SEVEN IMPERATIVES FOR THE INDUSTRY - KNOWLEDGE PARTNER - MCKINSEY
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Retail
speaks
Seven imperatives
for the industry
Knowledge partnerAfter a year like no other, Every retailer, to some degree, has long customers. The retail industry has seen
had a sense of what the future of retail more innovation in the past year than
the US retail industry could look like: consumers shopping it did in the prior decade. When faced
faces a still-uncertain from anywhere at any time on their with lockdowns, an array of new health-
future. Our latest computers or mobile devices, stores and-safety regulations, and volatile
morphing into showrooms or fulfillment consumer demand, the best retailers
research highlights
centers, products being shipped for proved resilient and agile. The K-shaped
seven imperatives that home delivery at ever-increasing recovery for the general economy—in
will position retailers speeds, and digitization everywhere. which some parts bounced back more
for success—regardless Some forward-thinking retailers started quickly while those at the bottom of the
making big investments a few years ago ladder struggled—applied to retail as
of what is next. to prepare for—and to help shape—such well. The largest businesses had the
a future. Others took a wait-and-see resources to adapt and have pulled
stance, expecting the trends would take away from the rest: industry leaders
time to play out. are delivering two to three times the
shareholder returns of their less-nimble
But the future came early. In March
competitors.
2020, COVID-19 shut down retail
locations across the country, forcing What has set the top performers apart?
US consumers to change their buying And how can retailers thrive in 2021
behaviors. Trends that had been on and beyond, even amid continuing
a multiyear trajectory saw dramatic uncertainty? The answers aren’t trivial:
acceleration. For example, demand as the nation’s largest private-sector
for buy online, pick up in store (BOPIS) employer, the retail industry affects the
has surged 40 percent since the start lives and livelihoods of millions. In this
of the pandemic. Three out of every report, we present research findings
four US consumers tried new shopping from the Retail Industry Leaders
channels. E-commerce volumes grew Association (RILA), with McKinsey &
as much in the first quarter of 2020 as in Company as a knowledge partner. Our
the previous ten years. analysis identified seven imperatives
that can give retailers the ability to adapt
Amid the unpredictability and the
to a changing consumer landscape while
head-spinning pace of change, retailers
pursuing new opportunities.
mobilized—finding novel ways to
continue to move products and serve
The Retail Industry Leaders Association metrics and explored consumer outlook,
(RILA), with McKinsey & Company as a digital acceleration, and future supply
knowledge partner, conducted research chain. The survey was augmented
on how retailers are approaching by in-depth interviews with top retail
strategy and operations. Executives CEOs as well as proprietary McKinsey
(such as CFOs, chief marketing officers, & Company customer research. The
chief digital officers, and chief supply analyses and discussions identified the
About the chain officers) at more than 30 US
companies completed a benchmarking
imperatives that will be critical to retail
success now and in the future.
research survey that covered more than 100
Retail speaks. Seven imperatives for the industry 2
Knowledge partnerSeven imperatives for rethinking retail
The changing competitive landscape will require retailers to pursue seven imperatives. The first four will be familiar to retailers,
so the challenge will be to accelerate progress. The next three imperatives represent additional strategies and efforts that will
be increasingly critical in the coming years. The ideal recipe will vary by retailer, so executives should review these imperatives
based on their organization’s starting point, their business strategy, and the approach that fits best with their brand’s DNA.
Doubling down on consumer-driven commerce
1
Become omnipotent on omnichannel
Consumers will choose retailers based on ease
and richness of end-to-end experience
2
This time (and all the time),
it’s personal
Consumers expect personalized experiences
and offers as table stakes; most retailers fall
short of these expectations today
3
Turbocharge delivery
As consumer expectations approach same day,
stress on supply chain will mount
4
Take a stand or take a seat
Consumers are finally voting with their wallets for
sustainability and broader purpose
Investing for growth
5
Recalibrate talent strategies
Winning the war for diverse talent, next-gen skills,
and embracing a fluid workplace will give retailers a
performance advantage
6
Pursue an eco(system)-friendly
strategy
Winners will embrace the networked economy to win
consumer mindshare and accelerate capabilities
7
Take productivity from foundational
to transformational
Analytics and automation will enable the step change
in productivity needed to fund the other imperatives
Retail speaks. Seven imperatives for the industry 3
Knowledge partnerDoubling down
on consumer-
driven commerce
1 Become omnipotent To handle shifting consumer
preferences and harness the power of
on omnichannel digital technologies, leading retailers
have increased their investments
Consumers will choose retailers based on ease and capabilities in four areas. These
and richness of end-to-end experience imperatives aren’t new: omnichannel
experiences and personalization have
2
been on retailers’ radar for years.
This time (and all the However, the seismic impact of the
time), it’s personal
pandemic—and changing consumer
preferences that will endure after it
Consumers expect personalized experiences abates—requires retailers to redouble
and offers as table stakes; most retailers fall short their efforts in these areas.
of these expectations today
3 Turbocharge
delivery
As consumer expectations approach same day,
stress on supply chain will mount
4 Take a stand
or take a seat
Consumers are finally voting with their wallets for
sustainability and broader purpose
Retail speaks. Seven imperatives for the industry 4
Knowledge partner1
Become
omnipotent on
omnichannel
Consumers will choose retailers based on
ease and richness of end-to-end experience
Retail speaks. Seven imperatives for the industry 5
Knowledge partnerTwo-thirds of survey respondents
“For us, some e-commerce
Omnichannel
cited the growth of omnichannel and
digital shopping as the most significant
trend affecting the industry—and
priorities that were
the greatest challenge. The growth previously five years out are
now more of a three-year
of e-commerce and demands by
consumers for seamless omnichannel
experiences are here to stay. According
to McKinsey consumer response
horizon. We need to more
research, consumers expect to continue
making more purchases online after
quickly understand how
the pandemic than before it began. to satisfy that consumer
E-commerce is projected to reach 25 to
40 percent of sales across categories and accelerate our
after the pandemic abates, with an
increase of two times or more for sports
timelines accordingly.”
and leisure and home improvement —Todd Vasos, CEO, Dollar General
goods (Exhibit 1).
Exhibit 1
Post-COVID-19 e-commerce penetration is expected to significantly
increase to 25–40% across categories
E-commerce penetration in North America Pre-COVID-19 Post-COVID-19
% of total retail revenue
38% 39%
11pp 32%
28%
19pp 25%
12pp
19% 20%
14pp
11% Grocery
grew from
3–4% to
10%
4% ~10%
Sporting and leisure Home improvement/ Apparel (mass General and mass
goods DIY market) merchandise
(N=14) (N=11) (N=23) (N=12)
Q: Of total retail sales ($), what was the average e-commerce share at the retailers with which you are familiar pre-COVID? - Of total retail
sales ($), what e-commerce share are you expecting at the retailers with which you are familiar post-COVID?
Source: Retail Professionals Survey, June 30–July 7, 2020, n = 50
Retail speaks. Seven imperatives for the industry 6
Knowledge partnerUnderstand the role Retailers have already begun to Accordingly, IKEA has added fulfillment
Omnichannel
of digital shifts on the respond, especially on fulfillment of capabilities to all of its US stores to
customer journey e-commerce orders. Nordstrom has support click-and-collect services
now linked its digital and physical (or curbside pickup) and contactless
As consumers continue to embrace
product offerings in its top ten markets delivery options. As Javier Quiñones,
online channels, retailers need to
to offer four times the selection available president and CSO at IKEA US,
understand the factors behind this shift
for next-day delivery while expanding explained, “We are building a business
in purchasing behavior, the different
pickup options for BOPIS to include model that will better meet the needs
expectations that accompany it, and the
their 249 Nordstrom Rack locations in of consumers today and sets us up for
impact on the omnichannel ecosystem.
addition to all 100 Nordstrom stores. success in the future. Having a strong
Today, such decisions are frequently
fulfillment network is essential, which is
made in a vacuum: 65 percent of Nordstrom CEO Erik Nordstrom expects
why we accelerated the transformation
retailers base store decisions on brick- the unexpected, saying, “I can’t imagine
of our stores to also support
and-mortar performance, with just 35 anybody knowing for sure what will
e-commerce with customer fulfillment.
percent considering the impact of such happen in the future—the takeaway is
We are changing almost everything
moves on omnichannel. With the line that our businesses have to be agile and
to ensure a seamless multichannel
blurring between digital and in-store flexible.”
experience.”
purchases, a seamless omnichannel
Rethink the network as the
experience has evolved from a “nice to Dollar General has rapidly expanded
role of the store blurs
have” to a “must have.” As Craig Menear, its contactless shopping capabilities
Chairman and CEO of The Home Depot Despite the growing demand for digital to respond to the spike in demand.
noted, “Our digital platform is the front experiences, brick-and-mortar stores The retailer combined the launch of its
door of our store. Customers are taking will not disappear. They will, however, BOPIS initiative—in 17,000 stores in just
us down that path—purchasing online take on new roles to better support an nine months—with the rollout of an app
and using online platforms as the start omnichannel retail strategy. When the with scan-and-go technology.
of the shopping experience, even if it pandemic limited in-store shopping, for
instance, 44 percent of stores served Dollar General CEO Todd Vasos said,
ends in the physical world.” “For us, some e-commerce priorities
partially or fully as fulfillment centers.
Upgrade e-commerce By 2022, survey respondents expect that were previously five years out are
capabilities that number to jump to 57 percent, with now more on a three-year horizon. We
stores focused primarily on providing need to more quickly understand how to
To continuously and sustainably manage
BOPIS and ship-from-store services. satisfy the consumer and accelerate our
evolving digital demand and consumer
timelines accordingly.”
expectations, retailers will need to
upgrade their e-commerce capabilities
along three dimensions:
• Develop inventory plans based on
real-time digital and physical trends, “Both experiences and
•
not just historical performance.
Adapt product assortment based
fulfillment are important uses
on real-time trends and provide for brick-and-mortar stores. We
consumers with more transparency
regarding availability. will continue to evolve the role
• Iterate continuously through rapid of the store on our continued
omnichannel strategy evolution.”
testing (such as enhanced mobile
shopping linked to nearby stores or
partners). —Mary Dillon, CEO, Ulta Beauty
Retail speaks. Seven imperatives for the industry 7
Knowledge partnerOmnichannel
How to get started
• Determine where to play in convenience, and experiential
omnichannel. The opportunities center. Retailers are starting to
in omnichannel are sprawling, so think of stores in the context of a
retailers must identify where to market strategy rather than as a
focus based on their DNA and the bunch of independent stores in a
categories they play in. given market.
• Identify the unique value of each
store. A store can play multiple
roles: fulfillment center, customer
If you’re on the journey,
how to accelerate
• Increase value at the store level.
Once retailers have determined
the roles of stores and other
facilities, they can then invest in
technology, upskilling, and hiring
to increase the performance of
each link in the network.
• Continue to invest in detailed,
real-time customer analytics to
monitor and react to abrupt shifts
in consumer demand. These
insights can then be harnessed
to optimize price and promotional
investments or offer new,
brand-relevant services to give
consumers ongoing reasons to
visit a store.
Retail speaks. Seven imperatives for the industry 8
Knowledge partnerThis time (and
all the time),
it’s personal
Retail speaks. Seven imperatives for the industry
2
Consumers expect
personalized
experiences and
offers as table
stakes; most retailers
fall short of these
expectations today
Knowledge partner
9The pandemic has weakened brand To successfully implement omnichannel capabilities can be built by developing
Personalization
loyalty significantly: in 2020, 76 percent personalization, retailers will need to a methodology to interpret and make
of consumers changed stores, brands, focus on several areas. They should decisions on omnichannel tests. Some
or channels. Personalization, supported coordinate corporate efforts with store of these efforts may start small, but
by data and analytics, is a powerful tool teams to ensure store operations and retailers should launch them with
to strengthen the connection to the frontline associate teams master new a long-term vision of omnichannel
brand, win consumer loyalty, and draw tools and engage with customers in personalization at scale in mind.
customers into stores. Retailers that a personalized way. Cross-channel
Retailers should look to implement
excel in personalization have boosted activities should be integrated by linking
omnichannel personalization at each
revenues, reduced marketing costs, and the often siloed in-store systems and
step of the end-to-end shopping
increased both customer acquisition and marketing technology stack. In addition,
experience—previsit, during the store
satisfaction (Exhibit 2). Yet research has retailers will need to work to change
visit, and postvisit. Doing so has the
revealed that most retailers are early in customer behavior by integrating
potential to increase traffic, conversion,
their personalization journey. While 100 personalization into the in-store
basket size, and retention.
percent of top-quartile1 retailers cited experience and encouraging customers
omnichannel personalization as a top- to “opt in” by downloading and engaging To capture the potential of omnichannel
five priority, only 15 percent of retailers with an app, interacting with a screen, personalization, leading retailers are
have fully implemented personalization or sharing information with an associate making investments in the sophisticated,
across all channels. in a live interaction. Last, measurement largely digital capabilities needed to
While
personalization
is a top priority,
only 15%
of retailers
have fully
implemented
personalization
across all
channels.
1Top-quartile retailers defined by those in the top quartile of revenue
growth from 2019 to 2020.
Retail speaks. Seven imperatives for the industry 10
Knowledge partnerPersonalization
Exhibit 2
Omnichannel personalization is increasingly becoming table stakes
Why personalization must be a top priority:
For most retailers, the consumer’s
10–15% 10–30% offline journey is not personalized:
data is captured only at point of
uplift potential in more efficient marketing sale vs throughout the customer
revenue and retention and cost savings journey.
3–5% 5–10%
This is a missed opportunity for
many at a time when ~76% of
increased customer higher satisfaction consumers have changed stores,
acquisition and engagement brands, or the way they shop and
consumer loyalty has been shaken
… yet only 15% of marketers say they have fully implemented up during the pandemic.
personalized marketing
Source: McKinsey omnichannel personalization research, 2019
create distinctive customer experiences. redesigned mobile app for health and an email address linked to a personal
A critical element of personalization wellness items. Customers can now pick profile was worth 2.5 times the average
is building better data and insights on up orders in-store, curbside, or through sale.
customers, an asset that also generates their local pharmacy’s drive-thru.
Of course, personalization efforts must
additional value across the value
Ulta Beauty is using digital tools such balance potential legal and reputational
chain. Targeted ads based on previous
as GLAMlab, its virtual try-on feature. risks around personalization by, for
purchases highlight products that will
In 2020, the company increased the example, prioritizing data privacy
help customers continue or complete
number of SKUs available via the tool by and the prudent use of technologies
current projects.
more than 550 percent. Since the COVID- such as facial recognition. While data
To keep up with the growing 19 crisis began, guest engagement with privacy requirements continue to
preference for online showings, IKEA GLAMlab has increased meaningfully, evolve, retailers can benefit from a
is experimenting with 3D home design with product views rising 12-fold in 2020. proactive approach that moves beyond
and investing in augmented-reality compliance to opportunity, reinforcing
Our research suggests the ROI for
technology that enables customers to customer trust.
personalization will quickly outpace that
test design choices using their phone.
of traditional mass marketing. At Modern
In November 2020, Walgreens launched
Retail Collective, McKinsey’s concept
a reinvented loyalty program with a
store at the Mall of America, collecting
Retail speaks. Seven imperatives for the industry 11
Knowledge partnerPersonalization
How to get started
• Define the right moments in the scale new experiences ten times
customer journey where you faster than traditional in-store
can provide the greatest benefit. initiatives.
When communicating with the
• Coordinate corporate efforts
customer in these moments,
with store teams to ensure
consider how digital and physical
frontline sales associates master
channels can best reinforce each
new tools and engage with
other.
customers in a personalized way.
• Evaluate technology options that Success will require retailers
balance level of investment and to enhance training programs,
high fidelity. For instance, could reimagine incentives, and evolve
an iPad on a stand or another the store operating model.
low-cost option sufficiently
• Get customer feedback rapidly
digitize elements of the in-person
and iterate. By using analytics on
experience? Investment at scale
consumer reviews and returns
will require a clear business case
data, and incorporating input from
and proven ROI.
in-store interactions between
• Stand up lean pilots with cross- sales associates and consumers,
functional teams that obsess retailers can create an army
over the consumer, integrate of brand champions to guide
and analyze data, and test and continuous improvement.
learn rapidly. This approach can
If you’re on the journey,
how to accelerate
• Double down on measurement consumer preferences. These
methodologies to inform decision insights will inform assortment
making. These insights allow decisions—focusing on fewer
retailers to track and tie online quality products that meet
and offline behavior and estimate consumers’ needs, rather than
incremental revenues for offering hundreds of products
potential customers. and hoping one sticks.
• Expand to the upper and lower • Solicit crew and customer
parts of the funnel. Retailers can feedback actively to generate
improve connection to consumers new ideas and improve the
by investing in product and customer journey.
service discovery based on
Retail speaks. Seven imperatives for the industry 12
Knowledge partner3
Turbocharge
delivery
As consumer
expectations approach
same day, stress on
supply chain will mount
Retail speaks. Seven imperatives for the industry
Knowledge partner
13The pandemic has elevated the Retailers expect dramatic changes in that will require significant investments
Speed
importance of order fulfillment— customer expectations for delivery over to propel their supply chain fulfillment
specifically, the speed at which retailers the next three years. The vast majority capabilities. More than 75 percent of the
can deliver goods. Since the definition of consumers—over 90 percent—see specialty retail supply chain leaders in
of warp speed looks quite different by two to three days as the baseline, and our sample have made two-day delivery
category, retailers must understand 30 percent expect same-day delivery. a priority, and 42 percent hope to offer
customer expectations and then carve Targets vary by retail category: two same-day delivery by 2022. Meeting
out a distinct value proposition. For or three days for specialty, same day these goals will require trimming at
example, we have seen a divergence for grocery, and within the hour for least two to three days from today’s
between the strategies of specialty prepared foods. delivery times.
retailers and grocery and hypermarket
In response, retailers are setting
retailers.
ambitious targets for delivery times
Exhibit 3
Retailers are investing in improving delivery speeds, recognizing that it provides a distinct
competitive advantage
2020 consumer delivery speed expectations 4–7 days Same day
% of total2
2–3 days 2–6 hours
6% 65% 12% 6% 12% Next dayGrocery and hypermarket retailers are Our survey found that 80 percent of Delivering at warp speed will require
Speed
eyeing similar investments in supply retailers plan to concentrate their 2022 several changes. Most retailers will
chain capabilities to keep up with shifting supply chain spending on addressing need to build, buy, or borrow the
consumer preferences. E-commerce the constant demands on e-commerce requisite capabilities to expedite delivery
penetration in grocery, which increased fulfillment. Automating warehouse roles and give customers more visibility into
from 4 percent in 2019 to 10 percent in is the top digitization and automation timing, as several leading retailers have
2020, is expected to rise to 30 percent priority for 64 percent of retailers. done. For example:
by 2024. Many grocery retailers These expectations add tremendous
• Target acquired Shipt in 2017 and
already have established partnerships pressure on already lean supply chains,
built a network of hundreds of
with marketplace providers such as and these initiatives could add 50 to 200
thousands of personal shoppers
DoorDash, Instacart, and Uber to enable basis points on a retailer’s profit and
who pick up goods at Target or
delivery within a matter of hours. In loss (P&L). Although such investments
other retailers and deliver them to a
addition, grocers are devoting millions of could have a detrimental impact on
consumer’s home, usually within two
dollars to upgrade their own fulfillment profitability in the near term, they
hours.
capabilities through the adoption of nevertheless set up retailers for success
robotic-process-automation (RPA) in the longer term. • Ahold Delhaize acquired a majority
technologies. stake in online pioneer FreshDirect
to augment its direct-to-delivery
capabilities in pure-play grocery
e-commerce.
• Fashion retailers such as Decathlon
and Gap are accelerating investment
in RPA to speed order processing
times, count inventory, and improve
overall warehouse productivity for
e-commerce orders.
• Grocers and hypermarket retailers
such as Albertsons and Walmart
are investing in partnerships
with microfulfillment providers to
regionalize their inventory in urban
areas.
Retailers that fail to upgrade their
fulfillment models run the real risk of
their supply chain adversely affecting
P&L. However, meeting rising consumer
expectations for speedy delivery and
achieving ambitious targets will require
executives to rethink and invest in the
80% of retailers plan to supply chain.
concentrate their 2022 supply
chain spending on addressing
e-commerce fulfillment.
Retail speaks. Seven imperatives for the industry 15
Knowledge partnerSpeed
How to get started
• Identify the customer’s “North • Quantify the business case and
Star.” Listen to the voice of the create the road map. Understand
customer (VoC) to calibrate both the strategic and financial
and tailor offerings based on considerations associated with
segment and willingness to pay. building the requisite capabilities
Service levels can be tiered and required to deliver to customers’
personalized based on customer “North Star” expectations. These
requirements, geography, capabilities include investing in
category, and brand, with VoC people, process, and technology
informing delivery times and enablers and building a cross-
openness to subscription models. functional road map.
If you’re on the journey,
how to accelerate
• Build a fit-for-purpose network. • Foster ecosystem collaboration.
Rethink the end-to-end network, Partner with marketplace
including the role of distribution providers and suppliers to build
centers and stores, to balance flexibility across the network and
speed, flexibility, reliability, cost, improve service.
capital, and supply chain risk.
Retail speaks. Seven imperatives for the industry 16
Knowledge partnerTake a stand
or take a seat
Consumers are finally
voting with their wallets
for sustainability and
broader purpose
4
Retail speaks. Seven imperatives for the industry
Knowledge partner
17Over the past year, social justice has As Javier Quiñones, president and CSO their wallets, rewarding companies that
Take a stand
dominated the national conversation at IKEA US, noted, “Being a purpose- have a clear purpose and adhere to ESG
and pervaded the private sector. led brand starts with the ‘why’ behind principles (Exhibit 4). One-third of survey
Environmental, social, and governance what we are doing. For IKEA, it always respondents3 reported they had stopped
(ESG) factors became increasingly comes back to our mission to make life using a brand based on its social actions,
important in 2020, bringing other better for people, and that’s not just and 71 percent indicated they would
trends into sharp relief. Consumers are our customers but society as a whole. lose trust in a brand forever if it placed
holding companies accountable for their People will not only buy from but also profits over people. At the same time,
actions to a greater degree and now buy into brands that stand up for their consumers are willing to pay more for
expect businesses to actively support values.” products that meet their values.
ESG principles. Although our research
Consumers, particularly millennials
survey did not include questions about
and Gen Zers, are indeed voting with
ESG principles, all of the CEOs we
interviewed raised unprompted the
importance of consumer sentiment and
the scrutiny on values and corporate
social responsibility.
“Being a
purpose-led
brand always
starts with the
‘why’ behind
what we are
doing. People
will not only
buy from but
also buy into
brands that
stand up for
their values.”
—Javier Quiñones,
President and CSO, IKEA US.
3 “E2020 Edelman Trust Barometer Spring Update,” Edelman, May 2020, McKinsey Consumer Survey.
Retail speaks. Seven imperatives for the industry 18
Knowledge partnerExhibit 4
Take a stand
There is growing evidence that consumers are aligning their purchasing power
with businesses’ societal commitments
Consumer expectations around societal contributions of businesses have risen ...
33% 71% 57% 62% 80%
stopped using a will lose trust in a believe companies believe business is of Gen Z refuse to
brand based on its brand forever if it need to redefine their putting profits before buy goods from
social actions places profit over purpose to fight the people companies involved
people pandemic in societal scandals
... and consumers are willing to pay more for products that meet their values
Pay more for products with least negative impact on environment Size of spend
% “Agree” or “Strongly agree”
50 Consumers, especially Gen
Quality Gen Zers Zers, are willing to pay more
45
for products that support
40 Quality millennials their values and have less
negative impact on the
35
environment
30
Value Gen Z
25 Quality Gen Xers
Value Value
20 Gen millennials
15 Xers Quality baby boomers
10
5
Value baby boomers
0
Willingness to pay more for products of companies sharing values
% “Agree” or “Strongly agree”
Source: 2020 Edelman Trust Barometer Spring Update; McKinsey consumer survey
Retail speaks. Seven imperatives for the industry 19
Knowledge partnerBeyond consumers, a broader set of market but generated 55 percent of the 1975. Walmart reinvented supply chain
Take a stand
stakeholders (including employees, total growth. According to McKinsey decarbonization and formed industry
investors, and board members) are research, 70 percent of consumers will groups such as the Rainforest Alliance
applying pressure to companies. pay a premium of more than 5 percent for coffee.
for a green product as long as its quality
• Employees are the top nonfinancial Similarly, Giant Eagle announced a goal
matches that of a nongreen alternative.
topic discussed in board meetings, of being free of single-use plastics in
and they are banding together to Retailers understand the link between its operations by 2025 and eliminating
ensure leadership is aware of their “doing good” and bottom-line impact. single-use plastic bags from all stores.
views. For example, Amazon and Most (80 percent) believe that company In February 2021, VF Corporation
Google workers walked off the job to actions matter to consumers, and 64 announced its goal to eliminate all
draw attention to their demands on percent believe those actions affect single-use plastic packaging, including
climate change. Some retailers have purchase decisions. poly bags, by 2025. Best Buy signed the
taken steps to provide more support Climate Pledge, with the goal of being
Accordingly, leading brands are setting
and development opportunities for carbon neutral across its business by
increasingly aggressive ESG goals.
employees—Bed Bath & Beyond has 2040—a decade earlier than its previous
raised starting wages, and Walmart, As Alex Gourlay, Co-COO of Walgreens goal of 2050—and offering products to
which has also boosted its wages, Boots Alliance, observed, “Corporate help customers reduce emissions 20
established ambitious reskilling social responsibility covers a huge percent by 2030.
programs to help workers advance range of business activities and has
Starbucks signaled its commitment to
in their careers. now come of age. Companies now really
social causes by extending benefits such
do walk the walk in their commitment
• The biggest institutional investors as upskilling and improved access to
to the communities they serve, the
in the retail industry (such as higher education, mental health support,
environment, and their people; and take
BlackRock and State Street) are and healthcare to part-time employees.
steps to monitor and evaluate their
including ESG as priority elements
performance and achievements in those
of their investment criteria,
areas. This is now a function that is at
with one-third of assets under
the heart of every business.”
management allocated based on ESG
considerations.4 Regarding the environment, Microsoft
pledged in 2020 to go carbon positive
During the past five years, products
by 2050 by removing more greenhouse
marketed for their sustainability
gases (GHG) from the atmosphere than
accounted for just 16 percent of the
the company has created since
consumer-packaged-goods (CPG)
80% of retailers believe company
actions matter to consumers,
and 64% believe those actions
affect purchase decisions.
4 Report on US Sustainable and Impact Investing Trends 2020, US SIF Foundation, www.ussif.org.
Retail speaks. Seven imperatives for the industry 20
Knowledge partnerTake a stand
How to get started
• Develop a credible purpose story • Take a proactive stand on issues
and ESG priorities, backed by by tailoring external engagement
societal commitments across and communications to highlight
ESG pillars and diversity, equity, the company’s values. For
and inclusion (DE&I) initiatives example, after the George Floyd
to improve the internal work protests in 2020, 32 percent of
environment, ensure pay equity, Fortune 1000 companies made
and create equitable products. statements and collectively
The combination ensures that promised $64 billion to advance
a company focuses its ESG racial equity. Taking a stand will
efforts on areas where it can be be credible only if backed with
distinctive. real commitments from the
organization.
If you’re on the journey,
how to accelerate
• Measure the impact of doing good • Establish bold, measurable ESG
by setting performance targets goals to guide the company and
and defining metrics aligned with track progress. Some companies
purpose goals (for example, DE&I have tied progress to executive
targets, GHG reduction targets, compensation—for example,
or number of new purpose-driven Starbucks and Sodexo on DE&I,
products). and Danone on climate change.
Retail speaks. Seven imperatives for the industry 21
Knowledge partnerInvesting
for growth
5 Recalibrate talent The pandemic reinforced that the
competitive landscape can change
strategies nearly overnight. Therefore, retailers
will need to build new capabilities to
Winning the war for diverse talent, next-gen skills, ensure they can adapt, with a focus
and embracing a fluid workplace will give retailers a on tech-based abilities and strategies.
performance advantage Three imperatives hold the key.
6 Pursue an
eco(system)-
friendly strategy
Winners will embrace the networked economy to
win consumer mindshare and accelerate capabilities
7 Take productivity
from foundational
to transformational
Analytics and automation will enable the step change
in productivity needed to fund the other imperatives
Retail speaks. Seven imperatives for the industry 22
Knowledge partner5
Recalibrate
talent strategies
Winning the war for diverse
talent, next-gen skills,
and embracing a fluid
workplace will give retailers
a performance advantage
Retail speaks. Seven imperatives for the industry 23
Knowledge partnerRetailers are short the workforce and • Reimagine the organizational • REI sold its Washington State
Next-gen talent
capabilities to succeed in the digital- blueprint and ways of working. campus in August 2020 and replaced
dominated world. To close the skills gap, it with distributed coworking spaces.
• Build and sustain a culture that can
companies will need to reimagine their
support in-person and virtual work • Dollar General is reevaluating its
strategies for sourcing and deploying
and evolve to support employees. approach to remote work and a
talent. Four key themes have emerged.
return to headquarters. Early in the
Acknowledge a more
Elevate your game on next- pandemic, its leaders examined the
remote world
generation talent mix of remote and on-site workers
The quick move to remote work during that would make the most sense in
Retailers recognize the magnitude
the pandemic has greatly expanded a post-pandemic world rather than
of the gap in digital talent and are
the available talent pool for retailers. simply bringing everybody back as
planning to increase their digital
If proximity is no longer a prerequisite, soon as it was safe to do so.
full-time equivalents (FTEs) by more
they are in a position to upgrade key
than 50 percent. Even that rise will • Walmart plans to keep thousands of
positions. When considering remote
be insufficient, meaning that retailers tech employees working from home
options, retailers must assess which
will need to continue to redouble their postpandemic and reserve office
roles work well in a remote location or
efforts as the world becomes more space “primarily for collaboration,
office; the importance of human and
analytics-driven. to sync up and strengthen
physical interaction is one important
As retailers evaluate their hiring, lens. Retailers will need to find ways to camaraderie.”
development, and retention efforts for access remote talent pools while still Embed flexibility into
digital talent, they should explore the maintaining the company culture. the workforce
following actions:
Industry leaders are revisiting their Retailers can significantly expand their
• Identify the capabilities and location strategies to help them attract talent pools for hourly and frontline
roles required to execute their and retain the right talent. associates by tapping into on-demand
omnichannel strategies (including labor models such as the gig economy.
deciding whether to make roles This independent workforce is large—68
domain-specific). million people, or 27 percent of the
US working-age population—and is
expected to account for the majority
of the workforce by 2027. During the
next three years, 70 percent of survey
respondents plan to rely more heavily
on flexible labor. Industry leaders are
already forging partnerships with new
marketplaces:
• Walmart partnered with Handy
to bring Handy’s installation and
assembly services to more than
2,000 of its 5,000 US stores.
• Meijer engaged Hyer to help meet its
workforce needs in real time across
the supply chain, from distribution
centers to in-store needs, to manage
rapid changes in demand.
Retail speaks. Seven imperatives for the industry 24
Knowledge partner• IKEA acquired TaskRabbit in 2017,
Next-gen talent
accessing its more than 60,000
independent workers to help
customers pick up, assemble, and
install IKEA products.
• ShopRunner partnered with a
number of apparel and skin-care
retailers, such as American Eagle,
Bloomingdale’s, Kiehl’s, and Under
Armour, for last-mile delivery.
However, this flexibility comes with
risks, including an erosion of brand
identity and company culture, legal
and regulatory issues, and an uneven
customer experience. Retailers that
go down this road must consider the
uncertainty and potential drawbacks
and implement the appropriate quality-
assurance and culture initiatives. • Gap pledged to double the number programs, and technology needed to
Notably, using a flexible workforce of its Black and Hispanic/Latino ensure their qualifications are in line
doesn’t alleviate the need to invest in employees by 2025. with job opportunities in an evolving job
reskilling in-store and other workers to market.5
adapt to a new omnichannel strategy; • Target announced plans to increase
in some circumstances it can further representation of Black team Retailers committed to strengthening
complicate the training picture. members across the company by 20 D&I in their talent strategies will need
percent over the next three years. to understand their starting points
Build a diverse workforce by analyzing data and the voices of
• Ulta Beauty has committed to
Diversity and inclusion (D&I) looms employees and customers to see
doubling the Black-owned brands
especially large in the consumer- how their companies perform on role
in its assortment by the end of 2021,
facing retail industry. Missteps at any and location metrics and reviewing
stepped up employee training to
of its many customer touchpoints core processes to locate risks and
make stores more welcoming for
can seriously damage corporate biases (for example, hiring and selling
all customers, and doubled D&I
reputation and sales, as demonstrated practices). They must also balance
trainings across the enterprise.
by the willingness of three-quarters of short-term initiatives and longer-term
Generation Z consumers to abandon But increasing diversity in the retail programs—for example, engaging store
companies that run ad campaigns seen industry will be challenging. COVID-19 managers and associates in developing
as misogynistic, racist, or homophobic. has accelerated the industry’s use of action plans, holding managers
automation and artificial intelligence (AI), accountable for making store operations
Leading retailers are making
and these advanced technologies bring more inclusive, and establishing
commitments to increase workforce
the threat of workforce displacement. collaborative partnerships with external
diversity and reflect the country’s
In addition, more diverse talent pools resources (such as Target with the
diversity with the products they sell.
can lack access to employer-sponsored Hispanic Association on Corporate
upskilling, external certification Responsibility).
5 Bryan Hancock, James Manyika, Monne Williams, Jackie Wong, and Lareina Yee, “Race in the workplace: The Black experience in the US private sector,” February 21, 2021,
McKinsey.com; Kelemwork Cook, Duwain Pinder, Shelley Stewart, Amaka Uchegbu, and Jason Wright, “The future of work in Black America,” October 4, 2019, McKinsey.com.
Retail speaks. Seven imperatives for the industry 25
Knowledge partnerNext-gen talent
How to get started
• Develop a road map to close and benefits (even for part-time
major talent gaps. It should employees) on par with top tech
include clear metrics to ensure competitors.
accountability and transparency
• Define and commit to a bold D&I
and an execution plan.
aspiration, both internally and
• Provide attractive development externally.
opportunities, clear career
paths, and competitive salaries
If you’re on the journey,
how to accelerate
• Build capabilities that provide • Consider how (or if) your
access to upskilling opportunities organization could take
and technical development for advantage of on-demand labor
the existing workforce while models and remote working to
preparing employees for an influx augment full-time, in-house staff.
of external hires.
Retail speaks. Seven imperatives for the industry 26
Knowledge partner6
Pursue an
eco(system)-
friendly strategy
Winners will embrace
the networked economy
to win consumer
mindshare and
accelerate capabilities
Retail speaks. Seven imperatives for the industry 27
Knowledge partnerSix of the seven global companies with ecosystem, they will have to figure out
6 of the 7
Partnerships and ecosystems
the highest market caps participate how to compete, participate, or coexist.
in ecosystems—interconnected sets
of services that enable users to fulfill
Our research identified five platform global
a range of needs in one integrated
archetypes, which vary based on where
they focus in the value chain (Exhibit companies
with the
experience. We expect the development
5). Further, some industries are a more
of ecosystems, especially those
natural fit for certain archetypes. A
convened by retailers, to accelerate.
McKinsey analysis suggests that
retailer considering an ecosystem highest
market caps
position must define the role it is well
ecosystems across a dozen sectors
suited to play based on its business
will collectively function as a $60
trillion economy by 2025.6 That makes
strategy, ambition, risk appetite, financial
resources, and existing capabilities.
participate in
developing an ecosystem strategy an
imperative for survival: even if retailers ecosystems.
aren’t positioned to establish their own
Exhibit 5
There are five platform archetypes to win in an ecosystem
Description Types Depth of value creation
Content Lead Transac-
and gene- Con- tions and Fulfill- After-
listings ration version payments ment sales
1
Aggregator Present information from Media and content
various suppliers in a Products or services
consolidated view to the end
customer Search
2
E-commerce Fulfill classic retail function Single vertical (food, fashion,
digitally and offer value-added and electronics)
services to suppliers Multivertical (eg, department
stores)
Niche vertical (eg, razor
blades)
3
Marketplace Connect customers to third Managed vs unmanaged
parties in a single integrated Horizontal, single vertical,
customer experience multivertical
4
Super app Consolidate multiple apps Inter-ecosystem
and functionalities into Intra-ecosystem
one overarching and ever-
expanding app
5
Service Provide critical functions Manufacturing
provider to the platforms and the Marketing and sales
overarching ecosystem
Payments and fulfillment
Aftersales
Source: McKinsey; Web research
6 Violet Chung, Miklós Dietz, Istvan Rab, and Zac Townsend, “Ecosystem 2.0: Climbing to the next level,” September 11, 2020, McKinsey.com.
Retail speaks. Seven imperatives for the industry 28
Knowledge partnerCompanies that participate in create new products, and expand as an store partnerships including Starbucks,
Partnerships and ecosystems
ecosystems shift from operating ecosystem. Disney, Apple, and Ulta Beauty; the Ulta
“pipeline businesses” (creating products Beauty partnership will roll out to more
Other retailers are following suit. Mass
and services that meet specific than 100 Target stores starting this
retailers now all have marketplaces,
customer needs) to operating “platform year).
which will give them a captive audience
businesses” (matching customers with
for the suite of services they are rolling
exchanges of goods, services, and social
currency). Ecosystems enable large-
out, as well as the scale to expand. In
recent years, Target has been on a path Retailers
considering
scale automation and collect massive
to transform itself from a pipeline to
amounts of valuable information,
platform business through a stores-
ranging from logistics data to behavioral
data. By developing an ecosystem,
as-hubs strategy that places stores at an ecosystem
must define
the center of its omnichannel platform.
traditional retailers have the potential to
Target has made significant strides
transform and leapfrog the competition,
counter challenges from digital rivals,
in building out its media network
(Roundel), investments in delivery
the role they
and engage with customers in new
ways.
capabilities and technologies (Shipt,
Deliv), and partnerships with other
are well suited
The leading Chinese retailer Suning is a national brands (for example, store-in- to play.
case in point. In the late 1990s, Suning
achieved offline market leadership in
home appliances. From 2010 to 2015,
Suning established and scaled an
online presence and began building an
e-commerce ecosystem with expanded
categories (grocery, books, and apparel)
and a marketplace model that attracted
third-party merchants. By 2019, Suning
qualified as a full-category omnichannel
retailer.
Among US retailers, Amazon has
excelled in using the ecosystem
approach to diversify its business
by building an ever-expanding, self-
reinforcing network of businesses,
including retail, cloud computing,
devices, advertising, logistics, finance
and payments, healthcare, and
more. Amazon famously started as a
bookseller, became a market leader
in cloud services and advertising (the
third largest for digital), and is now
attempting to do the same for healthcare
and pharmaceuticals. The company
continues to see a gap, fill the need,
Retail speaks. Seven imperatives for the industry 29
Knowledge partnerPartnerships and ecosystems
How to get started
• Explore nontraditional retail • Analyze and learn from
partnerships by joining forces successful ecosystem players.
to enter new geographies and Beyond learning from operating
marrying the best of physical practices, retailers must also
and digital. Reliance has helped understand the type of talent
Facebook expand its reach in needed and the necessary
India, and Oracle and Walmart’s investments in technology and
proposed partnership with TikTok infrastructure. More holistically,
offers the retailer the ability to it is important to cultivate
meet consumers where they the culture of innovation and
spend their time. disruption these ecosystem
players foster.
If you’re on the journey,
how to accelerate
• Decide what role the company • Choose a business model that
will play in the ecosystem— will create shareholder value
orchestrator, service provider, without compromising the
or participant. Some retailers brand’s integrity. This exercise
may design their business and involves scenario analysis to
operating model so services can understand the full financial
be used by other retailers—think rewards of different outcomes
Amazon Web Services or Target’s and the impact on valuation.
Shipt. When Walmart opened full-
service clinics to expand its
healthcare reach, the reward was
an improved valuation.
Retail speaks. Seven imperatives for the industry 30
Knowledge partnerTake productivity
7
from foundational
to transformational
Analytics and automation will enable
the step change in productivity needed
to fund the other imperatives
Retail speaks. Seven imperatives for the industry 31
Knowledge partnerExecuting the previous six imperatives the typical levers have little mileage
Productivity
requires meaningful investment in left. Thus the next phase will require
talent, capabilities, and capital. Retail deploying analytics and automation
as a sector has achieved outsized across the P&L (Exhibit 6).
productivity growth. Going forward,
Exhibit 6 Headwind High impact
Transformational productivity improvements are required Tailwind Medium impact
Low to minimal impact
to reshape P&L and enable investment
Impact on retail subsector
Affected P&L
line items Description of impact Food retail Hardline Apparel
Product cost Rising supply costs in key sourcing markets (eg, China)
Inventory risk driven by decentralized fulfillment to meet
increasing delivery expectations (eg, carrying more
inventory across stores to prevent stockouts)
Rising expectations for more ethically sourced products
Shift to value provides opportunity to increase private-
label assortment
L&D Increase in employee training and upskilling costs to
meet new capability needs (eg, next-generation data
analytics)
Labor expense Store labor: increasing wages and extending benefits to
part-time employees to attract and retain talent
Store labor: growth of on-demand gig labor to provide
additional capability needs from shifting role of the
physical store
Corporate HQ: growth of remote workforce and AI/
automation to bridge next-gen skills gap and relieve cost
pressure
Operational Increasing supply-chain fulfillment costs from overall
expense accelerated e-commerce growth
Rising expectations for faster delivery of online orders
Net rent Selective store closures and investment cost to retrofit
stores to enable fulfillment
Fewer leased office spaces from overall reduced need
for in-person workforce
Cost pressures on P&L from rising table stakes require retailers to make transformational productivity improvements
through automation and AI
Retail speaks. Seven imperatives for the industry 32
Knowledge partnerRetailers will need to prioritize than 10 percent. As retailers scale their value. To distance themselves from
Productivity
investments that are truly fulfillment networks, supply-chain competitors, they are launching
transformational. Our research automation can help address consumer ambitious efforts to dramatically
uncovered five areas that hold demand for speedy delivery while reduce spending by empowering their
particular promise. reducing cost per order. In particular, procurement organization with two
we see adoption of more flexible game changers. First, leaders are
Enable stores with tech
technologies such as goods-to-person introducing tech-enabled, advanced-
Technologies such as self-checkout AGVs (automated guided vehicles) analytics approaches to identify and
have become commonplace in the and person-to-goods picking robots unlock more sophisticated levers
industry. In the past 12 months, we have (and “cobots”) that can be operated through negotiations. Second, they
seen an acceleration to extend similar in smaller-scale facilities. These are partnering more closely with
capabilities across stores. Automated technologies can speed processing of business functions and using granular
inventory management through real- consumer orders by 300 percent and data, analytics, and design thinking to
time image processing improves both provide a positive ROI for retailers. challenge what and how goods and
productivity and in-stock positions for Automation of the distribution center services are being purchased and
customers. Digitizing administrative alone could boost profitability by 300 to identify inefficiencies. Through these
activities, through tools such as 700 basis points. efforts, retailers are capturing bottom-
AI-enabled labor scheduling, advanced line impact of 100 to 140 basis points or
insights platforms (in lieu of scorecards), In addition, retailers are investing
more.
or digital compliance tools enables in delivery experience management
managers to get out of the back room technologies to improve the consumer Boost private-brand
and onto the sales floor. IoT sensors help experience and provide visibility innovation and sourcing
preemptively address hardware issues across all points in the supply chain, excellence
in cooler doors or point-of-sale systems from distribution center processing
Private brands have evolved from
to prevent costly downtime. Together, times to delivery location and returns
lower-cost alternatives to A-level
we believe advanced levers like these processing. These investments have
brands to competitive weapons for
can increase profitability by about 300 helped retailers improve customer
retailers. They provide an opportunity to
basis points over time. satisfaction scores by up to 10 percent
strengthen customer loyalty through a
while enabling incremental revenue
Automate the supply chain differentiated, innovative offering and to
capture.
increase margins. Leading retailers are
and invest in solutions to
increase visibility Launch tech-enabled, using product design and development
business-backed indirect in collaboration with suppliers to
With e-commerce forecast to reach support innovation, penetration, and
spending optimization
more than 20 percent of sales (some growth. They are also using next-
segments and retailers have already Leading retailers recognize indirect
generation sourcing tools to completely
exceeded this threshold), many third-party spending, typically
change the way they negotiate with
retailers are still operating fulfillment amounting to 10 to 12 percent or
vendors: from a retail-backed target
networks built for penetration of less more of revenue, is a critical driver
costing to hit a certain initial markup to
of profitability and shareholder
Automation of the distribution
center alone could boost
profitability by 300 to
700 basis points.
Retail speaks. Seven imperatives for the industry 33
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