May 2016: April Showers Bring May Flowers
VIEWPOINT: Retail

May’s strong retail sales continued to highlight winners and losers. Once again, e-tailers continued to separate from the pack and health and personal care, sporting goods, and hobby retailers also outperformed the industry average of 3.6% annual seasonally adjusted sales growth, according to Commerce Department figures.1 Clothing, general merchandise, and electronics/appliances continued to struggle. And there was no joy in Department Store-ville, as department stores continued their declines with -5.8%.2

Although shifts among the various categories of traditional retail are interesting, the more important story is the speed with which online retailers are stealing share from traditional retailers – even as many traditional retailers redouble their omnichannel efforts.

Profitable Competition in the Amazon Age

Traditional retailers are learning a tough lesson: their existing omnichannel transformation efforts haven’t been sufficient to flourish in today’s digital-first world. Offering customers distinct brick-and-mortar and online journeys, supported by somewhat integrated inventory pools, enabled some traditional retailers to outperform peers that didn’t make basic omnichannel investments. Still, those wins are becoming rapidly eclipsed as online retailers continue to innovate. As shopping and transactional activity continues its digital migration, bolstered by increasingly faster back-end fulfillment, retailers don’t have a moment to rest.

Consumers are in the driver’s seat when it comes to this digital transformation and we thought our loyal readers may be interested in what they have to say. In a recent AlixPartners survey, many respondents said they find convenience, broad and deep assortments, and the best pricing online (figure 1).3

Figure 1: Top benefits of home delivery

Note: Only top 5 reasons displayed
Source: AlixPartners

 

Consumer expectations around speed and cost continue to evolve rapidly. Once the standard bearer, free shipping has become the price of admission. Fully 97% of consumers surveyed said free shipping “affects the purchase decision,” and 75% said it “greatly affects the purchase decision” (figure 2).

Figure 2: Impact of free shipping, 2012-2016

Source: AlixPartners

 

Led by Amazon Prime, consumers have added “fast” to expectations that only recently were limited to “free.” Among Amazon Prime members, 42% said they’re willing to wait a maximum of three days in order to get free shipping, compared with only 28% of non-Prime consumers with such a lofty minimum standard.

The service standards set by Prime, which our survey indicates now serves 36% of American households, are increasingly influential. And the Amazon effect has grown during the past four years. This year, only 60% of consumers said they’d wait up to five days for that shipped-free product, down from the 74% who said in 2012 they’d wait that long (figure 3). In response, Walmart recently began testing a two-day shipping subscription service, leveraging a regional delivery network of eight distribution centers. The service is projected to be complete by year-end.4

Figure 3: Maximum acceptable delivery times

Source: AlixPartners

 

Amazon’s latest fulfillment innovation spearheads an even more alarming trend among the company’s Prime membership base. Amazon now offers free Prime same-day delivery in 27 markets – and that number is set to grow.5 Based on respondents in the 16 original markets, there is evidence that in just one year’s time, the service has created a significant shift in consumer expectations toward same-day delivery (figure 4). As the service continues its rollout and as Prime membership rolls grow, retailers will want to be prepared to address this new normal.

Figure 4: Amazon Prime delivery expectations

Source: AlixPartners

 

The New Omnichannel Model

So, on what should retailers focus their omnichannel efforts around improving the customer experience and driving improved business fundamentals? For most retailers this isn’t about building a bunch of $100-million distribution centers. It’s much harder (but less costly) than that.

Part of the answer is a focus on the development of strategies for a digital world without thinking of them as specifically digital strategies. Although important, most omnichannel efforts to date have focused on things consumers assume they can expect, like improving operational capacity to ship product from retail stores or bolstering infrastructure and distribution centers.

The consumer-focused changes that will show that retailers “get it” are relatively inexpensive, but they’re complicated and can’t be done halfway. Retailers that fail to get a single view of their customers—with regard to who their customers are, what they want, how they buy, and the ways they’ll get their purchases—just aren’t going to make it.

As retailers become focused on better serving customers, they also have to sharpen their operational focus if they’re to drive channel profitability. This is about rearchitecting an entire go-to-market approach to keep pace with customers while eliminating the channel conflicts that hobble many retailers when the external threat is significant and well organized.

Representative opportunities include focusing on resolving channel conflicts, right-sizing the cost base to maintain profits with lower online margins, and improving digital execution (figure 5). That framework, which begins with a strategy designed to achieve those goals, can then include operational changes and a focus on the customer engagement cycle. The shift from omnichannel to true digital transformation is possible within 18 to 36 months, provided management is fully aligned on the end objectives.

Figure 5: The retail digital transformation framework

Source: AlixPartners

 

To make progress, retailers will have to cultivate specialist talent that can address their specific relevant metrics and objectives. That cultivation will mean going beyond measuring online revenue growth as a barometer of success and on to applying tactics and metrics that get redesigned for the new omnichannel model. It will likely be especially important to develop definitive metrics and actions around digital’s influence on stores.

This will require both huge expense and capital investment and a fundamental rethinking of all operating costs and organizational structures. More than that, it will require a mind-set shift that may be even harder to achieve.

Data Pack

For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above please contact retail@alixpartners.com.

 1Victoria Stillwell, “Retail Sales Rise More Than Forecast as U.S. Consumers Spend,” Bloomberg News, June 15, 2016, http://www.bloomberg.com/news/articles/2016-06-14/retail-sales-rise-more-than-forecast-as-u-s-consumers-spend.
 2Krystina Gustafson, “Retail sales bounce isn't enough to pull everyone out of doldrums,” CNBC.com, June 14, 2016, http://www.cnbc.com/2016/06/14/retail-sales-bounce-isnt-enough-to-pull-everyone-out-of-doldrums.html.
 3From April 13 to 16, 2016, the AlixPartners Home Delivery Survey polled 1,022 adults—who were representative of the US population across key demographics and income ranges—on their thoughts, opinions, actions, and expected actions regarding ordering home- or work-delivered products from catalogs, online stores, and television programs and commercials.
 4Laura Stevens and Sarah Nassauer, “Wal-Mart Takes Aim at Amazon,” May 12, 2016, The Wall Street Journal, http://www.wsj.com/articles/wal-mart-bets-on-free-two-day-shipping-1463045580.
 5Sarah Perez, “Amazon brings same-day delivery to nearly a dozen more U.S. metros”: April 6, 2016, Techcrunch, https://techcrunch.com/2016/04/06/amazon-brings-same-day-delivery-to-nearly-a-dozen-more-u-s-metros/.


This article regarding AlixPartners Viewpoint on Retail Performance and May 2016: April Showers Bring May Flowers (“Article”) was prepared by AlixPartners, LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance basis. No one in possession of this Article may rely on any portion of this Article. This Article may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. The information in this Article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the Article.