New York – June 10, 2019 – The rules of retail have fundamentally changed.  Success in the retail industry often used to hinge on being bigger than the competition.  Skillful operators that were No. 1 or 2 locally tended to enjoy higher profit margins. But in this era of rising consumer demands and digital advances, local leadership is only part of a winning formula.  Absolute scale —one that can fund the unprecedented investments required to stay competitive with the likes of Amazon and Alibaba as the industry digitalizes – rapid innovation and data-analytics expertise are now just as important.

Yet, many retailers have a great deal of work left to do to secure their future.  

According to new analysis by Bain & Company, The Future of Retail: Winning Models for a New Era, retailers in the U.S. accounting for nearly 30 percent of the sector’s entire profit pool are currently at risk of takeover or failure unless they can address specific shortcomings in scale, innovation and data-led consumer understanding.

“The threats to the industry are wide-ranging, but we believe some retailers still have time to develop a winning approach,” said Marc-Andre Kamel, who leads Bain & Company’s global Retail practice.  “By the same token, those already in a strong position will have to move even faster to maintain their competitive edge.”

Bain & Company has identified five retailer models that are likely to thrive in the future. Those that do not fit these models are in serious danger.

Ecosystem players.  One of the strongest retailing models of the future belongs to the far-reaching “ecosystem players” – companies that are building one-stop shops for consumers, including places to browse, buy, read, chat, play and more. Their ecosystems also offer all-in-one solutions to other vendors, supplying access to both customers and services, such as logistics, advertising, analytics and payments. But being an ecosystem doesn’t guarantee growth and profitability. There is a risk of being displaced by another ecosystem. This has been happening to eBay, for instance, at the hands of Alibaba in China, and Amazon in the U.S. and Western Europe.

Scale fighters.  Retailers following this model have access to absolute scale as well as local relative market share leadership. Yet size is not their only defining characteristic. They also move fast despite their mass and are deft at innovation, aided by a larger-than-average investment in IT. To maintain their strong position, they will need to maintain this creative edge, while managing traffic carefully—both online and in physical stores—and diversifying into new profit pools.

Value champions. These are low-cost chains that are evangelical about passing savings to their customers. But low prices are not enough. True value champions like Aldi, Lidl, Costco, T.J.Maxx, and Primark manage to offer a good-enough experience – often one that is less spartan than the pricing would suggest. To thrive in the future, they will need to broaden points of distribution in markets with lower penetration, reduce their supply costs and innovate to make their product range and value proposition even more appealing.

Hitchhikers.  “Hitchhikers” are a relatively small band of retailers that have distinctive capabilities in areas such as design and product development. However, they lack the absolute scale now required to keep pace with must-have investments in logistics, IT systems, advanced analytics and other capabilities. To resolve this strategic challenge, they borrow scale by partnering with other companies—effectively “hitchhiking” with them. In the long run, they will do well if they can excel at product development and marketing, especially staying at the cutting edge of search-engine optimization.

Regional gems.  Like hitchhikers, “regional gems” also lack the absolute scale that is increasingly vital in the industry, but their strong local leadership position has given them an advantage in the past, and may continue to grant some of them a defensible niche.  However, online players, with their far broader assortment, are eroding the benefits of locally tailored product ranges, for example, while data analytics is yielding the sort of granular insights into customer preferences that used to be the preserve of “feet on the street” local operators. The best defense for regional gems may be to invest even more in frontline staff and the digital tools that support them, while also strengthening their customer relationship management.

“These models for future retail success capture the new strategic priorities of a sector in flux. They can help executives gain a candid understanding of where their company might be headed, and alternative paths that they could yet take,” said Suzanne Tager, global senior practice director for Bain & Company’s Retail practice.  “No retailer can afford to sit still. Many have to figure out how to escape an unsustainable position. Others need to get even better at their current value propositions.”

Retailers that, as things stand, do not fit one of these five winning models will face a tough challenge meeting the strategic demands of the future.  These companies fall into two groups. One consists of “legacy laggards”: once-mighty businesses that have fallen on harder times as they struggle to adapt to market changes.  The other threatened group of retailers, paradoxically, often generates positive headlines. These “exciting but unsustainable innovators” catch the eye because of their pioneering—and often digitally powered—business models. Yet easy access to capital can mask the fact that they are subscale and lack a proper profit engine to support their ongoing investments.

While executives will face different strategic choices depending on their company’s starting point, five imperatives are likely to apply to all:

• Strengthen your differentiation today and prepare for a more innovative future.  Ditch the me-too strategy and nurture individuality.  Think strategically beyond the next quarter and anticipate future disruption.
• Obsess over customers and their experiences.  Use distinctive marketing to boost traffic (maybe teaming up with others). Worry about the most important episodes in the customer’s journey, not the inward-facing details of your sales channel.
• Find the fuel for technology investments.  Cut costs without hurting shoppers’ experience. Buy or borrow scale through M&A or partnerships. Join an ecosystem— or, for the select few, build one yourself.
• Use data to automate more decisions. Build the capabilities needed to master data analytics. Change culture to be more hands-off on decisions such as basic assortment, replenishment and pricing. Concentrate your finest minds on more complex challenges.
• Speed up innovation. Embrace Agile principles such as cross-functional teams and rapid prototyping. Take a more dynamic approach to capital expenditure by copying venture capital techniques.

Editor's Note: To arrange an interview, contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

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