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3 Ways of Navigating Today's Retail Headwinds

by: Peter Duffy
Blog navigating retail headwinds

The world of retail has changed in in numerous ways over the past few years, with many shifts driven largely by the COVID pandemic and the associated rapid digitalisation of today’s shopping experience. Estimates from Digital Commerce 360 suggest that the pandemic contributed an extra $218.53 billion to the ecommerce bottom line over the past two years alone.

But as consumers were forced to behave and shop very differently - those who had never considered buying groceries online were now having their groceries delivered to their homes weekly and even daily - most traditional retailers have found themselves facing significant challenges amidst this incredible headline digital growth.

In this article I’m going to unpack the three major challenges retailers are currently facing, but also propose some opportunities that exist for the industry to drive incremental growth by embracing new technologies, data and trends.

Challenge 1:

Eroded profit margins in core business as costs of produce, labour & freight increase

Profit margins in retail have been under pressure for a number of years, but especially over the past five. Data from Retail Economics and Alvarez & Marshal shows that in Europe, margins have fallen markedly (see Fig 1) increasing financial pressure on store owners. The UK (an historically high margin market) has been particularly hard hit, with pre-tax profits dropping from 9.1% to 5.5% over the five year period.

This data was collected prior to today’s ongoing crises in energy production and rapidly increasing distribution & supply costs. Both of these factors seem to paint a challenging picture for retailers, but there are emerging opportunities for high-margin growth.

Fig 1 Retailer Pre Tax Profit Margins 2015 2020

Opportunity 1:

Build data-driven Retail Media Networks to produce scaled alternative profit streams

Whilst core sales are going to remain under pressure from a pricing & margin contribution perspective, US retailers have been leading the charge into building Retail Media Networks (RMNs). RMNs are defined by The Consumer Goods Forum as “advertising platform[s] maintained by a single retail entity and established across its owned channels and digital properties, both online and in-store”. Think of them as omnichannel, digital-forward adaptations of the established trade media programs most retailers operate, leveraging modern advertising technologies to allow them to scale.

To that end, Walmart, who operate the Walmart Connect RMN, reported advertising revenues of $2.1 billion for 2021, and commerce giant Amazon $31 billion over the same period for advertising services alone. These huge numbers don’t tell the whole story though, as it’s the margin on media which is appealing to retailers right now.

“For a retailer running their core business on a two percent to four percent margin, the prospect of setting up a retail media business that could run at forty percent margin is pretty appealing. Because of the high margins that media delivers vs retailers’ core business, this could add ten percent to fifteen percent of group EBIT from retail media,” says Julie Jeancolas in an interview with Videoweek in February of this year.

Unsurprisingly these heady margins have caught the attention of the majority of retailers now, with Europe rapidly catching up to the US in launching RMN offerings and capturing a slice of the pie. In its report “Opportunities for e-commerce success in Europe: Retail media networks” McKinsey states that retailers from the EMEA region may actually have a revenue & profit advantage in developing RMNs versus the US, thanks to their history of more aggressive in-store monetisation as a byproduct of GDPR (see Fig 2).

In Store Modernization is more advanced in Europe than US

There are four critical considerations for retailers as they develop their RMN strategy:

  1. Retailers must be able to work with both their own and their partner's data in secure and privacy compliant ways. Most CPGs, for example, have become accustomed to easily matching their data with large platforms and expect the same of RMN partners, in order to understand their and target their key audiences. are reluctant to move/share data for compliance and privacy reasons. Here, data clean rooms will play a key role.

  2. The organisation must be joined up on the importance of RMN efforts and not siloed. For real success to happen, the teams building out media networks will need to work hand in hand with the business: everything from privacy to IT to product.

  3. Integrated data measurement and consumer insight capabilities are now table-stakes, the most advanced RMNs are offering high levels of targeting and even collaborative data science capabilities to model audiences for their advertiser partners.

  4. The most successful retail media networks in revenue terms will also work off-site, including integrations with major DSPs and other media ecosystems to extend inventory reach of audience buys. Margins will of course be lower in off-site media, but they will still be significantly higher than core business.

Challenge 2:

A consumer shift to value above all else due to constrained budgets, inflation, & a poor global macroeconomic outlook

Post-COVID, things haven’t really gotten much easier for consumers, who have seen their spending power significantly reduced by rising inflation around the world. Analysts are forecasting for high single digit inflation to persist into 2023, driving consumers to seek value wherever possible in their household expenses. Given the aforementioned margin pressures it will be hard for retailers, particularly grocers, to pass higher prices onto consumers without them just moving their business to discount competitors.

Suppliers have already begun to ratchet up prices for the goods on shelves, with CPG giant Unilever announcing 11% price rises across product lines in July of 2022 to counter their own rising costs. Similarly data from NCS comparing the buying trends of consumers relating to CPG products, revealed a nearly 13% price increase on average between June 2021 and 2022.

Whilst the bulk of consumer price increases appear to be centred on energy and at fuel pumps, the macroeconomic climate for retailers is tough and proposes to further impact ability to grow margin in their core businesses.

Opportunity 2:

Trading discounts for data to fuel future digital initiatives

One beneficial byproduct of the consumer shift to online has been that many retailers have been able to quickly accelerate their consumer data programs. Tesco, the UK’s largest grocery retailer, has seen huge growth in its Clubcard loyalty scheme in recent years, now boasting over 20m household members compared to an estimated 17m in 2019.

This double-digit percentage growth has been driven by an underlying “data for discounts” strategy that sees aggressive pricing and offers only for loyalty members, thus allowing the grocer to outpace its peers in sign-ups and utility of their scheme. Other retailers should follow suit in challenging times, recognising the value of data and insight contributes to the bottom line in ways that may not have been previously considered. This data, when combined with the aforementioned retail media opportunities available today may represent a solid base from which to increase alternative revenue streams, further partnership opportunities and ultimately to better serve and retain customers going forward.

Fig 2 Discounting should be two way trade

Challenge 3:

Leveraging data clean rooms to bridge the retailer / partner data divide

Another beneficiary of stay-at-home mandates and other recently enforced consumer lifestyle changes has been delivery, fulfillment and on-demand services businesses. In most major cities, the presence of delivery riders carrying everything from takeaways to groceries has become ubiquitous as consumers have sought the goods and products they need to their door as quickly as possible.

Gen-Zers in particular have embraced the role of on-demand services and online shopping, with a 2021 study from Deal Aid revealing that 87.6% of Gen Z consumers do more of their shopping online than in-store. As more young consumers flock to aggregator and rapid grocery delivery apps, the risk to retailers is that a very important segment of their market lives largely inside someone else’s CRM. Many of the larger food & grocery fulfillment apps have similar designs on building their own RMNs, and in creating direct relationships with suppliers and consumer goods companies directly.

In all likelihood, there will be room for both retailers and their fulfillment partners to each have a significant slice of media revenues, but retailers should still approach these relationships with care and ensure they are leveraging & securing access to some data to assess their success.

Fig 3 Few Retailers Offer Delivery Services to Customers

Opportunity 3:

Leveraging data clean rooms to bridge the retailer / partner data divide

Technology has evolved quickly since most B2B partnerships were struck between retailers and their partners. Today, with privacy enhancing technologies (PETs) becoming commonplace and data clean rooms making their way into the standard lexicon of both product and marketing teams, there are numerous opportunities to build data foundations to combine data securely to drive incremental insights.

For example, a grocer prior to signing a deal with a delivery partner, will want to understand the overlap of their existing customer and loyalty base in order to understand exactly what incremental opportunity is on the table from the partnership (see Fig 4). Using a data clean room, each party can now bring their data to the table, without moving or exposing it, to expose select insights and attributes to make the other party more comfortable.

When thinking about in-flight partnerships, the opportunities for secure data collaboration are myriad:

  • Data sharing from fulfillment partner to retailer around competitor purchase habits

  • Re-engaging lapsed consumers from retailer CRMs via partners

  • Joining data to power co-marketing and co-branded campaigns to ensure accuracy of targeting and messaging

Fig 3 Using Data Clean Rooms to Deepen Partnerships

In conclusion, whilst retailers might face a number of headwinds in today’s market there’s some incredibly exciting trends across areas including digitisation, media and data that promise to change the way their businesses operate going forward for the better. The winners will be the ones who look at these challenges as golden chances to adapt their commercial, technical and operational models to win over consumers, whilst improving margins and partnerships at the same time.

If you’d like to learn more about how data clean rooms enable secure data collaboration, and how Habu’s solution can help your business, let’s set up a call.