Overcoming Digital Disparity: How Retailers Can Drive Profit and Competitiveness by Dan Smythe and Jay Hentschel - Accenture
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Overcoming Digital Disparity: How Retailers Can Drive Profit and Competitiveness by Dan Smythe and Jay Hentschel
Digital has rattled the retail landscape on a number of fronts, and retailers are
left to pick up the pieces. Droves of retailers have gone multichannel because
that’s where the customer is going—but it’s not necessarily where the profit is.
Five years ago, 78 percent of consumers used at least one online channel
when searching for merchandise. Today, 88 percent do—and four in 10 want
even more digital interactions than what companies are providing.1 Retailers
have been quick to respond, but profit margins are lessening as sales continue
to shift to digital channels. Multichannel retailers saw digital sales grow
20-30 percent in 2014, but at the same time, their overall sales grew only 2-5
percent.2 Retailers must reverse this trend quickly to maintain competitiveness.
Under digital duress According to Accenture’s 2015 Seamless
Retail Survey, 80 percent of shoppers have
There are two common misperceptions that
“webroomed” or “showroomed” within the last
have given retailers false comfort:
year, and 72 percent said best price was a key
• Thinking that the cost to serve through influence.3 Delivery speed and scheduling are
digital would be less than in store. both important to online shoppers, but meeting
• Believing that digital pure plays would be these desires has inflated direct-to-consumer
profitable when they reached a certain size. fulfillment costs.
The truth is now setting in as retailers see a The digital boom also has massively increased
negative correlation between multichannel online supply while there has only been a small
and shareholder returns. increase in demand, creating overcapacity.
There is no denying that customers are leading Figure 1: Retailer’s growth and net profits in 2014.
the digital dance and retailers have no choice
Digital-only Growth 15-20%
but to get out on the floor. However, the
retailers
difference among the industry leaders and Net Profit 0%
followers will be in who takes the right steps
Growth 5-10%
to make digital profitable. Cost-reduction Store-only
initiatives can help, but they aren’t the only retailers Net Profit 6%
answer to surviving digital disruption.
Growth 2-5%
Digital: good for growth, bad for profits Net Profit 3%
Multichannel
Mature retailers need digital channels to fuel retailers Digital Sales 20-30%
growth. But they struggle to make money in
Comp-store Sales 1-2%
these channels due to price pressure that is
driven by information transparency and the Source: Accenture analysis based on Retailers’ financial
high cost to serve. Consumers have more statements and earnings announcements
power in the digital age, and they are flexing
their muscle by shopping around.
2The book stores and consumer electronics Three ways to toughen up
retailers that have gone out of business in
It is time for retailers to ratchet up their
recent years illustrate that it’s not just about
competitiveness and not be left in the dust of
using the digital channel—competitiveness
digital disruption. Here’s how:
comes from having the cost structure to
afford digital. 1. Look at the sum, not the parts.
Taking a collective, holistic view of the business
“More” isn’t a moneymaker is what can unearth new ideas for how to save
New channels may increase revenue, but costs. Silos make it difficult to see beyond
they put profits and competitiveness at risk. channels. For instance, how can a retailer think of
Most retailers have invested in multichannel. its investments in digital and stores as mutually
However, they leaped before looking at the exclusive? By looking at digital and stores in
future financial burden. conjunction, retailers can determine how to take
Multichannel retailers are disadvantaged advantage of assets and capabilities to achieve
because they are footing the bill on: the lowest possible costs.
Store costs: Store costs can be It’s also important to be realistic about when and
upwards of 15 percent of sales for a where to invest. Digital may not always be the
store-based retailer and 0 percent for way forward. Associated British Foods (ABF), the
a direct retailer.5 parent company of discount retailer Primark, has
no plans to offer online shopping. Instead, they
Supply chain: Supply chain costs are
have chosen to open stores quickly in existing
typically 2-3 percent of sales for a
countries. “Primark is not broken,” says ABF
store-based retailer and 10-15 percent
Financial Director John Bason. “So why try
for a direct retailer.6
and fix it?”8
IT: IT costs are typically 1 percent of
sales for a store-based retailer and 4 Argos is a retailer that is successfully looking at
percent for a digital retailer. the sum of its parts in the digital world. With
40 percent of its sales coming through digital
and 90 percent of transactions made in store,
The difference among industry leaders Argos recognized the opportunity to unify the
and followers will be in who takes the two worlds. The company decided to open digital
right steps to make digital profitable. stores that replace catalogs with iPads and paper/
pencils with dynamic touchscreens. Customers
can browse more than 20,000 products and order
Stores like Macy’s have adapted to the them through an iPad, collecting them minutes
imbalance of digital supply and demand in retail later at Pay-and-Collect tills.9 Argos’ new digital
by getting creative about how they use their approach has helped Home Retail Group to
assets. When stores were underperforming, increase sales and pre-tax profits.10
instead of closing them, they turned them
into distribution centers to support the digital
channel (while also maintaining a balance of
brick-and-mortar stores).7
32. Get costs in line. When Samsung sought to compete with the likes
Being agile enough to compete isn’t a one-time of Apple, the company looked the find the most
exercise that happens by just cutting costs. fertile ground to establish a retail partnership.
Success comes from reinvesting those savings in Best Buy proved to be Samsung’s best bet as it is
activities that will drive competitive advantage the world’s largest consumer electronics retailer,
and revenue growth, such as creating a more and Samsung brought over 1,400 experience
efficient operating model, embedding enterprise- shops into Best Buy stores, going beyond
wide process excellence or building leading- traditional shop set ups and providing a better
edge capabilities. customer experience.13
Target is among the companies strengthening the It is also important to maintain strong
core. Positive Q1 earnings in 2015—first quarter relationships with suppliers—relationships where
digital sales increased 38 percent over 2014— mutual success is the goal. Suppliers that are
show that the company is growing digital and accountable for performance, that can offer
increasing profitability at the same time. First volume-based pricing and that can help you get
quarter sales were strong in signature categories products to customers faster should be your
in stores and online. Target is controlling costs preferred partners.
and working in more agile ways, such as
removing layers of approval and accelerating Time to recalibrate
decision-making through a leaner top-level
Many retailers have kept an eye on the digital
workforce. They continue to invest in technology
top line rather than the bottom line. They
and supply chain capabilities that get products
assumed that a multi-channel strategy would
to customer when and how they want them.11
increase their competitiveness. Indeed, new
3. Team up. channels can be a source for growth, but they
Retailers should look to the broader ecosystem may lead to a highly complex cost structure
to see where partners can bring products or that has an impact on profitability.
capabilities to complement their strengths. For Now is the time to take control amid digital
example, savvy retailers tap into a network of disruption. Take a broader view on channel
partners to help manage the cost profile and investments to make strategic decisions that can
enhance the customer experience. Whole Foods drive growth. Make cost reduction sustainable.
has partnered with Instacart to deliver Whole Find the right partners who can help build
Foods products in as little as one hour. Customers business and improve the customer experience.
can also use Instacart to order items and then The potential rewards of taking action boldly
pick them up in-store. By teaming up, customers and quickly are immense.
get the delivery benefits while Whole Foods
avoids managing complex logistics.12
4Contact the authors About Accenture
Dan Smythe Accenture is a global management
daniel.l.smythe@accenture.com consulting, technology services and
Jay Hentschel outsourcing company, with more than
j.edward.hentschel@accenture.com 323,000 people serving clients in more
than 120 countries. Combining unparalleled
experience, comprehensive capabilities
Join the conversation:
across all industries and business functions,
@AccentureStrat
and extensive research on the world’s
most successful companies, Accenture
References collaborates with clients to help them
Accenture Study: “Customer 2020: Are You Future-Ready or
1
become high-performance businesses and
Reliving the Past?”, 2015
Accenture analysis based on Retailers’ financial statements and
2
governments. The company generated net
earnings announcements revenues of US$30.0 billion for the fiscal
3
Accenture Seamless Retail Study, 2015 year ended Aug. 31, 2014. Its home page
Accenture analysis based on Retailers’ financial statements and
4
earnings announcements
is www.accenture.com.
5
Accenture benchmarks
6
Accenture benchmarks
7
Tom Ryan, “Macy’s, Others Turn Stores Into Online Fulfillment About Accenture Strategy
Centers”, Forbes, April 2013
8
Ese Erheriene, The Wall Street Journal, “Primark Parent: No IPO
Accenture Strategy operates at the
or Online Shopping for Us” July 11, 2014 intersection of business and technology. We
9
Ian Newcombe, Sanderson Multichannel Retail Blog, “Argos: bring together our capabilities in business,
the Multi-channel Store of the Future?”, March 26, 2014
10
Chloe Rigby, Internet Retailing, “Digital transformation helps
technology, operations and function strategy
Argos owner report 32% profits rise,” April 29, 2015. to help our clients envision and execute
11
TheStreet, “Target (TGT) Earnings Report: Q1 2015 Conference industry-specific strategies that support
Call Transcript;” conference call took place on May 20, 2015,
10:30 AM ET; transcript accessed online May 22, 2015 at
enterprise wide transformation. Our focus
http://www.thestreet.com/story/13159058/1/target-tgt- on issues related to digital disruption,
earnings-report-q1-2015-conference-call-transcript.html competitiveness, global operating models,
12
Whole Foods Company News, “Whole Foods Market® and
Instacart partner to offer one-hour delivery across 15 major
talent and leadership help drive both
U.S. cities” September 8, 2014 efficiencies and growth. For more
13
SAMSUNG, “SAMSUNG Joins Forces with Best Buy to information, follow @AccentureStrat or
Provide Consumers a Unique Mobile Shopping Experience”
April 4, 2013 visit www.accenture.com/strategy.
Copyright © 2015 Accenture This document makes descriptive reference to trademarks that may be owned
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High Performance Delivered such trademark.
are trademarks of Accenture.
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