A new formula for retail recovery and growth

A new formula for retail recovery and growth

Stagnating profits and sweeping changes in consumer behavior triggered by the pandemic presents retail organizations with an opportunity to rethink and restructure.

Today’s apparel and discretionary retailers find themselves scrambling to maintain profit levels or recapitalizing and facing a heavy debt load. Apparel retailers—even successful ones—can only remain stationary for so long. As the market matures and consumer trends change, sales begin to dip and profits plateau or decline if their offerings don’t continue to evolve. Over the past 10 years, the apparel industry has seen it play out time and time again: Those who fail to adopt pay the price in profits.

Entering 2020, US discretionary retailers were facing challenges on multiple fronts. The ongoing coronavirus (COVID-19) pandemic is exacerbating these challenges and creating new ones that further squeeze retailers’ profits.

Factors already contributing to retail cost pressures and profit squeezing include:

  • Increasing rent and labor expenses
  • Declining in-store foot traffic
  • Reduced overall category spend
  • Intensified competition

The pandemic effect

Many consumers were conditioned over the years to buy apparel and other discretionary items on sale, in stores, and with high-touch customer service. The COVID-19 pandemic has accelerated changes to consumer buying habits by as much as five years and increased the collective power of their demands for convenience and value in every aspect of the retail shopping experience. Still, today’s consumer trends are quite different than those of six months ago. COVID-19–related health and safety concerns have changed the definition of a frictionless purchase, whether it’s in-person or online.

Having redefined expectations for convenience and value, today’s consumers are likely unwilling to return to their past purchasing habits and lower their expectations to previous levels. Apparel and discretionary retailers should seek to keep current with consumers and understand which aspects of convenience their customers are willing to pay for so they can target their investments accordingly.

Retail and innovation: it’s now or never

While retailers work through the short-term challenges of mitigating consumers’ COVID-19–related shopping concerns, they should also focus on long-term demands and opportunities, which include efficiently manage costs, strategically invest in retail innovations, and adopt a business model that enables them to stay agile with evolving market and consumer demands.

Some of those investing in retail innovation focus on building out their existing R&D function. Others—especially those interested in accelerating time to market—decide to acquire new capabilities.  As consumer needs continue to rapidly evolve, retail M&A is likely to increase. Reaction time to emerging trends has become a strategic differentiator, and consumer M&A is a way to leapfrog competition.

Five archetypes for retail recovery

There’s an opportunity on the back end of the current health and economic crisis for retail recovery. But organizations should take steps now to rethink and restructure how they do business to stay ahead of changing consumer needs and demands. Our analysis identified five archetypes that can put them on the path to sustained profitability. CEOs and their leadership teams need to pick the right archetype and quickly move forward with confidence.

The tech trend-setter is an established brand and omnichannel mass retailer with value-driven customers and a traditional buy-and-stock model. Its profit model is high-volume, with targeted algorithmic advertising for white label products and an agile supply chain. Strategies for success include:

● Emphasize multichannel digital shopping

● Offer one-click order and subscription services

● Redefine returns processing (such as one-click, prepaid, and labeled)

● Expand complementary services for “one-stop shopping” experience

● Establish in-store model for adjacent brands

The emerging threat archetype is typically a market-disrupting, direct-to-consumer brand with price-sensitive customers and minimal warehouse model. It has scaled profit volume with minimal infrastructure, a vertically integrated supply chain, and highly targeted advertising. Strategies for success include:

● Establish alliances for omnichannel opportunities or store-in-store models

● Implement frictionless returns processes (such as home pickup)

● Utilize minimal showroom-style locations

● Promote brand awareness through pop-up shops in select target markets

● Use artificial intelligence (AI) to drive bundled pricing and loyalty programs

This archetype is an established omnichannel brand with flagship stores, loyal consumers, minimized distributors and inventory hubs. They offer high-quality, midpriced apparel through outsourced manufacturing and see revenue growth through innovation. Strategies for success include:

● Rationalize footprint and minimize locations focused on foot traffic

● Redirect real estate investment to experiential stores in key markets

● Identify alliances for dedicated in-store space at mass retailers

● Prioritize direct-to-consumer online sales

● Upgrade the digital platform and implement AI-driven loyalty programs

This is an established omnichannel, fast-fashion brand with high foot traffic and trend-focused consumers. These brands profit through high sales volume, in-house supply chains, and cost-efficient production. Strategies for success include:

● Rationalize underperforming stores

● Expand online platform with “in-store” services (such as virtual dressing rooms)

● Provide curated content upon login or purchase

● Incorporate white label basics to drive margin expansion

These are usually non-established, specialty retailers with high-end price points and loyal and social media–based consumers spread out over a boutique brick-and-mortar footprint. They rely on price point, service experience, and taking market share from established brands. Strategies for success include:

● Expand through adjacent businesses (such as athletic apparel and digital workout platforms)

● Provide a personalized consumer experience through online and in-store shopping

● Produce high-quality goods at an aspirational, yet achievable price point

● Drive a social media- and influencer-focused marketing strategy

● Rationalize footprint to highly targeted locations with a boutique footprint


Read the full report here.

2020-10-20T21:16:47+00:00

About the Author:

Anthony Moran
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