A.T. Kearney, Features, The New Rules of Retail

Retail@250, Deeper Into the Future

rr-retail250-future-lewisdartOur first Retail@250 article explored one of the most significant strategic and structural shifts in retailing, one that will continue past America’s 250th birthday in 2026. That shift is the convergence of technology with consumer power, each fueling the other’s acceleration. The combo will end last century’s  landscape of mass markets and the dominance of retail scale and usher in a new era characterized  by fragmentation and emphasis on local. The forces at play are best described as personalized  commerce, testing retailers’ abilities to satisfy consumers’ desires using predictive analytics.

Artisanal and Diverse

No sector is immune to these dynamics. In the grocery category we see a shift from Kraft Foods to “craft foods.” Giant food companies are losing large market share to emerging startups, organic and local brands, and smaller grocery stores sourcing from local area farmers. Domestic organic food growth grew 12 percent from 2014 to 2015, according to the USDA, while local food sales hit $12 billion in 2014, up from $5 billion in 2008. Ethnic diversity is also reshaping consumption. Tomato ketchup has averaged a  -0.2 percent decline from 2011 to 2015, while chili sauces have averaged a7 percent growth, as the U.S. Hispanic population hit 55 million, 17 percent of the U.S. population, according to the U.S. Census Bureau. Niche players are thriving.

American icon Campbell’s Soup Co.’s  share of the market fell more than  13 percent from 2005 to 2014, to  42.4 percent, while Amy’s Kitchen saw  its share grow 175 percent, according to Euromonitor. Amy’s is just one of many niche players pecking at pieces of the giant’s breadth of brands and products. That’s forcing Campbell’s to figure out  how to innovate and create their own special niches of newness across its enormous enterprise.

Most markets have seen the explosive array of craft beers. In 2015 this  product accounted for 12 percent of  the U.S. beer market. That year, the number of American breweries grew  15 percent, the biggest growth at any  time in American history, according to the Brewers Association.

The Never-ending Long Tail

Of course, we’re witnessing fragmentation across mainstream retailing. Most malls are threatened, seen as dinosaurs that consumers shun in favor of mixed-use lifestyle “villages,” small local boutiques, and the internet with thousands of startup websites, most which don’t make any money. Similarly, big box retailers and mega-brands need to figure out how to break down their big stores full of stuff into more special, innovative, personalized and intimate experiences.

Another data point reported from MasterCard is that businesses with annual volumes under $50 million are growing at twice the rate of GDP, providing further evidence that “smaller is better” as we move toward Retail@250.

These are but a few examples across a few retail sectors and brands. All consumer-facing industries are being fundamentally reshaped by the synergistic dynamics of technology power connecting with, and accelerating, consumer power.

Ten Consumer Trends Driving

Small is Better

The millennial segment, soon to be  the dominant consumption cohort, represents more than just a demographic group. Millennials are changing the culture of America, drawing all demographic groups into their community and way
of thinking. The “millennial mindset” is driving the future.

There are 10 major trends that characterize this new culture:

  1. Lack of trust in big business, big finance, big government?essentially everything big.
  2. Less inclination toward compulsive consumption and ownership, leading to a growth in the sharing, swapping and renting markets.
  3. Desire to experiment and seek new and unique products. They want more “special for me” personalized products and services, and show less loyalty to brands.
  4. Desire for authentic experiences vs. products (travel, leisure, entertainment, eating out and outdoor sporting events).
  5. Desire to live in urban areas—the top 50 cities are growing at three times the rate of the rest of the country, and incomes are growing faster in these major cities (now more than 35 percent above the national average). This trend will continue but within the ever-larger cities, there will be a splintering into distinctive neighborhoods and communities, each appealing to particular lifestyles and ethnic groups.
  6. Families will be forming later in life, and there will be fewer of them. Research firm Demographic Intelligence predicts marriage rates will fall to historic lows in 2016, and nearly a third of women and more than 40 percent of men who marry for the first time will be 30 and older, versus 8 percent and 13 percent, respectively, in 1960. Today 34 percent of children live with a single parent, 79 percent higher than in 1980 and 278 percent greater than in 1960, according to the Pew Research Center.
  7. The U.S. will increasingly fragment into ethnic, religious and economic segments, as census data from 2015 shows that among kids under five years of age, white children were in the minority.
  8. The income gap will continue, polarizing commerce and shrinking the middle class. Between 2009 and 2012, the top 1 percent of earners captured 95 percent of total income growth, according to University of California at Berkeley economist Emmanuel Saez.
  9. Time is the new luxury. Convenience must be embedded into everything in life. Americans work more than ever: Adults employed full time report work an average of 47 hours a week, up an hour and a half from 2006, according to Gallup. This trend contributes to Americans’ feeling more stressed and time-strapped than ever before; 70 percent of Americans feel they do not have the time to do everything they need to do, while 50 percent of Americans believe their lack of time is a bigger problem than a lack of money, according to Datamonitor.
  10. Mobility has wrought profound change. The world of stores, brands, services, entertainment and information are all in a device that fits into consumers’ pockets. The consumer is the POS. Eventually, mobile will be the starting point of every purchase, and every interaction with the consumer. If you can’t engage them instantly on the mobile platform, chances are you’ve lost them.

Snapshot of a New Landscape

Following is a quick snapshot of the shifting structure of major retail sectors. It is not all-inclusive, but does highlight how consumer and technology power is beginning to shape the future.

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Malls and Shopping Centers Among the roughly 1,300 major malls, as many as 300 aspire to be vibrant, fun and enjoyable shopping and entertain-ment experiences. Innovative uses of technology, including mobile devices, will be used to heighten the experience. Mall architecture will be modernized and new brands and retailers will replace those department and specialty stores that fail to change for the new consumer. The most successful malls will be go-to destinations where shoppers will stick.

Another 200 to 300 malls will change to appeal to their local communities. Festival Mall in Atlanta, for example, was dying until it transformed to serve its Hispanic neighborhood. The mall is now successful.

The remaining 700 shopping complexes will decline, as they will be seen as neither convenient nor experiential. The operators will seek new tenants (such as healthcare offices, gyms, baseball batting cages) but won’t regain their retail footing.

Mixed-use lifestyle centers and little villages are growing. They are built to resemble modern small town MainStreets, but are built in urban areas. Stores, products, services and entertainment activity will be tailored according to local preferences. Urban mixed-use places also will include residential units.Outlet and off-price malls will likely continue to thrive as credible choices for the value consumer. Thus, the major off-price brands, particularly the TJX Companies, will continue their explosive growth, and will steal share from higher-end retailers.

•  Department Stores and Branded Specialty Store Chains

Department stores will evolve into flagship centers of entertainment in major urban areas, with a reduced number of smaller stores in communities across the country. They will resemble showroom boutiques, curated and personalized for local preferences.

The online and physical distribution process (omnichannel) will be fully and seamlessly integrated across such enterprises. The flagships, in addition to offering entertainment enhanced by technology and other experiences, will have a combination of third-party brands that will lease and fully operate their own brands and designated space, as well as a large percentage of the department store’s strong private and exclusive brands. The strong private brands also will be rolled out into small branded specialty boutiques.

Branded specialty store chains that survive will provide the same experiences and fully integrated omnichannel process as department stores, but will laser focus on personalizing the omnibrand experience for their targeted consumer. As their online business continues to increase, the number and size of these stores also will shrink.

•  Omnichannel, Pureplay e-commerce, Discounters and Clubs

The integrated distribution model,  operating across multiple physical  and digital platforms, will grow as the dominant distribution model for the future. Accordingly, pure e-commerce players such as Amazon and hundreds of other startups will continue to open physical stores. The digital channel will continue to grow at a faster rate than  the physical, but will eventually reach a symbiotic balance between the two.  Just as Amazon must roll out locally curated and small, physical stores with showrooms, Walmart will perfect itsomnichannel model and leverage its 4,500 stores as both distribution centers and as places to shop. Using analytics, Walmart will maintain only the larger boxes that perform well. Instead, the company will develop smaller, locally-curated stores in neighborhoods. Dollar stores continue
to dominate with that model, stealing a huge share of Walmart’s business for several years. Walmart and Amazon will be fighting for the number-one slot in value retailing far into the future.

The clubs, such as Costco, will have to fofollowalmart’s pivot toward omnichannel? shrinking and fragmenting the battleship into locally curated, entertaining speed boats, without losing the treasure hunt.

All of these big boxes must eventually perfect grocery delivery. (Instacart and Deliv represent early promise of  the possibility).

While the convenience of shopping  online favors digital commerce, all winning models will be omnichannel, with physical stores that will be smaller, more social, fun and engaging. But  make no mistake: digital and physical distribution will be an imperative.  The millennial mindset demands it.

•  Local Neighborhood Stores

Stores that are small, special, intimate, personal, social and community-focused will win big, and will be profitable, to boot. It’s back to the future when the local mom and pop owners were part of your life and knew everything about you without the need for analytics and algorithms. This model will accelerate and ultimately prevail.

The key difference today is that data analytics and algorithms provide the ability for gigantic, multi-billion dollar, massive enterprises to fragment and ulti-mately, to sprinkle local “moultimatelyspecially-curated niche stores and brands into neighborhoods across the country, including many different neighborhoods within major cities. A chain like Whole Foods, with many stores in New York City, will have different assortments in each. TJX (Marshalls and TJ Maxx) already has different stock and a different look and presentation in each of its neighborhoods, all curated to satisfy local preferences. These differentiated stores might be blocks away from each other.

The Future Is Now

The strategic and structural landscape we have envisioned for 2026 is happening daily. Many of these moves will appear before America’s 250th birthday. There are many other elements in this transformation that we will describe in our Retail@250 series of articles and interviews with the industry’s top leaders.

Anyone waiting to begin their  transformation is a dead man walking. Indeed, the future is now, and you must be addressing it now, or you will be history when it arrives.

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