 4). Although online is often an “extra” service, up to 65% of retailers are increasing their efforts to provide a fully integrated experience across brand, offer, communication and price.
As omnichannel evolves rapidly, we see significant flow impacts on physical store paper, format and size, expanded capabilities to leverage deep customer data, and significant chain restructuring. We can expect supply to respond to channel changes.
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ESG programs will be critically important in 2022 as the pandemic continues, climate predictions gain prominence and corporate net zero commitments gain momentum.
Australian consumers are increasingly in favor of having a positive impact on people and our environment, with >80% willing to cut consumption to combat climate change and >10% willing to pay more (see Figure 5).
However, a deeper debate on ESG should be approached with a measurement strategy. A principled alignment towards sustainable consumption has not been fully proven to translate into willingness to pay more, and investments in ESG initiatives (such as sustainable packaging) need to be measured and implemented. artwork. It is also important to have a deep understanding of key customer segments, for example ESG initiatives that align more strongly with millennials in Australia, and for repeat purchase segments such as groceries.
We have already seen rising costs and inflationary pressures in Australia, and this is expected to continue through 2022. Headline inflation in the December quarter of 2021 was 3.5%, relative to headline inflation. Australia’s 10-year average of 1.9% (see Exhibit 6) Although this is a modest increase compared to the 6.9% (annual) growth recorded in the United States, it can be expected to put significant pressure on the entire retail value chain.
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Retailers are grappling with rising shipping costs as overseas container prices have quadrupled in the past 12 months. We expect shipping costs to remain elevated for most of 2022, as we see supply chain costs gradually disappear as the supply and demand imbalance corrects.
The pandemic has also exacerbated supply problems and hence, supply imbalances. As a result, some pockets have been hit by cost pressures, with retailers also burdened by rising raw material and commodity costs. For example, red meat prices rose more than 10% in the September 2021 quarter, and shortages of wood pallets and aluminum put pressure on soft drink prices.
The COVID-19 pandemic has caused significant and widespread supply chain disruption. These disruptions are caused by a combination of factors including port congestion, cargo space limitations, container and pallet shortages, and labor constraints. Service levels have fallen across the value chain, with shelf availability down by up to 7pp at the height of the pandemic.
In Australia, COVID-19 is rapidly changing the workplace, employee value proposition (EVP) expectations and relative employer/employee bargaining power. By 2022, Australian retailers will struggle to attract and retain top talent with clear challenges in key roles (such as data scientists and category managers).
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Getting the TEUs right by 2022 is imperative. Our experience shows that new EVPs need to adapt and prioritize the preferences of new hires (see Figure 7).
We expect 2022 to be a year of continued disruption that will bring many challenges as well as great opportunities for Australian retailers. As we look to the future, it is important that retailers strengthen their core operations to prepare for the “next normal”, think boldly, constantly innovate and adapt to this context.
Of course, each retailer will face a unique set of strategic, operational and financial questions to answer. However, we believe that there are three key topics that are important for all retailers to address in 2022: (1) becoming an organization focused on advanced analytics, (2) renewed and created customers and (3)) developing stronger operations. A model for the future, shown in Figure 8.
Over the past 3-5 years, advanced analytics (AA) solutions have evolved and evolved significantly to provide more processing power, storage, and more mature predictive analytics technologies. With increased consumer expectations and growing e-commerce transactions, this creates the perfect breeding ground for rapid innovation and capacity building.
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Leading retailers (global and local) are already investing in essential digital transformations, and we’re seeing it among our customer partners. At this stage, it is no longer the domain of “first movers” but becomes table stock for investing in the company’s sustainability.
Since the AA journey requires significant capital and skill development, the way to “win” is to start small and repeat. It is important to build an organization around AA that will focus on how decisions are made, and to create a deliberate sequence of use cases (such as programmatic efforts) that will help fund the journey and – as shown in the figure – be open to customer preference outcomes. 9.
Investment in AA can unlock significant benefits of 10-15% increase in sales, 500 bps margin expansion, 5-10% labor savings (and reuse) and 15-20% increase in supply chain efficiency. This is further enhanced when AA use cases are unlocked across the value chain: customer experience, category management, upstream operations, and in-store fulfillment.
Customer preferences evolve faster than a typical BAU assortment review and product development cycle. As a result, many retailers are not in tune with the latest category priorities, winners and losers and they have yet to reset the fundamentals of category management (such as pricing strategies) in response to the shift.
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As retailers consider this need, we believe there are three key elements that need to be addressed: (1) getting the core proposition right, (2) creating a clear omnichannel proposition that delivers products and services to customers, and (3) creating Repair and maintenance. Explicit “promises” to customers shown in Exhibit 10.
We recommend focusing on three areas