‘The three transformative themes creating retail opportunity’

Retailers face a perfect storm of rising costs, narrowing margins and declining volumes. The natural reflex to these headwinds is to cut spending and put strategic projects on hold. 

But life at the top calls for ambidexterity – leadership that is able to play offence and defence at the same time. 

Notwithstanding the immediate pressures that require a response, notably the impact of rising inflation and weakening consumer sentiment, three transformative themes – the climate crisis, digitalisation and skills requirements – are creating an opportunity, and imperative, to build a competitive advantage in retail.

In response, wholesalers and retailers need a strategic plan and bold investment focused on each of the three themes.

1. Net-zero – accelerating progress

The industry must get a grip on a significant challenge. European retail and wholesale value chains are responsible for 40% of EU greenhouse gas emissions, much of which could be reduced with existing technologies. 

However, new investment is required— we estimate 0.3% to 0.9% of annual revenues above current levels — to fund net-zero operations, sustainable products, circular business models and waste management. 

Through these levers, companies can start to build the green business models of the future. The good news is that about 50% of investments, focused for example on reducing packaging materials or switching to clean transport, will produce a positive impact.

If the sector accelerates its progress, it could reduce Scope 1 and 2 greenhouse gas emissions by up to 90% by 2030. Also, with a third of consumers saying they care deeply about sustainability, sustainable products have historically outperformed legacy inventories by about a factor of three. 

At the same time, more and more institutional investors are adopting ESG criteria and channelling capital to greener companies. Sustainable businesses attract more directed and energised employees. What is good for the planet is also good for business.

• Data: Primark and Amazon rank among most sustainable retailers in consumer poll

2. Digitalisation – the basis for growth

Digitalisation is set to drive 90% of the sector’s growth over the coming years. We expect European ecommerce penetration to double to about 30% by 2030. 

But Europe’s established retailers invest only about 2.1% of their revenues in IT, compared with 4.5% to 6% among online pureplays. To grow,  retailers need to add investment of 0.4% to 0.6% of annual revenues over the coming years.

The potential upside of investment in digital is that as much as 50% of tasks through the value chain can be automated, through more digital channels, technology-driven operations, advanced analytics and next-generation IT architecture. 

These present opportunities to embed efficiencies and create a more compelling consumer experience. To master the tech trends that are essential for growth, as well as to build new businesses and transform old ones, investment is key. 

• Research: How 57 CEOs are investing – including Primark, Under Armour and eBay

3. Talent – in focus

The retail industry is the largest private sector employer in the EU but its attrition rate is about 20% – double that of other sectors. There can be no transformation without a talent strategy. 

New skills in digital and analytics, data science and user experience are required, alongside plans for career paths that will drive loyalty. To get there, companies will need to double their annual investment in workforce development, spending 0.1% more of annual revenues. 

As the industry becomes more digital, the shape of the workforce will change. We estimate the sector needs to upskill and reskill 10 million to 13 million people a year up to 2030.

In summary, to complete the triple transformation, retailers and wholesalers will need to invest up to 1.6% of annual revenues, starting from now. 

This sounds like a lot but European players are currently laggards. Investment by US retailers is about 1.9 times that of their European counterparts. 

In an economic downturn, there are clear reasons why some companies recover and grow, while others do not. However, tough times present opportunities.

The next step for decision makers should be to assess how they can play a game of defence – combining measures that drive productivity and focus – while playing offence by investing in the three areas that will define those who win in the next decade in retail.

• Winning the war for talent: How to attract and retain the workforce of the future

Anita Balchandani is a senior partner and leader of UK consumer, and Bartosz Jesse is a partner and a leader in the retail practice, at McKinsey & Company