Future of Retail: The Path to Innovation

In Future of Retail: Redefine Market Share in Time, we have already explained the key players in the retail market of the future, along with the changes in consumer needs and the new notion of market competition – shifting from a competition for channels to a competition for consumer engagement in different life scenarios around the clock. In the second article of the series, we are going to take a closer look at the basis, opportunities and pathways for innovation in this transformation towards the future of retail.   

In China’s unique digital environment, the three key consumer-centered market players, the disruptor, partner and conventional retailer are all reshaping the retail ecosystem with the aid of increasingly more sophisticated technology and analytics. With an ecosystem revolving around consumers, the ever-changing consumer needs have become the core driver for the decision-making and transformation of market players, bringing new opportunities and challenges. 

Fig 1. New Opportunities in the Future of Retail

Faced with changing consumer needs, it is imperative for market players to make full use of data and technology as well as consumer needs to back and guide the transformation, ensuring innovative consumer engagement in different life scenarios around the clock and catering to every consumer demand in a prompt and precise manner. This innovative consumer engagement allows companies to occupy more time in the 24 hours of a consumer’s day, reinforce consumer retention and further refine consumer profile.

A battle for consumer’s time via multiple touch points. Alibaba and Tencent & JD provide a useful example; in addition to upgrading the core competitiveness of the long-established platforms, the two dominant ecosystems are taking progressive steps to ensure maximum consumer engagement in various life scenarios via e-commerce, SNS, entertainment and payment. The innovative consumer engagement model is the battlefield for the major ecosystems to fight to occupy maximum share of a consumer’s day. By providing increasingly diverse services and contents, the two ecosystems are aiming to attract and retain consumers by ensuring continuous satisfaction.   

Establishing around-the-clock consumer engagement also helps data collection and analytics. In meeting consumer needs and establishing consumer interactions through comprehensive touch points, ecosystems are able to collect multi-dimensional and comprehensive data from consumers to gradually form precise consumer insights and profile, which will in turn drive the optimization and personalization of each specific touch point, thus ensure that the ecosystem is readily present for every consumer demand to deliver fast, personalized and precisely unique experience.  

In striving to engage consumers in all life scenarios around the clock, companies are taking proactive and innovative measures to transform into the future of retail in the following three aspects:

Transformation and Optimization of Conventional Value Chain 

In order to keep up with the fast-changing consumer needs and optimize the operation efficiency of the system, market players in retail are faced with pressing need to digitalize the entire retail process, using effective analytics to maximize the value of data and propelling value chain transformation. Drawing from extensive professional service experience, Deloitte employs a full suite of comprehensive methodology, analytics, experts, and industrial insights to aid retail enterprises in strategy, consumer interaction and marketing, procurement and sales to drive value chain transformation and optimization. The key applications of retail analytics are:  

Strategic planning based on analytics: Aiming at long-term development and objectives, data analytics can help companies make a wide range of strategic decisions including new market entry, market expansion and growth strategy.

Customer insights and marketing based on analytics: There are three front-end stages of interaction between enterprises and consumers: awareness, conversion and retention. By optimizing various checkpoints in the three stages with effective analytics, companies can maximize return on investment through data-based modelling and test/learn in the awareness stage; increase sales by improving basket size and conversion during conversion; and maximize customer lifetime value and share of wallet using next best action modelling during the retention stage.

Fig 2. Consumer Interaction and Marketing Analytics 

Procurement and sales based on analytics: For the back-end supply chain, the three stages are: design and planning, manufacturing and shipment, and distribution and liquidation. By using corresponding analytics, companies can optimize every decision-making process in the supply chain. For instance, in the design and planning stage, using analytics and client insights, companies can ensure more pertinent and profitable assortment and pricing strategy; consumer demand and forecast are taken into account in determining store sites, space and inventory allocation to maximize store profit. In the manufacturing and shipment stage, data-driven exploration of consumer demands will help guide procurement, manufacturing, inventory management and other day-to-day operation activities. In the distribution and liquidation stage, retailers can forecast the result of markdown and promotional activities based on inventory and sales record, and develop plans that do not affect the profit margin and profiablity. 

Fig 3. Supply Chain Analytics

The application of digital manufacturing technology also propels the demand-centered supply chain system. An example would be the Speed Factory in Europe, Adidas introduced robotics to optimize production and manufacturing process, so boosting efficiency and lowering the cost. By transforming its globalized supply chain system to a local market supply chain, Adidas managed to reshape and optimize the conventional value chain.

Cross-channel Integration

Integrating multiple channels, especially online and offline channels, is of key significance to enterprises striving to ensure innovative consumer engagement in various life scenarios. There are obvious discrepancies between e-commerce enterprises and brick-and-mortar retailers regarding resources and technological competitiveness. Integrating resources and data from various scenarios and processes and forming systematic solutions for consumer needs will substantially boost the efficiency and competitiveness of the entire ecosystem. As an example, the Tmall mini store launched by Alibaba’s LST platform effectively pooled resources and respective strengths of retailers, brand owners and mom-and-pop stores and helped them address their pain points and develop digital competence, ultimately enabling integrated cross-channel services. In this very process, store owners not only get a better selection of goods, but are also able to optimize procurement order placing and day-to-day management through the use of digital devices; through shared channel resources, distributors can now come into contact with more offline mom-and-pop stores and upstream brands; while brand owners aided by this integration can interact with more consumers via the LST platform, boosting distribution efficiency. Furthermore, as the platform that prompted such integration, LST is also able to integrate all resources in the Alibaba system in order to improve consumer touch points and the ecosystem at large.  

Model and Service Innovation

The changing consumer needs are resulting in increasingly noticeable discrepancies in business models in the retail space. In the fast-changing market environment, as a principal touch point in consumer interaction, the retail outlets in various business models need to stay open-minded when it comes to innovation and use innovative models and services to ensure higher consumer satisfaction. A good example would be Alibaba’s Hema stores. After two years of fast development, this new species in the retail landscape has established a highly efficient business model featuring a combination of shop front and storage as well as seamless integration of retail, in-store dining and delivery services that bridges online and offline retail, and meets diverse consumer needs with more precise and efficient product, service and experience.  In this innovative model, the physical store focuses more on consumer experience, while the online channel, backed by mobile devices and a fast delivery service of 3 km radius, covers a larger number of consumers and handles more sales.

To sum up, technology and analytics are undoubtedly the foundational enabler for all the pathways mentioned above. According to a joint global survey by Deloitte and MHI, new technologies including cloud computing & storage, sensor & automatic identification, inventory & network optimization, robotics & automation are already widely adopted worldwide as key drivers of enterprise optimization and innovation; while emerging technology such as wearable & mobile technology, predictive analytics, 3D printing, Internet of Things and driverless vehicles are looking at exponential growth and increasing adoption rate in the coming five years. The advances in tech and analytics are allowing more opportunities and possibilities of interaction between businesses and consumers, as well as providing companies more approaches in reshaping value chain. To ensure continuous innovation and the transition towards the future of retail, it is essential for companies to stay open-minded about new technological revolution and make full use of these technological advances to enable strategic transformation.

Fig 4. Technology and Analytics, the Foundational Enabler of New Retail

In the second article of the Future of Retail series, we took a closer look at the basis, opportunities and pathways for innovation in this transformation towards the future of retail.   More articles on the future of retail will be released on major trends and coping strategies.