for the industry Seven imperatives speaks Knowledge partner Knowledge After a year like no other, Every retailer, to some degree, has long customers. The retail industry has seen the US retail industry had a sense of what the future of retail more innovation in the past year than could look like: consumers shopping it did in the prior decade. When faced faces a still-uncertain from anywhere at any time on their with lockdowns, an array of new health- future. Our latest computers or mobile devices, stores and-safety regulations, and volatile research highlights morphing into showrooms or fulfillment consumer demand, the best retailers centers, products being shipped for proved resilient and agile. The K-shaped seven imperatives that home delivery at ever-increasing recovery for the general economy—in will position retailers speeds, and digitization everywhere. which some parts bounced back more for success—regardless Some forward-thinking retailers started quickly while those at the bottom of the of what is next. making big investments a few years ago ladder struggled—applied to retail as to prepare for—and to help shape—such well. The largest had the a future. Others took a wait-and-see resources to adapt and have pulled stance, expecting the trends would take away from the rest: industry leaders time to play out. are delivering two to three times the shareholder returns of their less-nimble But the future came early. In March competitors. 2020, COVID-19 shut down retail locations across the country, forcing What has set the top performers apart? US consumers to change their buying And how can retailers thrive in 2021 behaviors. Trends that had been on and beyond, even amid continuing a multiyear trajectory saw dramatic uncertainty? The answers aren’t trivial: acceleration. For example, demand as the nation’s largest private-sector for buy online, pick up in store (BOPIS) employer, the retail industry affects the has surged 40 percent since the start lives and livelihoods of millions. In this of the pandemic. Three out of every report, we present research findings four US consumers tried new shopping from the Retail Industry Leaders channels. E-commerce volumes grew Association (RILA), with McKinsey & as much in the first quarter of 2020 as in Company as a knowledge partner. Our the previous ten years. analysis identified seven imperatives that can give retailers the ability to adapt Amid the unpredictability and the to a changing consumer landscape while head-spinning pace of change, retailers pursuing new opportunities. mobilized—finding novel ways to continue to move products and serve

The Retail Industry Leaders Association metrics and explored consumer outlook, (RILA), with McKinsey & Company as a digital acceleration, and future supply knowledge partner, conducted research chain. The survey was augmented on how retailers are approaching by in-depth interviews with top retail strategy and operations. Executives CEOs as well as proprietary McKinsey (such as CFOs, chief marketing officers, & Company customer research. The chief digital officers, and chief supply analyses and discussions identified the About the chain officers) at more than 30 US imperatives that will be critical to retail companies completed a benchmarking success now and in the future. research survey that covered more than 100

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Knowledge partner Seven imperatives for rethinking retail

The changing competitive landscape will require retailers to pursue seven imperatives. The first four will be familiar to retailers, so the challenge will be to accelerate progress. The next three imperatives represent additional strategies and efforts that will be increasingly critical in the coming years. The ideal recipe will vary by retailer, so executives should review these imperatives based on their organization’s starting point, their strategy, and the approach that fits best with their brand’s DNA.

Doubling down on consumer-driven commerce

Become omnipotent on omnichannel 1 Consumers will choose retailers based on ease and richness of end-to-end experience

This time (and all the time), 2 it’s personal Consumers expect personalized experiences and offers as table stakes; most retailers fall short of these expectations today

Turbocharge delivery 3 As consumer expectations approach same day, stress on supply chain will mount

Take a stand or take a seat 4 Consumers are finally voting with their wallets for and broader purpose

Investing for growth

Recalibrate talent strategies 5 Winning the war for diverse talent, next-gen skills, and embracing a fluid workplace will give retailers a performance advantage

Pursue an eco(system)-friendly 6 strategy Winners will embrace the networked economy to win consumer mindshare and accelerate capabilities

Take productivity from foundational 7 to transformational Analytics and automation will enable the step change in productivity needed to fund the other imperatives

Retail speaks. Seven imperatives for the industry 3

Knowledge partner Doubling down on consumer- driven commerce

To handle shifting consumer Become omnipotent preferences and harness the power of on omnichannel digital technologies, leading retailers 1 have increased their investments Consumers will choose retailers based on ease and capabilities in four areas. These and richness of end-to-end experience imperatives aren’t new: omnichannel experiences and personalization have been on retailers’ radar for years. This time (and all the However, the seismic impact of the pandemic—and changing consumer 2 time), it’s personal preferences that will endure after it Consumers expect personalized experiences abates—requires retailers to redouble and offers as table stakes; most retailers fall short their efforts in these areas. of these expectations today

Turbocharge 3 delivery As consumer expectations approach same day, stress on supply chain will mount

Take a stand 4 or take a seat Consumers are finally voting with their wallets for sustainability and broader purpose

Retail speaks. Seven imperatives for the industry 4

Knowledge partner Become omnipotent on omnichannel Consumers will choose retailers based on ease and richness of end-to-end experience

Retail speaks. Seven imperatives for the industry 5 1 Knowledge partner Two-thirds of survey respondents cited the growth of omnichannel and “For us, some e-commerce digital shopping as the most significant priorities that were trend affecting the industry—and the greatest challenge. The growth previously five years out are of e-commerce and demands by Omnichannel consumers for seamless omnichannel now more of a three-year experiences are here to stay. According to McKinsey consumer response horizon. We need to more research, consumers expect to continue quickly understand how making more purchases online after the pandemic than before it began. to satisfy that consumer E-commerce is projected to reach 25 to 40 percent of sales across categories and accelerate our after the pandemic abates, with an timelines accordingly.” increase of two times or more for sports and leisure and home improvement —Todd Vasos, CEO, goods (Exhibit 1).

Exhibit 1 Post-COVID-19 e-commerce penetration is expected to significantly increase to 25–40% across categories

E-commerce penetration in Pre-COVID-19 Post-COVID-19 % of total retail revenue

38% 39% 11pp 32% 28% 19pp 25% 12pp 19% 20% 14pp 11% Grocery grew from 3–4% to 10% 4% ~10%

Sporting and leisure Home improvement/ Apparel (mass General and mass goods DIY market) merchandise (N=14) (N=11) (N=23) (N=12)

Q: Of total retail sales ($), what was the average e-commerce share at the retailers with which you are familiar pre-COVID? - Of total retail sales ($), what e-commerce share are you expecting at the retailers with which you are familiar post-COVID?

Source: Retail Professionals Survey, June 30–July 7, 2020, n = 50

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Knowledge partner Understand the role Retailers have already begun to Accordingly, IKEA has added fulfillment of digital shifts on the respond, especially on fulfillment of capabilities to all of its US stores to customer journey e-commerce orders. Nordstrom has support click-and-collect services now linked its digital and physical (or curbside pickup) and contactless As consumers continue to embrace product offerings in its top ten markets delivery options. As Javier Quiñones, online channels, retailers need to to offer four times the selection available president and CSO at IKEA US, Omnichannel understand the factors behind this shift for next-day delivery while expanding explained, “We are building a business in purchasing behavior, the different pickup options for BOPIS to include model that will better meet the needs expectations that accompany it, and the their 249 Nordstrom Rack locations in of consumers today and sets us up for impact on the omnichannel ecosystem. addition to all 100 Nordstrom stores. success in the future. Having a strong Today, such decisions are frequently fulfillment network is essential, which is made in a vacuum: 65 percent of Nordstrom CEO Erik Nordstrom expects why we accelerated the transformation retailers base store decisions on brick- the unexpected, saying, “I can’t imagine of our stores to also support and-mortar performance, with just 35 anybody knowing for sure what will e-commerce with customer fulfillment. percent considering the impact of such happen in the future—the takeaway is We are changing almost everything moves on omnichannel. With the line that our businesses have to be agile and to ensure a seamless multichannel blurring between digital and in-store flexible.” experience.” purchases, a seamless omnichannel Rethink the network as the experience has evolved from a “nice to Dollar General has rapidly expanded role of the store blurs have” to a “must have.” As Craig Menear, its contactless shopping capabilities Chairman and CEO of Despite the growing demand for digital to respond to the spike in demand. noted, “Our digital platform is the front experiences, brick-and-mortar stores The retailer combined the launch of its door of our store. Customers are taking will not disappear. They will, however, BOPIS initiative—in 17,000 stores in just us down that path—purchasing online take on new roles to better support an nine months—with the rollout of an app and using online platforms as the start omnichannel retail strategy. When the with scan-and-go technology. pandemic limited in-store shopping, for of the shopping experience, even if it Dollar General CEO Todd Vasos said, ends in the physical world.” instance, 44 percent of stores served partially or fully as fulfillment centers. “For us, some e-commerce priorities Upgrade e-commerce By 2022, survey respondents expect that were previously five years out are capabilities that number to jump to 57 percent, with now more on a three-year horizon. We need to more quickly understand how to To continuously and sustainably manage stores focused primarily on providing satisfy the consumer and accelerate our evolving digital demand and consumer BOPIS and ship-from-store services. timelines accordingly.” expectations, retailers will need to upgrade their e-commerce capabilities along three dimensions: • Develop inventory plans based on real-time digital and physical trends, “Both experiences and not just historical performance. fulfillment are important uses • Adapt product assortment based on real-time trends and provide for brick-and-mortar stores. We consumers with more transparency regarding availability. will continue to evolve the role • Iterate continuously through rapid of the store on our continued testing (such as enhanced mobile shopping linked to nearby stores or omnichannel strategy evolution.” partners). —Mary Dillon, CEO, Ulta Beauty

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Knowledge partner How to get started Omnichannel

• Determine where to play in convenience, and experiential omnichannel. The opportunities center. Retailers are starting to in omnichannel are sprawling, so think of stores in the context of a retailers must identify where to market strategy rather than as a focus based on their DNA and the bunch of independent stores in a categories they play in. given market. • Identify the unique value of each store. A store can play multiple roles: fulfillment center, customer

If you’re on the journey, how to accelerate

• Increase value at the store level. Once retailers have determined the roles of stores and other facilities, they can then invest in technology, upskilling, and hiring to increase the performance of each link in the network. • Continue to invest in detailed, real-time customer analytics to monitor and react to abrupt shifts in consumer demand. These insights can then be harnessed to optimize price and promotional investments or offer new, brand-relevant services to give consumers ongoing reasons to visit a store.

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Knowledge partner This time (and all the time), it’s personal

Consumers expect personalized experiences and offers as table stakes; most retailers fall short of these 2expectations today

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Knowledge partner The pandemic has weakened brand To successfully implement omnichannel capabilities can be built by developing loyalty significantly: in 2020, 76 percent personalization, retailers will need to a methodology to interpret and make of consumers changed stores, brands, focus on several areas. They should decisions on omnichannel tests. Some or channels. Personalization, supported coordinate corporate efforts with store of these efforts may start small, but by data and analytics, is a powerful tool teams to ensure store operations and retailers should launch them with to strengthen the connection to the frontline associate teams master new a long-term vision of omnichannel brand, win consumer loyalty, and draw tools and engage with customers in personalization at scale in mind. Personalization customers into stores. Retailers that a personalized way. Cross-channel Retailers should look to implement excel in personalization have boosted activities should be integrated by linking omnichannel personalization at each revenues, reduced marketing costs, and the often siloed in-store systems and step of the end-to-end shopping increased both customer acquisition and marketing technology stack. In addition, experience—previsit, during the store satisfaction (Exhibit 2). Yet research has retailers will need to work to change visit, and postvisit. Doing so has the revealed that most retailers are early in customer behavior by integrating potential to increase traffic, conversion, their personalization journey. While 100 personalization into the in-store basket size, and retention. percent of top-quartile1 retailers cited experience and encouraging customers omnichannel personalization as a top- to “opt in” by downloading and engaging To capture the potential of omnichannel five priority, only 15 percent of retailers with an app, interacting with a screen, personalization, leading retailers are have fully implemented personalization or sharing information with an associate making investments in the sophisticated, across all channels. in a live interaction. Last, measurement largely digital capabilities needed to

While personalization is a top priority, only 15% of retailers have fully implemented personalization across all channels.

1 Top-quartile retailers defined by those in the top quartile of revenue growth from 2019 to 2020.

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Knowledge partner Exhibit 2 Omnichannel personalization is increasingly becoming table stakes

Why personalization must be a top priority: For most retailers, the consumer’s

offline journey is not personalized: Personalization 10–15% 10–30% data is captured only at point of uplift potential in more efficient marketing sale vs throughout the customer revenue and retention and cost savings journey. This is a missed opportunity for 3–5% 5–10% many at a time when ~76% of increased customer higher satisfaction consumers have changed stores, acquisition and engagement brands, or the way they shop and consumer loyalty has been shaken … yet only 15% of marketers say they have fully implemented up during the pandemic. personalized marketing

Source: McKinsey omnichannel personalization research, 2019

create distinctive customer experiences. redesigned mobile app for health and an email address linked to a personal A critical element of personalization wellness items. Customers can now pick profile was worth 2.5 times the average is building better data and insights on up orders in-store, curbside, or through sale. customers, an asset that also generates their local pharmacy’s drive-thru. Of course, personalization efforts must additional value across the value Ulta Beauty is using digital tools such balance potential legal and reputational chain. Targeted ads based on previous as GLAMlab, its virtual try-on feature. risks around personalization by, for purchases highlight products that will In 2020, the company increased the example, prioritizing data privacy help customers continue or complete number of SKUs available via the tool by and the prudent use of technologies current projects. more than 550 percent. Since the COVID- such as facial recognition. While data To keep up with the growing 19 crisis began, guest engagement with privacy requirements continue to preference for online showings, IKEA GLAMlab has increased meaningfully, evolve, retailers can benefit from a is experimenting with 3D home design with product views rising 12-fold in 2020. proactive approach that moves beyond and investing in augmented-reality compliance to opportunity, reinforcing Our research suggests the ROI for technology that enables customers to customer trust. personalization will quickly outpace that test design choices using their phone. of traditional mass marketing. At Modern In November 2020, Walgreens launched Retail Collective, McKinsey’s concept a reinvented with a store at the , collecting

Retail speaks. Seven imperatives for the industry 11

Knowledge partner How to get started • Define the right moments in the scale new experiences ten times customer journey where you faster than traditional in-store Personalization can provide the greatest benefit. initiatives. When communicating with the • Coordinate corporate efforts customer in these moments, with store teams to ensure consider how digital and physical frontline sales associates master channels can best reinforce each new tools and engage with other. customers in a personalized way. • Evaluate technology options that Success will require retailers balance level of investment and to enhance training programs, high fidelity. For instance, could reimagine incentives, and evolve an iPad on a stand or another the store operating model. low-cost option sufficiently • Get customer feedback rapidly digitize elements of the in-person and iterate. By using analytics on experience? Investment at scale consumer reviews and returns will require a clear business case data, and incorporating input from and proven ROI. in-store interactions between • Stand up lean pilots with cross- sales associates and consumers, functional teams that obsess retailers can create an army over the consumer, integrate of brand champions to guide and analyze data, and test and continuous improvement. learn rapidly. This approach can

If you’re on the journey, how to accelerate • Double down on measurement consumer preferences. These methodologies to inform decision insights will inform assortment making. These insights allow decisions—focusing on fewer retailers to track and tie online quality products that meet and offline behavior and estimate consumers’ needs, rather than incremental revenues for offering hundreds of products potential customers. and hoping one sticks. • Expand to the upper and lower • Solicit crew and customer parts of the funnel. Retailers can feedback actively to generate improve connection to consumers new ideas and improve the by investing in product and customer journey. service discovery based on

Retail speaks. Seven imperatives for the industry 12

Knowledge partner Turbocharge delivery 3As consumer expectations approach same day, stress on supply chain will mount

Retail speaks. Seven imperatives for the industry 13

Knowledge partner The pandemic has elevated the Retailers expect dramatic changes in that will require significant investments importance of order fulfillment— customer expectations for delivery over to propel their supply chain fulfillment

specifically, the speed at which retailers the next three years. The vast majority capabilities. More than 75 percent of the Speed can deliver goods. Since the definition of consumers—over 90 percent—see specialty retail supply chain leaders in of warp speed looks quite different by two to three days as the baseline, and our sample have made two-day delivery category, retailers must understand 30 percent expect same-day delivery. a priority, and 42 percent hope to offer customer expectations and then carve Targets vary by retail category: two same-day delivery by 2022. Meeting out a distinct value proposition. For or three days for specialty, same day these goals will require trimming at example, we have seen a divergence for grocery, and within the hour for least two to three days from today’s between the strategies of specialty prepared foods. delivery times. retailers and grocery and hypermarket In response, retailers are setting retailers. ambitious targets for delivery times

Exhibit 3 Retailers are investing in improving delivery speeds, recognizing that it provides a distinct competitive advantage

2020 consumer delivery speed expectations 4–7 days Same day % of total2 2–3 days 2–6 hours

6% 65% 12% 6% 12% Next day <2 hours

2022 retailer delivery speed goals % of total

29% 29% 18% 12% 12%

More than 75% of specialty retail supply chain leaders have made two-day delivery a priority, and 42% hope to offer same-day delivery by 2022.

2 Figures may not sum to 100%, because of rounding.

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Knowledge partner Grocery and hypermarket retailers are Our survey found that 80 percent of Delivering at warp speed will require eyeing similar investments in supply retailers plan to concentrate their 2022 several changes. Most retailers will

chain capabilities to keep up with shifting supply chain spending on addressing need to build, buy, or borrow the Speed consumer preferences. E-commerce the constant demands on e-commerce requisite capabilities to expedite delivery penetration in grocery, which increased fulfillment. Automating warehouse roles and give customers more visibility into from 4 percent in 2019 to 10 percent in is the top digitization and automation timing, as several leading retailers have 2020, is expected to rise to 30 percent priority for 64 percent of retailers. done. For example: by 2024. Many grocery retailers These expectations add tremendous • Target acquired Shipt in 2017 and already have established partnerships pressure on already lean supply chains, built a network of hundreds of with marketplace providers such as and these initiatives could add 50 to 200 thousands of personal shoppers DoorDash, Instacart, and Uber to enable basis points on a retailer’s profit and who pick up goods at Target or delivery within a matter of hours. In loss (P&L). Although such investments other retailers and deliver them to a addition, grocers are devoting millions of could have a detrimental impact on consumer’s home, usually within two dollars to upgrade their own fulfillment profitability in the near term, they hours. capabilities through the adoption of nevertheless set up retailers for success robotic-process-automation (RPA) in the longer term. • Delhaize acquired a majority technologies. stake in online pioneer FreshDirect to augment its direct-to-delivery capabilities in pure-play grocery e-commerce. • Fashion retailers such as Decathlon and Gap are accelerating investment in RPA to speed order processing times, count inventory, and improve overall warehouse productivity for e-commerce orders. • Grocers and hypermarket retailers such as and are investing in partnerships with microfulfillment providers to regionalize their inventory in urban areas. Retailers that fail to upgrade their fulfillment models run the real risk of their supply chain adversely affecting P&L. However, meeting rising consumer expectations for speedy delivery and achieving ambitious targets will require executives to rethink and invest in the 80% of retailers plan to supply chain. concentrate their 2022 supply chain spending on addressing e-commerce fulfillment.

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Knowledge partner Speed

How to get started

• Identify the customer’s “North • Quantify the business case and Star.” Listen to the voice of the create the road map. Understand customer (VoC) to calibrate both the strategic and financial and tailor offerings based on considerations associated with segment and willingness to pay. building the requisite capabilities Service levels can be tiered and required to deliver to customers’ personalized based on customer “North Star” expectations. These requirements, geography, capabilities include investing in category, and brand, with VoC people, process, and technology informing delivery times and enablers and building a cross- openness to subscription models. functional road map.

If you’re on the journey, how to accelerate

• Build a fit-for-purpose network. • Foster ecosystem collaboration. Rethink the end-to-end network, Partner with marketplace including the role of distribution providers and suppliers to build centers and stores, to balance flexibility across the network and speed, flexibility, reliability, cost, improve service. capital, and supply chain risk.

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Knowledge partner Take a stand or take a seat Consumers are finally voting with their wallets for sustainability and broader purpose

Retail speaks. Seven imperatives for the industry 17 4Knowledge partner Over the past year, social justice has As Javier Quiñones, president and CSO their wallets, rewarding companies that dominated the national conversation at IKEA US, noted, “Being a purpose- have a clear purpose and adhere to ESG and pervaded the private sector. led brand starts with the ‘why’ behind principles (Exhibit 4). One-third of survey Environmental, social, and governance what we are doing. For IKEA, it always respondents3 reported they had stopped (ESG) factors became increasingly comes back to our mission to make life using a brand based on its social actions, Take a stand Take important in 2020, bringing other better for people, and that’s not just and 71 percent indicated they would trends into sharp relief. Consumers are our customers but society as a whole. lose trust in a brand forever if it placed holding companies accountable for their People will not only buy from but also profits over people. At the same time, actions to a greater degree and now buy into brands that stand up for their consumers are willing to pay more for expect businesses to actively support values.” products that meet their values. ESG principles. Although our research Consumers, particularly millennials survey did not include questions about and Gen Zers, are indeed voting with ESG principles, all of the CEOs we interviewed raised unprompted the importance of consumer sentiment and the scrutiny on values and corporate social responsibility.

“Being a purpose-led brand always starts with the ‘why’ behind what we are doing. People will not only buy from but also buy into brands that stand up for their values.” —Javier Quiñones, President and CSO, IKEA US.

3 “E2020 Edelman Trust Barometer Spring Update,” Edelman, May 2020, McKinsey Consumer Survey.

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Knowledge partner Exhibit 4 There is growing evidence that consumers are aligning their purchasing power with businesses’ societal commitments

Consumer expectations around societal contributions of businesses have risen ... a stand Take 33% 71% 57% 62% 80% stopped using a will lose trust in a believe companies believe business is of Gen Z refuse to brand based on its brand forever if it need to redefine their putting profits before buy goods from social actions places profit over purpose to fight the people companies involved people pandemic in societal scandals

... and consumers are willing to pay more for products that meet their values

Pay more for products with least negative impact on environment Size of spend % “Agree” or “Strongly agree”

50 Consumers, especially Gen Quality Gen Zers Zers, are willing to pay more 45 for products that support 40 Quality millennials their values and have less negative impact on the 35 environment 30 Value Gen Z 25 Quality Gen Xers Value Value 20 Gen millennials 15 Xers Quality baby boomers

10

5 Value baby boomers 0 Willingness to pay more for products of companies sharing values % “Agree” or “Strongly agree”

Source: 2020 Edelman Trust Barometer Spring Update; McKinsey consumer survey

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Knowledge partner Beyond consumers, a broader set of market but generated 55 percent of the 1975. Walmart reinvented supply chain stakeholders (including employees, total growth. According to McKinsey decarbonization and formed industry investors, and board members) are research, 70 percent of consumers will groups such as the Rainforest Alliance applying pressure to companies. pay a premium of more than 5 percent for coffee. for a green product as long as its quality

• Employees are the top nonfinancial Similarly, Giant Eagle announced a goal a stand Take matches that of a nongreen alternative. topic discussed in board meetings, of being free of single-use plastics in and they are banding together to Retailers understand the link between its operations by 2025 and eliminating ensure leadership is aware of their “doing good” and bottom-line impact. single-use plastic bags from all stores. views. For example, and Most (80 percent) believe that company In February 2021, VF Corporation Google workers walked off the job to actions matter to consumers, and 64 announced its goal to eliminate all draw attention to their demands on percent believe those actions affect single-use plastic packaging, including climate change. Some retailers have purchase decisions. poly bags, by 2025. signed the taken steps to provide more support Climate Pledge, with the goal of being Accordingly, leading brands are setting and development opportunities for carbon neutral across its business by increasingly aggressive ESG goals. employees—Bed Bath & Beyond has 2040—a decade earlier than its previous raised starting wages, and Walmart, As Alex Gourlay, Co-COO of Walgreens goal of 2050—and offering products to which has also boosted its wages, Boots Alliance, observed, “Corporate help customers reduce emissions 20 established ambitious reskilling social responsibility covers a huge percent by 2030. programs to help workers advance range of business activities and has Starbucks signaled its commitment to in their careers. now come of age. Companies now really social causes by extending benefits such do walk the walk in their commitment • The biggest institutional investors as upskilling and improved access to to the communities they serve, the in the retail industry (such as higher education, mental health support, environment, and their people; and take BlackRock and State Street) are and healthcare to part-time employees. steps to monitor and evaluate their including ESG as priority elements performance and achievements in those of their investment criteria, areas. This is now a function that is at with one-third of assets under the heart of every business.” management allocated based on ESG considerations.4 Regarding the environment, Microsoft pledged in 2020 to go carbon positive During the past five years, products by 2050 by removing more greenhouse marketed for their sustainability gases (GHG) from the atmosphere than accounted for just 16 percent of the the company has created since consumer-packaged-goods (CPG)

80% of retailers believe company actions matter to consumers, and 64% believe those actions affect purchase decisions.

4 Report on US Sustainable and Impact Investing Trends 2020, US SIF Foundation, www.ussif.org.

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Knowledge partner Take a stand Take How to get started

• Develop a credible purpose story • Take a proactive stand on issues and ESG priorities, backed by by tailoring external engagement societal commitments across and communications to highlight ESG pillars and diversity, equity, the company’s values. For and inclusion (DE&I) initiatives example, after the George Floyd to improve the internal work protests in 2020, 32 percent of environment, ensure pay equity, Fortune 1000 companies made and create equitable products. statements and collectively The combination ensures that promised $64 billion to advance a company focuses its ESG racial equity. Taking a stand will efforts on areas where it can be be credible only if backed with distinctive. real commitments from the organization.

If you’re on the journey, how to accelerate

• Measure the impact of doing good • Establish bold, measurable ESG by setting performance targets goals to guide the company and and defining metrics aligned with track progress. Some companies purpose goals (for example, DE&I have tied progress to executive targets, GHG reduction targets, compensation—for example, or number of new purpose-driven Starbucks and Sodexo on DE&I, products). and Danone on climate change.

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Knowledge partner Investing for growth

The pandemic reinforced that the Recalibrate talent competitive landscape can change strategies nearly overnight. Therefore, retailers 5 will need to build new capabilities to Winning the war for diverse talent, next-gen skills, ensure they can adapt, with a focus and embracing a fluid workplace will give retailers a on tech-based abilities and strategies. performance advantage Three imperatives hold the key.

Pursue an 6 eco(system)- friendly strategy Winners will embrace the networked economy to win consumer mindshare and accelerate capabilities

Take productivity 7 from foundational to transformational Analytics and automation will enable the step change in productivity needed to fund the other imperatives

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Knowledge partner Recalibrate talent strategies

Winning the war for diverse talent, next-gen skills, and embracing a fluid workplace will give retailers a performance advantage

5Retail speaks. Seven imperatives for the industry 23

Knowledge partner Retailers are short the workforce and • Reimagine the organizational • REI sold its Washington State capabilities to succeed in the digital- blueprint and ways of working. campus in August 2020 and replaced dominated world. To close the skills gap, it with distributed coworking spaces. • Build and sustain a culture that can companies will need to reimagine their support in-person and virtual work • Dollar General is reevaluating its strategies for sourcing and deploying and evolve to support employees. approach to remote work and a talent. Four key themes have emerged. return to headquarters. Early in the Acknowledge a more talent Next-gen Elevate your game on next- pandemic, its leaders examined the remote world generation talent mix of remote and on-site workers The quick move to remote work during Retailers recognize the magnitude that would make the most sense in the pandemic has greatly expanded of the gap in digital talent and are a post-pandemic world rather than the available talent pool for retailers. planning to increase their digital simply bringing everybody back as If proximity is no longer a prerequisite, full-time equivalents (FTEs) by more soon as it was safe to do so. they are in a position to upgrade key than 50 percent. Even that rise will positions. When considering remote • Walmart plans to keep thousands of be insufficient, meaning that retailers options, retailers must assess which tech employees working from home will need to continue to redouble their roles work well in a remote location or postpandemic and reserve office efforts as the world becomes more office; the importance of human and space “primarily for collaboration, analytics-driven. physical interaction is one important to sync up and strengthen As retailers evaluate their hiring, lens. Retailers will need to find ways to camaraderie.” development, and retention efforts for access remote talent pools while still Embed flexibility into digital talent, they should explore the maintaining the company culture. the workforce following actions: Industry leaders are revisiting their Retailers can significantly expand their • Identify the capabilities and location strategies to help them attract talent pools for hourly and frontline roles required to execute their and retain the right talent. associates by tapping into on-demand omnichannel strategies (including labor models such as the gig economy. deciding whether to make roles This independent workforce is large—68 domain-specific). million people, or 27 percent of the US working-age population—and is expected to account for the majority of the workforce by 2027. During the next three years, 70 percent of survey respondents plan to rely more heavily on flexible labor. Industry leaders are already forging partnerships with new marketplaces: • Walmart partnered with Handy to bring Handy’s installation and assembly services to more than 2,000 of its 5,000 US stores. • Meijer engaged Hyer to help meet its workforce needs in real time across the supply chain, from distribution centers to in-store needs, to manage rapid changes in demand.

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Knowledge partner • IKEA acquired TaskRabbit in 2017, accessing its more than 60,000 independent workers to help customers pick up, assemble, and install IKEA products. • ShopRunner partnered with a Next-gen talent Next-gen number of apparel and skin-care retailers, such as American Eagle, Bloomingdale’s, Kiehl’s, and Under Armour, for last-mile delivery. However, this flexibility comes with risks, including an erosion of brand identity and company culture, legal and regulatory issues, and an uneven customer experience. Retailers that go down this road must consider the uncertainty and potential drawbacks and implement the appropriate quality- assurance and culture initiatives. • Gap pledged to double the number programs, and technology needed to Notably, using a flexible workforce of its Black and Hispanic/Latino ensure their qualifications are in line doesn’t alleviate the need to invest in employees by 2025. with job opportunities in an evolving job reskilling in-store and other workers to market.5 adapt to a new omnichannel strategy; • Target announced plans to increase in some circumstances it can further representation of Black team Retailers committed to strengthening complicate the training picture. members across the company by 20 D&I in their talent strategies will need percent over the next three years. to understand their starting points Build a diverse workforce by analyzing data and the voices of • Ulta Beauty has committed to Diversity and inclusion (D&I) looms employees and customers to see doubling the Black-owned brands especially large in the consumer- how their companies perform on role in its assortment by the end of 2021, facing retail industry. Missteps at any and location metrics and reviewing stepped up employee training to of its many customer touchpoints core processes to locate risks and make stores more welcoming for can seriously damage corporate biases (for example, hiring and selling all customers, and doubled D&I reputation and sales, as demonstrated practices). They must also balance trainings across the enterprise. by the willingness of three-quarters of short-term initiatives and longer-term Generation Z consumers to abandon But increasing diversity in the retail programs—for example, engaging store companies that run ad campaigns seen industry will be challenging. COVID-19 managers and associates in developing as misogynistic, racist, or homophobic. has accelerated the industry’s use of action plans, holding managers automation and artificial intelligence (AI), accountable for making store operations Leading retailers are making and these advanced technologies bring more inclusive, and establishing commitments to increase workforce the threat of workforce displacement. collaborative partnerships with external diversity and reflect the country’s In addition, more diverse talent pools resources (such as Target with the diversity with the products they sell. can lack access to employer-sponsored Hispanic Association on Corporate upskilling, external certification Responsibility).

5 Bryan Hancock, James Manyika, Monne Williams, Jackie Wong, and Lareina Yee, “Race in the workplace: The Black experience in the US private sector,” February 21, 2021, McKinsey.com; Kelemwork Cook, Duwain Pinder, Shelley Stewart, Amaka Uchegbu, and Jason Wright, “The future of work in Black America,” October 4, 2019, McKinsey.com.

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Knowledge partner How to get started talent Next-gen

• Develop a road map to close and benefits (even for part-time major talent gaps. It should employees) on par with top tech include clear metrics to ensure competitors. accountability and transparency • Define and commit to a bold D&I and an execution plan. aspiration, both internally and • Provide attractive development externally. opportunities, clear career paths, and competitive salaries

If you’re on the journey, how to accelerate

• Build capabilities that provide • Consider how (or if) your access to upskilling opportunities organization could take and technical development for advantage of on-demand labor the existing workforce while models and remote working to preparing employees for an influx augment full-time, in-house staff. of external hires.

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Knowledge partner Pursue an eco(system)- friendly strategy

Winners will embrace the networked economy to win consumer mindshare and 6accelerate capabilities

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Knowledge partner Six of the seven global companies with ecosystem, they will have to figure out the highest market caps participate how to compete, participate, or coexist. 6 of the 7 in ecosystems—interconnected sets Our research identified five platform global of services that enable users to fulfill archetypes, which vary based on where a range of needs in one integrated they focus in the value chain (Exhibit companies experience. We expect the development 5). Further, some industries are a more of ecosystems, especially those with the natural fit for certain archetypes. A convened by retailers, to accelerate. retailer considering an ecosystem McKinsey analysis suggests that highest position must define the role it is well ecosystems across a dozen sectors suited to play based on its business market caps will collectively function as a $60 strategy, ambition, risk appetite, financial trillion economy by 2025.6 That makes resources, and existing capabilities. participate in and ecosystems Partnerships developing an ecosystem strategy an imperative for survival: even if retailers ecosystems. aren’t positioned to establish their own

Exhibit 5 There are five platform archetypes to win in an ecosystem

Description Types Depth of value creation

Content Lead Transac- and gene- Con- tions and Fulfill- After- listings ration version payments ment sales

Aggregator Present information from Media and content various suppliers in a Products or services 1 consolidated view to the end customer Search

E-commerce Fulfill classic retail function Single vertical (food, fashion, digitally and offer value-added and electronics) 2 services to suppliers Multivertical (eg, department stores) Niche vertical (eg, razor blades)

Marketplace Connect customers to third Managed vs unmanaged parties in a single integrated Horizontal, single vertical, 3 customer experience multivertical

Super app Consolidate multiple apps Inter-ecosystem and functionalities into Intra-ecosystem 4 one overarching and ever- expanding app

Service Provide critical functions Manufacturing provider to the platforms and the Marketing and sales 5 overarching ecosystem Payments and fulfillment Aftersales

Source: McKinsey; Web research

6 Violet Chung, Miklós Dietz, Istvan Rab, and Zac Townsend, “Ecosystem 2.0: Climbing to the next level,” September 11, 2020, McKinsey.com.

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Knowledge partner Companies that participate in create new products, and expand as an store partnerships including Starbucks, ecosystems shift from operating ecosystem. Disney, Apple, and Ulta Beauty; the Ulta “pipeline businesses” (creating products Beauty partnership will roll out to more Other retailers are following suit. Mass and services that meet specific than 100 Target stores starting this retailers now all have marketplaces, customer needs) to operating “platform year). which will give them a captive audience businesses” (matching customers with for the suite of services they are rolling exchanges of goods, services, and social out, as well as the scale to expand. In currency). Ecosystems enable large- recent years, Target has been on a path Retailers scale automation and collect massive to transform itself from a pipeline to amounts of valuable information, platform business through a stores- considering ranging from logistics data to behavioral as-hubs strategy that places stores at data. By developing an ecosystem, an ecosystem the center of its omnichannel platform. and ecosystems Partnerships traditional retailers have the potential to Target has made significant strides must define transform and leapfrog the competition, in building out its media network counter challenges from digital rivals, (Roundel), investments in delivery the role they and engage with customers in new capabilities and technologies (Shipt, ways. are well suited Deliv), and partnerships with other The leading Chinese retailer Suning is a national brands (for example, store-in- to play. case in point. In the late 1990s, Suning achieved offline market leadership in home appliances. From 2010 to 2015, Suning established and scaled an online presence and began building an e-commerce ecosystem with expanded categories (grocery, books, and apparel) and a marketplace model that attracted third-party merchants. By 2019, Suning qualified as a full-category omnichannel retailer. Among US retailers, Amazon has excelled in using the ecosystem approach to diversify its business by building an ever-expanding, self- reinforcing network of businesses, including retail, cloud computing, devices, advertising, logistics, finance and payments, healthcare, and more. Amazon famously started as a bookseller, became a market leader in cloud services and advertising (the third largest for digital), and is now attempting to do the same for healthcare and pharmaceuticals. The company continues to see a gap, fill the need,

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Knowledge partner How to get started

• Explore nontraditional retail • Analyze and learn from partnerships by joining forces successful ecosystem players. to enter new geographies and Beyond learning from operating marrying the best of physical practices, retailers must also

and digital. Reliance has helped understand the type of talent and ecosystems Partnerships expand its reach in needed and the necessary India, and Oracle and Walmart’s investments in technology and proposed partnership with TikTok infrastructure. More holistically, offers the retailer the ability to it is important to cultivate meet consumers where they the culture of innovation and spend their time. disruption these ecosystem players foster.

If you’re on the journey, how to accelerate

• Decide what role the company • Choose a business model that will play in the ecosystem— will create shareholder value orchestrator, service provider, without compromising the or participant. Some retailers brand’s integrity. This exercise may design their business and involves scenario analysis to operating model so services can understand the full financial be used by other retailers—think rewards of different outcomes Amazon Web Services or Target’s and the impact on valuation. Shipt. When Walmart opened full- service clinics to expand its healthcare reach, the reward was an improved valuation.

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Knowledge partner Take productivity from foundational to transformational

Analytics and automation will enable the step change in productivity needed to fund the other imperatives

Retail speaks. Seven imperatives for the industry 31 7 Knowledge partner Executing the previous six imperatives the typical levers have little mileage requires meaningful investment in left. Thus the next phase will require talent, capabilities, and capital. Retail deploying analytics and automation as a sector has achieved outsized across the P&L (Exhibit 6). productivity growth. Going forward, Productivity

Exhibit 6 Headwind High impact Transformational productivity improvements are required Tailwind Medium impact to reshape P&L and enable investment Low to minimal impact Impact on retail subsector Affected P&L line items Description of impact Food retail Hardline Apparel

Product cost Rising supply costs in key sourcing markets (eg, ) Inventory risk driven by decentralized fulfillment to meet increasing delivery expectations (eg, carrying more inventory across stores to prevent stockouts) Rising expectations for more ethically sourced products Shift to value provides opportunity to increase private- label assortment

L&D Increase in employee training and upskilling costs to meet new capability needs (eg, next-generation data analytics)

Labor expense Store labor: increasing wages and extending benefits to part-time employees to attract and retain talent Store labor: growth of on-demand gig labor to provide additional capability needs from shifting role of the physical store Corporate HQ: growth of remote workforce and AI/ automation to bridge next-gen skills gap and relieve cost pressure

Operational Increasing supply-chain fulfillment costs from overall expense accelerated e-commerce growth Rising expectations for faster delivery of online orders

Net rent Selective store closures and investment cost to retrofit stores to enable fulfillment Fewer leased office spaces from overall reduced need for in-person workforce

Cost pressures on P&L from rising table stakes require retailers to make transformational productivity improvements through automation and AI

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Knowledge partner Retailers will need to prioritize than 10 percent. As retailers scale their value. To distance themselves from investments that are truly fulfillment networks, supply-chain competitors, they are launching transformational. Our research automation can help address consumer ambitious efforts to dramatically uncovered five areas that hold demand for speedy delivery while reduce spending by empowering their particular promise. reducing cost per order. In particular, procurement organization with two Productivity we see adoption of more flexible game changers. First, leaders are Enable stores with tech technologies such as goods-to-person introducing tech-enabled, advanced- Technologies such as self-checkout AGVs (automated guided vehicles) analytics approaches to identify and have become commonplace in the and person-to-goods picking robots unlock more sophisticated levers industry. In the past 12 months, we have (and “cobots”) that can be operated through negotiations. Second, they seen an acceleration to extend similar in smaller-scale facilities. These are partnering more closely with capabilities across stores. Automated technologies can speed processing of business functions and using granular inventory management through real- consumer orders by 300 percent and data, analytics, and design thinking to time image processing improves both provide a positive ROI for retailers. challenge what and how goods and productivity and in-stock positions for Automation of the distribution center services are being purchased and customers. Digitizing administrative alone could boost profitability by 300 to identify inefficiencies. Through these activities, through tools such as 700 basis points. efforts, retailers are capturing bottom- AI-enabled labor scheduling, advanced line impact of 100 to 140 basis points or In addition, retailers are investing insights platforms (in lieu of scorecards), more. or digital compliance tools enables in delivery experience management managers to get out of the back room technologies to improve the consumer Boost private-brand and onto the sales floor. IoT sensors help experience and provide visibility innovation and sourcing preemptively address hardware issues across all points in the supply chain, excellence from distribution center processing in cooler doors or point-of-sale systems Private brands have evolved from times to delivery location and returns to prevent costly downtime. Together, lower-cost alternatives to A-level processing. These investments have we believe advanced levers like these brands to competitive weapons for helped retailers improve customer can increase profitability by about 300 retailers. They provide an opportunity to satisfaction scores by up to 10 percent basis points over time. strengthen customer loyalty through a while enabling incremental revenue differentiated, innovative offering and to Automate the supply chain capture. and invest in solutions to increase margins. Leading retailers are using product design and development increase visibility Launch tech-enabled, business-backed indirect in collaboration with suppliers to With e-commerce forecast to reach spending optimization support innovation, penetration, and more than 20 percent of sales (some growth. They are also using next- Leading retailers recognize indirect segments and retailers have already generation sourcing tools to completely third-party spending, typically exceeded this threshold), many change the way they negotiate with amounting to 10 to 12 percent or retailers are still operating fulfillment vendors: from a retail-backed target more of revenue, is a critical driver networks built for penetration of less costing to hit a certain initial markup to of profitability and shareholder

Automation of the distribution center alone could boost profitability by 300 to 700 basis points.

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Knowledge partner “The days of only one function driving any successful initiative are behind us. Everything we do requires strong coordination of cross-functional teams—from digital to store operations to merchants and more, everyone plays an integral role. And it all starts with a clear understanding of consumer expectations and the right prioritization.” —Brian Cornell, Chairman and CEO, Target a cost-forward approach, by developing applied to simplify core business deep expertise in costing engineering, processes, can capture a large competitive sourcing, and advanced proportion of this benefit. For instance, fact-based negotiations. In this way, up to 40 percent of tasks in finance retailers are achieving 10 to 20 percent functions can be automated based on growth in private-brand sales while available technologies in a short period improving margins in this category by of time. 500 to 800 basis points. Automate business support functions Automation and analytics have the dual benefit of boosting profitability while also freeing up resources to focus on the tasks that matter (such as new growth opportunities). In our experience, merely automating repetitive tasks can free up 20 to 30 percent of time across functions such as finance, HR, IT, procurement, and legal. However, few retailers currently have the capabilities or tools required to unlock this productivity. To achieve these results, retailers must consider the true long-term cost of not investing in productivity improvements. Too often, retailers overestimate their business-as-usual performance or the initial investment needed to achieve benefits from automation. The reality is that available technologies, when

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Knowledge partner Getting started Revisit the brand promise

Few if any retailers will be able to In the words of Kevin Holt, CEO of Ahold address all of these imperatives at Delhaize USA, “How well you create a “How well you scale and at the same time—the overall value proposition is the cornerstone create a value cost and complexity will be too high. of the brand’s ability to survive.” The Therefore, the first step will be to set postpandemic environment will require proposition is priorities. Some imperatives, such as actions on the imperatives tailored to the cornerstone prioritizing ESG principles and attracting the individual brand promise’s DNA. next-generation talent, are related and What does the retailer want the brand of the brand’s may make sense to tackle in tandem. to stand for, and how can embracing the ability to However, retailers will need to balance imperatives strengthen the retailer’s a range of trade-offs, such as the ability to deliver that brand promise? survive.” tension between speedy delivery (send For example, a retailer committed to —Kevin Holt, CEO, USA lots of boxes), sustainability efforts fulfilling digital demand might prioritize (reduce the number of boxes shipped), developing an assortment that enables and the challenge of offering a broad more efficient logistics to offset the assortment and personalizing the higher operational costs associated with shopping experience. digital fulfillment. The key to striking the right balance is fidelity to the retailer’s brand promise.

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Knowledge partner During the past year, many retailers shifted course and innovated at a speed they once thought impossible. Now is not the time to slow down. Retailers that can accelerate their progress with targeted investments, embrace new approaches to talent and ecosystems, and free up resources to support promising ventures have the potential to become leaders in the industry for years to come.

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Knowledge partner We wish to thank Brian Cornell Craig Menear the following for Chairman and CEO, Target Chairman and CEO, The Home Depot their contributions Mary Dillon Erik Nordstrom CEO, Ulta Beauty CEO, Nordstrom to this report: Alex Gourlay Javier Quiñones Co-COO, President and CSO, IKEA US Kevin Holt Todd Vasos CEO, Ahold Delhaize USA CEO, Dollar General

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Manik Aryapadi Hannah Yankelevich Partner, Cleveland Associate Partner, Minneapolis [email protected] [email protected]

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Knowledge partner