COVID-19 SERVICE: We are heightening our efforts to assist the UK retail & leisure industry through this challenging period. Explore this service now… COVID-19 SERVICE

White Papers

Retail Economics conduct in-depth research on a range of retail related topics. Our thought leadership papers protide cutng edge insights on major factors infuencing the UK retail market. See below for our latest retail white papers.

THOUGHT LEADERSHIP PAPERS

We work with a range of companies to produce co-branded thought leadership white papers allowing you to demonstrate expertise within the industry.

  • Independently-authored analysis and research
  • Develop an authoritative voice within UK retail
  • Media support and launch events

12 February 2021

Outlook for UK Retail and Leisure 2021

Ten retail and leisure trends for 2021

This report, in partnership with NatWest, looks at the challenges facing UK retail in 2021 in context of Covid-19 and the significant structural changes unfolding. Taking the form of 10 trends, it explores the question: "has the UK landscape changed forever?"

The world continues to face an extraordinary crisis. The COVID-19 pandemic sent shockwaves throughout the global economy, dislocating international supply chains and reshaping the way consumers live, work, communicate and shop.

Coordinated action from global policymakers and central banks was swift. The UK Government took unprecedented action to support businesses and protect jobs, while the Bank of England cut interest rates to new record lows and kick-started quantitative easing.

A shock to the system

Nevertheless, the shock to the UK economy has been severe.

  • Retail Economics forecasts UK output to fall by 10.5% in 2020 before bouncing back by 5.3% in 2021.
  • While economic output is not expected to return to pre-pandemic levels until 2022, the strength, speed and shape of the recovery will be highly contingent on the effectiveness of the vaccine rollout.
  • The hit to the economy will be felt unevenly with unemployment expected to rise to 7.1% in 2021, with retail and leisure being two of the hardest-hit sectors.

Big challenges ahead

The UK economy enters 2021 with fierce challenges ahead. Further national lockdowns cast doubt over
the survival of many viable retail and leisure businesses. Meanwhile, other measures to control the virus continue to disrupt daily life, causing long-term consequences for the economy.

The changing high street

The high street will undergo a transformation as we emerge into a new normal. Retailers such as the
Arcadia Group, Debenhams, Peacocks, Edinburgh Woollen Mill, Bonmarché and others have already fallen into administration. The reality is that many others will follow. This will likely mean fewer shops across high streets and the purpose of stores changing rapidly.

Digital-first thrives

Elsewhere, other businesses are thriving in this digital-first environment. They are well positioned to grasp opportunities in emerging markets, retain loyal customers and win new ones as consumers seek alternatives that meet new expectations. However, these changes will be felt unevenly across different sectors, channels and regions as the ‘new normal’ emerges.

Summary of the 10 retail and leisure trends

  • Trend 1: Changes in consumer spending behaviour
  • Trend 2: Consumer confidence
  • Trend 3: Continued focus towards online channels
  • Trend 4:Prioritising digital within the customer journey 
  • Trend 5: The changing role of physical stores
  • Trend 6: Brands connecting directly with their consumers
  • Trend 7: Raising Environmental, Social and Governance (ESG) Credentials
  • Trend 8: Developing more resilient supply chains
  • Trend 9: Managing the implications of Brexit trade policies
  • Trend 10: Updating business models

Trend 1: Changes in consumer spending behaviour

The pandemic is changing buying behaviour and households’ propensity to spend. Research
identifies four consumer buying behaviour groups and spend behaviours. Consumers are migrating towards
businesses that are better aligned to their values.

The outlook for consumer spending will be shaped by two underling factors:
1 How the impact of the pandemic continues to influence buying behaviour.
2 How the economic shock impacts personal finances and households’ propensity to spend.

This research segments and quantifies households into ‘Behavioural Change Quadrants’.
• The first analysis looks at buying behaviour
• The second at consumers’ propensity to spend.
• Third, we analyse a combination of the two.

This final segment provides an overall picture to help identify four general consumer archetypes. This in
turn allows us to better understand the direction and expected shifts of spending patterns throughout 2021.

Download the full report for more details

Trend 2: Consumer confidence

Consumer perceptions about the threat, disruption and duration of the COVID-19 pandemic altered significantly throughout the course of 2020 and this will continue throughout 2021. The initial national lo ckdown in March 2020 caused a seismic shock to societal norms, uprooting everyday lives in the way people work, socialise, communicate and shop.

Research from Retail Economics showed that during this initial period of lockdown, most consumers envisaged a six-month period of disruption (until around November 2020) before a return to normal. In hindsight, this was a gross underestimate. But as the impact of the pandemic endures, consumers
have become more accustomed to living under varying degrees of restrictions and have adapted behaviours accordingly.

Spending cutbacks
Our research shows that consumers who believe that it will take longer than 12 months for their lives to return to normal are significantly more likely to cut back on discretionary spending in 2021. Younger consumer groups appear more pessimistic about both the duration of the impact of the virus and their propensity to spend. Of course, there are many other factors to consider such as higher youth unemployment rates, the roll-out of the vaccine and the impact on the wider economy.

Confidence linked to spending
Our research reveals a strong correlation between the perceived length of the pandemic and confidence in spending in 2021. Almost two in five consumers (38%) think that their lives will return to normal by June 2021.

Download the full report for more details

Trend 3: Continued focus towards online channels

The closure of leisure and non-essential retail during periods of national lockdown necessitated a shift towards online. Consumers were faced with an entirely new customer journey, ordering products online that they normally purchase at a physical store. Our research shows that almost half (46%) of consumers completed a new online purchase that they previously only ever purchased in-store. This new wave of online shoppers has broken through the typical barriers of setting up online accounts, entering payment details
and overcoming issues of trust.

Permanent or temporary?
The crucial question facing many retailers and leisure businesses is ‘to what extent are these shifts in consumer behaviour permanent?’ and ‘will consumers revert to previous habits when more normal times return?’ In reality, changes to spending habits will be diverse, affecting different consumer groups across different product categories as outlined in Trend 1.

The research shows that:
• Just under a third (32%) of consumers believe their shopping habits will change on a permanent basis.
• A higher proportion (40%) of 45-54 year olds believe this to be the case.

To discover more findings please download the full report. 

Trend 4: Prioritising digital within the customer journey

The impact of the pandemic has completely rewired the customer journey for many parts of retail and leisure. The closure of nonessential retail outlets created an urgent need to engage with the online channel for many households, and the growing influence of digital across the entire customer journey will accelerate. In recent years, technological advances in online platforms and connected devices has created new consumer groups and more complex interactions. Retailers are having to reassess and relearn what is driving customer  behaviour across digital and physical channels as we transition into a new normal.

Digital connectivity
Digital connectivity now lies at the epicentre between consumers, retailers and brands. Arguably, the impact of the pandemic has amplified the influence of digital in our lives. Competition for consumer attention (e.g. on social media, online marketplaces or search engines) has become fiercer than ever. The customer journey involves five stages of interaction between consumers and retailers/leisure.

New ways to shop
The pandemic has impacted all stages of the customer journey, from the awareness of products during a  shopping trip with friends, to click-and-collect services, where delivery to customers’ cars is being used as a new way of fulfilment to reduce social contact.

Impacting work, influencing shopping
The research shows that 61% of employed people agree that COVID-19 has impacted the way they work and this has influenced how and where they shop. While there does not appear to be a strong correlation with age corollary, there is a firmer relationship with income group. Indeed, the proportion of consumers who agree that there has been an influence in where they

Download the full report for more details

Trend 5: The changing role of physical stores

The continued fusion of physical and digital realms will be a key feature throughout 2021, with a renewed focus on repurposing physical stores in the context of evolving customer journeys. The impact of the pandemic has intensified across each journey stage and the urgency to reflect this across retail estates and leisure operators will become increasingly important.

In reality, this trend is simply an acceleration of what is already unfolding. A physical outlet’s value will be measured against new performance metrics incorporating its ‘media value’. Inevitably, retail and leisure
brands will associate ‘physical customer engagement’ with ‘impressions’ that enhance numerous processes within an increasingly complex customer journey.

Strategic use of properties
Businesses will need to reassess the value of properties and consider how to use them as powerful media assets, integrating digital strategies, rather than just as distribution hubs. Also, successful retailers and
leisure brands will use more sophisticated techniques to assess the quality and value of physical interactions with them.

This will include more wi-fi, video analytics and AI-powered insights. With AI, businesses can focus on generating a single customer view, where tracking in-store customer journeys will be correlated with online
shopping characteristics.

Trend 6: Brands connecting directly with their consumers

In 2021, the urgency for consumer brands to establish a more direct relationship with end customers will rise and the impact of the pandemic will accelerate this transition. 

Brands such as Nike, Adidas, Samsung, Dyson and others have made significant strides in recent years, boosting their online customer proposition while increasing their physical presence, usually with flagship experiential stores. 

The seismic shift towards online presents a significant opportunity for brands to embrace customer-facing online channels.

While the long-term motivation is commercial success, the direct-to-consumer (DTC) model allows brands to discover deeper insights about their consumers, gain greater control of the customer experience, and enhance brand differentiation.

Over two thirds of consumers either prefer to shop directly with brands or show no preference over shopping directly with retailers. Brands will need to adapt their practices to reflect rapidly changing consumer  preferences and embrace a more agile operating model.

To discover more findings please download the full report. 

Trend 7: Raising Environmental, Social and Governance (ESG) Credentials

Early in the pandemic, apparent concerns around the Environmental, Social and Governance (ESG) were at risk of being relegated as firms focused on survival. However, as the initial shock subsided, businesses and governments are considering how to build back better, with sustainability playing a key role.


Three major themes that will see ESG play a more central role throughout 2021 include:
• Supply chains
• ESG-focused investors
• Consumer pressure

Shorter supply chains help produce fewer emissions 

Around 22% of global greenhouse gas emissions are attributable to the production and distribution of traded goods consumed abroad1, around a third2 of which are directly linked to trade-related freight transport. Shortening supply chains could reduce embedded emissions in the transport of goods, encouraging businesses to move supply chains ‘closer to home’, while  a more carbon-efficient local production base could yield significant benefits. 

Nonetheless, the potential reduction in carbon emissions is not always clear-cut. For example, more carbon-producing transport methods (e.g. road and rail versus ocean freight) decouple the straightforward relationship between distance and carbon emissions.

Rising demand for sustainable investment 

The influence of ESG rating providers has risen significantly in recent years. There is rising demand for sustainable investment from large pension funds to retail investors. As such, investors are looking to engage with products that ‘do good’ as well as generate returns. 

• More than 360 new ESG-focused funds were launched in 2019.
• This is up 2.5 times on the previous year, generating €120 billion in investments

Download the full report for more details

Trend 8: Developing more resilient supply chains

  1. COVID-19 has exposed weaknesses in many brands’ international supply chains.
  2. Strategies such as near-shoring, re-shoring and on-shoring are gathering momentum.
  3. There are clear indications that retailers want to source more locally where possible.

Key themes for developing supply chain strategies include:

  • Simplification: With shorter supply chains using more on-shoring, near-shoring and re-shoring.
  • Diversification: More sources of supply, reduced reliance on single countries and single suppliers.
  • Rethinking inventory: Establishing alternate supply sources to enable fast-tracked volume delivery capability. Adopting better, more agile inventory policies to maintain ‘just-in-time’ strategies with established mitigation.
  • Understanding cost to serve: Any move to near-shoring will have an impact on margin, due to local cost differences. It’s essential to gain an understanding of these differences to build mitigation options and pricing scenarios. There is a clear trade-off between agility and inventory write-offs.

Download the full report for more details.

Trend 9: Managing the implications of Brexit trade policies

  1. Brexit has established a level of certainty for UK retailers and leisure operators sourcing from the EU. 
  2. ‘Red tape’ at the border and Rules of Origin conditions will have to be addressed.
  3. New international trade negotiations could deliver significant reductions in import costs.

The new United Kingdom/European Union trade agreement provides a much-awaited resolution to the future trading relationship for both parties. It establishes a level of certainty for UK retailers and leisure operators
sourcing from the EU, and for retailers selling directly to consumers in the EU via e-commerce.

Nevertheless, companies will now have to effectively manage the implications of the trade agreement if they are to maximise margins. New tariff costs on trade with the EU have been avoided altogether and the
agreement contains provisions that should help minimise the cost of new customs and other regulatory friction emerging at the border. However, some uncertainty remains over how effective and efficient new import systems will be in practice.

No new tariff costs on imports from the EU
The centrepiece of the new UK/EU Trade & Co-operation Agreement is a commitment by both sides to abolish tariffs on all trade in goods, including agricultural goods. Consequently, this makes it the first trade
agreement the EU has ever signed that achieves this.

Rules of Origin
However, there are conditions that must be met, principally – Rules of Origin. These rules require that goods are ‘wholly obtained’, contain a substantial proportion of raw materials, or have been substantially transformed in the UK or the EU. The precise rules differ from one product to another and are outlined in a long annex to the main agreement.

The new UK/EU Trade and Co-operation Agreement is first trade agreement the EU has ever signed that commits to abolishing tariffs on all trade in goods.

As goods arrive in the UK from the EU, a declaration of preferential origin must be submitted in order to  qualify for tariff-free treatment, completed by the importer or exporter. While the completion of preferential original declarations undoubtedly adds new administrative costs, the trade agreement allows for single declarations to cover multiple shipments of the same product, thereby simplifying the process. However, if goods fail to satisfy the relevant preferential Rules of Origin, they will be liable for the full rate of Most Favoured Nation (MFN) duty.

To discover more findings please download the full report. 

Trend 10: Updating business models

  1. Retail and leisure business models will need to adapt quickly to meet future challenges.
  2. Understanding the new shopping behaviours identified in this report will be crucial.
  3. Consumers require a creative use of digital and physical spaces to service them effectively.

The pace of change brought on by COVID-19 will not relent in 2021. As businesses continue to adapt to new challenges, their business models will also need to adapt.

New systems will come online, policies will determine what is permissible, and consumer behaviour will respond accordingly to the environmental constraints at the time. As such, business models will be tested to their limits. Legacy systems within restrictive business models, if left unchecked, will stifle survival efforts, and it will be vital for companies to be ever vigilant for emerging opportunities and threats as the year unfolds.

New business models for emerging trends
Strategies underpinning retail and leisure business models will vary widely when attempting to combat the  long-lasting impact of COVID-19, Brexit and other challenges. They depend on many external factors such as location, competitor dynamics and regulation. However, the common theme for all businesses is the need to be fastidious in updating their business models so their operations capitalise on emerging trends, both in the UK and globally. These include the reality of a more dynamic international trade environment and 
the ongoing disruptive impact of COVID-19 and related government policies.

The research identifies five key themes that retailers must carefully consider when developing their  strategies:

  • Theme 1: Identifying new customer cohorts
  • Theme 2: Leveraging permanent shifts in behaviour
  • Theme 3: Retailer voids
  • Theme 4: Using physical stores more effectively
  • Theme 5: Post-Brexit and international trade

Conclusion

Throughout 2021, retailers and leisure businesses will continue to face ongoing challenges presented by the
impact of the pandemic and the raft of policy measures deployed to control the spread of the virus. The speed and effectiveness of the vaccine rollout will be critical in restoring confidence for many consumers, while the expected duration of the pandemic will have a direct impact on households’ willingness to spend.

To read the full conclusion and acces the full research paper, please complete the form at the top of this page.

 

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

16 November 2020

Covid-19 and the Future of Retail Supply Chains

What is the impact of Covid-19 on the future of retail supply chains?

The COVID-19 pandemic has caused a sudden and severe impact on international trade, investment and global economic growth. As nations grappled with the impact of the virus, factory closures throughout international markets caused a ripple effect across an expansive supply chain network, quickly leading to disruption across the world.

Retailers across Europe experienced a significant shock to both supply and demand on an unprecedented scale, compounded by government measures which restricted the movement of people and goods. Certain governments imposed unilateral export controls on specific goods to protect domestic supply, while others reduced tariffs to encourage trade. Meanwhile, tighter border controls slowed the ability for goods to seamlessly transit through countries. While these measures were temporary, the impact across supply chain networks could cause longer-term distortions.

Global trade volumes fell sharply in the first half of 2020, pulling down global economic growth. The International Monetary Fund (IMF) forecasts a decline in global growth of 4.9% in 2020, although the Euro Area (-10.2%) and the U.K. (-10.2%) are expected to experience sharper slowdowns. World exports contracted by 19%   in the six months to May 2020 (Figure 1) and are expected to fall in the region of 13% to 32% across 2020, according to the World Trade Organisation (WTO).

As the flow of goods seized up in countless locations, many households across Europe struggled to access basic consumer products in the immediate aftermath of the pandemic. In some parts of the market, the supply-side shock combined with a surge in demand, especially across grocery supply chains. This forced retailers and brands to acknowledge the fragility of some modern supply chains. [Extract - Download the full report for more insights]

 

Shifting supply chain dynamics

Prior to COVID-19, international supply chains were already in transition. Increasing pressure over Environmental, Social and Corporate Governance (ESG), the impact of technology, Brexit and increasing geopolitical volatility underscored the importance of supply chain security.

Businesses are being forced to reassess the future of their supply networks and how they can not only meet COVID-19 related challenges, but simultaneously address underlying structural challenges to ensure they are future-proofed.

 

Impact of Covid-19

COVID-19 has highlighted the fact that globally dispersed and complex supply chains are only as strong as their weakest link. As businesses assess the impact of the crisis and future gaze, new supply chain strategies are emerging as industries adjust to the new normal.

Strategies are likely to involve using shorter, more flexible and resilient supply chains better equipped to deal with supply shocks, but also address rapid changes in consumer behaviour witnessed in recent months (covered in our ‘The Shape of Retail: Consumers and the New Normal’ report).

Improving supply-chain security is likely to involve a combination of:

  • Simplification: with shorter supply chains using more on-shoring, near-shoring and re-shoring.
  • Diversification: more sources of supply, reduced reliance on single countries (e.g. China +1/+2 models) and single suppliers.
  • Rethinking inventory: establishing alternate supply sources to enable fast-tracked volume delivery capability. Adopting better, more agile inventory policies to maintain ‘just-in-time’ strategies with established mitigation.
  • Understanding cost to serve: any move to near-shoring will have an impact on margin due to local cost differences. Build an understanding of these differences to build mitigation options and pricing scenarios. There  is a clear trade-off between agility, and inventory write-offs.

Risk mitigation

The impact of COVID-19 has exposed the over-reliance on single suppliers and single-country supply routes for many businesses, forcing them to consider supplier diversification and even dual-sourcing to ensure supply continuity.

Our research found that almost 70% of retailers surveyed  had conducted a review of their supply chains as a direct result of COVID-19. From detailed conversations, many were at pains to report the significant work that had already been conducted around Brexit planning, so they were better positioned to deal with the impact of the pandemic.

Nevertheless, the sudden and severe impact on supply chains forced action, with more than half (55%) of retail respondents reporting they had already diversified a number of their supply chains. Other measures included reducing product ranges (30%), near-shoring (23%), diversifying sourcing countries (15%), on-shoring (14%) and increasing inventories (5%). However, there was a marked difference between food and non-food retailers, with agri-food supply chains appearing to be much more flexible for switching suppliers and sourcing countries.  [Extract - Download the full report for more insights].

 

Brexit

Considerable uncertainty remains over the future relationship between the U.K. and the European Union (E.U.). Whatever the outcome, there will be significant repercussions for supply chains for European retailers, particularly those U.K. based. After all, the E.U. is the U.K.’s largest trading partner, accounting for approximately half of both imports and exports of goods. Supply chains between the U.K. and the EU are highly interwoven throughout the entire retail industry.

While domestic production of food in the U.K. accounts for around 60% of consumption, three-quarters of food imports currently originate in the E.U. Likewise, the E.U. accounts for a significant proportion of U.K. imports for electricals (47%), health and beauty (69%), apparel (39%), DIY and gardening (61%) and furniture (48%).

Although both sides are keen to strike a deal, the end of the transition period on 31 December 2020 moves ever closer. Both parties are still far apart on important issues like fisheries and state aid, and as time runs out to resolve differences, the chances of a no-deal outcome increases. If a no-deal scenario emerges, retailers will be affected in four main areas: (1) supply chain issues; (2) border friction; and (3) increasing tariffs and (4) the speed of goods transitioning into and out of the country and its impact on inventory, therefore working capital

Deal or no deal?

In the event of a no-deal, moving goods between the U.K. and the E.U. will become more costly and problematic. There is also likely to be an immediate interruption to supply as retailers grapple with new U.K. border requirements which could cause significant delays.

The magnitude of the impact could also be exacerbated by Christmas timing, restricting retailers’ ability to stockpile essential products because of limited warehousing space. New rules and procedures (e.g. paperwork, customs systems, permits, testing requirements) will affect many different industries. The common impact on all European businesses trading across the Channel is increased cost and complexity. [Extract - Download the full report for more insights].

 

Geopolitical environment 

Rising tensions between the U.S., China and the E.U. have created considerable uncertainty within the international trade environment, impacting foreign direct investment and influencing supply chain strategies for many international businesses.

War of words

Confidence in the global trading system has been significantly undermined following aggressive and unpredictable interventions by the U.S., including the sudden imposition (or threat of imposition) of new tariffs that do not conform to WTO rules. U.S. action has also undermined the effectiveness of the WTO to rule on trade disputes between countries. U.S. measures have also led to retaliatory tariffs from major trading partners, including China and the E.U. These ‘retaliatory’ or ‘rebalancing’ tariffs are frequently applied to U.S. food and consumer goods such as soya beans (China) and jeans, whisky and orange juice (E.U.), leading to mutually harmful tit-for-tat trade restrictions.

Global trade disputes could escalate further as the WTO is set to grant the E.U. authority to impose extra duties on $4 billion of U.S. imports to the E.U. This is in retaliation for illegal subsidies granted by the U.S. government to Boeing. It raises the real prospect of U.S. tariffs against E.U. imports in response to illegal state aid to the European aerospace industry; this comes at the same time E.U. tariffs are being applied to trade from the U.S. in response to state aid to U.S. aerospace. This mutual retaliation might bring a long-standing (16 year) dispute over large civil aircraft to ahead. Meanwhile, it could inflict unwelcome collateral damage on a range of totally unrelated sectors such as retail products on the two sides exercise their option of applying retaliatory duties.

The impact of COVID-19 has only fuelled further risks in the rise of protectionist trade policies and the resurgence of nationalism. We have already witnessed the potential implications of these trends during 2018-2019 as the U.S. and China became embroiled in a trade war. As uncertainty escalated, ever-changing trade policies forced businesses to boost operational flexibility to adapt to swift changes in trade flows.

Ongoing uncertainty in the international trade environment and foreign investment will lead to shifts in goods and investment flows. This will increase impetus to ongoing supply chain diversification while adding to the perceived value of geographic diversity in supply chains. [Extract - Download the full report for more insights].

 

Sustainable supply chains 

Early in the pandemic, apparent concerns around sustainability were at risk of falling to the wayside as firms focused on survival. However, as the initial shock resided, businesses and governments are considering how to build back better, with sustainability playing a major role.

The crisis has highlighted various compelling ESG-related scenarios that cannot be ignored as economies look to rebuild. This will influence the future of international supply chains. These driving forces include:

  • On-shoring/re-shoring/near-shoring – an obvious benefit of on-shoring is likely reductions in transportation carbon emissions.
  • Regulatory incentives – Government rescue packages will incentivise investment into digital and green technologies.
  • ESG targets – retailers will face increasing pressure for transparency of their ESG standard, including supply chain management and emissions data.
  • Consumer behaviour – awareness of consumerism and its impact is influencing behavioural change with rising demand for sustainably-produced products.

Shorter supply chains help produce fewer emissions

Around 22% of global greenhouse gas emissions are attributable to the production and distribution of traded goods consumed abroad³, around a third⁴ of which are directly linked to trade-related freight transport. Shortening supply chains will abate some emissions embedded in the international transport of goods, encouraging businesses to move supply chains ‘closer to home’, while a more carbon-efficient local production base would also present obvious benefits.

However, the potential reduction in carbon emissions is not always clear-cut. For example, more carbon-producing transport methods (e.g. road and rail compared to ocean freight), decouple the straightforward relationship between distance and carbon emissions. Other factors like the speed of freight are also important. Reducing the speed of ocean freight (thereby increasing the time in transit) can yield significant carbon reduction. Nevertheless, on-shoring will also help European retailers reduce their exposure to regions with potentially higher social risks associated with poor labour conditions.

 

Technology 

Technological advancement has revolutionised supply chains in recent years. The drive towards efficiency has streamlined supply chains, from warehousing robotics and autonomous ships to computerised shipping and tracking. Whether it’s greater efficiency, better communication or enhanced transparency, the supply chain continues to evolve at pace, and the role of technology is central to future development.

The COVID-19 crisis has put even greater emphasis on using technology to build more resilient supply chains. Indeed, the WTO noted that the pandemic has led to accelerated trends towards digital trade and increased use of electronic communication, creating growth in business-to-business e-commerce.

Technological innovation and adoption will shape the future of supply chains, driven by:

  • Digitalisation: the buyer-supplier relationship will make identifying, recruiting and switching suppliers more efficient and build stronger supply chains
  • Automation: its impact has the potential to make it more economical to manufacture closer to domestic economies.
  • Artificial intelligence: to pre-empt supply chain disruption, utilise big data, waste reduction, cybersecurity, autonomous vehicles and identify opportunities.

Artificial intelligence (AI)

Traditionally, the application of artificial intelligence within supply chains has been focused on demand planning, forecasting and waste reduction. Machine Learning (ML) techniques have been applied for many years to improve and refine processes to boost efficiencies.

However, artificial intelligence is now permeating all stages of the supply chain, from sourcing raw materials and connecting with customers, to encouraging brand loyalty. For example, ML is being used to adapt to changing conditions and priorities in warehouses and distribution centres. While ‘pick density’ might be an initial priority, as carrier cut-off times approach, priorities may shift to meet other obligations in an automated manner.

Big data fuels AI systems; and ML supply chain applications will need big data platforms to collect, cleanse and organise data – turning it into actionable insights to improve supply chain efficiency. For example, in August 2018, JDA Software completed the acquisition of Blue Yonder, a market leader in AI solutions for retail and supply chains. The acquisition accelerated JDA's vision of an Autonomous Supply Chain by leveraging the Blue Yonder platform. It connected their Service Control Point (SCP) systems to external data – particularly social, news, event, and weather data – enabling more automated and optimized business decisions. The ambition is for retailers to be able to leverage an end-to-end supply chain solution with integrated AI to provide better planning, analysis and execution on a cognitive, connected platform.  [Extract - Download the full report for more insights].

 

Sensitivity analysis: The impact of onshoring

As retailers prioritise building more resilient supply chains, the prospect of sourcing products from domestic economies (on-shoring) emerged as a strong theme for many. Our research revealed that some retailers had already begun to source more domestically as they looked at alternative strategies to mitigate the impact of supply chain disruption.

Furthermore, our research highlighted that other underlying motivations around the impact of Brexit, carbon reduction ambitions and consumer behavioural change combined to add further weight and, in some cases, urgency to this strategy.

As part of our research, we conducted a retailer survey that includes data from over 30 of the largest European retailers with a combined turnover of €600 billion. In-depth interviews were conducted to understand better the motivations, desire and ability for businesses to generate greater sourcing capabilities from their domestic markets.

Interviews were also conducted across a range of industry experts including financial services, government departments and industry trade bodies.

Leveraging these data and insights, we estimate that across the six European countries covered in the research (U.K., Italy, Spain, France, Germany and France) c.$31.5 billion worth of trade could be on-shored over the coming 12 months, equating to around 3.6% of total imports of retail products across these countries. [Extract - Download the full report for more insights].

 

Opertational Toolkit: Strategies to navigate through the Covid-19 crisis and beyond

International supply chain networks are transitioning through a period of intense change, affected by significant interconnected forces. The impact of COVID-19 acted as a catalyst for businesses to review and prioritise strategies around building more resilient supply chains that are fit-for-purpose in the context of increasing geopolitical volatility and pressures around ESG.

Many retail businesses could see this as an opportunity to ‘reset’ their thinking around supply chains. For some, immediate measures are necessary to protect the viability of their businesses; but further out, more strategic decisions will be required to future-proof operations for long-term success.

 

1. Workforce management

For most retailers, business continuity will largely hinge on their ability to intelligently manage their workforce throughout their supply chain, whether it’s on the shop floor or elsewhere in the supply chain.

The majority will require visibility over their tier 1 suppliers and develop relationships that instil confidence that adequate measures are in place to limit the risk of plant closures. This will be critical when planning for periods of peak demand such as Christmas and Black Friday. Factories, distribution centres and logistic providers are at risk of running at reduced capacity because of control measures, such as social distancing, or illness. In the event of reduced capacity, understanding how allocation priorities will be treated will also be essential in minimising the impact on businesses. What’s more, the ability to re-route distribution to different distribution centres can help manage capacity constraints.

It will also be critical for retailers to prepare succession plans for vital positions throughout the supply chain, ensuring key executive (and management) positions have adequate cover, should employees need to self-isolate or become ill. These plans should consider both short-term and long-term implications, preparing for all eventualities at all levels of seniority. [Extract - Download to read more].

 

2. Agile planning

Contingency planning across the business will be vital in reducing risks and identifying ways to mitigate the impact of the virus. Retail brands will need to assess the impact in both financial and operational terms and also develop solutions that limit the impact of supply chain disruption.

A continuous review and risk assessment of supply chains is needed so that businesses have built in the necessary flexibility to switch suppliers, operate parallel supply chains if needed, or switch supplier countries if localised disruption persists. Identifying the weakest links in supply chains and understanding the impact that disruptions could have in meeting supply requirements is critical.

To operate in a fast-paced, dynamic environment, having complete visibility of supplier inventory, production capacity and live order fulfilment status will be essential. Where possible, it will also be important to trace extended supply chain networks to assess risks further down the supply chain. In addition, the ability to conduct risk assessments of Tier 2 suppliers and plan for potential disruption (e.g. seeking out alternative suppliers to keep plant operation near full capacity) will be extremely important. This will require companies to quickly adopt a digital-first approach. [Extract - Download to read more].

 

3. Digital transformation

The imperative for businesses to adopt a ‘digital-first’ approach to their supply chains has never been more pressing. It will become the norm for intelligent retailers to quickly identify bottlenecks in supply chains and to pivot towards alternative suppliers to ensure supply continuity.

However, this will require antiquated paper-based systems to be replaced with digital supply chains to drive greater transparency, faster and more data-driven decision making.

COVID-19 may accelerate the use of Internet of Things (IoT) hardware, which links the physical and digital worlds. Leveraging data science and analytics to bring real-time visibility across the entire supply chain will help achieve greater precision and efficiency. Providing a detailed view of stock, sales, orders, deliveries, and returns across all channels will enable more accurate demand forecasting, better inventory management and deliver important cost savings. 

 

Download the full report to get acces to all charts and country profiles!

 

 

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

09 September 2020

The Connected Retail Customer Journey and Digitalisation

An unrecognisable market?

Today’s customer journey has distinctly changed from a decade ago. Technological advancements in connectivity, online platforms and connected devices have created new consumer groups and more complex interactions. Retailers are having to reassess and relearn what’s driving customers’ behaviour across digital and physical channels. 

Modern retail selling takes a combined approach that intuitively blends digital and material engagements. With the rollout of 5G and the Internet of Things (IoT) facilitating even faster data transmission, change and innovation are set to accelerate. Understanding how these new consumer groups react differently to online and in-store tactics is key to making the most of the opportunities in retail.

The COVID-19 pandemic has naturally sped up these trends and will continue to impact consumer behaviour even as lockdown measures ease. 

Digitalisation has also changed the purpose of physical stores. Successful retailers recognise that in-store experiences have to evolve to include technology and digital touchpoints alongside traditional infrastructures. Stores need to become immersive, multi-channel experience environments, promoting loyalty over single transactions.

“Online retailing forecast to rise to 50% of non-food spending by 2030”

 

Understanding the connected customer

This research intends to show what all  these changes mean for the industry. How the journey really plays out, from both sides of the till, and how connectivity is experienced differently by our customers. 

In Part One of the report, we’ll identify the three types of connected customers and their behavioural characteristics. In Part Two, we’ll show you each stage of the connected customer journey in detail, and explore the behaviours that our customer groups typically display. 

Throughout the report, we’ll talk about some of the ways that retailers are approaching these challenges in practice, and how technology can be used to help you attract, engage and sell to the modern, connected customer.

 

We identified three key groups based on the value they placed on being connected:

Type 1

Connectivity Assumptive - Stated that they had a relatively low appreciation of being connected online. Customer characteristics: This group accounts for about 10% of consumers. They are more likely to be aged between 16 and 24 with a slight bias towards being male. 

Type 2

Connectivity Acknowledgers - Stated that they had a medium appreciation of being connected online. Customer characteristics: This group accounts for about 30% of consumers. They are more likely to be aged between 24 and 39 and have an even gender split. 

Type 3

Connectivity Appreciative - Stated that they had a relatively high appreciation of being connected online. Customer  characteristics: This group accounts for about 60% of consumers. They are more likely to be over 40-years old and  from the most affluent households. This type are mostly female, with the most uneven gender split.

 

The rise in digital technologies

The rise in digital technologies means more routes for customers to interact with retailers. We found, for instance, that 84% of consumers had browsed, researched or bought a retail product on a connected device in the last 12  months.

Compare that to just 10 years ago, when less than a quarter of adults owned a smartphone.2 Technology has  transformed our buying behaviour, even for those who have little appreciation of being connected itself. 

Most customers do see connectivity as overtly important: nearly two-thirds (62%) feel that being connected is ‘very’ or ‘extremely’ important to their lifestyle. Indeed, over a third of consumers agreed with the statement ‘I can’t live without my smartphone’. The most common uses were socialising and shopping.

“84% of consumers had browsed, researched or bought a retail product on a connected device in the last 12 months”

 

A Paradox

Classifying the retail audience by the appreciation they tell us they have for connectedness gives us a unique but paradoxical understanding of the role of technology in their lives. For example, consumers who appreciate being connected the most are generally older. This is partly because younger consumers are ‘digital natives’. Having grown up with access to smartphones, wifi and the internet, their adoption of new technologies is more frequent, and comes more naturally. Because of this, they perceive less importance in the building blocks that make these technologies work, instead taking the basics of connectivity for granted.... [download the report to read the full section].

 

The Connected Customer Journey

The customer journey involves five stages of interaction between consumers and retailers.

Stage 1- Awareness: where consumers initially discover retailers/brands and their products and services in all the different  channels.
Stage 2 - Research: where shoppers consider products in more detail (e.g. reading product reviews, comparing alternatives, service levels and price).
Stage 3 - Purchase: where shoppers make decisions about different payment options, promotions and decide the most appropriate channels to purchase goods.
Stage 4 - Fulfilment: the stage at which retailers work to get products into the hands of consumers. Shoppers make decisions about how they want to receive their purchases/orders (e.g. direct from in-store, click and collect or home delivery).
Stage 5 - Service and returns: the post-sales experience, where retailers work to resolve any issues from the purchase and fulfilment stages (e.g. product enquiries, warranty issues, refunds, returning unwanted items).

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

15 July 2020

Economic Outlook for the UK Retail Industry and the Impact of Covid-19

Economic Outlook for the UK Retail Industry

The UK faces an unprecedented crisis. Never has a single event had such a widespread impact on financial markets, companies and households. The International Monetary Fund (IMF) expects the global economy to contract sharply by 3% in 2020 – significantly worse than during the financial crisis of 2008. The Euro Area is expected to report much weaker growth, with output falling 7.1% in 2020, while advanced economies are predicted to suffer a 6.1% fall before bouncing back in 2021. 

In the UK, Government measures to control the spread of Covid-19 caused significant disruption, paralysing the economy and uprooting societal norms. Response from the Bank of England and the Government was swift, but the hit to the UK economy will be inevitable. Support measures such as the Coronavirus Job Retention Scheme¹, business rates holiday and deferral of VAT have been a lifeline for many businesses and will help cushion the blow, but deep scars are likely to be left across various sectors. 

Consumer spending has fallen significantly. In the second quarter, it is expected to be 30% lower than in the final quarter of 2019². Although the Coronavirus Job Retention Scheme assisted firms in retaining staff, household incomes have declined and will come under further pressure following a projected rise in unemployment... [download to read the full report]

Outlook for UK consumer and retail

Consumer spending has been dealt a significant blow. The initial closure of non-essential retail (e.g. entertainment and leisure, bars, pubs and restaurants) crippled demand in large parts of the economy. 

Clearly, the most impacted areas involve spending on goods and services with close social contact such as footwear and beauty salons for instance. Consumer confidence remains extremely fragile, heighted by fears around job security, health and overall prospects for the economy. Consumers are also prioritising their spending on essentials over discretionary purchases, and delaying the purchase of various goods while increasing precautionary saving.

The long-term implications to the retail sector will be vast. Around a third of British consumers think that the way they shop will change permanently – greater than changes in the way they will travel, communicate or work. Additionally, almost half (45%) of consumers have now purchased an item online that they had only ever previously purchased in-store, since the outbreak. This has exposed them to new customer journeys. Inevitably, some behavioural changes will endure and will remain after the crisis... [download to read the full report]

Food and Grocery

The food and grocery sector will remain a clear winner in 2020. The closure of food services (e.g. cafes, restaurants and bars) resulted in on-going transference of spending while encouraging more cooking from scratch and online ordering. Online is expected to account for 9.3% of total grocery spending in 2020, up from 7.8% in 2019, as retailers ramp up capacity for picking, packing and distribution.

Apparel

Apparel is expected to be the hardest hit sector, given lockdown and social distancing measures significantly undermine demand for new outfits. Although online clothing and footwear is one of the most widely used sectors online, the shift towards this channel did very little to insulate against the overall decline in the market. Spring/Summer ranges have been piled up in closed stores for most retailers during the lockdown, leading to excess levels of stock which will be heavily discounted. Many retailers will be desperate to turn inventory into cash as quickly as possible to shore-up balance sheets. 

Electricals

Electrical retailers have benefited significantly as companies set up home working systems requiring laptops, software and accessories. Home schooling has also led to increased uptake of educational products and budget laptops as parents looked to occupy their children and assisted with teaching. Notably, businesses with mature online propositions helped ease the transition towards online for many retailers and households.

Home, Furniture & Flooring

Homewares and furniture retailers have seen sales tumble in the immediate aftermath of the lockdown. The Furniture and Flooring sector fell significantly in April (-77.9%) and May (-64.7%) while Homewares also plunged in April (-42.2%) before showing signs of improvement in May (-15.8%).

Download the report to view other sectors in full. 

Future of retail and consumer

It is inevitable that the UK retail sector will emerge from the crisis in a very different form. Unfortunately, further administrations, job losses and store closures can be expected. However, a more resilient sector will emerge, characterised by nimble and adaptable businesses that are better placed to form the cornerstone of the economic recovery.

This transition will cause a ‘shake-out’ across the sector as consumers migrate towards businesses that are more aligned to a new set of values. Retailers and consumer brands who fail to pivot their business models fast enough are likely to fail, replaced by those with nimbler strategies and new firms to fill the voids. The urgency to address the burden of rent, right-sizing store estates and reducing other operating costs will become more pressing as brands adjust to a new retail paradigm.

Our research identifies five underlying trends that are likely to reshape the sector:

  • Trend 1. Step change in online
  • Trend 2: The new in-store experience
  • Trend 3. The changing face of retail property
  • Trend 4: Consolidation and partnerships
  • Trend 5: Shifting supply chains

Download the full report now to gain more insights into these five major trends affecting the UK retail industry...

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

13 July 2020

Consumers and the New Normal: Exploring the impact of the coronavirus on European retail

As the world continues to face into a truly unprecedented crisis, global lockdown measures to control the spread of COVID-19 have paralysed economies and unsettled societies. Widespread business closures, social distancing restrictions and isolation have caused significant disruption.

The International Monetary Fund (IMF) expects the global economy to contract sharply by 3% in 2020 -much worse than during the financial crisis of 2008. The Euro Area is expected to report significantly weaker growth, with output falling 7.1% in 2020, while advanced economies are predicted to suffer a 6.1% fall before bouncing back in 2021. 

These are extraordinary times. Never has a single event had such a wide-ranging impact on financial markets, businesses and households. The stakes are high and governments and central banks in advanced economies will continue to run significant fiscal deficits to avoid high levels of structural unemployment, protracted disruption to supply chains and waves of business failures. The benefit of running large deficits today is seen as far outweighing any eventual costs. As countries around the world emerge from lockdown, governments will cautiously explore ways to enable societies to manage the interconnected realms of public health and economic wellbeing..... [download full report to read more]

The impact of COVID-19 on consumer behaviour

Governments across Europe have begun to ease restrictions as the threat of COVID-19 is downgraded. Pockets of spending are starting to return, but consumer caution remains high as society transitions to a new normal in the way we work, socialise and shop.


The shock to societal norms has forced many consumers to seek alternative customer journeys as store closures rendered many previous behaviours redundant. Many shoppers are now reassessing old spending patterns, reordering priorities and feeling a sharp hit to confidence. As European consumers reconcile the impact of the crisis on their daily routines, four distinct consumer behaviours have emerged:

1. Cautious: cut back on some spending and waiting for more normal times
2. Undeterred: spending levels have remained unaffected by the impact of the virus
3. Hibernators: cutting back on all non-essential purchases
4. Confident: spending levels have risen

The prevailing consumer instinct is to hold back some spending on non-essential purchases and adopt a more cautious view of personal finances. This constitutes 41% of ‘cautious’ European respondents surveyed. Typically, these consumers delayed some spending on discretionary purchases, focusing on essentials, while waiting for normality to return.

One in five consumers consciously cut back spending on all non-essentials as concerns about the future significantly undermined their confidence as they effectively entered a ‘hibernation’ mode. This consumer segment is disproportionately comprised from the least affluent households with spending predominantly focused on essentials.

A third of consumers claim that the crisis has not influenced their level of spending on retail products, appearing undeterred when it comes to shopping... [download full report to read more]

Consumer trend 1: Focussing on essentials

Understandably, consumers have prioritised their spending on essentials such as food and health, avoiding discretionary purchases within categories like apparel, electricals and homewares. Indeed, across the European countries surveyed, 61% of consumers agreed that they had prioritised their spending on essentials since the coronavirus outbreak, with Italy (76%), France (75%) and Spain (75%) experiencing the largest shift. Clothing and footwear were consistently the worst affected sectors across all countries, highlighted by a net balance of 73% of Italian consumers suggesting they had cut back spending in these sectors since the outbreak (Figure 4). A similar proportion of consumers in Spain also suggested this was the case, with electricals, homewares and furniture experiencing significant declines.

Unsurprisingly, food has been the stand-out beneficiary during the lockdown as measures legislated the closure of restaurants, cafes and bars. The transition of spending away from food services towards the grocers has greatly benefited the food and drink sector with 22% of U.K. consumers suggested they shopped more within this category. Every country surveyed experienced an increase in spending across food. Interestingly, Switzerland showed just a marginal increase of 1%.... [download full report to read more]

Consumer trend 2: Accelerated shift towards online

As lockdown measures were implemented across Europe, a predictable switch towards online channels emerged. The shift was immediate but it was felt unevenly across regions and sectors. Some retailers struggled to cope with a sudden surge in demand, pushing websites to breaking point and exceeding fulfilment capacity.
Although highly penetrated markets, such as the U.K., were better equipped to cope, higher consumer adoption rates saw a step-change in the proportion of shopping conducted online. This trend is highlighted by the fact that more than four in 10 consumers across Europe (research included U.K., Germany, France, Spain, Italy and Switzerland) indicated they had purchased something online for the first time... [download full report to read more]

Consumer trend 3: Readjusted expectations

As consumers now focus on the easing of restrictions, their expectations have ultimately endured a period of readjustment. The overriding priority for shoppers returning to stores is safety –above that of convenience, price and choice. It is important to consumers that they perceive a safe shopping environment as they navigate store aisles while observing social distancing guidelines.

Beyond policy adherence, retailers will need to prioritise safety measures when attempting to reassure consumers and garner trust. Evidently, the most applicable measures centre around social distancing and hygiene which will become a minimum expectation from consumers during this transitionary period.

Retailers failing to meet these expectations risk loss of confidence from their customer base, arguably at a time when gaining trust has never been more important. Nevertheless, age-related disparities will arise, reflecting differences in perceived risk of contracting the virus where higher risk consumer contracting the virus where higher risk consumer groups will respond positively to retailers adhering to COVID-19 trading guidelines which ultimately could help forge lasting relationships.... [download full report to read more]

Future trends

For many consumers, as the initial coronavirus panic subsides and a ‘new normal’ comes into view, it is clear that shoppers will not revert to pre-COVID-19 behaviours.

Consumers have transitioned through an initial period of anxiety, but as capacity returns to enable consideration of future scenarios, the longer-term implications and ‘fallout’ from the restrictions comes to the fore. Many shoppers appear pragmatic about the immediate state of retail, accepting various restrictions and a protracted customer experience in lieu of safety. But shopper missions have fundamentally changed. While social distancing measures remain in place, the overall experience will be considerably compromised, shifting from experiential endeavours that entail a mix of leisure and entertainment to one where the primary purpose is driven by the functional acquisition of products. The question on everyone’s mind is, how long will this last?

European consumers are remarkably aligned in their expectations of how long it will take for them to experience some semblance of normality. Most consumers believe it will take around six months before returning to ‘normal’, taking this period of disruption up to the end of 2020.

There will be a ‘step-change’ in the proportion of retail sales conducted online in 2020 as lockdown measures necessitate the shift towards this channel. Overcoming the initial barriers to online shopping will cause a step-change across countries, resulting in an estimated €13.6 billion of additional online sales in 2020 –above previous expectations –for the U.K. (€5.0 billion)*, France (€3.0 billion), Germany (€2.3 billion), Spain (€1.5 billion), Italy (€1.5 billion) and Switzerland (€0.3 billion).

Beyond the pandemic: The impact on retailers

European governments swiftly implemented measures to support their economies, businesses and households. While these measures helped limit the economic damage inflicted by COVID-19, inevitably the retail sector will emerge from the pandemic in a different form.

A ‘shake-out’ across all retail geographies is on the horizon as consumers migrate towards business models that are aligned to a new set of values. Retailers who fail to pivot their business models fast enough will cease to exist, engulfed by those with nimble strategies and new entrants. It is equally as critical to strategically tackle the heavy legacy fixed cost base of many retailers in order to become more agile. Retailers will need to address the burden of rent and other occupancy costs in order to support the footprint of the future.

Retail industries across the world are currently transitioning through a readjustment period. Accordingly, businesses that emerge ‘on the other side’ will be stronger and more adaptable to challenges that lie ahead.

Phase 1 of restructure: Survival –timing is everything
The impact of the virus pushed many healthy retailers from a positive to negative cash flow within weeks (see our previous report ‘Surviving the Cash Crunch’). As lockdown measures persisted, demands on liquidity intensified and the depletion of working capital forced many retailers into administration.
To this end, many non-essential retailers remain in ‘survival mode’, preserving capital and carefully navigating a phased approach to reopening from lockdown.

Phase 2 of restructure: The fallout -consolidation and partnerships
As the survivors gain more traction, weaker retailers in the market will fail, leading to market consolidation. During this phase, acquisition opportunities will arise which could help drive value, reposition brands and build scale.

Phase 3 of restructure: Innovation –a time to shine
As a new normal appears, consumers will have more conviction over their new needs and wants. They will also form a more conscious framework which delineates their expectations of retailers and the kind of relationship they want with them.

Our research highlights five key themes that retailers must embrace as a new retail paradigm emerges:

Theme 1: Identifying new customer cohorts
As identified in figure 10, a new cohort of consumers has emerged, based on their perceived risk of COVID-19. This consumer group is primed for permanent changes in their shopping habits. They have learned new shopping behaviours; and new customer journeys have been revealed in the search for alternative ways to acquire essential items, driven by a desire to reduce their risk of contracting the virus.... [download full report to read more]

Theme 2: Leveraging permanent shifts in behaviour
The closure of non-essential retail across large swathes of Europe has necessitated a clear shift towards online.
A significant proportion of European consumers (44%) are buying products online for the first time and are experiencing new customer journeys. A key consideration for retailers will be trying to identify which reactionary behaviours will endure and how they will develop in the interim... [download full report to read more]

Theme 3: Retailer voids
The retail landscape has evolved at a frightening pace. Many businesses entered 2020 with weak balance sheets and the impact of COVID-19 was ‘a step too far’ for some, pushing them into administration. Similarly, other retailers will struggle to survive as a new retail paradigm makes many existing propositions obsolete. Failure to react intelligently will leave gaps in some markets, providing opportunities for surviving retailers to swoop in and occupy obvious voids. These voids are likely to be most visible in physical retail space across Europe. Before the pandemic, there was already excess capacity of retail floor space in most countries due to the rise of online shopping and shifting consumer behaviours. For example, in the U.K. it is estimated that there is around 20%* overcapacity of retail space that businesses cannot commercially justify. In a post COVID-19 world, this figure will be higher. Also, the market will correct over a shorter time frame... [download full report to read more]

Implications for retail business models
• Direct to consumer is likely to accelerate as brands leverage online channels to offer solutions to consumers’ emerging needs and wants. Operating with larger profit margins and uninhibited by vast store estates occupied by retailers, there will be an opportunity for brands to accelerate their push to consumers in this new retail paradigm.
• Specialist retailers will emerge to fill the gaps concerning new customer demands. Armed with deep knowledge, flexible supply chains and sophisticated online operations, these retailers will operate with leaner and more flexible business models.
• Regional expertie will become an important differentiator of choice for consumers. Such retailers offer unique regional propositions that are relevant to their local communities.

Theme 4: Adapting the purpose of stores
Many themes are omnipresent across Europe. One such theme is the urgency to repurpose physical retail space. This will result in a significant shift in the value and purpose of stores. Gone are the days where physical stores are solely purposed for distributing products, accountable for their own profit and loss. The merging of physical and digital realms will become even more critical as retailers leverage technology to inject greater value into stores. For example, being able to offer extended ranges, use of augmented reality (AR), and crucially, using online fulfilment of physical orders.

Theme 5: Shifting supply chains
Retailers will need to develop more resilient supply chains and distribution platforms. At the survival phase, the priority here will be agile planning. With such an approach, it can help balance costs and reduce risk during a period of extreme uncertainty. In the consolidation phase, retailers that thrive will be those with supply, fulfilment and return systems that are flexible, nimble and responsive, and that can quickly adapt to new retail trends.

Conclusion

The impact of COVID-19 and the raft of policy measures that have been enacted across Europe have preserved public health but have had a devastating effect on retailers and brands. Consumer confidence across Europe, and indeed the world, has sustained a severe blow. Many households are worried about health, personal finances and job security which all undermine propensity to spend.
Permanent changes within the retail industry are likely to arise from an event of this nature and magnitude –for retailers as well as consumers.
However, these changes will be felt unevenly across Europe as a ‘new normal’ emerges. Influencing factors include policy implementation, retail sector, consumer type, culture and geography. Each country faces its own unique set of challenges as its retail industry transitions towards a post-COVID-19 era.

Throughout the disruption, three overriding consumer trends have surfaced:
1. A focus on essential spending
2. An accelerated shift to online spending
3. A readjustment of expectations... [download full report to read more]

Download the full report to gain deeper insights into the impact of COVID-19 on European retail.

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

07 May 2020

The Contribution of the Takeaway Market to the UK Economy

This report provides a snapshot of the valuable economic, social and cultural contribution made by the takeaway sector to the UK. Based on research conducted by Retail Economics (and Prevision), the report examines the entrepreneurial opportunity the sector presents, the huge steps takeaway restaurants have taken to respond to changing consumer appetites and the challenges posed by government regulation, which threatens to stifle a vibrant sector.

It uses industry-standard macroeconomic models to quantify the economic contribution of the UK takeaway sector to the UK economy. The models use data from the Office for National Statistics, the Business Register and Employment Survey, the Labour Force Survey, the Annual Survey of Hours and Earnings, HMRC and proprietary data from Retail Economics. Data was also supplied by Just Eat. A survey of 300 takeaway owners from across the UK was also conducted by Prevision. Interviews took place between the 10 July to the 24 July 2019.

Headline statistics

Over the last three years, the takeaway sector has been cooking on gas, growing at almost twice the rate of the overall economy, with total spending rising from £10.6 billion to £12.5 billion between 2015 and 2018. In response to consumer demand and to satisfy appetites, the number of dedicated takeaways is estimated to have risen from 30,189 in 2015 to 37,732 in 2018. Additionally, the average household spent £38 per month on takeaways in 2018, an increase of 15% since 2015, and such growth suggests people will only become hungry for more.

This increase in demand for takeaways is estimated to have added £5.9 billion in value to the UK economy in 2018 and £307 million in direct taxes to the UK Government. That figure leaps to £1.8 billion if we take indirect taxes like VAT and employee national insurance into account. Such is the explosive growth of the sector that measured by revenue, it is greater in size than the architecture and TV production industries.

Technology has been pivotal in the sector serving up a feast and has provided new and innovative routes to market for small, independent takeaway restaurants, with almost 35,000 takeaways and restaurants now using online apps.

Accordingly, the sector has responded quickly to changes in consumer appetites. Vegan orders have increased by 388% from 2016 to 2018, and with consumers more conscious about sustainability and industry practices that figure will likely increase. In that same time, Persian food has seen growth of 34% and Nepalese takeaway restaurants have increased by 16%.

Takeaways are one of the most ethnically diverse parts of the UK economy and the sector offers a gateway for would-be entrepreneurs, with 40% of takeaway owners considering themselves first-time entrepreneurs. The sector was also responsible for 286,798 jobs in 2018, an increase of 13,000 jobs since 2015, employing more people than the Telecoms, Advertising and Insurance sectors.

Interestingly, small businesses make up the majority of the sector and are growing with such ferocity that 30% of takeaways now employ more than ten people. What’s more, the creation of jobs doesn’t discriminate by region, with employment stretching the length and breadth of the UK. Since 2015, Yorkshire and Humber has seen the largest increase in job creation, followed closely by the East and West Midlands and the North East.

As well as providing a healthy serving of employment opportunities, the takeaway sector makes a vital contribution to the UK economy, accounting for a 12% slice of the food services industry pie, which includes restaurants, cafés, pubs, bars and events.

The takeaway market is set to expand further and grow at approximately 3.7% a year for the next five years, remaining an important source of revenue for the Government. Consumer appetites look like they’ll only get bigger too, with spending on takeaways forecast to rise to £15 billion by 2023, an increase of 20% on 2018, which will result in a value of £7.1 billion to the economy. 

Report recommendations

However, there are great challenges on the horizon for the takeaway sector with government legislation potentially stirring up trouble. A more in depth analysis is covered in the full report, where we look into seven recommendations that will ensure the sector continues to flourish, creating further job opportunities and allowing entrepreneurs to grow their businesses. Our recommendations look at the areas of skills, immigration and health, and they are:

  • Mandated wages for T-level students during their industry placements
  • Bring forward the Catering and Hospitality T-level to 2021
  • Explore the feasibility of a grant to incentivise businesses to offer placements
  • Reduce the salary threshold for chefs on the Shortage Occupation List
  • Introduce the duration of short-term visas to two years
  • Increase a medium and long-term strategic skills list
  • Introduce an online calorie calculator as exists in Northern Ireland and Scotland

Our full report also contains a snapshot of the valuable economic, social and cultural contribution made by the takeaway sector to the UK, and examines the entrepreneurial opportunity the sector presents, and the huge steps takeaway restaurants have taken to respond to changing consumer appetites.

Download the full report for a feast of information...

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

07 May 2020

The Retail Cash Crunch: The Impact of COVID-19 on Major Non-Food UK Retailers

Published: April 2020

The world is facing an extraordinary crisis. The COVID 19 pandemic has sent shockwaves throughout global communities, dislocated international supply chains and triggered steep selloffs in financial markets. It has already become clear that the high street will take  on a very different form once the pandemic is over.

Weaker players will unfortunately cease to exist, leaving behind a smaller but more resilient  sector that have acted fast. In the Office for Budget Responsibility’s (OBR) coronavirus analysis, they assume a three month lockdown due to public health followed by another three month period when they are partially lifted. Against this backdrop, real GDP falls 35 per cent in the second quarter but bounces back quickly. Unemployment rises by more than 2 million to 10 per cent in the second quarter, but then declines more slowly than GDP recovers.

However, at present, an accurate assessment of the duration and trajectory of the virus is difficult to  determine. Coordinated action from global policymakers and central banks has been swift. The UK Government has taken unprecedented action to support businesses and protect jobs, while the Bank of England has cut interest rates to new record lows. The result is a flood of cheap credit, quantitative easing, liquidity injections, loan guarantees, cash hand outs, tax breaks and generous employment subsidies which will cushion the blow to a certain extent.

The trauma will be acute for retailers, despite an unprecedented government support package. Retail Economics estimate that non food retailers could see a decline in sales of c.17% over 2020 equating to over £37 billion of lost revenue. 

Government aid has provided significant support for retailers to manage cash flow. A 12 month business rates holiday and the Job Retention Scheme are particularly significant for the retail sector, given these two components comprise a large proportion of operating costs. Further concessions including the option to defer Value Added Tax (VAT), the Coronavirus Business Interruption Loan Scheme, the COVID-19 Corporate Financing Facility and protection from eviction for commercial tenants will undoubtedly help those under intense pressure. 

These support measures, in combination with lending facilities offered by banks, will be a lifeline for retailers of all sizes and across all channels which are pivoting towards a focus on cash and rightsizing their operations. With these measures in place, our scenario analysis suggests that near term liquidity over an initial three month lockdown period looks manageable for most large retailers. But working capital demands would intensify from June and beyond.

However, should a lockdown persist beyond June, and without further government intervention, large parts of the sector would come under  intense pressure, with many retailers falling into administration by September as cash reserves and credit facilities become exhausted... [download full report to read more]

The impact on retail sales and consumer behaviour

The COVID-19 pandemic has already fundamentally altered consumer behaviour. Lockdowns, social distancing and other restrictions are forcing many households to jostle parental and home schooling responsibilities while working from home. The closure of gyms, cancellation of sporting events and social distancing is challenging how people spend their time, re ordering priorities and altering routines.

The sudden shock to everyday life has forcibly introduced new shopping behaviours, but the impact will be felt unevenly across retail sub sectors. The closure of non essential retail stores has necessitated a shift towards online, forcing many consumers to engage new  customer journeys.

The initial shift towards online shopping will fail to offset the overall decline in demand. Non food retailing is expected to fall by 16.7% in 2020 as most stores remain affected until June 2020 and demand is undermined by weak consumer confidence and elevated levels of unemployment. Elsewhere, food retailers will benefit from increased volumes as almost all meals are now consumed in the home. The transfer of spending from the closure of restaurants, bars, cafes and pubs will flood the grocery sector with increased demand across both foods and alcoholic beverages... [download full report to read more]

The impact assessment for UK non food retail

The impact of COVID-9 has caused a mandated lockdown of around 70% of non food retailing in the U.K. The initial period of store closures will last for three weeks before it is subject to review. However, it is widely expected to be extended. Retail shops allowed to remain open include:

  • Supermarkets and other food shops
  • Health shops, pharmacies including non dispensing pharmacies
  • Petrol stations, bicycle shops, home and hardware shops
  • Laundrettes and dry cleaners 
  • Bicycle shops, garages, car rentals, pet shops
  • Corner shops, newsagents, post offices, and banks

Even retailers allowed to remain open have faced significant challenges. Enforcing social distancing measures in the workplace has created a 
significant issue. Food retailers are limiting the number of shoppers into their stores at any one time while also providing staff with Personal 
Protective Equipment (PPE). Clear protective screens have also been installed at checkouts to further safeguard staff at retailers such as Aldi, 
Morrisons, Iceland and Sainsbury’s. 

Elsewhere, other retailers have been caught in a difficult middle ground; technically allowed to open under Government guidelines but finding significant operational challenges when servicing customers effectively. For example, hardware stores are unaffected by the lockdown, but B&Q stores are closed, only allowing online ordering for home delivery, but also servicing click and collect in carparks with a contact free service... [download full report to read more]

How long can retailers survive in the current status quo assuming a 70% reduction in sales?

This scenario addresses the question of how long non food retailers can survive the current status quo assuming an on going lockdown of  stores for the foreseeable future without access to further capital. 

Assumptions are based on the likely hit to revenue from store closures as of 3 March, the wider impact on consumer spending and Retail Economics’ retail sales and consumer panel data. As a result, it is expected that non food sales are likely to fall in the region of 70% during the period of lockdown. 

Empirical judgements are also included in the methodology regarding how much operating expenses, investment, and cash returns to shareholders would decline as a result of falling sales and inclusion of Government measures to support businesses. Revolving credit facilities are also factored for, together with a lagged decline in the cost of goods sold and other carefully considered assumptions (e.g. retailers will try to reduce labour costs by 50% through furloughed employees; and essential retailers will continue to see sales hold up better than retailers whose stores that have been forced to close)... [download full report to read more]

What next for the industry?

Government measures to support businesses will be a lifeline for retailers of all sizes and across all channels. Our scenario analysis suggests  that near term liquidity over an initial three month lockdown period looks manageable for most large retailers with government support in place.
Working capital demands intensify from June and beyond. 

By August, an ongoing lockdown would decimate large segments of the sector and see swathes of retailers fall into administration as cash reserves and credit facilities are exhausted without further government intervention. Distressed discounting would erode margins significantly as retailers desperately trade over the summer months. While the duration of the pandemic remains uncertain, being nimble, innovative and quick to react in a fast paced environment will be critical, as will offering something that is meaningful to the customer in this challenging time. This unprecedented environment has dictated fundamental changes to most retailers’ operating models.

Inditex, owners of Zara, have switched some of their supply chains to the production to clinical face masks and hospital gowns. Likewise,  Burberry has started the production of PPE equipment from its West Yorkshire factory and shared plans with the Government to dedicate its global supply chain to delivering more than 100,000 surgical masks to the NHS for use by medical staff. 

Boots is also supporting the Government to establish new ‘drive through’ testing stations that provide COVID 19 tests for frontline NHS staff. Along with Amazon, they are also planning to help in the distribution of antibody tests that people will be able to conduct themselves at home. 

Elsewhere, Brew Dog, Coty and Louis Vuitton have started to produce hand sanitiser. Dunelm and B&Q have introduced a carry to car option for online orders and has also scrapped signing on delivery to reduce the spread of the virus. Sweaty Betty has also introduced free online workouts. 

Strategic partnerships are also likely to emerge as mutually beneficial and collaborative arrangements are used to cuts costs and leverage sales opportunities... [download full report to read more]

Download the full report to gain deeper insights into the cash cruch from the impact of COVID-19...

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

07 May 2020

What's happening to Retail Property?

For much of the last three decades in retail, aggressive expansion of physical space drove market share as retailers’ key strategies involved ‘land grab’, while the broadening of the grocery sector into non-food proposition created even fiercer competition.

A rapid increase in stores across high streets and shopping centres ensued, as well as the development of larger ‘big-box’ stores, frequently located in out-of-town retail parks. In part, large chain retailers and landlords were able to turn to capital markets to fund extensive real estate build-outs, leading to the development of new shopping centres, retail parks and lifestyle centres, which added to and cannibalisedthe traditional town centresthey encroached upon. This expansion led to oversupply in many regions across the UK, creating ‘clone’ high streets that lacked relevance to their immediate communities and over time suffered from underinvestment and local authority complacency. What’s more, mass marketing strategies focused on an aggressive pricing strategy with the aim of capturing market share, which often diluted profit margins, brand equity and anonymisedcustomer relationships.

This expansionary era dovetailed with vibrant economic growth, as households (responsible for 2/3rds of the economy) saw real incomes rise by c.3% each year from 1997 to 2007, and more sophisticated global supply chains drove consistent deflation across core retail categories such as clothing, electricals and homewares. Resultantly, the retail expansion strategy worked for decades.

Over the last few years there has been a reversal of many of these trends.This was a catalyst for consumers to start looking for cheaper alternatives at a time when improvements in technology brought-about heightened transparency in pricing, service and quality, and the discounters had a much firmer foothold in the market.

The rise of online

Digital transformation led to the emergence of more sophisticated multichannel propositions, supported by higher penetration of smartphone ownership and online shopping, ultra-convenient home deliveries and more efficient click-and-collect.

The composition of retail spending shifted rapidly online. In the past decade, the value of online retail has risen four-fold, worth an estimated £70 billion in 2018 and accounting for just under £1 in every £5 spent. For some sectors such as clothing, this proportion rises to over a third, which is particular pertinent in some town centres where clothing occupants comprise over 40% of the physical presence.

Forward-thinking omnichannel retailers and the emergence of pure online players offering strong online propositions exploited these trends, while benefitting from collecting vast amounts of consumer data. Efforts by retailers late to the party that mimicked the mechanics of offering an online proposition frequently proved dilutive, as additional infrastructure and investment were deployed to service the same customer and the same order.

But crucially, the fast-paced adoption of consumer technologies presented shoppers with an array of digital touchpoints which fundamentally altered the way they interacted in physical locations. A linear customer journey that had existed for decades quickly dissolved and reformed to a more complex structure. Shoppers now expect to be able to seamlessly transition between channels, redefining the boundaries between physical, digital and on the move.

The experience economy

Engaging in meaningful experiences has become a differentiator of choice for many consumers. An abundance of material possessions has left consumers attaching more value to experiences; evidenced by the reduction in retail spending from 30% of household expenditure in the 1960s, to 27% in 2004 and 24% in 2016. Our forecasts suggest that this will fall further to 20% in the next 10 years.

Although the shift towards experiences has arguable come at the expense of retail, its role in the customer journey is undeniable. While consumers claim to spend more time browsing products online than they do in-store, the relative importance in the discovery and research of retail products is more influential in physical locations, in particular flagship destinations where ‘experiences’ matter.

Retailers and landlords alike recognise that staging meaningful experiences are critical in the moments that matter: moments of discovery; moments of desire; and moments of action.

What’s more, consumers expect digitally enhanced physical environments (such as Instagram walls, Facebook check-ins and Snapchat codes) that inspire, excite and offer experiences that cannot be replicated online/

Operating Costs

Against these seismic shifts, retailers have also faced a backdrop of spiralling operating costs. Successive rises in business rates, National Living Wage (NLW), National Minimum Wage (NMW), logistics, utilities and other central costs has put intense pressure on profitability. Indeed, the Retail Economics Retail Cost Base Index shows that operating costs rose by 2.4% in 2018. However, over the last five years, operating costs facing retailers have risen by 10.8%, with labour costs constituting more than half of the increase.

Indeed, consecutive increases in NLW and NMW and costs associated with the Apprenticeship Levy have driven an acute rise in labour costs which constitute around 46% of total operating costs. Wage hikes among lower paid groups have a ‘ripple effect’ across entire wage distributions as businesses retain wage differentials. We estimate that the increase in NLW costs the industry in the region of c.£1.5bn per year to implement.

Business rates also remain a significant burden on retailers who have a disproportionate exposure to property. Retail Economics estimates that business rates cost the retail industry an estimated £7.5bn in 2018, and in some parts of the country exceed retailers’ rental values.

How has the industry reacted?

The collision between these seismic structural shifts, rising operating costs and squeezed profitability has led to a broad polarisation in the retail property market.
On the one hand, these challenges have led to a host of high profile retailers such as New Look, Toys R Us and Debenhams either closing their doors for good or cut back on the number of stores as they restructure.

On the other, a furious churn of small independent firms continues to drive overall growth in the number of outlets occupied by retailers and leisure businesses alike. Since 2012, the overall number of retail and leisure units has risen by over c.60,000 units, an average 2.9% increase each year. The rate of increase has been more pronounced in leisure (+5.2%) units than in retail (+1.8%) during the period.

However, this conceals a polarisation in retail between independents and multiple retailers. Against the backdrop of these challenges, cost cutting plans emerged as the overriding priority for many retail boardrooms, with store disposals decisions a priority. Resultantly, there has been a consistent net loss of over 7,000 stores in the last six years, the largest fall occurring in 2018.

What’s more, landlords are finding it increasingly difficult to reoccupy empty units. Vacancy rates across high streets (11.5%), shopping centres (13.6%) and retail parks (7.1%) in the second half of 2018 all rose on the previous year. Retail park vacancy rates are now at their highest level since 2014.

It’s estimated that around 37,000 units lie empty across high streets, shopping centres and retail parks in the UK, with almost a third (11,600 units) having been unoccupied for more than three years.

Store closure programmes have been part of a wider cost cutting exercise for many multiple retailers as they battle against rising costs and shifting consumer behaviour. Retailers have been forced to adopt a forensic approach to reduce costs beyond store closures, including reducing head count and simplifying business models.

As a result, the industry has seen a rise in the number of retail redundancies, as well as cutting back on hours worked and reducing employee benefits. In the 12 months to March 2019, 4,500 retail jobs have been lost every month and the number of employees in the industry has been steadily declining c.1% each year since 2015... [extract]

Download the full report to get a deeper insight into how the retail property market is changing in the UK

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

06 May 2020

The impact of AI on the UK retail industry

In this report, Retail Economics (and international law firm CMS) start by plotting some of the applications and implications of AI throughout the customer journey from the perspective of the customer and the retailer, using the five stages of the Retail Economics Customer Journey. 

While not exhaustive, at each stage we look at the most prevalent or game-changing applications and, using the insights gleamed from our surveys, examine how ready consumers and business really are. We then take a deeper look at how businesses plan to adopt AI technologies in their organisations, the areas they will target for investment, and the key challenges they foresee.

Once the preserve of science fiction movies and books, Artificial Intelligence (AI) is not only a reality today but an increasingly common feature of life. Through voice and image recognition, natural language processing and machine learning, our smart phones and speakers are an integral part of our day-to-day. In this report we look at how AI is helping to answer questions like:

  • How can a retailer ensure that a particular brand or promotion will catch the eye of a millennial shopper when browsing products and prices online?
  • How do they convert awareness into a sale online or in store?
  • Once a product has been purchased online, what technology is needed to ensure the quickest and most cost-effective delivery to a customer?
  • What about aftersales support, how is that best provided?
  • And what can a retailer learn from a purchase about a shopper’s buying habits which might help prompt further sales in the future?

What features below is extracted content from the report on a chapter which focusses on the use of AI in the first stage of the customer journey - Awareness & Influence. 

Stage 1 of the Customer Journey (consumer perspective) - Awareness

Awareness is a primary battleground for any consumer brand or retailer to win in the hunt for sales and profits. There are various ways a customer can become aware of a brand, including TV or print advertising, personalised emails, recommendations from friends and family, as well as targeted online advertising. Retailers, seeking any advantage they can in an increasingly competitive marketplace, are turning to AI technologies to help them create greater customer awareness. Two of the most dominant, if still nascent, that are being used are personalisation and product recommendations.

Personalisation

It is generally accepted that shoppers are more likely to purchase items in-store or online from retailers which send them relevant, personalised promotions and  ailored offerings. Current personalisation includes online fashion retailers serving personalised landing pages, only displaying clothing available in a customer’s  ize and or preferred brands. Shop Direct’s technology allows 1.2 million versions of its very.co.uk landing page. Amazon attributes 35% of sales to its personalisation strategies (McKinsey). In the past it has been possible to personalise experiences using simple rules — now machine learning can analyse  normous and seemingly disconnected sets of data deeply and quickly — and then act in real-time based on that analysis. This will take personalisation to a new level.

CMS’ consumer panel survey found that while shoppers wanted greater personalisation only 45.3% believed targeted online adverts – the most prevalent current application of personalisation – provided appropriate content to them. Nevertheless, through advances in technology personalisation will continue to be a key
tool for retailers. The survey results show the essential mantra to follow is: ‘make sure it is effective and that shoppers’ trust is not lost’. We are reminded of the legendary example of a retailer who accidentally exposed the pregnancy of a high-school teenager to her parents by sending her coupons for baby clothes and cribs.

Product recommendations

One of the most recognised AI powered applications used today is the automated suggestion of products and services to shoppers. These AI-powered recommendation engines vary greatly in sophistication but advanced algorithms can correlate disparate data such as purchasing habits, images viewed, social media content, location or weather in real time. Retailers are already able to suggest holiday items for shoppers who recently booked an airline ticket. Adding biometric data into the mix will allow retailers to identify customers as they walk into a shop and then personalise their in-store experience. Retailers will be able to suggest garments that will fit a customer’s body shape. On page 20 we analyse how such use comes at a time when regulation, most notably GDPR, is protecting the individual’s rights around such data.

More sophisticated personalisation requires more personal data, however our survey of shoppers showed that more than half would not be comfortable sharing personal data, such as health, age, body shape and dietary habits, to enable companies to provide more targeted product recommendations. Although a key finding was that younger consumers are three times more likely to share highly sensitive data than older shoppers. Targeting younger shoppers with solutions that use sensitive data-is an obvious strategy for operators in the clothing & footwear, food & grocery, and health & beauty sectors.

 

Stage 1 of the Customer Journey (retailer perspective) - Influence

Hyper-personalised multichannel marketing strategies provide an opportunity to influence consumers in ways never seen before, such as using data to pull customers to a product that could genuinely enhance their wellbeing rather than pushing potentially unwanted items on them. Alternatively, future subscription services will provide products based on a customer’s behaviour rather than requiring an active purchase. Currently we are seeing AI technologies increasingly being used for multichannel marketing.

Multichannel marketing

According to a global survey conducted by Forrester Consulting and commissioned by Emarsys, 54% of retail marketers are using AI-driven personalisationacross channels to drive growth in their business. The technologies will deliver multichannel marketing campaigns that seamlessly target  onsumers with personalised content and experiences across websites, mobile platforms and within physical stores. In the future this may include the use of AI- ssisted facial recognition to register returning customers in a store, tracking data of a customer’s journey through a shop to optimise store layout, or optimising the  unctionality and design of a site based on a user’s unique profile. In contrast to the consumer findings our survey shows that businesses have a high degree  of confidence in AI’s ability to deliver accurate marketing content. But is this trust well placed? Nearly 60% of businesses trust fully automated AI-driven marketing  ampaigns to deliver content to their customers. In contrast, only 45% of customers believed personalised adverts displayed to them were relevant.

 

Download the full report now to see how AI is being used in the other customer journey stages...

 

How are retailers and brands adopting AI technologies?

Companies across Britain are overall positive about AI-powered technologies and their ability to improve their businesses and interactions with consumers.
This is likely because there are a host of areas which can benefit from AI, with our research indicating that 62.5% of retailers and consumer organisations believe that achieving ‘more efficiency in the supply chain’ presents the biggest opportunity for them. Just over 53% said that realising cost savings would provide the greatest benefit followed by 46.9% who feel that ‘creating more meaningful relationships with customers’ would have the greatest impact on their operations.

When asked which AI-related technologies would have the biggest impact on the industry, nearly 70% of the organisations polled said that virtual assistants would be one of the most positively disruptive forces in the industry, followed by 59.4% who said they believed that the ‘internet of things’ would have the greatest  impact. Chatbots, autonomous vehicles and dynamic pricing were the next most cited technologies. Perhaps most surprisingly were the technologies that scored the lowest. Despite the media interest, high profile technologies such as drones, virtual reality and 3D printing do not appear to be high on companies’ radars.

Identifying which area of a business to target for AI investment is a fundamental exercise for retailers to carry out. Customer engagement and enhancing the way in which goods reach consumers seem to be the top priorities. 65.6% of businesses in our survey felt that ‘sales, marketing and insight’ was the most essential area to focus on, in part because improved sophistication of AI-centric marketing strategies is resulting in a better return on investment. More than 53% of retailers said they would focus AI investment on their warehousing and distribution divisions, while 46.9% said they were keen to improve their buying and merchandising through the use of AI. Back office functions such as HR and finance do not appear to be prominent targets for investment.

 

Challenges of implementing AI

Shortage of AI expertise

Adopting any technology can be tricky for a business but AI technologies may additionally involve job losses and trust issues with customers. However nearly 60% of the retailers and consumer brands we spoke to said they felt that a ‘lack of specialised skills’ was the principle challenge they faced in rolling out AI within their organisations. This goes some way to explaining why 75% of organisations polled think they will use external technology partnerships to enhance their AI capabilities. The 38% that said they would develop capabilities in house will need to reflect on how to plug the apparent skills gap.

Legal and regulatory barriers

46.9% of the organisations we polled said that one of the main barriers to AI investment involved the legal
and regulatory issues related to its use. The complex patchwork of rules governing the use of AI within an organisation can be a minefield to navigate. There are
a host of laws around the use and storage of personal data while some AI-technologies, such as a dynamic pricing, may fall within the realm of competition law.

Trust and ethics

Perhaps in answer to our research around trust (see page 15), in order to properly handle the issue of data security, companies need to firstly not underestimate its importance and secondly think about hiring skilled people to help manage data ethics in an organisation. This was reflected in our survey where over 60% of companies think they will need to invest in roles managing data ethics. As AI technologies make more ‘decisions’ within organisations, there will be greater scrutiny from customers and regulators as to how these decisions are made. We believe a key component of any AI strategy will be the use of an AI Ethics Board.

AI-readiness amongst consumers is hugely variable

Businesses also need to reflect on whether AI is always called for in every instance. Just because something can be done, does that mean it should be? Our survey of consumers shows that perceptions can differ wildly by technology type and by age category. There is also significant divergence between how receptive consumers claim to be and how ready organisations perceive them to be. Consumers and retailers are not always on the same page. For example, while some businesses are investing in drone technology and autonomous in-house delivery in a bid to lower logistics costs, consumers were far more reticent about these
new technologies.

 

Download the full report to gain deeper insight into the topic...

 

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

06 May 2020

The Future of Online Retail in the UK

A new age of retail has emerged over the last decade. This age is characterised by a richly textured digital landscape, buzzing with new technologies, devices and online communities which has gradually overshadowed analogue consumerism.

This report published by Retail Economics (partnered with Womble Bond Dickinson) unearths unique insights concerning the causative forces driving the digital customer journey and reveals stark differences across consumer segments. The digital retail revolution is only just getting started,  but ultimately – a tipping point will emerge.  It looks at the possibility of onlline retail sales accounting for the majority of retail sales in the next 10 years. The research framework identifies 10 overarching themes as to why this might be so:

1. Customer Journey evolution
2. The evolution of online
3. Importance of age for category penetration
4. Increased pace and spend of online
5. Increasing significance of Gen Z and millennials
6. Faster, cheaper in-home deliveries
7. Fewer stores drives consumers online
8. Better connectivity and more powerful devices
9. New retail business models
10. The rise of AI

Introduction

Seismic shifts have fundamentally changed the way in which consumers research, purchase and consume products from retailers of all sizes, types and  cross all channels. An array of varied touch-points influence, enhance and intelligently ‘nudge’ shoppers through an ever-expanding number of paths to  purchase, from increasingly personalised social media campaigns to stockless stores where merchandise is viewed through augmented reality apps.

Successful retailers have always had to reinvent themselves throughout history; the most successful listen to their customers, embrace change and invest  isely for the future. However, the race to digital transformation is occurring at such a pace, many retailers are struggling to keep up with disruptive  frontrunners.

Those retailers enjoying success appear to be those adopting new technologies at pace in order to leverage new opportunities. Nevertheless,  new risks are emerging too. Consumers are increasingly conscious, even defensive, over their data protection rights and seek an equitable exchange of value in favour of data relinquishment. With this backdrop, the impact of future technologies and consumer acceptance is highly uncertain.

Advancements in technology will power speedier and cheaper online fulfilment, which will increasingly be delivered in-home. Emerging subscription  models, autoreplenishment and the shift towards fewer (but more experiential) stores will facilitate aggressive online migration.

The burning question for  any retailers is whether they can pivot swiftly enough while swimming against unpredictable tides of digitisation. Retailers must embrace change, have a  unique proposition and continue to innovate in order to survive.

With digital natives expected to form the majority of the adult population in the next ten  years, we forecast that online will account for more than 50% of all retail sales by 2028.

The majority of retail spending to be online within 10 years

Today’s customer journey is truly unrecognisable from the analogue path observed just a decade ago. In the next 10 years, we expect to see the rate of change accelerate as innovative technology shifts the balance of power in favour of the consumer. Powered by technology, changes in the property  market, improvements in connectivity, new business models and generational shifts, the physical and online channels will meld together, but online will drive the majority of retail sales within the next 10 years. 

This will create significant challenges for the retail industry. The role of the store will evolve from mere product distribution hubs to meaningful customer  experience environments, offering discovery, entertainment and escapism. The consumer experience will be embroidered with digital touchpoints that  distort the boundaries between what’s physical and digital. Nevertheless, online will become the main driving force behind retail sales. We forecast that online sales will overtake store-based sales within 8-10 years, with online accounting for 53% of total retail sales by 2028.

The digital revolution: Past, present and future

As part of a necessary framework to explain the projected future impact of online; from our 10 key reasons, the first four touch upon past and present factors providing historical context. This is followed by six subsequent reasons which focus more on future impacts.

Reason 1: Customer journey evolution

The impact of digital technology has irreversibly changed the way we shop. The explosion of consumer choice is predicated on: the penetration of b roadband, improved connectivity, more powerful devices, the emergence of new services and the vast investment in digital platforms. It has clearly  affected how shoppers research, communicate, consume content, seek information and purchase products throughout the customer journey. Meanwhile,  both physical and digital experiences have become of utmost importance to consumers whose expectations are more demanding than ever. 

The growing impact of thesmartphone cannot be understated. Following the launch of the first iPhone in 2008, it took less than 10 years for the majority of  time consumers spent online to occur on mobile devices (62%1). In March 2019, 55%2 of visits to retailer websites were on smartphones, with categories such as Health and Beauty seeing this proportion exceed two in every three visits. Almost half of consumers suggested that smartphones are the most 
important device to connect to the internet, this figure rising to 72% for those aged between 16-34. These shifts have torn apart the analogue customer journey and replaced it with an almost endless array of digital and physical alternatives. 

Our digitally-integrated lives mean that competition for shoppers’ attentions has become much more fiercely contested; giving rise to the attention economy. Retailers compete with a digital kaleidoscope of other  distractions’, thus intensely focus on reducing friction throughout the customer journey. 

The emerging challenge is to connect with customers in the right  way. This means in the right manner, with the right content, on the right device, at the right time – in the ‘moments’ that matter most. Moments of inspiration, moments of desire and moments of action. New technologies have helped to enable smoother and speedier transactions, but consumer references have become much more fragmented as the range of available options have exploded. 

One reason for this fragmentation is that consumers  are now exposed to more influences for inspiration (e.g social media, celebrity endorsement, online communities, bloggers and influencers who spot new products and trends). For Gen Z and millennials, this occurs most frequently on smartphones.  

Our research revealed that the majority (53%) of younger shoppers (aged 16-24) think that smartphones are the most useful device when making them aware of new products and brands. This is in stark contrast to consumers aged 65 and over, of whom only 3% agreed with their younger counterparts. 
Such differences are partially driven by variance in smartphone ownership, but younger shoppers spend significantly more time on smartphones than any  other age group. On average, 18-24 year old females spent 3hrs 40 minutes per day on their smartphones, more than twice the duration of men aged over 55 (01:42mins).

This state of near constant connectivity has occurred at an exceptional pace, with significant consequences to physical destinations throughout the UK; arguably leading to lower levels of footfall across high streets, retail parks and particularly shopping centres. 

Primary locations in large city centres and key regions continue to deliver sustainable levels of footfall, but many secondary locations that are burdened with excess capacity and dwindling levels of footfall are expected to remain. 

Indeed, our research shows that online now accounts for around one in four shopping occasions and although high streets showed the greatest penetration across all age groups, their prominence as the main shopping channel is dwindling. 

Over one in ten consumers suggested that they will shop less frequently in physical shops in the next 12 months, outweighing those who suggested they will shop more frequently. Consumers pinpointed high streets as the main physical channel that they are intending to shy away from in the future, but the results were not clear-cut. Gen Zs (aged under 25) suggested that they are likely to do more shopping in physical locations in the coming 12 months, with the importance of physical retailing being a consistent theme throughout our research for this age group. 

 

Download the full report to gain deeper insights into the other nine overarching themes that are driving the online retail revolution towards the tipping point...

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

20 March 2020

Impact of the Coronavirus on Retailers

This report explores the unfolding impact of the coronavirus (COVID-19) on the UK retail and leisure industry.  When released, this research is included in our 30 day free trial subscription as part of our COVID-19 Service. 

About out COVID-19 Service

Retail Economics conducts extensive research and analysis on the impact of coronavirus (COVID-19) on the UK retail and leisure industry. Our service consists of frequent, timely analysis and updates in a variety of formats so you can absorb the information quickly in a way that best suits you.

Retailers (and retail related industries) integrate key findings and insights from our proprietary research into their response strategies to the COVID-19 crisis which enables them to make more informed – and timely – decisions which helps them manage the associated risks and to plan ahead.

This service incorporates many dynamic components and explores relevant issues in an adaptive manner, responding to real events as they unfold and as consumer behaviour evolves.

Click here for more details

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

21 November 2019

2020 UK RETAIL AND LEISURE OUTLOOK

** REPORT PUBLISHED BEFORE CORONAVIRUS (COVID-19) CRISIS **

We fully acknowledge that a significant quantity of content in this report does not reflect or account for the COVID-19 impact to the UK retail and leisure industry.  

Considerable political and economic uncertainty persists heading into 2020. The ongoing impact of Brexit dominates the political agenda and remains a key factor constraining business investment and dampening consumer confidence.

Against this backdrop, UK retailers face seismic structural challenges as the ongoing shift towards online shopping and the rising prominence of the experience economy collides with spiralling operating costs. The proportion of online shopping has now reached almost 20%, quadrupling in the last 10 years. We forecast that this figure could rise to 50% for internet shopping in the next 10 years.

Meanwhile, an abundance of physical possessions has caused consumers to re-evaluate the importance of material goods. Following two decades of falling prices, in real terms, for clothing, footwear, electricals and many other goods, UK households have arguably reached a period of ‘peak stuff’. The economic value they attach to material possessions has diminished, leaving them valuing ‘experiences’ more than ever before.

This perfect storm of behavioural shifts and rising operating costs (e.g. business rates, labour costs, logistics) has left many retailers with business models that are not fit-for-purpose. Exposed by too many stores, inflexible lease structures and legacy systems, business models are creaking under the pressure of spending shifts and the purpose of the in-store experience.

However, with great disruption comes opportunity. Those retailers who have ‘embraced, adapted and innovated’ have managed to thrive in this fast-paced environment where relevancy is vital.

The Retail Economics Outlook for the UK Retail Industry 2020 Report provides an in-depth analysis of the challenges facing both UK retailers and consumers as we enter a new decade of change.

Consumer Environment

  • Inflation
  • Labour Market
  • Wages and Disposable Incomes
  • Credit and Household Debt
  • Housing Market and Assets
  • Interest Rates
  • Brexit
  • Consumer Confidence

Retailer Environment

  • Operating Costs
  • National Living Wage/National Minimum Wage
  • Business Rates
  • Sourcing Costs
  • Brexit
  • Investment
  • Behavioural Change

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

23 May 2018

Retail Economics/RBS Outlook for UK Retail 2018

A vast blanket of uncertainty engulfs the entire economic landscape at present. Attempting to accurately predict the immediate future for the retail industry appears to be a task beyond mortals.

I feel that 2018 will be a memorable year. Pervading structural change continues to rattle traditional business models and will undoubtedly intensify as we move forward.

A tough consumer environment will remain throughout the first half of 2018 as the debilitating squeeze on personal finances finally eases by Q4 2018. Nevertheless, confidence will remain a delicate issue with possible interest rate hikes, a tough labour market and political instability forming an unwelcoming backdrop.

Retailers will also face a continued pincer movement of rising operating and sourcing costs with soft consumer demand. Many retail business models will come under increasing strain as the unforgiving shift towards online and the experience economy collide with inflexible leases, high rents and excess properties.

Focussed work will continue behind the scenes to better understand the role of digital and social marketing in alignment with dazzling in-store experiences, while delivering a truly seamless omnichannel experience.

There’s no question - boardrooms across the UK will have to discuss the ‘embrace, adapt and innovate’ philosophy in order to thrive, or indeed, just to survive. 

The Retail Economics/RBS Outlook for UK Retail 2018 report contains:

Consumer Environment

  • Inflation
  • Labour Market
  • Wages and Disposable Incomes
  • Credit and Household Debt
  • Housing Market and Assets
  • Interest Rates
  • Brexit
  • Consumer Confidence

Retailer Environment

  • Operating Costs
  • National Living Wage/National Minimum Wage
  • Business Rates
  • Sourcing Costs
  • Brexit
  • Investment
  • Behavioural Change

To download your copy of the Retail Economics/RBS Outlook for UK Retail 2018, please complete and submit the form on this page.

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

12 June 2017

Election result makes hard Brexit more likely not less

Some of the early analysis of last weeks election suggests that it will now be more difficult for the government to drive through a hard Brexit. We disagree. In fact the opposite is the case a hard Brexit becomes more likely now.

When the UK submitted its Article 50 letter it set in train a process to leave the EU which now has its own momentum. This means that unless the UK and EU explicitly agree otherwise at the end of the two-year process the UK will be out of the EU and will have a trading relationship based on so-called WTO rules. In trade terms this is what hard Brexit means. This outcome requires no further decision or action on the part of either party and is the default consequence of the UK's decision to leave. As Michel Barnier the EUs chief Brexit negotiator told the Commission "... in any event the UK would become a third country on 29 March 2019." So hard Brexit is the road that we are already on.

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.

01 June 2017

The Retail Experience Economy: The Behavioural Revolution

Retailers need to offer a more multifunctional, "experience-based" environment in order to inspire, win and retain the loyalty of customers.

At-A-Glance

  • The Retail Experience Economy identifies four key factors determining a customer’s shopping experience: (1) Environment, (2) Education, (3) Escapism and (4) Entertainment
  • 24% of 2,000 respondents said they would willingly pay more for the same product if it meant they would receive a meaningful experience when purchasing it
  • 43% of shoppers said that they are likely to spend more money in the future with a retailer who offered a meaningful shopping experience in-store
  • Entertainment ranked the highest for younger consumers: 35% of respondents aged between 18-24 years old, compared with just 13% for the 65+ age group
  • Environment was the most important element of a meaningful shopping experience, selected by almost half (46%) of 35-44 year olds
  • Almost two thirds of consumers are more inclined to shop at destinations that house cafes, restaurants and bars as they place a multipurpose environment with social meeting points as a high priority

UK retail is undergoing significant structural change. A behavioural revolution is taking place through a transformational shift in what people value most — experiences. Evolutionary processes have guided economic value from commodities, to goods, to services and in this new paradigm, experiences are taking prominence over products. The genesis of an emerging era of retail is rearing its head – The Retail Experience Economy.

Retailers must engineer seamless experiences that envelope the consumer in beautiful retail environments that entertain, provide escapism and relevant education.

Research conducted by Retail Economics and Squire Patton Boggs found that almost a quarter of consumers said they would willingly pay more for the same product if it meant they would receive a meaningful experience when purchasing it. Furthermore, 43% of shoppers said that they are likely to spend more money in the future with a retailer who offered a meaningful shopping experience in-store.

Retailers’ abilities to predict, analyse and adapt to forthcoming waves of these behavioural shifts will stand as the differentiating factor from their competitors.

Subscribe to Retail Economics to keep abreast of the latest developments and understand what this could mean for your business.