Retail Holiday Newsletter
Recapping retail’s successful holiday season
Preliminary estimates indicate that Bain-defined holiday retail sales crushed expectations, growing at 8.4% year-over-year, significantly higher than the 10-year average (see Figure 1). We define holiday retail sales as unadjusted in-store and nonstore (e-commerce and mail order) sales during November and December, excluding sales by auto and auto parts dealers, gasoline stations, and restaurants.
Holiday sales grew 8.4% in 2020, well above the 10-year average
In-store shopping remained surprisingly strong, growing 3.6% year-over-year and making up 75% of total retail sales (down only slightly from 78% in 2019). But nonstore sales―predominantly e-commerce―were the real winner, recording approximately 26% year-over-year growth.
Despite high unemployment rates, declines in consumer confidence, and the surge in Covid-19, many retailers enjoyed a successful holiday. Consumers had more free time for shopping, according to a Bain/Dynata survey, as well as increased savings from earlier in the year. They also reduced spending on discretionary categories such as travel, entertainment, and dining out. Instead, they shopped for groceries, at-home recreational activities, and home improvement projects. As a result, some retail categories flourished while others faltered, despite the industry’s stellar performance overall (see Figure 2).
Performance varied significantly across retail categories this holiday season
Consumers turned to omnichannel offerings and shopped earlier
Amid mounting Covid-19 cases and new restrictions, in-store foot traffic fell almost 19% this holiday season, compared with the previous year. Many consumers turned to flexible pickup options such as curbside, drive-through, and buy online, pick up in stores (BOPIS); even more shoppers relied on delivery.
Retailers also successfully encouraged earlier shopping to avoid stockouts, shipping delays, and carriers’ fee hikes for last-minute deliveries. Consumers hurried to get “guaranteed by Christmas” shipping offers. According to Mastercard, December 12 and 11 were the third- and fourth-largest shopping days of the holiday season, respectively, coming after Black Friday and the following Saturday, but outperforming Cyber Monday.
Ten resolutions for future success
Already, it’s become clear that 2021 will present similar challenges to 2020. Leaders will continue to invest for the future, as we observed last year.
The turbulence of 2020 created a great performance divide within retail, not only among categories, but also among companies within each category. Leaders saw up to 35 points higher revenue growth than their bottom-quartile peers (see Figure 3).
Leading retailers are distancing themselves from the rest
Top performers include those that were winning online long before the pandemic, and those that invested heavily and quickly to enhance their BOPIS, curbside and delivery-fulfillment capabilities. For example, Target accelerated its omnichannel plan by expanding ship-from-store resources through Shipt and by growing curbside and BOPIS offerings, such as adding fresh grocery. It also opened new small-format stores and implemented robotic inventory replacement, investments it had been making before the pandemic. Similarly, Best Buy converted select stores into fulfillment hubs, partnered with intermediaries, and enlisted store employees to help with home deliveries in late 2020.
We know change fatigue is high, and the desire to “return to normal” is tempting. But unless retailers change as fast as their markets, the consequences will be severe. To catch up or maintain their leads, retailers have no choice but to undergo transformations. Investing in these 10 resolutions for the new year―and beyond―is imperative.
Obsess about your customers
Most of the direct marketing emails that flood consumers’ inboxes daily do more harm than good. According to a survey conducted by Twilio and Lawless Research, 94% of customers say they’re annoyed by the current communications they receive from businesses. Even if emails are personalized, they still often miss the mark. Nearly everyone has made an infrequent purchase, such as a refrigerator, only to later receive an email from the retailer asking, “Are you still interested in refrigerators?” with their top five recommendations (which seldom include the refrigerator you just bought).
However, retailers that do personalization well often earn a Net Promoter Score℠—a measure of a customers’ likelihood to recommend a store or brand—that’s 20 points higher than competitors’ scores. They also see sales increases of 5% to 10%.
Many assume that successful personalization requires collecting infinite customer information. But retailers can start small by initiating relevant conversations with customers and responding quickly to their suggestions. They can use basic information beyond browsing behavior, such as age and prior purchases, to tailor messages. In turn, customers happily shop more and share more information, strengthening the relationship in a mutually beneficial cycle.
Over time, astute retailers incorporate social media engagement, credit card data, and other external information to create a comprehensive single view of the customer, while managing data privacy. Applying sophisticated technology systems and advanced analytics, they use this information to further personalize the customer experience. These retailers target shoppers where they browse (stores, websites, apps, social media), suggest products they actually want (with personalized search algorithms and recommendation engines), and tailor offerings to what they care about most (pricing and promotions, fulfillment speeds, loyalty rewards, and more). Leading retailers take a test-and-learn approach to profit from rapid customer feedback and further delight customers.
For retailers that serve multiple customer segments, successful personalization is even more critical. The Covid-19 crisis has disproportionately affected lower- and middle-income Americans. Some consumers will prioritize lower pricing. Others may desire more premium products, perhaps to treat themselves, given fewer opportunities for entertainment and travel. The top-performing retailers of 2021 will understand their consumer bases and use their personalization capabilities to deliver relevant messages and offers.
Many retailers continue to tread water in a sea of product sameness, with little more than inflated discounts to keep them afloat. Most offer some private brands for commodity products—but they’re often lower-cost knock-offs with little customer loyalty. Too few have developed powerful signature products—like Trader Joe’s Mandarin Orange Chicken, Amazon’s Alexa devices, or Costco’s Kirkland sheet cakes―that spur traffic, boost customer loyalty, and accelerate profitable growth.
As online marketplaces make nearly everything available everywhere—often at lower prices—retailers can limit the inevitable race to the bottom by selling exclusive products, often at higher margins than national brands. Many currently get lost identifying and investing in tangential ways to differentiate, from discounting to decorating to window dressing. While these are important to the customer experience, the product itself matters most. If you give customers a superior product at the right price, they’ll go out of their way to get it.
Winning retailers translate comprehensive customer insights into a clear category strategy. They understand that simply replacing beloved national products with mediocre private ones will quickly send customers into the arms of competitors. Instead, these retailers rely on a mix that includes exclusive offerings with national brands, the coveted products of their trusted private brands, limited distribution offers, and value-added bundles of products or services. To grow these offerings, they collaborate closely with manufacturers on development and with functions across the organization on promotion, price, and placement. Few have these skills today, but those that develop them will survive and thrive in the new year and beyond.
With e-commerce growing rapidly, many retailers are building or expanding online fulfillment centers while closing physical stores. Retailers permanently closed more than 11,500 stores in 2020, according to Chain Store Guide, with thousands of additional closures likely to occur over the next several years.
But closures are failing to live up to the promise of increasing profitability. Customers view them as a sign of trouble. The retailer loses the marketing benefits of physical locations and local density. Less traffic is recaptured by other stores and online channels than predicted. Why? Closures don’t fix the fundamental problems.
Many retailers treat stores as “selling sites” rather than distribution nodes within an omnichannel customer journey. Stores can be powerful competitive weapons, even during a pandemic. Retailers such as Dick’s Sporting Goods say that more than 90% of total sales in the second quarter―including in-store, ship-from-store, BOPIS, and curbside pickup―involved a store at some point. Customers appreciate the human interaction, the instant gratification and the ability to touch and try products. What’s more, in-store sales are usually the most profitable channel for omnichannel retailers. Unplanned purchases are higher; distribution and return costs are lower. Many of these benefits persist with BOPIS and curbside pickup.
The economics are even more attractive with microwarehousing technologies, which turn stores into hybrid selling sites and fulfillment nodes. They also build more resilient supply chains, a critical capability, as proven by the pandemic. Leading retailers are going beyond pure cost optimization to consider the supplier base, real-time predictive planning, demand forecasting, and expanded partnerships for stronger fulfilment capabilities.
Retailers like Walmart, Target, and Amazon’s Whole Foods Market are proving the advantages of rethinking stores rather than closing them. They’re investing in the digital in-store experience, across experiential shopping, contactless checkouts, and quick returns, making shopping seamless, easy, and enjoyable for customers. In another year of uncertainty, those that use stores to become truly omnichannel will be better equipped to adapt to changing consumer preferences.
Build real and virtual scale
While the digital age has proliferated the number of choices available to consumers, shopping behavior has consolidated. The majority of all online shopping trips now start on Amazon, and it is by far the most used retail app. According to research we conducted with SimilarWeb, the company enjoys online conversion rates that are nearly twice as high as the top 30 retailers’ average. It’s no wonder. Amazon offers extraordinary selection as well as an ecosystem of convenient services like music, videos, and fast shipping. By selling its capabilities to others, even competitors, Amazon has gained greater scale, cost efficiencies, and access to customer data across its ecosystem.
Amazon’s strategy creates a serious dilemma for traditional retailers: How can they boost traffic and customer engagement if they are not Amazon and lack Amazon’s investment capacity?
Increasingly, growth requires partnerships. Social platforms, including TikTok, Instagram, and Facebook, are building their commerce offerings, giving retailers like Nike the opportunity to convert new customers on the platforms and delight them with embedded, seamless checkout experiences. Delivery aggregators such as DoorDash and Instacart are expanding into nonfood retail, providing Macy’s, Sephora, and others with fast delivery at scale. Retailers such as Amazon and eBay are offering expanded product selection and distribution through their growing marketplaces. And some retailers are forming buying groups, enabling participating retailers to get better deals on merchandise through their collective scale.
Industry leaders will attract the best partners and become great partners themselves. Only those with exceptionally strong brands and loyalty―not to mention the capital for new capabilities―can sit on the sidelines and wait for customers to come to them. Some may choose to build their own entire ecosystem or hybrid ecosystem: Think of how Walmart has added partnerships with DoorDash and Instacart to its third-party marketplace and owned delivery capabilities. The rest will opt for strategic partnerships, which naturally means ceding some control over portions of their customer journeys and data. But giving up some operational control to gain scale and growth is likely worth it. In fact, for some retailers, it may be the only way to survive.
In disruptive periods, strong companies that reshape their organizations and invest in growth, often through M&A, typically emerge even stronger. Following the Great Recession, from 2009 to 2011, the number of retail deals greater than $1 billion increased 25% globally, and deal values skyrocketed by nearly 130%.
The pandemic has upended the retail industry, leaving more businesses seeking partnerships or financial relief. Part of the fallout has been the number of retail bankruptcies, which were up 30% to 40% from 2019. The disrupted competitor landscape presents an opportunity for retailers to round out their owned capabilities and build scale beyond ecosystem partnerships.
But one-off deals won’t be enough. Successful M&A comes from experience. Frequent acquirers far outperform inexperienced dabblers. Bain research shows retailers with above-average deal activity―through several small acquisitions or multiple large deals―realized 8.5% to 10.5% total shareholder returns (TSR), compared with the market average of 6.7%.
These acquirers know that doing a deal, from sourcing to diligence to closing, is the easy part. Postacquisition value creation is what separates great acquirers from the rest. Integrations often go awry. After all, 20% of major corporate changes fail to deliver, producing less than 50% of the expected results.
Companies that do consistently succeed don’t just know how to pick ‘em; they also know how to successfully integrate acquisitions―and divest when needed―to keep their portfolio strong. The best retailers also establish a repeatable model for M&A, setting up the people, tools, technology, and processes to succeed again and again.
Tap the power of purpose
Business leaders, politicians, and social activists are advocating for environmental, social, and corporate governance reforms with increasing urgency. Many companies are already making transformative changes. More than 30 have signed Amazon’s pledge to reach net-zero carbon emissions by 2040 (a decade ahead of the Paris Agreement). And some have sustainability at the core of their brand purpose. For instance, Patagonia’s mission is to “use business to inspire and implement solutions to the environmental crisis.” But others still believe that sustainability creates tension between purpose and profits.
In actuality, many baseline sustainability initiatives―such as optimizing logistics and delivery routes, increasing energy efficiency, eliminating single-use plastics, or swapping paper mailings with email―can generate savings. After all, carbon generally costs money. Retailers can give customers incentives to purchase larger orders instead of several smaller ones. Bain research has shown that online transactions with twice the number of items and no split shipments can reduce per-item emissions by up to 30% and shipping costs by up to 50%. For example, after two years of declining profits, H&M increased its focus on omnichannel fulfillment and sustainability. As a result, it enjoyed profitable growth in the second half of 2019.
Not all sustainability initiatives will be immediately profitable. Some will require real trade-offs, but can still result in tangible long-term benefits. For example, companies that invest in sustainability can increase employee retention and top-line growth. More than 70% of employees said they were more likely to work, and stay, at a company with a strong environmental agenda, according to a Fast Company survey. And 65% of consumers say they feel a responsibility to purchase brands that advocate sustainability, while 90% are likely to switch to sustainable brands of equal price and quality.
If these reasons aren’t enough, risk mitigation may tip the scale on sustainability. Corporate sustainability reporting standards are gaining traction, and regulatory environments may change faster than expected. The media is also quick to spotlight consumer health and environmental scandals. Retailers that aren’t building the capabilities required for additional transparency or stricter regulations could soon face the consequences.
Most retailers will begin with small steps to reduce waste and implement minimum reporting standards. But those that treat sustainability initiatives like their other innovations will get ahead of the competition and stay there. Industry leaders will enlist the entire organization to identify and implement practical wins, creating a culture with the motivation to overcome setbacks.
Many companies need to take a clear-eyed look at their approaches to diversity, equity, and inclusion (DE&I) to create workspaces where all people feel they belong, have opportunities to learn and grow, and can make meaningful contributions.
DE&I is becoming a top priority in employee and customer decision-making. As of August 2020, more than 75% of employees and job seekers say a diverse workforce (across gender, race, ethnicity, religion, and sexual orientation) is an important factor when evaluating employers. More than 60% say their employer should be doing more to increase its diversity.
A diverse workforce is able to better understand and quickly connect with customers. For an industry that sells products to customers of all ethnic backgrounds and has a heavily female customer base, retail doesn’t always reflect that profile in its boardrooms, marketing departments, or even sales floors.
Sustained diversity requires inclusion, ensuring all individuals can be themselves and fully participate within an organization. It’s not just the right thing to do. Inclusion leads to better business outcomes. Employees in “speak-up” cultures are 3.5 times more likely to contribute their full innovative potential, according to a 2013 Harvard Business Review study. And 64% of consumers say they’re more likely to consider or purchase a product after seeing an ad that they consider to be diverse or inclusive.
Beyond diversity and inclusion, equity is the ultimate goal. Equity means that the structures, systems, and processes in place ensure fair treatment, access, opportunity, and outcomes for all people. To achieve it, business leaders must recognize that DE&I is not just an HR program or even a destination, but an ongoing journey―a change in the mindset, processes, and behaviors of everyone in the organization.
Industry leaders will invest to understand their starting points and engage employees to define a bold ambition. They’ll establish quantifiable metrics to track progress. They’ll transform recruiting, training, and promotion processes to increase representation in leadership. They’ll commit to a culture of inclusivity and equip their teams with the tools for open and direct dialogue. Externally, they’ll consider DE&I as an integral part of the customer experience, from marketing to partner selection.
It will be a complex and challenging journey, one that requires a tailored, rather than one-size-fits all, approach. But every retailer has an obligation to start down the path.
In the early 1900s, American engineer Frederick Taylor tried to improve workplace efficiency through “scientific management.” With deceivingly simplified principles, his methods achieved fame around the world. But this backfired, damaging productive relationships between managers and their employees.
Sadly, Taylor’s principles continue to dominate management mindsets more than a century later. Today, with increasingly educated and mobile employees, the roles of managers and ways of working must evolve from this approach (see Figure 4).
Four principles of modern management can improve workplace efficiency
Retail leaders will add the greatest value not by commanding and controlling more efficiently, but rather, by unleashing their organizations’ human potential more effectively. It starts by empowering and listening to talented employees. Managers that hear their employees will not only increase their team’s personal fulfillment, but also uncover profitable growth. Cultures that value performance and inspire employees are almost four times more likely to be top performers on growth, profitability, and TSR.
In addition, Bain research shows that the best leaders effectively manage time, talent, and energy to keep their employees engaged and inspired—and 40% more productive than the rest. This means that they accomplish as much by Thursday morning at 10 a.m. as most organizations do by the end of a very long Friday. It also means that through the miracle of compounding, over 10 years, the best will generate 30 times more output than traditional competitors.
Find the fuel to grow
An old expression says, “you get what you measure.” Well, most retailers measure short-term sales and profits far more frequently and intensely than they measure customer satisfaction. And they often find that digital channels deliver lower margins. The reality is likely even worse. Many retailers are misallocating or not fully allocating costs for omnichannel offerings. As a result, many executives hesitate to invest in them.
But if there’s one trend retailers can bet on, it’s the continued growth of omnichannel shopping. Many customers are embracing, and loving, BOPIS and curbside pickup. In grocery, the Net Promoter Score for these channels increased an average of 29 points from the third to fourth quarters of 2020, according to research we conducted with ROI Rocket. As the pandemic wanes, leading retailers won’t snap back to their old ways of working. Instead, they’ll improve and increase the profitability of these offerings by:
- Increasing delivery speeds while reducing costs. Speed is the key to success in omnichannel. And the keys to speed are getting the right inventory close to customers (a significant benefit of physical stores) and increasing flow efficiency (such as reducing wait time in deliveries). Leading retailers systematically root out and eliminate wait times, use automation and training to expedite picking and packing, and pursue partnerships to increase essential skills.
- Reducing the number and cost of returns. The goal isn’t free returns, it’s no returns. Great omnichannel retailers are creating digital tools to help customers select the right products.
- Sharing costs with suppliers. Suppliers benefit from easy access to customers. Retailers can work with suppliers on pay-for-performance trade programs, better placements, customer insights, or subscription programs (such as Amazon’s Subscribe & Save).
- Adjusting their revenue models. Creative retailers are also sharing costs with customers and other partners, through fees for faster delivery, value-added-services such as Amazon Prime and Walmart+, and more. Advertising is another opportunity for monetization. Instacart, for example, generates approximately 30% of its revenue from advertising and about 40% from consumer fees and markups.
There may be some trial and error in calibrating omnichannel profitability, especially while improving the customer experience. But retailers that get it right will reap long-term benefits.
With every annual budget cycle, market conditions change, technologies advance, competitors adapt, customer needs evolve, and what was once a prudent expenditure falls out of alignment with current realities. Managers seek to cut expenses to improve margins, typically gravitating toward the easiest categories to cut, such as store labor or marketing. In return, customer satisfaction erodes, shoppers turn to competitors, sales decline, and next year (if not sooner) the familiar cycle repeats.
Sam Walton had a sage philosophy: “Every time Walmart spends one dollar foolishly, it comes right out of our customers’ pockets.” Rather than asking the finance department for additional funds to create another layer of management, perhaps a better question is, “What would a customer think of such spending?” By examining every dollar in every corner of the organization through the eyes of the customer, retailers can stop wasteful spending, reduce layers of bureaucracy, and shift spending to initiatives that increase customer satisfaction and loyalty to fuel growth.
Cost of goods sold, an often-overlooked area that makes up 60% to 80% of retailer expenses, is a good place to start. Some retailers have improved their gross margin by 150 to 300 basis points through better, and often mutually beneficial, collaboration with vendors. They start by taking a customer-centric lens to their assortment to reduce complexity, increase space for the products customers love, and link decisions to vendor negotiations. Retailers can make similar customer-friendly saving decisions by optimizing promotions and evaluating selling, general, and administrative costs (see Figure 5).
With the right capabilities and mindset, successful and sustained cost transformation efforts can translate to higher TSR of 20% to 25%, more than double the industry average of 10%.
Retailers can find saving opportunities across all cost buckets
Opportunity emerges in 2021
Making bold New Year’s resolutions is popular and easy. But fewer than 20% of people who make resolutions actually keep them. This year can be different. Continued disruption creates an environment ripe with opportunity, and retailers that invest will come out ahead. We’re optimistic about 2021 and the role that retailers can play in restoring hope and prosperity to the world.
Until next season
This is the last issue of this year’s holiday newsletters. Thank you for following the season with us. We hope you’ve enjoyed our discussions on Singles Day, Amazon, consumer holiday shopping preferences, and 2021 resolutions. The full series can be found here.
We look forward to keeping in touch with you over the coming months. We’ll be back later this year to share our 2021 holiday outlook. As always, we welcome your thoughts and questions.
About our research partner
Advan provides hedge funds, real estate investors, retailers, and businesses with insights into foot and vehicle traffic and behavior that enable them to make better business and investment decisions. Advan processes billions of daily foot traffic observations from thousands of cellphone applications on 150 million locations and more than 2,500 companies across all sectors. Advan is headquartered in New York City. For more information, please visit www.advan.us.
The authors would like to acknowledge Sarah Irizarry, Bela Uribe, Noopur Kamal, and Sneha Karkala for their contributions to this newsletter.
Net Promoter®, NPS®, NPS Prism®, and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld. Net Promoter Score℠ and Net Promoter System℠ are service marks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld.