WRC 2023: Retailers' profits decline as the Internet becomes more important in people’s lives

US-based global consulting and financial advisory firm AlixPartners and the World Retail Congress - a key event for the retail sector taking place from today and running for three days in Barcelona - today released a report that addresses the needs of retailers to evolve in a cost-effective way in today's world, where consumer habits are increasingly technology-driven and consumers are becoming more tech-savvy.

This report on Turning Profit Destruction into Customer and Shareholder Value finds that as the Internet becomes more and more pervasive in our society, retailers' profits are declining.

Some of the reasons why this is happening identified in this report as the cause of this phenomenon would be a lack of transparency or that retailers are investing heavily - and increasingly so - but inefficiently in the digital landscape.

For retailers to adopt a "Digital-First Retail" approach is not only seen as the only solution to this downturn, but could also allow them to take full advantage of the growing customer preference for online shopping.

A costly but unrewarding omnipresence

With the rise of online consumption, retailers' profits are being squeezed, "as the cost of serving customers anytime, anywhere and at any speed does not generate sufficient revenue growth to maximise the return on existing investments in technology, systems, infrastructure and people, let alone new investments," the report reads.

After analysing 50 US public retailers in various sectors - including apparel, department stores, hardlines and specialty retailers - the report found that while their average online presence has soared from 9.4 per cent in 2012 to 25.6 per cent in 2022, their profitability (as measured by average EBITDA percentage) has declined over the same period from 13.8 percent to just 8.3 percent.

There is no doubt that customer preference for digital shopping is currently on the rise. Figures show that 86 percent of consumers use the internet at least once to research a product during their shopping process.

These trends combined create a major problem for retailers: higher costs than the competition due to necessary digital investments and lower profits.

Time for change

"It is clear that retailers can no longer operate in the same way and expect different results when it comes to real return on their investments," said David Bassuk, global retail practice leader, in a statement shared by AlixPartners.

The consultancy says that "Digital-First Retail" is not a programme or initiative, but a change of mindset that puts the focus of a retailer's business model on digital, as they believe that the internet cannot be put on the back burner in this day and age.

Ian McGarrigle, chairman of the World Retail Congress, said: "After an unprecedented three years marked by the pandemic, retail has gone from adapting to a massive acceleration of online sales at the expense of the in-store experience, to a period of resurgent in-store retailing and a slowdown in online growth. But what is clear is that there is no status quo in this new reality".

What were the main issues identified?

AlixPartners shared the following statements with FashionUnited.

Retailers spend a lot but inefficiently on digital

According to technology research firm Gartner, the bulk of global retailers will spend 181 billion dollars (more than 164 billion euros at current exchange rates) on technology and digital improvements by 2022.

Despite this spending, additional research by AlixPartners conducted among 150 global retailers has revealed that only 24 percent of retailers believe their company's digital capabilities are above average, and only 36 percent of executives believe their digital teams have the capabilities to meet the digital strategy needs of their businesses.

The research also revealed that there is a gap between the assessments of the company's capabilities of those doing the work and the executives making the decisions.

There is a lack of understanding of digital profitability and a lack of transparency and common key performance indicators

AlixPartners' research has further revealed that 84 percent of retail executives believe that online selling delivers cumulative value, but only 48 percent are measuring the true costs and benefits of an omni-channel approach.

The lack of a measure of success results in many companies making digital investments that prove ineffective. A lack of understanding of profitability within and across all channels also prevents companies from correctly calculating customer lifetime value.

According to the report, it is essential for retailers to make changes to their investments if they are to match the pace of their own customers. For "often, it's not about spending more, it's about spending smarter, more holistically and more intentionally," explain the experts from Alixpartners.

Retailers to increase digital spending

According to AlixPartners, more than half (63 percent) of retailers plan to make larger digital investments in 2023 compared to 2022. Given consumers' preference for digital, most have no choice: if they cannot deliver a satisfactory online experience, they risk losing customers and market share to their competitors.

Thus, three quarters (75 percent) of retail executives are confident that they will get a good return on their digital investments. However, almost two-thirds (64 percent) doubt that their current digital tools from past investments can support a modern DFR business. This raises the question of why, if past investments have not met expectations, there is confidence that future investments will perform differently.

The report strongly asserts that DFR is the answer to how to profitably evolve, taking the positive attributes of successful digital native retailers (including agility and adaptability) and adopting them for traditionally store-led businesses.

This article was originally published on FashionUnited.ES and has been translated and edited into English by Veerle Versteeg.

The content of this article has been edited after publication and has been updated with the latest information shared at the World Retail Congress.