Overcoming Digital Disparity: How Retailers Can Drive Profit and Competitivenessby Dan Smythe and Jay Hentschel

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Under digital duress There are two common misperceptions that have given retailers false comfort:

• Thinking that the cost to serve through digital would be less than in store.

• Believing that digital pure plays would be profitable when they reached a certain size.

The truth is now setting in as retailers see a negative correlation between multichannel and shareholder returns.

There is no denying that customers are leading the digital dance and retailers have no choice but to get out on the floor. However, the difference among the industry leaders and followers will be in who takes the right steps to make digital profitable. Cost-reduction initiatives can help, but they aren’t the only answer to surviving digital disruption.

Digital: good for growth, bad for profits Mature retailers need digital channels to fuel growth. But they struggle to make money in these channels due to price pressure that is driven by information transparency and the high cost to serve. Consumers have more power in the digital age, and they are flexing their muscle by shopping around.

Digital has rattled the retail landscape on a number of fronts, and retailers are left to pick up the pieces. Droves of retailers have gone multichannel because that’s where the customer is going—but it’s not necessarily where the profit is.

Five years ago, 78 percent of consumers used at least one online channel when searching for merchandise. Today, 88 percent do—and four in 10 want even more digital interactions than what companies are providing.1 Retailers have been quick to respond, but profit margins are lessening as sales continue to shift to digital channels. Multichannel retailers saw digital sales grow 20-30 percent in 2014, but at the same time, their overall sales grew only 2-5 percent.2 Retailers must reverse this trend quickly to maintain competitiveness.

According to Accenture’s 2015 Seamless Retail Survey, 80 percent of shoppers have “webroomed” or “showroomed” within the last year, and 72 percent said best price was a key influence.3 Delivery speed and scheduling are both important to online shoppers, but meeting these desires has inflated direct-to-consumer fulfillment costs.

The digital boom also has massively increased online supply while there has only been a small increase in demand, creating overcapacity.

Growth 15-20%

Growth 5-10%

Growth 2-5%

Net Profit 3%

Net Profit 6%

Net Profit 0%

Comp-store Sales 1-2%

Digital Sales 20-30%

Digital-only retailers

Store-only retailers

Multichannel retailers

Figure 1: Retailer’s growth and net profits in 2014.

Source: Accenture analysis based on Retailers’ financial statements and earnings announcements

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The book stores and consumer electronics retailers that have gone out of business in recent years illustrate that it’s not just about using the digital channel—competitiveness comes from having the cost structure to afford digital.

“More” isn’t a moneymaker New channels may increase revenue, but they put profits and competitiveness at risk. Most retailers have invested in multichannel. However, they leaped before looking at the future financial burden.

Multichannel retailers are disadvantaged because they are footing the bill on:

Store costs: Store costs can be upwards of 15 percent of sales for a store-based retailer and 0 percent for a direct retailer.5

Supply chain: Supply chain costs are typically 2-3 percent of sales for a store-based retailer and 10-15 percent for a direct retailer.6

IT: IT costs are typically 1 percent of sales for a store-based retailer and 4 percent for a digital retailer.

Stores like Macy’s have adapted to the imbalance of digital supply and demand in retail by getting creative about how they use their assets. When stores were underperforming, instead of closing them, they turned them into distribution centers to support the digital channel (while also maintaining a balance of brick-and-mortar stores).7

Three ways to toughen upIt is time for retailers to ratchet up their competitiveness and not be left in the dust of digital disruption. Here’s how:

1. Look at the sum, not the parts. Taking a collective, holistic view of the business is what can unearth new ideas for how to save costs. Silos make it difficult to see beyond channels. For instance, how can a retailer think of its investments in digital and stores as mutually exclusive? By looking at digital and stores in conjunction, retailers can determine how to take advantage of assets and capabilities to achieve the lowest possible costs.

It’s also important to be realistic about when and where to invest. Digital may not always be the way forward. Associated British Foods (ABF), the parent company of discount retailer Primark, has no plans to offer online shopping. Instead, they have chosen to open stores quickly in existing countries. “Primark is not broken,” says ABF Financial Director John Bason. “So why try and fix it?”8

Argos is a retailer that is successfully looking at the sum of its parts in the digital world. With 40 percent of its sales coming through digital and 90 percent of transactions made in store, Argos recognized the opportunity to unify the two worlds. The company decided to open digital stores that replace catalogs with iPads and paper/pencils with dynamic touchscreens. Customers can browse more than 20,000 products and order them through an iPad, collecting them minutes later at Pay-and-Collect tills.9 Argos’ new digital approach has helped Home Retail Group to increase sales and pre-tax profits.10

The difference among industry leaders and followers will be in who takes the right steps to make digital profitable.

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2. Get costs in line.Being agile enough to compete isn’t a one-time exercise that happens by just cutting costs. Success comes from reinvesting those savings in activities that will drive competitive advantage and revenue growth, such as creating a more efficient operating model, embedding enterprise-wide process excellence or building leading-edge capabilities.

Target is among the companies strengthening the core. Positive Q1 earnings in 2015—first quarter digital sales increased 38 percent over 2014—show that the company is growing digital and increasing profitability at the same time. First quarter sales were strong in signature categories in stores and online. Target is controlling costs and working in more agile ways, such as removing layers of approval and accelerating decision-making through a leaner top-level workforce. They continue to invest in technology and supply chain capabilities that get products to customer when and how they want them.11

3. Team up. Retailers should look to the broader ecosystem to see where partners can bring products or capabilities to complement their strengths. For example, savvy retailers tap into a network of partners to help manage the cost profile and enhance the customer experience. Whole Foods has partnered with Instacart to deliver Whole Foods products in as little as one hour. Customers can also use Instacart to order items and then pick them up in-store. By teaming up, customers get the delivery benefits while Whole Foods avoids managing complex logistics.12

When Samsung sought to compete with the likes of Apple, the company looked the find the most fertile ground to establish a retail partnership. Best Buy proved to be Samsung’s best bet as it is the world’s largest consumer electronics retailer, and Samsung brought over 1,400 experience shops into Best Buy stores, going beyond traditional shop set ups and providing a better customer experience.13

It is also important to maintain strong relationships with suppliers—relationships where mutual success is the goal. Suppliers that are accountable for performance, that can offer volume-based pricing and that can help you get products to customers faster should be your preferred partners.

Time to recalibrateMany retailers have kept an eye on the digital top line rather than the bottom line. They assumed that a multi-channel strategy would increase their competitiveness. Indeed, new channels can be a source for growth, but they may lead to a highly complex cost structure that has an impact on profitability.

Now is the time to take control amid digital disruption. Take a broader view on channel investments to make strategic decisions that can drive growth. Make cost reduction sustainable. Find the right partners who can help build business and improve the customer experience. The potential rewards of taking action boldly and quickly are immense.

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Contact the authorsDan Smythe daniel.l.smythe@accenture.com

Jay Hentschel j.edward.hentschel@accenture.com

Join the conversation: @AccentureStrat

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

About Accenture StrategyAccenture Strategy operates at the intersection of business and technology. We bring together our capabilities in business, technology, operations and function strategy to help our clients envision and execute industry-specific strategies that support enterprise wide transformation. Our focus on issues related to digital disruption, competitiveness, global operating models, talent and leadership help drive both efficiencies and growth. For more information, follow @AccentureStrat or visit www.accenture.com/strategy.

References1 Accenture Study: “Customer 2020: Are You Future-Ready or Reliving the Past?”, 2015

2 Accenture analysis based on Retailers’ financial statements and earnings announcements

3 Accenture Seamless Retail Study, 2015 4 Accenture analysis based on Retailers’ financial statements and e arnings announcements

5 Accenture benchmarks6 Accenture benchmarks7 Tom Ryan, “Macy’s, Others Turn Stores Into Online Fulfillment

Centers”, Forbes, April 20138 Ese Erheriene, The Wall Street Journal, “Primark Parent: No IPO

or Online Shopping for Us” July 11, 20149 Ian Newcombe, Sanderson Multichannel Retail Blog, “Argos:

the Multi-channel Store of the Future?”, March 26, 201410 Chloe Rigby, Internet Retailing, “Digital transformation helps

Argos owner report 32% profits rise,” April 29, 2015.11 TheStreet, “Target (TGT) Earnings Report: Q1 2015 Conference

Call Transcript;” conference call took place on May 20, 2015, 10:30 AM ET; transcript accessed online May 22, 2015 at http://www.thestreet.com/story/13159058/1/target-tgt-earnings-report-q1-2015-conference-call-transcript.html

12 Whole Foods Company News, “Whole Foods Market® and Instacart partner to offer one-hour delivery across 15 major U.S. cities” September 8, 2014

13 SAMSUNG, “SAMSUNG Joins Forces with Best Buy to Provide Consumers a Unique Mobile Shopping Experience” April 4, 2013

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