Industry
Retail
Omnichannel CX and Intelligent Innovation – The Future of Retail
Highlights
- Even as growth for department stores has remained stagnant, the unique, engaging experiences, and vast assortments on offer have continued to attract shoppers.
- Driving growth amid shorter fashion cycles, supply chain uncertainties, and enhanced customer expectations, has become the biggest challenge.
- Department stores must invest in technologies to enhance in-store experience, strengthen digital channels, and optimize operations.
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Diverging paths
Over the past century, department stores have evolved from selling apparel and accessories, to offering lifestyle in a curated setting.
However, the consolidated sales at top department stores in the US, over the past decade, have struggled to match the pace of the economy or that of the overall growth in retail sales.
Between 2012 and 2022, the US retail market grew exponentially, and apparel and accessories sales increased at a fast pace. However, overall department stores sales declined in the same period. The alarming decline of the segment has resulted in consolidation at the top, stagnation in the middle, and decline or closure of the lower-end department store retailers.
Navigating trends and managing priorities
The 2022 US holiday season characterized a shift in shoppers’ behavior.
Shopping channel trend: A significant portion of shoppers buying online occupied the top spot; online sales during 2022 continued double-digit growth.
Category trend: About half of the shoppers purchased clothes and accessories.
Fashion consumer trend: A higher percentage of male shoppers increased spending on fashion compared to their female counterparts.
Style trend: Sustainability is the new walk the talk—showcased in London, Paris, and Milan fashion shows. Retailers grappled with many questions: Are these fads or are they here to stay? Are the new realities posing new challenges or are they the new opportunities?
The 2023 holiday season was all about personalized connections with loyal, high value, omnichannel customers.
For a luxury department store retailer in the US, a small proportion of its customers at the higher end drove a majority of its annual sales and each of these customers was a millionaire. Personalized connections and unique in-store experiences were the top priorities for this retailer. While, for a fast fashion retailer, an omnichannel customer shopped four times more than a single-channel customer, and a majority of these omnichannel customers were loyalty card holders. Building onto the advantages of omnichannel behavior by offering a seamless experience across channels is a key priority for this retailer.
2024 priorities: Focusing on loyal customers, optimizing operations, investing in technologies are the highlights of business plans and investments. Retailers plan to:
- Grow sales from loyal, high-value customers to offset slowdown in the mass segment. Personalization, pricing, promotions with data science are the key investment areas.
- Drive digital-led innovation in business models and omnichannel experience. A strategic priority for retailers, we see a chunk of their technology investment going into this area.
- Transform the supply chain to minimize disruptions. Artificial intelligence and machine learning (AI-ML) based predictive models, end-to-end visibility, supplier collaboration, and local-sourcing platforms are important technology investment areas.
- Offer best price to shoppers by optimizing costs with value sourcing, controlled capex, and reduced opex. Warehouse automation, in-store shopping-assistance technologies, cross-skills training, digital training modules, and reducing energy and fuel consumption are top priorities.
- Build sustainability at the core of the brand. Traceability, sustainable materials, and circular models are becoming a matter of substance rather than just a statement of purpose.
The quest for growth
Despite the surge in digital shopping options, department stores continue to offer a more wholesome in-person experience.
The experience of a physical store remains unmatched. Customers can find an inviting ambience; personal assistance; a wide assortment of products to see, touch, feel, and choose from; and the option to try on–all under one roof. On the other hand, there is something to be said about shop anywhere, anytime options and express deliveries that have also become the norm.
So, what’s the right balance between stores and digital channels? The dilemma has existed for some time, but the pandemic-accelerated shopper behavior shift has forced business leaders to relook at investment strategies. Key areas of importance include:
- Understanding customer behavior
- Augmenting physical stores with digital channels
- Building a resilient supply chain
- Optimizing the cost of operations
- Managing talent needs
As an example, retailers could consider enhancing store experiences for Gen X and Gen Y customers with deeper pockets, while offering digital channel convenience to their millennials and Gen Z buyers. While stores at premium locations establish the retailer’s brand presence in the region, the digital channel can be enhanced with a marketplace platform hosting a multitude of third-party sellers.
Five growth drivers
Consumer preference for online shopping and doorstep delivery need not mean the end of physical department stores.
Retailers can adopt strategies to remain relevant and competitive. We recommend making bold bets in the following areas:
Seamless omnichannel experience: Like other brick-and-mortar retailers, department stores should focus on providing authentic, immersive, and consistent customer experience across channels. Brick-and-mortar retailers have introduced or enhanced their online capabilities, and a vast majority of customers compare prices and inventory online while shopping in-store.
Bringing in-store experience to digital channels, while extending the convenience of online shopping to stores, requires investments in technologies that facilitate a better understanding of customer behavior, personalized customer journeys, and unique experiences. Providing associates at each touchpoint complete visibility of customer history and empowering them to act on the intelligence are key to driving high levels of loyalty. Department stores must also focus on enhancing omnichannel experience for after-sales service, warranties, returns, and contact centers.
To that end, we recommend investing in unified commerce platforms, mobile point of sale (PoS) systems, customer-data platforms, and AI-driven personalization. Additionally, stores must make investments in augmented reality- (AR) based solutions for virtual try-ons, room configurations and recommendations, real-time product notifications, headless e-commerce solutions, mobile apps with voice assistance and AR, advanced personalized search, site personalization, real-time personalization, deep learning algorithms for personalized marketing campaigns, triggered messages, exit-intent pop-ups and banners, and tailored coupons.
Curated marketplaces: Stores should expand their range by introducing new brands and categories with the products of new third-party merchants to provide customers the convenience of one-stop shopping without corresponding investments in inventory and working capital.
This would require retailers to invest in marketplace platforms, computer vision, natural language processing, and process automation technologies. It would help retailers significantly reduce the time to onboard new suppliers and new products and ensure consistency of information across products, which helps customers in their discovery process.
Small-format and digital-first stores: Small-format stores focused on a sub-set of the categories relevant to a neighborhood and a digital-first store focused on product and service experience will enable department stores to expand their reach and be present where the customers are, while reducing operating costs. When coupled with clienteling solutions and mobile PoS systems, digital-first stores also provide a convenient place for store associates to cross-sell product categories that are not present in the store. These stores serve multiple purposes, including expanding presence in high footfall regions, penetrating new markets, and offering more convenience to shoppers in the neighborhood.
This would call for investing in small stores, an endless aisle, omnichannel order management, and inventory visibility.
Off-price options: When times are good, people love a bargain; when times are bad, people need a bargain.
Luxury retailers have taken note of changing consumer tastes while offering low prices for designer brands. These off-price options satisfy the demands of value-shopping customers looking for a high-quality brand experience at lower costs. Retailers say they can determine the inventory that can be marked down and sold based on a more-value-for-less strategy. The off-price model offers a solution for retailers and brand manufacturers looking for sustained growth and allows customers to browse bargains even in the non-sales season.
Optimized, transformed supply chain: Department stores need to transform the supply chain to deal with the complexities of buying channels, shipping sources, destination nodes, and delivery modes. They should build end-to-end visibility, focus on optimal placement of inventory within the network, and a have clear understanding of the supply-chain cost. All these will enable optimization in packaging, warehousing, and logistics. Increased volatility and shorter business cycles demand shorter product development lead times, better forecasts, and end-to-end visibility.
Retailers will need to focus on technologies such as AI-ML-based demand planning platforms to differentiate forecasting approaches based on product life cycles. They must leverage attribute-matching to recommend buddy items for new items and generate localized size curves. AI-ML can also help them determine the right nodes to stock inventory and optimize inventory levels across the supply network and ensure supply chain visibility focused on shipment, order, inventory, and capacity.
What the future holds
Incremental use of data and technology is going to define the channel-less, connected retail experience for shoppers.
Omnichannel transformation, social commerce, off-mall and mall stores, and curated marketplaces are some of the smart ways retailers can provide excellent digital and in-store experiences.
Going forward, the sustained growth of department stores will depend on their ability to influence customers with curated goods, helping them discover products they want, modernizing store assortments with brand portfolios, and extending seamless convenience across channels.
