As new systems and digital capability continue to evolve the way retailers run their businesses, Essential Retail is gauging the views of the sector's main figureheads, via a series of exclusive interviews. This week, it's the turn of JDA Software's group vice president for global retail strategy, Lee Gill.

Asda's Andy Clarke addressed grocery industry delegates at an IGD conference last month by saying that the supermarket world's biggest challenge from a business perspective is centred on making digital-enabled retailing profitable.

He's not the only retail executive to think so. It's been a common theme on the conference circuit and in trading statements from the industry's largest corporations over the last 12 months, while in the spring PwC underlined the issue via a survey of 400 retail and consumer goods company CEOs, which showed that just 16% of them felt they could fulfil multichannel retailing profitably.

The research also indicated that 67% of businesses are seeing their costs go up as a result of serving customers across multiple channels, with handling returns from online and store orders a key pain point (cited by 71% of respondents). Shipping direct to the customer and shipping to store for customer pick-up were also acknowledged as particularly costly processes of modern retailing.

Lee Gill, group vice president for global retail strategy at JDA Software, the company which commissioned the research, says that retailers cannot bury their heads in the sand and hope the issue goes away. They need to get to grips with new technology that can improve efficiencies and encourage customers to shop across channels by utilising their stores in a relevant manner.

"This fulfilment challenge is not going to go away – customers do not want to pay for delivery," he told Essential Retail.

"If it's not going to go away what can you do? You can wean customers off home delivery to click & collect which reduces the cost, or you start to invest in technology to basically help mitigate that."

The retail industry is slowly reacting to the reality of lower margins bought on by serving the modern customer, with some chains taking what they view to be the relevant action to look after their balance sheets. In the summer John Lewis announced it would charge £2 for click & collect orders up to £30, while Tesco quickly followed suit by raising the threshold for £4 in-store collection charges to £40.

John Lewis introduced a click & collect charge in the summer

Although these decisions have clearly been made for the right business reasons, the danger is that customers won't see it that way. The cold, harsh reality for retailers is that customers do not expect to pay extra, which underlines the risk the two aforementioned retailers have taken in establishing click & collect levies.

It's like the industry has got itself into a bit of a tangle. The race to offer customers the ultimate convenience and seamless multichannel service has been made without the bottom line in mind, and Sainsbury's head of online Robbie Feather was critical in his assessment of the sector, saying the UK had built the world's best online grocery industry while single-handedly destroying "most of the value in the channel" by failing to charge shoppers accordingly.

JDA's Gill sees it as a pertinent issue, saying: "The net is that everyone is waiting with interest to see what happens with John Lewis.

"As a customer, I struggle with the concept of being charged for click & collect – I just expect it to be in the store anyway, but the fact you don't have it in the store is your problem. Why are you charging me for that problem?"

Moves by the likes of Tesco and Sainsbury's in selling off property to help balance their finances, in keeping with a grocery world defined by the lowering of product prices and a shift towards customers shopping in smaller, more urban-based shops, perhaps highlight the real profitability issue related to modern retail. Expensive large stores that are no longer the preferred mode of shopping for customers can be a real drain on finances.

Gill agrees, suggesting that the retail industry has spent the last few decades creating big out-of-town supermarkets and the wider sector has decanted stock rooms out of their stores to release sales floor footage. Now, it could be argued that the companies that have the models best suited to serving today's consumer are those that operate stock-heavy stores, such as Argos and Screwfix, effectively offering inventory from mini warehouses across the UK, but driven by the web.

"The profitability question is much bigger than just home delivery and click & collect," he explained.

"The question I asked Andy Clarke [as part of a World Retail Congress panel debate earlier this year] is 'what is happening to the store estate?'. People are changing the way they shop to little and often which is impacting sales in out-of-town stores – these sales are being replaced by online."

Gill added: "We will continue to see further declines in out-of-town stores – it's why you are seeing franchise models, downsizing of stores and renting out to third parties. It's all an effort to try and deal with profitability."

The need for various fulfilment options, including the introduction of pick-up points in-store, in carparks and at other third-party locations, means things will get more challenging, said Gill, who predicts operations for the supermarket sector will continue to be "tough going forward".

"It wouldn't surprise me if we saw someone fall out of the game in grocery. I don't know who that can be, but there's too much capacity."

So while retailers continue to fight battles in relation to finding the right price points, opting for the most suitable services and placing a balanced focus across each sales channel, they are moving towards finding a new route to the consumer.

New platforms of engagement, including social media, customer feedback forums and personalised loyalty programmes – not to mention the continued growth in online sales that leave a data trail of customer behaviour – mean there is an opportunity for retailers to boost sales by becoming more relevant and targeted.

How they mine personal data in a responsible way and drive cross-channel experiences will lead them to "the prize", argued Gill, who said: "The solution is compensating margin erosion by driving top-line sales – it's a no brainer.

"If I know your likes and dislikes, a helpful recommendation can drive sales up. If I can also get you in store as well as shopping online, all statistics show that you'll spend more time and money. There is a prize in that margin erosion but the erosion has come before the prize. That's why we're going to see a period of difficulty for retailers."

But is there light at the end of the tunnel? "Retailers will do what they have always done; they will slash costs and make efficiencies. I don't think the long-term future is bleak, the industry will just metamorphose into a different model."

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