How can retailers prioritise digital investments for a downturn?

Inflation, energy costs and labour shortages have coalesced, putting pressure on the margins of retail businesses. Technology is often touted as a route to leaner operations, but where should retailers invest for value that can endure beyond this current downturn? 

The post-pandemic boom that saw consumers flood back into stores has waned and retail sales remain flat across the UK as the cost-of-living crisis continues to contract consumer spending. At the same time, businesses face higher energy bills, wage inflation and other input costs.

Christmas — usually the catalyst for consumer spending at this time of year — is not expected to deliver bumper profits, with 60% of British consumers admitting they will spend less to curb the cost-of-living crisis.

In these belt-tightening times, a hard stop on investment in all digital transformation programmes will no doubt be the topic of conversation in retail boardrooms. However, as retailers look to manage costs carefully across the board, any pull-back on digital investment must be sense-checked against the likelihood of a detrimental effect to service levels and customer service overall.

Understanding – and protecting – digital initiatives that drive value for customers and the business is key. The post-pandemic environment has gifted retailers a plethora of data on all aspects of their operations, and now is the time to analyse it and use it smartly. In an operating environment where customer focus is more critical than ever, prioritisation of new or improved capabilities in customer management, enabled through digital initiatives, is vital.

Use data to drive supply chain efficiencies

The global supply chain crisis has exacerbated the inefficiencies that retailers were already grappling with around inventory management, distribution, personnel, and availability of data to guide decision making. Asking ‘are we doing everything we can as cost effectively as possible?’ must include solving end-to-end supply chain issues as a top priority, leveraging the insight and efficiency that digital can drive.

Aggregating and interpreting data throughout the supply chain is a complex process, yet it is key to syncing and streamlining in-store and online offerings, identifying where operational cost can be removed, and understanding where there is wasteful activity to address, which can yield incremental savings.

This activity should remain a priority, and often sits alongside smart, price-making contractual discussions with suppliers that can also provide some financial respite and more surety for future forecasting, whilst preserving relationships with key partners.

Labour cost and effective deployment of staff is another critical consideration across retailers’ supplier networks. Productivity conversations typically centre around optimising staff in-store to get product to the shop floor in the most efficient manner. Online, it’s easier to automate product display, yet this still requires promotions, price changes, and special offers to be integrated digitally, in addition to managing the associated effects upon inventory levels up and down the supply chain.

Finally fix returns

Every retailer with significant online sales wants to revolutionise returns. For fashion retailers in particular, returns cost the business dearly, with typically over 40% of stock coming back in.

The shift from store purchases to ecommerce accelerated by the pandemic has only heightened the importance of solving this problem. It is perhaps a timely reminder for retailers ahead of the holiday season around why it is so important that they harness the disparate sets of data at their disposal to design data-driven, algorithmic interventions that can reduce return rates.

At a base level, identifying the impact of different customers, categories and suppliers on returns is essential, as well as where value is lost throughout the returns supply chain. Taking this a step further, data must be used to determine how to manage customer lifetime value and true product profitability.

Furthermore, evolving physical stores to act as efficient return nodes within the retailer’s supply chain network presents an important future operating model shift for businesses with a large physical footprint.

Adopt digital first strategies

Ultimately, retailers must consider themselves digital businesses with stores (if they have them) as channels. Digital first Retail requires a mindset shift regarding technology spend since the leading digital retailers have already realised that they are also technology companies. Digital investment is essential in order to continue delivering high quality digital services, and should be considered as the same high priority investment as store opening and re-fit.

Some retailers may, of course, decide to limp along with current systems in place but, eventually, they will need to come to terms with why the value, timeline, and cost of digital investments will add up for long-term gain.

Retailers will not regret making many of these long overdue fixes to their digital operations. However, during an economic downturn, the case for action – and the benefits that will be realised as a result – must be made abundantly clear.

New, data-led capabilities in customer or product management may not have always been the priority that they are today, but in 2023 and beyond they will be crucial in shaping boom or bust decisions, and may offer a more attractive return on digital spend than traditional ERP solutions.