Commerce of the future

2022. szeptember 14.

The pandemic has caused a leap forward in time, experts say, and trade is on the verge of a transformation unprecedented, or at least not on this scale. Apart from an increase in the proportion of online sales, the change is not yet so spectacular. We asked KPMG’s Head of Global Retail, Paul Martin, to help us understand the changes and give us a picture of what to expect in the future.

What do you think are the main factors shaping trade now and in the coming years?

We are and have been witnessing a lot of changes in retail over the last three years. We can distinguish six factors that are shaping the sector in Europe and many other countries around the world. Geopolitical and macro-economic challenges are the first. And then there is the Covid pandemic, which we temporarily forgot about, but if you look at China, where they are responding to the new wave with a lockdown, you can see that the epidemic is having a severe impact on the supply chain. The second aspect is the issue of cost-effectiveness, which is related to the previous one. Inflation has a significant impact on costs in Europe. Over the last 10 years, profitability in the sector has declined significantly, the global EBIT margin has fallen by 50%. This makes it clear that all costs will rise in the next 12-24 months. Costs of manpower, utility, supply chain costs. So, we need to look at efficiency, but without risking growth plans.

The next factor is the bottleneck in the global supply chain. It is increasingly difficult to get goods from A to B. This not only leads to cost increases, but if there is no product it is also difficult to sell. Market players need to review their supply chain structure to prior closer sources of supply rather than more distant ones. They also need to review their product range to see what is most profitable. The fourth aspect is ESG (environment social governance). Many companies need to show that they are about more than profit. Instead of short-term profit, the longer-term ethical maximization of profit must become fundamental. Given the very low profitability in the industry, combining cost efficiency with ESG considerations is, in my opinion, the best way forward. For example, closer sources will also result in lower costs and a smaller carbon footprint.

The next factor is the merging of distribution channels. We have been talking about digitalization for fifteen years, and the pandemic has fundamentally accelerated the online.  Across Europe, customers have returned to physical stores 6 months after the lockdowns, so they are and will remain important. And in most of the countries they are also the biggest channel for the foreseeable future. So, the future is not online and not offline, but hybrid, where channels coexist. New channels are also emerging, such as social media marketing or Metaverse, for example. The channel structure is becoming increasingly fragmented, so organizations need to think customer-centric and not use a single channel-first approach. And the last, sixth, aspect is customer behaviour. Good place, good product, good price. For centuries, this has been the way of commerce. This is clearly true now, but you also need to know who you want to do business with.

Many digitally driven businesses have the advantage of insight into their customers’ habits, so they offer personalized promotions, price, and fulfilment options. In the age of inflation and cost pressures, this is essential, otherwise it becomes extremely difficult to understand which consumers are profitable and which are not. These are six key points that both retailers and suppliers in Europe need to pay attention to at the moment.

What changes might this bring about in the structure of retail? What steps should retailers take?

Let’s look at what happened after the 2008-2009 global financial crises. Organizations reduced their range and packaging sizes. In food retail, for example, the former 100 gram packs became 80 gram packs and the price remained the same. Retailers closed stores and reduced staffing levels at headquarters. The next 24 months will not be easy and there is no doubt that there will be companies trying to optimize their operations. However, I do not think there is much room for manoeuvre. Rather, we need to think about how to achieve growth.

We need to understand who the consumer is and what shapes their purchasing needs. If I am a member of a family of four with a limited budget, then for me it is all about value and only the cheapest price matters. If, on the other hand, I am an affluent consumer, who cares about sustainability and has requirements for ethical purchasing, then I am potentially willing to pay a higher price. Businesses need to know this about me and the reasons why I buy. To use a CE example: If I am looking to buy a home theatre system for an event or similar, I will prefer the advanced technical features. However, if I am driven by a sudden decision and find out in the morning that I need one in the afternoon, what matters to me is whether it is available near me and whether I can be sure that it is available. In a nutshell, there is a real opportunity to understand who the consumers are and to personalize the way you make contact.

What do you think about the role of D2C?

D2C, direct selling, is definitely an emerging trend and is expected to grow further in the coming years. Many manufacturers and suppliers want to opt for this option to keep profits in-house. The good news for retailers is that it’s not so easy, moving from B2B2C to D2C is not easy. The main activity of dealers is selling to the end customer, but many manufacturers do not have the capabilities to do this.

“The main activity of dealers is selling to the end customer, but many manufacturers do not have the capabilities to do this.”

Some are trying to buy or build this and are increasingly becoming partners with platform service providers who can help them develop D2C offerings, but this still doesn’t make it easy for manufacturers. D2C is most visible in the sportswear sector at the moment. Large global brands have significantly reduced the number of their retail partners from 25,000 to 800. They are concentrating on their best retail partners, their own mono brand stores and their own websites. This is the most advanced model and it shows what can happen in retail. I think there will be a balance. Suppliers will be working with their retail partners and building their own D2C business in the process. But there will be no conflict. We have been talking about real cooperation for decades but in most cases, it has been collision not collaboration. This is now a real opportunity for cooperation. If you look at other industries, car manufacturing, or aviation, you see the only way to reduce costs completely is to start at the beginning of the value chain and go all the way through. Retail is still very fragmented. There is no trust, there is no data sharing, there is nothing to bring the players together. If there is no real collaboration within the sector, it will always be difficult to develop cost-effective agenda.

What could be the fate of smaller independent retailers?  What options are left for them to keep on the market?

In my publication on the future of retailing, I describe seven types of forms that could be successful in the future. We can talk about large, global platforms that sell products and services to consumers. And large global retailers that want to become one. There will be significant national players that will not become platforms but will continue to operate in a omnichannel model. In addition to the D2C already mentioned, there will also be discount players, which are often more profitable than efficient. The last group includes category specialists and independents. Both will have a place in the market. The former will have to sell product knowledge and customer service. They know exactly the category, the product and the customer. Therefore, they can charge a higher price. In the last 3 years, we have seen that during the pandemic, people preferred to stay in the area where they lived, they did not want to travel, and they wanted to do everything locally. And this was to the benefits of the independents. The challenge for them is how, if the world returns to pre-pandemic norms, they will be able to stay in touch with all the new consumers they have attracted as independents.

You can hear about the need for digital transformation five years ago or even longer? How quickly do you think this transformation will actually take place?

I don’t think there is a timeline for that. Digital transformation is a recurring theme. 5, 10, 15 years ago the world changed suddenly, whereas in the previous 2,000 years the business model has not changed. You got the product from A to B and sold it in a physical location. If you were good, you could open more stores to sell more products. Then all of a sudden, online came along and you had to transform your operation. And a lot of organizations are still in the early stages of that. A lot of people ask me how long it takes. I usually answer that it’s like painting the Golden Gate Bridge in San Francisco. It takes two years to paint the whole thing, and when you’re done, you can start again the same day. It’s hard because for human, constant change is a struggle.

How will inflationary pressures affect the transformation process? Could it have a similar effect to the pandemic, but in the opposite direction?

We are in a very interesting situation at the moment. Most business leaders in Europe and North America have never seen inflation because they have not seen it in the last 30-40 years. The price of everything in the supply chain is going up significantly and it affects all cost groups. It is very easy to make a loss by buying something now and selling it later, because later that revenue will be worth less. The big question is how much of the cost increase can be compensated by the margin and how much can be passed on to the end user. Therefore pricing and promotion will become particularly important in the next 6 months. The impact of inflation will reduce resources and the motivation to transform the organization. However, the crisis is also an opportunity, in my view, to make changes that we would not have made in a favourable environment. A challenging period therefore creates real opportunities for brave organizations.

További rovatainkból:

Itt a roller, hol a biztosítás?

Itt a roller, hol a biztosítás?

Idén május 9-én került kihirdetésre a kötelező gépjármű-felelősségbiztosításról (KGFB) szóló 2009. évi LXII. törvény módosítása, amely az...



A nagy érdeklődésre számot tartó sportesemények a műszaki kereskedelemben, elsősorban a televíziók kapcsán, mindig is kiemelt szezont jelentenek,...

Konyhakiállítás 2024

Konyhakiállítás 2024

Videók - Konyhakiállítás 2024Március 1-3 között került megrendezésre a 14. Konyhakiállítás, Magyarország legrangosabb konyha tematikájú rendezvénye....

Share This