Why retailers must use tech to dramatically cut costs

As non essential shops gradually opened this month, images of snaking queues soon emerged from high streets across the nation. According to reports, some customers had been waiting in line since 3am. But while that might suggest a large pent up demand to hit the shops, the overall outlook for bricks & mortar retailers remains bleak.

Paul Martin, UK head of retail at KPMG, estimates one-in-four non-essential shops may stay permanently closed. “I believe we will only see a limited number of stores reopening,” he tells Essential Retail. “The reality is, demand is suppressed.. even in China and Hong Kong [where shops have been open longer] demand is down 10-30%.”

Combined with an imminent recession and government support schemes closing, retailers will have to make some tough choices in the coming months. While its true conversion rates are estimated to be around 90%, as people are more likely to buy something if they’ve been waiting in line – profit margins are estimated to be very low this year. KPMG estimates it to be around 0.5% for the sector, compared with around 6% 10 years ago. Put simply: the cost of doing business is much higher.

As such retailers will need to slash overheads significantly. Of the 50-odd retail CEOs Martin speak to every week, many are now looking at cutting their cost base by up to half.

Automating processes

Now more than ever, technology is expected to play a key role in achieving that (along with a drastic reduction in the number of physical stores). “One chief executive I spoke with last week said ‘I thought we had 3-5 years to make those changes, we’re going to have to make them much much faster now'."

Martin adds: “Going forward there will be a lot more automation, both in the back and front end.” That will mean fewer staff but also retaining a more skilled workforce, where people can do things better than machines. He cites the Ocado model of automated warehouses and distribution. “It is expensive setting up the infrastructure but over time there is a payback.” Meanwhile, the fashion sector could see a lot of human involvement taken out the process – such as sending digital samples of clothes rather than having people traveling with physical design prototypes. “When you look at all these different process and touch points a lot of that can be automated.”

Similarly stores no longer need teams of area managers driving between branches for meetings, when so much of that could be done by one person using video conferencing technology.

However, Khaled Tawfik, managing director at Boston Consulting Group, warns against throwing money at a lot of technology solutions without first assessing the return. “Often by breaking cycles across business, you can take lots of money across the business without having to spend a tonne of Capex,” he says.

“The biggest way technology can help is by creating transparency"Khaled Tawfik, managing director, Boston Consulting Group

Predicting demand

Tawfik believes advanced analytics will be crucial in streamlining product ranges. “Having fewer products will be key, as it will make operations more efficient and retailers ought to get better terms from suppliers.” Better anticipating the products customers want, will also mean less money is tied up in dead stock.

“The biggest way technology can help is by creating transparency. Retailers can analyse vast amounts of data and understand where they are spending money and use algorithms to understand which bits of spend they need… that is something that can pay back within the year, many times over.”

That could also help with resourcing. “Labour is a huge element of cost for retailers, it’s about managing colleagues in store to free them up  to do value-added activities”. Using predictive analytics for scheduling can help retailers more accurately estimate customer demand in each store and allocate the right level of staff. “So you have fewer wasted hours in stores.”

Simon Geale, senior vice president at management consultancy Proxima, agrees the key is to cut smartly. “There is no use going into it and saying ‘we need to take 20% off everything,’ which is a strategy some are using. You have to understand what you should be paying for each kind of service. In a market, where for the next 18 months supply and demand is going to be constantly rebalancing itself, you’ve got to be making the right purchases at the right times.”

Online and in-store

As retailers take a gradual approach to reopening, Mark O'Hanlon, managing director of Kurt Salmon, part of Accenture Strategy, says data can also help determine what the physical footprint should look like.

“I do think there is a need for [retailers to be] very agile and light on their feet here,” he says. Retailers will need to look at data to determine where the right locations are, and whether customers will treat stores in the same way post Covid – and then respond quickly.

Data will also be key in understanding customer behaviour. “For example, would [shoppers] travel a longer distance to flagship store and but then want to top up their shops closer to home?” he says. But they also need to look at how the offline and online proposition can properly complement each other. “The future store may be more bespoke and have a different role,” he says.

KPMG’s Martin believes a lot of this change is long overdue. Omnichannel is no longer “a nice to do” but an “existential necessity,” he says. For a lot of legacy bricks & mortar retailers, most of their capital expenditure still goes into physical stores, with just 1-2% of their turnover going into IT investments – compared with the high double-digit investment of online-only platforms.

“Increasingly they will have to put more into technology developments,” he says. “It has been difficult for legacy players to keep up, so they will either have to partner [such as the recent examples of tie-ups with Deliveroo] or pivot their brands.”

The point is Covid has accelerated the urgency to change business models. “If they still have their heads in the sand now, they’ve been asleep for a couple of months.”