The State of Retail 2023: Tough Times, Tight Wallets and Transformational Technology

We are in a very different place compared to when I wrote the last State of Retail article in late 2021. Back then, we were looking forward to a post-COVID economic recovery and re-entering a world without lockdowns, masks and movement restrictions. No industry was perhaps more excited than retail, whose customers had been prevented throughout the pandemic from partaking in the core activities of the physical shopping experience.

Now we know that optimism was somewhat misplaced. While life has returned to normal for many, the fallout of the pandemic on national finances has been unprecedented. Governments paid companies to close and people to stay at home, which required the printing of more money in the last two years than in all human history. Over in the US, President Biden's COVID relief bill cost an eye-watering $1.9 trillion, while the E.U.'s Governing Council put in place a €1,850 billion pandemic emergency purchase programme (PEPP).

The supply chain impact of the lockdown, exasperated by the Chinese government's zero-covid response that closed its factories and shut down its ports, has also led to supply disruptions and shortages in critical components such as semiconductors that continue today. These supply issues have caused shortages in everything from cars to game consoles. Order a PlayStation 5 for this Xmas, and even though it is two years after its launch, you are still likely to be disappointed.

Then, while the world was still in the final throes of the lockdowns, Russia invaded Ukraine, causing another crisis that has resulted in massive price increases in fuel, energy and food, as well as the destruction of parts of Ukraine and the loss of over 83,000 lives. The financial impact of the double whammy of COVID and conflict on the world economy has been devastating. For example, the COVID-19 pandemic and the war in Ukraine collectively cost the German economy 420 billion euros ($415.38 billion) in lost value creation.[i]

Stormy Waters Ahead

While the years between 2020 to 2022 have been exceptionally challenging for retail, 2023 has all the indications of being worse. A decade of quantitative fiscal easing and near zero-interest rates is not sustainable, especially when combined with the vast amounts of cash printing for COVID relief and Ukraine military assistance. The payback and ramifications of these actions should have been no surprise to anyone possessing even the most basic understanding of economics and history.

• Collapsing global GDP growth will lead to a worldwide economic recession.
• This recession will be combined with rising inflation, leading to stagflation.
• Rising interest rates will lead to mortgage defaulting and a potential housing market collapse.
• Job losses will increase as companies look to cut costs to stay solvent, leading to rising income and wealth inequality between labour and capital owners.
• Strike action will increase as unions fight to increase wages and protect jobs.
• The constant impact of climate change and pressure to cut carbon emissions will lead to energy supply issues and increased price rises.
• Stagflation, rising energy costs, soaring interest rates and the threat of job losses will cause a massive restriction in household spending power.

We are already seeing the effect of this impact on retailers. In Germany, the HDE retail association has forecasted that 2022 will experience the worst slump in Christmas sales since 2007. In the U.K., most Britons surveyed declared that they planned to cut festive spending, with estimates predicting that Christmas 2022 could be the worst since comparable records began in 1989.

The recession is also starting to cause job losses. While the story of employment over the pandemic years has been one of scarcity and rising wages, companies – especially tech companies - are now having to shed jobs to cut costs and remain competitive. Even Amazon, which experienced an unprecedented boom in online sales throughout the pandemic, has had to adjust to the slowdown by cutting 10,000 jobs.

Adjusting to Rough Waters

Inflation will continue to drive prices upwards, causing people to be selective about what they spend their money on. In response, retailers will compete for the ever-shrinking consumer wallet, engaging in price wars to entice consumers to click on their website or visit their stores.  

Mega sale days such as Black Friday and Cyber Monday are likely to be expanded from a single-day event to a week-long one, doing everything they can to attract consumers and encourage them to spend money on perceived bargains.  

Budget offerings and private-label brands are likely to become increasingly popular in the grocery sector as consumers look to save on their weekly food bills.

Luxury goods and experiences will become limited to those with excess capital and will be the first thing consumers cut back on during this uncertain period. Expect to see many people cancel their reservations for expensive luxuries such as holidays and cars, resulting in a significant drop in prices in the new year.

Interest-free credit offerings will become increasingly popular, with payment services such as Klarna and PayPal credit increasing in use as consumers look to spread the cost of any significant purchase over a more extended period.

The Transformation of Retail

While the immediate focus will be on surviving, many retailers will use this opportunity to rethink their value propositions, refine their supply chains and refocus their attention. The following details some of the trends we should expect to see in 2023 and into 2024:

1. Ecommerce continues to grow

The shift to eCommerce will continue, albeit slower than during the COVID years. Recent forecasts indicate that the European e-commerce market will continue its fast and dynamic climb. Ecommerce user penetration rate will exceed 60 per cent in the most mature e-commerce markets across the European Union[ii], and revenues from this channel will top $1.2 trillion U.S. by 2025.[iii] In the U.S., Q3 2022 eCommerce sales represented 14.8 per cent of all retail sales, a figure that will continue to rise.[iv] However, it is interesting to note that research companies such as Forrester predict that online-only retailers will struggle, forecasting an 'e-pocalypse' in the U.S. that will bankrupt brands that lack a physical strategy.[v]

2. The physical and digital experience merges

Consumers will also expect a seamless experience whether they are shopping in-store or online using a laptop, tablet or smartphone. As a result, retailers will focus on developing a strategy that incorporates multiple business models and leverages the advantages of different demand channels, from retail stores to apps, aiming to meet consumers wherever, whenever and however they prefer to shop. Retailers that have already launched or expanded their omnichannel offerings will reap the benefits of this investment, gaining a first-mover advantage while others play catch-up.

3. Brick-and-mortar stores will operate as fulfilment centres.

The rise of omnichannel and demand for a seamless multi-channel customer journey will change how physical stores are used, transforming them into combined retail and logistics centres capable of servicing both online and in-store customers. Options such as 'Buy Online, Pick up In-Store' (BOPIS); and Buy Online, Return In-Store (BORIS) have now become integral to the retail experience in mature European markets such as the U.K., and the use of this approach is likely to spread to other countries.

To support the long-term success of a BOPIS or BORIS strategy, retailers must invest in a modern inventory management system that can provide a single, global view of inventory positions across their many stores and fulfilment centres. Expect also to see the store assistants use this software to check inventory levels across multiple stores with mobile devices that offer instant item reservation and in-store or home delivery.

4. Shopping will continue to become cashless

The pandemic led to the accelerated adoption of contactless payment methods, seeing laggards such as the elderly forced to move away from physical cash. Likewise, using facial recognition on smartphones helped overcome people's privacy concerns with biometric payment systems. Customers appreciate the convenience that contactless payments provide, saving them valuable time otherwise spent counting cash, entering PINs, or signing receipts. According to a Mastercard global consumer study, nearly eight in 10 shoppers use contactless payments, and the global contactless payment market is projected to grow at a CAGR of 20.4%, becoming a $5 trillion market by 2027.[vi]

5. Stores will increasingly become Cashierless

The use of cashier-free 'just walk out' stores is also likely to be accelerated as retailers look to reduce costs and find ways to stay profitable by increasing consumer convenience. Cashierless stores utilise a combination of computer vision, sensor fusion and A.I. deep learning algorithmic technologies to enable shoppers to avoid the most unpleasant and inconvenient part of the shopping experience – the bit at the end. Regardless of where you shop, there is always the task of queuing to pay for your goods, then removing them from the retailer's basket or trolley so they can be scanned either by yourself or a cashier and paying for them. The ability to avoid this non-value-adding task saves the consumer time, but there are also significant benefits for the retailer. The constant monitoring of consumers helps them understand shopper behaviour, and the continual tracking of every item eliminates losses through theft. Hiding items under your coat or jumper serves no purpose when the system sees everything and automatically deducts the money from your account the moment you walk out of the store. 

Cashier-free stores, therefore, merge the multiple conveniences (and algorithmic behaviour tracking) of online shopping with the communal experience of in-person shopping while also saving the retailer money. Amazon was the innovator of this concept, first trialling it back in 2018 with its Amazon Go store, and the retailer estimates that the operating costs for 1,000-square-foot Amazon Go stores have fallen from $4 million to $159,000 per store, a 96 per cent decrease. It is, therefore, no wonder that large European retailers such as Aldi, Carrefour and Sainsbury's are all currently experimenting with this technology.

6. Increased consumer segmentation and specialised services

Globally, 80% of consumers have highlighted that they value promotions tailored to their needs and expect more from companies to retain their loyalty. Throughout 2023 expect to see an increase in the number of retailers that offer paid membership and subscription services as they attempt to cultivate recurring customer relationships and more predictable revenue streams. There will also be greater effort spent on understanding the different types of consumers, their needs, and their behavioural, transactional and engagement trends. This will enable the provision of more personalised offerings and the avoidance of a more traditional mass marketing 'shotgun blast' approach that reaches everyone but leaves few feeling special.

The cash-conscious predictable consumer will be offered savings through auto-replenishment services that save time purchasing commodity items, providing consumers with increased convenience while saving time and money. This must deliver more value than simply saving a click, so price discounts, free samples and other goodies will be needed to retain customer loyalty.

The ability of technology to capture increasing levels of data about customers' online and in-store preferences will enable retailers to curate their offerings, providing increasingly personalised pricing, products and experiences. As competition for the shrinking wallet heats up, retailers will compete to claim their share by offering hyper-personalised offerings and discounts.

A 2021 retail study by McKinsey[vii] identified four types of personalisation requirements, 'Meet me where I am'; 'know my tastes'; Offer something just for me'; and 'Check in with me'.

Source: McKinsey' The value of getting personalisation right—or wrong—is multiplying.'

Loyalty will also be increasingly rewarded, such as exclusive access to various exclusive offers and VIP perks. Gaining new customers is vastly more expensive in time and money than retaining an existing one, so the ROI for this personal service is there.

7. Data-driven decisions become critical.

The use of loyalty cards also allows retailers to tap into a trove of excellent consumer information to support these increasingly personalised offerings, tracking which stores they use, when they use them, and what rewards interest them. This data will have increasing value both to the retailer and to other partners in their attempts to garner a clear idea of who their customers are, what they want, and how to best deliver that to them.

Tools such as Machine Learning (ML) planning systems and decision intelligence platforms will become increasingly important as the volume, variety, variability and velocity of data increases exponentially. These will enable retailers to spot disruptive supply issues early, minimising stock-outs while preventing over-ordering.

8. Sustainability becomes essential

As shoppers become increasingly more aware of their ecological footprint, their desire to procure goods that have a minimal impact on the planet's health has gone from a niche requirement to mainstream. From eco-friendly products made from renewable resources to ethically made and sourced items produced by companies with fair wages and labour practices, socially conscious consumers are becoming increasingly selective about which brands they are prepared to purchase. According to a 2020 Capgemini consumer survey, 79% of shoppers changed their purchase preferences based on sustainability, and 34% were willing to pay up to a 25% premium for more sustainable products and services.[viii]

Whether the willingness to pay extra will remain during the forthcoming recession is unknown, but what is likely is that the cost-of-living crisis will redirect demand to charity shops and online second-hand trading platforms as people attempt to save money and practice sustainable shopping.

Research by Savoo, a UK-based voucher code and money-saving website, also highlighted which European countries have the most sustainable shoppers. Finland came out on top, followed by Denmark and Slovenia, while on the other end of the scale, Malta, Ireland, and Greece were ranked Europe's least sustainable shoppers.[ix]

 

Source: Savoo. 'Europe's Most Sustainable Shoppers'

A Tough Year – But Fortune Favours the Anti-fragile

There is limited good news for the retail industry in 2023. It will be a year of recessionary economic growth, high inflation and reduced consumer spending. While inflation is due to reduce in the latter part of the year, many companies will have undertaken significant cost-cutting exercises that will increase unemployment and suppress wages.

The key for retailers is to use data intelligently, provide increasing levels of personal value and offer consumers a seamless experience regardless of how they shop. Retailers across Europe should strive to create a personalised, engaging and increasingly sustainable brand experience across omnichannel offerings. In short, retailers are in for a fight to stay profitable and attract what little consumer expenditure that emerges. Fortune will favour those who evolve to these disruptive market conditions and find ways not just to survive – but thrive.

By mid-2024, the period of high inflation should have passed, GDP recovered, market conditions improve, and retailers will find that their investments to retain consumer loyalty during these challenging times will start to pay dividends.