Booz & Company shares 2012 outlook for retail industry
Casual Living Staff -- Casual Living, December 22, 2011
The U.S. economy wobbled in 2011. The year started on a high note after a strong holiday season in 2010. But then disturbing macroeconomic factors - stubbornly high unemployment, rising inflation, government debt crises in Europe and the U.S., and stock market volatility - raised fears of a double-dip recession and caused consumer confidence to sink again.
The impact of these events varied according to consumer income levels. Our annual consumer survey found that spending was most constrained among low-income shoppers, who continued to feel recessionary pressures. As one might expect, shoppers at the higher end felt less squeezed. This was reflected in performance: Retailers such as Wal-Mart, Target, and Kohl's struggled with same-store sales growth, while Saks, Nordstrom, and Neiman Marcus recorded same-store sales growth of 8 to 12 percent, and high-end luxury retailers, such as Louis Vuitton and Hermès, again enjoyed double-digit growth.
Retailers continue the long-term task of exploring store formats that will enable them to penetrate new geographies and consumer segments. Wal-Mart is innovating in formats with mixed results: The retailer recently closed down its Marketside pilot (smaller-format grocery stores) and is now experimenting with Wal-Mart Express, a scaled-down version of its core format designed for space-constrained urban markets and low-population rural markets. Rite Aid has partnered with Save-a-Lot to combine pharmacy capabilities and low-income assortments in certain geographies. As formats proliferate, retailers will need to pay special attention to integrating them, to properly serve target customers and exploit white spaces in the market.
Other retailers are reinventing what they do inside the box in order to enhance their appeal. For example, Walgreen is adding fresh food to many stores, upgrading its beauty offerings in select locations, and redesigning its pharmacies to improve the customer experience (by making it easier to interact with pharmacists, for instance).
Retailers are also reevaluating their footprints, given the new realities of consumer demand and the rising use of online channels. Best Buy and Gap announced the closure of up to 20 percent of their stores, and some retailers, including Sears and Target, are renting excess space to other retailers.
In an era of frugal consumers, developing the capabilities required to place the right product in the right store at the right price is essential to fuel top-line growth and profitability. Furthermore, customers are demanding a more "curated" selection; they want the right styles, prices, and experience all in one format.
To get the most out of their stores, retailers will also need to tailor them to better reflect local tastes and preferences. This localization effort leads to a better shopping experience, increasing traffic, revenues, and loyalty.
All of a retailer's efforts are ultimately directed to providing a shopping experience capable of attracting and retaining customers. A compelling shopping experience is also a highly effective differentiator that confers competitive advantage. Witness the continued success of the experience-focused retailers, such as Zappos.com and REI.
In developing compelling experiences, retailers must understand the varying expectations that arise in different formats and retail settings, as well as among the different customer segments across those formats. Further, retailers must calculate the cost of providing a specific customer experience (including the implementation cost and the ongoing operational cost) and weigh it against the targeted returns.
Forward-looking retailers are focused on social media, which is likely to become the next generation of e-commerce engines and a powerful new sales channel. In a 2010 survey by Booz & Company, 27 percent of consumers said they would purchase goods through social networking sites, and 10 percent said such transactions would likely be incremental to their regular shopping.
The sales volume in social media is still small, but we expect it to grow to US$30 billion by 2015, nearly half of which will be in the United States. Almost all sizable retailers are already using social media, such as Facebook and Twitter, to connect with customers. Some have already started to build a commercial presence in the new channel. For instance, 1-800-Flowers has a fully functioning store on Facebook.
Though the long-term revenue prospects in social media are appealing, the direct revenue it generates will be only a small fraction of sales for many retailers in the near term. However, to prepare for the future, retailers should be thinking about capabilities they will need to commercialize social media. They should be monitoring the social conversation around their brands and using social media as a channel for building customer intimacy, understanding, and loyalty. Further, they should be considering how to make the leap from getting customers to "like" them on Facebook to getting them to make repeated purchases. (For more detail, see "The Coming Wave of 'Social Apponomics'")
In the past, our year-end missives have prompted executives to call or write us with their own thoughts and comments. We hope this one sparks a dialogue with you about the challenges you face in the coming year, the distinctive capabilities needed to meet those challenges, and how we can help you make your company more prosperous in 2012.
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