Retail Viewpoint: Navigating disruption and economic headwinds, what will shape retail in 2024?

Every new year brings optimism, but retailers will need to couple it with a strong plan to fight off economic difficulties in 2024. With many input costs likely to go up and tightening consumer demand, retailers cannot simply rely on passing price increases onto customers—they will need to enhance productivity and bottom lines through additional efforts. 

As we covered in our annual AlixPartners U.S. Holiday Outlook Survey, Singles’ Day report, and EMEA Critical Consumer report, shoppers are spending less and trading down as inflationary pressures continue to stress purse strings. At the same time, retailers are confronting a vast array of new technological advances—especially around the implementation of AI and machine learning to improve business functions.  

This is an opportunity to shift business models underpinned by digital and data transformation to support top line and drive productivity. In the fifth edition of the AlixPartners Disruption Index (ADI), our survey of more than 3,000 senior executives, 50% of retail respondents are predicting business model changes over the next year due to disruptive forces (compared to a 37% all-industry average).  

Retailers that most effectively revamp their operating and business models while also managing digital disruption with a strategic cost focus will best position themselves for success. Here are our ten leading predictions for the retail industry in 2024, in no particular order:  

1. Economic constraints fuel consumer frugality  

Consumers continue to trade down as economic strains challenge the middle class.  

Consumers will focus on saving more, with a search for value and strong deals dominating their choices when they do spend. Discretionary retailers will need to do better at capturing these trade-down customers by offering value-right, comparable products at lower prices. We expect retailers in the middle of the price spectrum to be hit the hardest, as certain segments will still gravitate toward high-tier products while the majority will seek the low end. Private labels stand to gain, as beyond price advantages, consumer sentiment of private label quality continues to climb. 

• “Discretionary retailers must do better at capturing trade-down customers, by offering comparable products of higher-tier retailers at better prices. It’s a short-term, one-to-two-year mimicking strategy to cherry pick the higher tier’s marginal customers.” — Pete Madden, Partner, Chicago
   

2. Operating model evolution and revolution  

Operating model transformation becomes the new imperative to align operations, resources, and costs with new consumer expectations and competitive dynamics.    

Retailers will find that their low-hanging efficiency efforts of 2023 did not go far enough, as most organizations still have work to do to unlock growth-driving agility and productivity. No longer is it sufficient to focus only on SG&A; redeploying those resources toward driving growth will see opportunistic retailers achieve more than their close-minded counterparts. 

AlixPartners EMEA Retail Lead Matt Clark argues that due to macro shifts, companies that can effectively integrate new models that complement their strategy will likely lead the charge in this new retail landscape, while those unable to adapt may find themselves left behind. Some can learn from the recent success of discounters, which have dramatically increased market share by tailoring their proposition to value-seeking consumers and moving more mainstream. 

• “FY24 will be a year of operating model reckonings. Progressive thinking on organizational structures and injection of automation and GenAI into business processes will drive efficiency and unlock investment capital.” — Bill Lewis, Partner, Dallas

3. Business-as-usual disruptions: workforce shortages, wages, unions 

Challenges akin to 2021’s supply chain woes will reemerge as workforce shortages, unionization, and rising minimum wages create more disruption.  

According to the 2024 ADI, 23% of retail executives say finding enough employees with critical skills is one of the workforce issues that most impacted company growth over the past 12 months. Of 16 surveyed options affecting company growth, this finished second highest. 

Personnel shortages will continue to affect the full supply chain, from production to distribution to sales. We have already seen several announced or passed wage increases. Strikes will also continue to raise retailers’ labor spend. 

4. Sustainability mandates and Gen Z drive change  

Sustainability practices, catalyzed by consumer demands and government regulation, gain traction and come with financial repercussions. 

As regulations tighten (with the EU leading the way and the U.S. soon to follow), enacting and executing plans to boost sustainable practices is a financial necessity for retailers. These practices must integrate into all operational decisions and connect to clear, reportable KPIs and margin improvements. 

Our Disruption Index finds that 69% of retail executives feel pressure to take a stance on environmental issues from the government and regulators, 67% feel pressure from their investors and board, 63% feel pressure from customers, and 57% feel pressure from employees and team members.  
 

5. Retailer FOMO spurs AI spending dilemma  

Fear of missing out (FOMO) will lead to excessive spending on AI with mixed results, building pressure on capital budgets and 2024/25 financial results.  

In 2024, retailers will spend billions chasing AI-enabled capabilities that may or may not deliver desired benefits. However, companies that take a considered and deliberate approach to AI implementation may use 2024 as the year to lay the foundation for future success. According to the ADI, 42% of retail executives heavily consider ROI when making decisions around tech investments and 35% consider the cost to implement. These figures will rise. 

• “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run (Amara’s Law). Retailers that have FOMO will be taken in by the excitement of the shiny new toy they are being sold and will expect it to solve all their problems.” — Catherine Brien, Partner and Managing Director, London 

6. Retailers embrace social commerce surge  

Social commerce becomes a bigger tool in retailers’ arsenal to drive demand.  

While the Asian market has widely adopted livestreaming thanks to platforms like Taobao, North America and EMEA are just getting exposure to social commerce options such as TikTok Shop. Coresight Research and Bambuser predict that the U.S. livestream market will reach $31.7 billion by the end of this year and $67.8 billion by 2026, accounting for more than 5% of total eCommerce.  

As live video shopping becomes more mainstream, TikTok hopes to dominate the market with its integrated logistics offerings. According to a Digiday+ Research survey, 78% of brands allocated marketing funds toward TikTok in Q3 2023, up from 54% in Q1. Those that use the platform to share relatable content that’s not overly produced or polished, with a self-aware tone, will best resonate with consumers and drive sales. 

7. AI-powered personalization builds loyalty  

Personalization hits its stride for customer acquisition and retention. The winners will rise above the rest by leveraging AI for “Personalization 2.0.” 

Consumers now expect personalization in retail and their loyalty is tested when they feel treated generically. Retailers that utilize data to target the right customer with the right product at the right time will jump ahead of the competition. 

AI tools can help in a world where customers are less loyal and more expensive than ever to acquire. Our recent AI survey found the biggest friction points in shopping are marketing and promotion quality and relevance—each at 45%—followed by sizing confidence and customer support. 

• “Targeting the right customer segment with the right offer and pricing to animate spend will accelerate data-driven approaches. Monetization of data will gain in importance.” — Nordal Cavadini, Partner and Managing Director, Zurich

8. Market shake-up: M&A and PE transactions rise  

M&A activity and PE transactions heat up as economic difficulties mount and investors hunt for value. 

With interest rates high and retailer valuations bottoming out, expect more activity from opportunistic investors identifying strong-but-undervalued retailers that may be available at a discount. Further declining volumes will also lead to more merger discussions as shareholders look for synergies that can prop up profits. According to the 2024 ADI, 55% of retail execs believe their company will actively pursue M&A in the next 12 months. 

• “With high interest rates becoming more of a norm and continued opportunity in the retail sector, expect more activity from “activist investors” as they evaluate the financial health of retailers across the competitive landscape and identify opportunities for massive profitability improvements.” — Lisa Brockmeier, Senior Vice President, New York
   

9. Shrinkage reality check  

While shrink is still a problem for retailers, claims that it is surging are hyperbole. It will no longer be an acceptable excuse for poor results. 

Partner and Managing Director Sonia Lapinsky discussed the exaggeration in a recent New York Times article. As the article states, a report published by the Council on Criminal Justice found shoplifting reports were 16% higher during the first six months of 2023 compared to H1 2019—but when excluding New York, reports were actually 7% lower. Out of 24 cities, 17 reported decreases across these two periods. 
 

10. Digital-first profit focus  

A shift to a “profitable, digital-first” mindset—from 2023’s willingness to trade top-line sales for profit—will accelerate as pressure mounts to drive shareholder value. 

Increased pressure to adopt a digital-first mindset will drive companies to emphasize omnichannel profitability and mask losses from eCommerce. According to the 2024 AlixPartners Disruption Index, 87% of retail executives’ companies have seen a positive ROI as a result of digital transformation efforts over the last 12 months. 

But profitability will reign supreme—digital retailers that haven’t yet turned a profit will face heightened scrutiny to do so, affecting valuations. Expect to see profit control through operating model advancements, altered country mix to reduce COGS, and tech implementations—specifically AI and automation strategies—that reduce SG&A. We will also see greater scrutiny on core assortment, pricing, and operational changes from pure eCommerce players. 
 

Conclusion 

Among the reasons for hope and optimism in 2024: a belief that the worst of the inflationary pressures are behind us. With that said, it will take time for consumer demand and prices to return to more favorable levels even when economic conditions stabilize. Retailers must use 2024 to rethink operating models to ensure they can meet still-shifting demand targets, with a focus on profitability measures. Addressing AI advancements with a strategic financial lens will be crucial to adjusting correctly—otherwise, retailers will be left with shiny, expensive tools that fail to provide much-needed bottom-line improvements.