FRESH TAKES ON BIG IDEAS

For the retail industry, the past few years have brought quite low lows (think store closures and supply chain disruptions) and quite high highs (think robust consumer spending and innovations in delivery models, like curbside pickup and “buy online pick up in store”). Today, many retail executives are still trying to find their footing and figure out what comes next, at a time when all of retail’s main stakeholder groups—consumers, suppliers, employees, and investors—are raising the bar on what they expect from retailers. But one thing is clear: consumers have been and will continue to be in charge.

That means that now, more than ever, it’s critical for retailers to truly understand the consumers they serve today and anticipate how consumers’ expectations and behaviors will shift tomorrow. The best retailers are recognizing the complexities of consumer behavior and investing in capabilities that allow them to stay aware of what’s happening, almost in real time. And instead of looking at consumers as distinct segments—as in, “there are segments of consumers who are spending more money and looking to splurge, and there are other segments of consumers who are spending less and seeking value”—the most successful retailers are realizing that, actually, almost every individual customer is doing each of these things. The same consumer is splurging and saving at the same time.

For example, we see that nearly 80 percent of US consumers are trading down—but 40 percent are also finding ways to splurge. They’re most likely trading down and splurging in different categories, but the point is that the same consumer can exhibit both sets of behaviors. Likewise, we see that people are demanding both value and sustainability. So the most astute retailers are developing a more nuanced and dynamic understanding of where, when, and how consumers want to be served.

Generating deeper and more detailed insights about consumers is one thing. Acting on those insights is yet another—and, of course, there are costs involved in doing that. We see the best retailers making bold moves now to create new, complementary profit pools to help fuel their investments in the customer. In other words, they’re starting to build ecosystems and go “beyond retail.”

Retailers are developing their “beyond retail” strategies in more—and more creative—ways. They’re starting to think: What role can a retailer play in providing healthcare? Or in providing telephony and connectivity? Or financial services, travel, or entertainment? How can they become more integrated into consumers’ daily lives? I think we’re going to see many more new and fresh versions of how this ecosystem dynamic actually manifests.

“We see that nearly 80 percent of consumers are trading down—but 40 percent are also finding ways to splurge.”

Retailers will have many choices on where and how they play, but as they think about offering new services and launching new businesses, their decisions really must be consumer-driven. One common pitfall is when a retailer says, “It would be fabulous if we could get our consumers to buy X, because that would be a margin-enhancing business for us. It would be really attractive from a P&L perspective. Let’s get into that business.” That’s the wrong way to make those kinds of decisions.

Instead, it should be a matter of company leadership asking: “What distinctive capabilities and assets do we have? What are consumers actually looking for, and where is there a gap in what consumers are being offered today? How could we extend our distinctive capabilities to create value across our ecosystem?” The retailer then needs to figure out how to do that in a way that’s accretive to its economics—and maybe that means using a different business model. Maybe it’s a partnership or a joint venture instead of a wholly owned business, for example.

For a retailer to go beyond retail is a complex undertaking, but we know that the industry is ready for it. In fact, the best retailers are already doing it. We’re seeing that most of the economic profit generated in the retail sector is increasingly concentrated among fewer companies—and in many cases, those are the companies introducing some of the most innovative and distinctive offers and experiences into the market.

So I’d put this challenge to every player in the retail industry: your consumers, your teams, your suppliers, and your shareholders all want and expect more, and you’ve proven your ability to innovate, especially over the past few years. How will your unique “retail reset” come to life?

ABOUT THIS AUTHOR

Becca Coggins is a senior partner in McKinsey’s Chicago office and leads McKinsey’s global Retail Practice.

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