The retail transformation – New strategies for the future

By Matthias Holzamer and Patrick Müller-Sarmiento

The unstoppable rise in online shopping coupled with store closures during the pandemic and the latterly disrupted supply chains owing to lockdowns in China and the war in Ukraine have piled huge pressure on (brick-and-mortar) retail in recent years and driven some retailers to the brink of ruin. Now, there is new trouble on the horizon, as the rocketing inflation causes an explosion in retail companies' (procurement) costs.

At the same time, customer demands are increasing and consumers are putting off non-essential purchases because of inflation. Retailers must reinvent themselves to avoid going further down the slippery slope, say the retail and restructuring experts at Roland Berger.

Accounting for 22% of the workforce nationwide, the retail sector is one of Germany's largest and perhaps most diverse industries. Furniture, fashion, electrical goods, DIY stores, and drugstores are the biggest segments, alongside food retail. Then there are other non-food segments such as pharmacies, books, car dealerships, or service stations, as well as wholesale. The sector has been in a state of upheaval for years now. Online shopping is the main driver of the transformation, with e-commerce picking up further momentum during the Covid lockdowns. Digitalization and convenience are changing the entire retail landscape: Sales are shifting from the floor to the web, corporate giants are expanding at the expense of SMEs, and the attractiveness of big cities is growing to the detriment of smaller towns. New sales channels such as quick commerce (q-commerce), where everything revolves around speed, are further ramping up the transformation pressure on the industry.

Online shopping boomed in the pandemic

During the Covid lockdowns, e-commerce was the only shopping option available to many people for a while. Online business boomed, and multichannel and convenience offerings such as click & collect became must haves for retailers. E-commerce benefited from the corona crisis, and the online share of retail in the narrower sense (excluding food retail) now stands at 20%.

The big loser was brick-and-mortar retail, which suffered massive sales losses from which it has still not recovered. Food retail was the only sector able to operate normally for some time. For all other retailers, the enforced store closures during lockdown were a disaster. In fashion and cosmetics, for example, sales slumped by as much as 30%.

High costs depress margins and consumer sentiment

Barely has the retail sector recovered from the impact of the pandemic before new trouble emerges on the horizon: The rocketing inflation is squeezing both retailers' margins and customers' willingness to shop. And there is no sign of relief, because (procurement) costs are not going to fall in the foreseeable future. Except in food retail, it will be only market players who have strong pricing power that will be able to pass costs through to customers. The same applies to the alternative way to protect margins, namely by reducing costs: This is a bumpy road given the higher customer expectations around sustainable, ecological, and fair production and supply of products. If a retailer is unable to meet these requirements, they are guaranteed to be at a competitive disadvantage. And it is not only customers who are demanding compliance with ESG (environment, social, governance) criteria: The topic is also gaining importance among banks and investors and can lead to less favorable financing terms or high financing costs if not complied with or not implemented quickly enough.

These are not the only challenges. In addition to rising energy costs and the need to convert suppliers' vehicle fleets to electric mobility, the growing shortage of skilled workers is weighing on retailers' future performance. Added to this are the global supply chain and logistics problems, further exacerbated by the war in Ukraine and the periodic lockdowns in China.

To make sure that their customers don't face empty shelves in-store, many retailers have filled their warehouses to the brim. Just-in-time has given way to just-in-case. Availability is the new watchword in times of great uncertainty. But inflated inventories also drive up costs.

Supply chain digitalization and attractive shopping experiences

The way to achieve more independence and efficiency in these crisis times is by investing in supply chain digitalization. Many retailers are already using smart systems to optimize their logistics, warehousing, and supply chain in order to better utilize capacities, increase throughput, or shorten delivery times. But data analytics, too, is becoming increasingly important for retailers: Those that apply dynamic pricing (like at gas stations) can quickly adjust prices to demand levels. Big data applications can also analyze consumer shopping trends and behaviors and help optimize customer contact. However, digitalization requires substantial investments, and it only makes sense for brick-and-mortar retail to make these if the local authorities also contribute with urban planning measures to revitalize downtown areas or neighborhoods, some of which are in danger of falling derelict. New concepts such as the 10-minute city can make pedestrian zones more attractive again. They suggest that people can get everywhere they need to be in their daily lives in a maximum of ten minutes – stores, restaurants, doctors' offices, schools and kindergartens, as well as leisure facilities.

The moment of truth

There is a future for brick-and-mortar retail as long as the sector reinvents itself. Organizations and systems need to be made fit for the future. This involves digitalizing processes and supply chains and using intelligent systems, as well as consistently improving the shopping experience at the point of sale. That requires extensive investment – and it will take time. But retailers will find that it is worth it if they start now.

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