The retail industry stands at a critical inflection point. The convergence of evolving consumer expectations, relentless technological disruption, and the inexorable demand for sustainability has rendered antiquated retail models obsolete. Retailers with a rudimentary transaction-based approach will likely lose 30-50% of their current revenue base in the next five years. To secure continued relevance and competitive viability, retailers must unreservedly embrace the HFS ‘Future of Retail’ framework. Rooted in real-world developments, the framework delineates a structured approach to navigating the complexities and capitalizing on the opportunities of this new technology-led era.
The current retail paradigm is generic, cumbersome, and disintegrated
As Exhibit 1 illustrates, the current retail ‘modus operandi’ presents several challenges for consumers as it is limited by design.
Exhibit 1: The retail customer is frustrated by the non-intuitive and transactional nature of retail experiences
Source: HFS Research, 2024
Retailers with this rudimentary mindset have been experiencing significant customer churn (up to 30%), a continuous dip in market share (3-5% per year), and cost overruns of more than 20% because of operational inefficiency. Therefore, it’s imperative to reimagine your operations with a structured transformation approach.
Retail’s existential crossroad—embark on the ‘Future of Retail’ framework
The HFS ‘Future of Retail’ framework (see Exhibit 2) has two intertwined layers. The inner layer focuses on the operational and technological components, and the outer layer focuses on stakeholder experience and sustainability.
Exhibit 2: The ‘Future of Retail’ framework professes a customer-oriented paradigm enabled by tech
Source: HFS Research, 2024
Decoding the inner layer—operational and technological components
- Anticipatory digital: The transition from transactional interactions to personalized, experience-driven relationships is non-negotiable. Retailers must harness data and AI to deliver experiences that are not only personalized but anticipatory. For example, they can leverage machine learning to offer tailored suggestions based on individual customer behavior, preferences, and past interactions. They can also utilize AI to predict and respond to customer intent even before they explicitly search for a product or service. For instance, after selling a printer, given the ink cartridge’s average consumption time, send effective and personalized follow-up emails about availability, pricing, and possible promotions for that model’s specific brand of ink cartridges. Use marketing automation tools in combination with real-time triggers and AI-driven algorithms to achieve this.
- Experiential (physical) store: The role of the physical store must undergo a complexion and functional change. It can no longer be merely a point of sale. It must serve as an experiential hub and a micro-fulfillment center. On the one hand, the store must deliver a digital-like experience by leveraging technologies such as virtual shelves, endless aisles, AI-assisted product selection, digital pricing tags, and automated checkouts. On the other hand, a part of the store must be utilized as a micro-fulfillment center. This can significantly address the last-mile fulfillment and reverse logistics challenges. Walmart’s integration of stores as fulfillment centers has led to a 30% reduction in last-mile delivery costs.
- Autonomous supply chain: Leverage AI, automation, and IoT technologies to construct more resilient and agile supply chains. Utilize AI-driven forecasting for demand planning, inventory management, and replenishment. Implement robotics and automated systems in warehousing, packaging, and distribution. Leverage IoT for real-time tracking of goods, improving visibility, and reducing inefficiencies. Zara’s agile supply chain model has enabled the brand to slash lead times by 50% and swiftly respond to constantly shifting consumer demands.
- Unified commerce: Ensure a seamless shopping experience across online and offline channels with consistent branding, pricing, and customer service. By integrating online and offline channels through cloud and other relevant omni-channel retail solutions, retailers can capture a broader customer base and drive incremental sales, potentially boosting total revenue by 5-10%. This is also a great way of futureproofing your business against black swan events such as the COVID-19 pandemic. Best Buy is a great example of a retailer that experienced relatively less disruption during the 2020-21 mayhem owing to tight integration among its various customer touchpoints.
The outer layer advocates focusing on stakeholder experience and sustainability
- Customer experience: Retailers must create touchpoints that foster engagement throughout the customer journey—from discovery to post-purchase support. These touchpoints include targeted marketing campaigns, personalized recommendations, consistent purchase experience, loyalty program enrollment, quick customer support, follow-up communications, feedback loops, referral bonuses, social media engagement, and exclusive offers. Moreover, develop a mechanism for monitoring and optimizing employee performance across various channels (physical stores, online, call centers) to ensure a consistent and high-quality customer experience.
- Employee experience: Employee experience must be handled based on the nature of work, which differs for a store associate vs. a contact center agent. For instance, store associates should be empowered through wearables or mobile apps for associate-to-associate and associate-to-store communication to combat out-of-stock situations and resolve customer and operational issues in real time. This also will ensure they are not physically tired due to unnecessary movement across the shop floor.
- Partner experience: Facilitate the integration of supplier and retailer systems for better coordination and efficiency. For instance, Walmart’s vendor-managed inventory (VMI) system enables suppliers to manage their products in Walmart’s warehouses. Suppliers monitor inventory levels and ensure their products are replenished as needed.
- Sustainability: Retailers must look at the entire sustainability proposition from various angles:
- Transparency and information disclosure: Providing customers and stakeholders with clear and accessible information about product sourcing, production processes, and environmental impact.
- Reusability and recycling: Implementing practices that promote the reuse of materials and the recycling of products to minimize waste.
- Green practices: Adopting and promoting sustainable business practices, such as reducing carbon footprints, using renewable energy, and supporting environmentally friendly initiatives.
The Bottom Line: Forward-looking retailers must simultaneously progress on the various dimensions of the HFS ‘Future of Retail’ framework to meet the heightened expectations of the new-age consumer.
As retail is a low-margin business and infrastructure investments tend to scale linearly, all the technological, operational, and business initiatives must be measured against improvement in financial performance, brand perception, operational efficiency, and customer satisfaction.
