Retail industry outlook 2021
The new rules of retail
There’s little question retail has just lived through a market-shaping year. Consumer behavior changed overnight as health and safety concerns suddenly became a purchase driver. We saw technological adaption that would normally have taken years occur in a matter of months. COVID-19’s continued effects will be felt even after the pandemic subsides.
Understanding retail’s shifting landscape
For our 2021 retail industry analysis, Deloitte interviewed 50 retail executives and 15 of our retail subject-matter specialists to address what the retail world may look like with COVID-19 in the rearview mirror—and what retailers may expect as they plan for 2021 and beyond. Understanding how political and economic factors may unfold will be instrumental to considering future investments and strategies. While it’s difficult to plan around ever-changing political agendas, what is worth considering is how proposed policy changes could affect the retail space.
The trajectory of the pandemic and vaccine rollout will undoubtedly shape the 2021 economic landscape. Retail executives seem to agree that an economic recovery to prepandemic trajectory levels will take time, with six in 10 expecting recovery in the next one to two years—but a quarter see a longer timeline of two to five years. The old playbook and rules will likely have to be thrown out, and bold, differentiated action will be required to stand out from the competition.
Four opportunities to rewrite the rules
Grocers, home improvement suppliers, and mass merchants benefited from changes in consumer behavior, as well as their designation as essential services. Others, such as apparel and department stores, have struggled since the pandemic’s onset and are approaching the upcoming year with cost-cutting as an imperative. Despite these differences, executives are unified in their desire to not let the crisis go to waste, as it may prove a once-in-a-lifetime opportunity for organizations to transform their businesses and rewrite the rules of the retail industry. Specifically, executives identified four priority areas where the rules will likely be rewritten and key investments will take place:
1. Digital acceleration
One of the most discussed topics coming out of the pandemic is digital acceleration. With the pandemic taking the volume of digital interactions to unprecedented levels, the majority of retailers expect a continued increase in demand for digital engagements through 2021. Only three in 10 executives rated their organizations as having mature digital capabilities and, as such, many are planning “major” investments in e-commerce, contactless capabilities, and store technology upgrades.
While having a digital touchpoint might help retailers meet minimum consumer expectations, they should look for additional capabilities to differentiate themselves as customer acquisition costs rise. For the long game, the new rule of retail is about looking for new revenue models, like subscriptions or memberships, and forming new partnerships and alliances to create a profitable and digital omnichannel experience.
Perhaps the bigger juggernaut shaping the space is large tech companies and their access to consumers and their data. With tech companies dictating channel preferences, differentiation becomes an even more urgent need.
2. Supply chain resiliency amid disruption
Widespread disruption in the second half of 2020 exposed inefficiencies in the supply chain, leading some retailers to realize how ill-equipped they are to anticipate and meet consumer demand amid unprecedented times.
We were curious to learn how retailers were addressing this, and while half said that they believe retail is past the point of no return because of globalization, a quarter are looking to repatriate some of their supplier production to avoid the risk of stockouts and delays.
Retailers understand the importance of reacting more quickly to consumers’ needs and realize the value of greater resiliency and agility. It’s no surprise, then, that eight of 10 expect moderate to major supply chain investment in 2021. Order fulfillment (e.g., last-mile delivery and curbside pickup) will see the heaviest investments, followed by warehouse management and procurement, according to our research.
Given the disruption consumers felt during the pandemic, it will be important for retailers to build back confidence by winning the last mile, fortifying every link in the supply chain, driving decisions through the consumer lens, and measuring resiliency investment.
3. Health and safety strategies
Winter has brought a spike in COVID-19 cases and, along with it, rising anxiety. In Deloitte’s pre-Thanksgiving pulse survey, 56% of consumers were anxious about shopping in stores, revealing the need for retailers to invest in additional health and safety measures in the upcoming year. Executives were aware of the concern, stating that both “health and safety” and “trust” would be among the top 2021 purchase drivers for US consumers. Retailers should go beyond the status quo where health and safety investments are concerned to create greater differentiation, loyalty, and trust.
With trust in short supply everywhere, retail is in an even worse position compared with other industries hit hard by the pandemic and its accompanying safety concerns. According to a recent Deloitte study, only 23% of consumers ranked the retail industry as trustworthy, versus 33% for travel and hospitality, indicating an opportunity for retailers to use their health and safety investments to also build greater trust with consumers.
The majority of executives we surveyed plan to make moderate to large investments in health and safety upgrades in 2021, with three quarters investing in sanitation devices and barriers. One third plan to invest in employee testing capabilities.
While 5G-powered applications won’t come to life in the immediate short term, forward-looking retailers should begin laying the groundwork for it now and continue to scan the horizon for deployable applications.
4. Cost realignment opportunities
Heading into 2020, the retail industry was already in a depleted position, with heavy debt burdens, slow asset turnover, increasing SG&A, compressed margins, and increased competition. COVID-19 has compounded many of these problems, with retail margins becoming even more compressed as consumers continue to shift online.
By now, retailers have been able to regroup and analyze how COVID-19 has reshaped their business, leaving a clearer picture of which costs they can live without and which ones they can’t. This may prove to be an opportunity to rebalance cost structure. For retailers battered by lockdowns and the economic effects of the pandemic, it’s a fundamental requirement. Long-contemplated cost reductions, such as rationalizing store footprints and reducing business travel, can now be pursued in the name of COVID-19 response.
While these cost reductions are a good start, they don’t represent a transformation from the old retail model. New rules of profitability will likely require fresh ideas.