he North American retail landscape 

looks quite
different today than it did even ten years ago. The way
that consumers make purchasing decisions has
dramatically altered: they stand in stores, using their
smartphones to compare prices and product reviews;
family and friends instantly weigh in on shopping
decisions via social media; and when they’re ready to
buy, an ever-growing list of online retailers deliver
products directly to them, sometimes on the same day.

These shifts have led a number of industry observers to

forecast the end of retail as we know it. Some predict
that retail will change more in the next five years than
it has over the past century and that the extinction of
brick-and-mortar stores isn’t far off. Our view is less
dramatic, but we do believe that big changes are
inevitable and that retailers must act now to win in the
long term.

There is historical precedent for this kind of upheaval,

which recasts the industry’s winners and losers. Within
the past century, local corner stores gave way to
department stores and supermarkets, then to suburban
shopping malls, then to discount chains and big-box
retailers. Each of these shifts unfolded faster than the
one that preceded it, and each elevated new companies
over incumbents. Indeed, six of the ten largest US
retailers in 1990 have since fallen from their positions
as new winners, such as Amazon.com, Costco, and
Walgreens, emerged in their place (Exhibit 1).

Exhibit 1
Shifts in the retail industry often create new winners, as evidenced by
changes in the top ten US retailers.
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Yet history also offers incumbent retailers some hope:
industry shifts have actually tended to unfold slowly—
over decades, in most cases—providing time to react.
While it is true that powerful forces are at work in
retail today, we believe their full impact won’t be felt
for years. (For instance, despite the e-commerce boom,
brick-and-mortar stores should still account for
approximately 85 percent of US retail sales in 2025.1 )
That said, incumbent retailers can’t expect to stay
successful by going about business as usual. In this
article, we discuss the major trends reshaping the retail
landscape and the actions we believe retailers must
take if they are to ride the wave instead of being swept
away.
 The trends that will matter
most
Drawing on our research and experience working with
companies across the North American retail sector, we
believe that five trends will have a significant impact
on the industry: demographic changes, multichannel
and mobile commerce, personalized marketing, the
distribution revolution, and emerging retail business
models. Each trend is powerful on its own, and
collectively they will redefine what it takes to be a
successful retailer.

The rise of boomers, Hispanics, and

millennials

Economic indicators do not paint a rosy picture for

retailers: budget deficits are mounting, unemployment
remains high, and the average consumer’s balance
sheet—while improving—remains shaky, for it has
taken more than five years to recover the $16 trillion in
net worth US consumers lost from peak to trough in
the recent recession. Additionally, rising social costs
related to health care, taxes, higher education, and
other areas will continue to stress disposable income.
Indeed, most industry forecasts suggest that US retail
growth over the next five years will average 3 to 4
percent annually, well below the 5 to 7 percent yearly
growth seen in the decade prior to the recession.2

We believe that these projections are reasonable and

that this slower growth rate is likely to extend well
beyond the five-year time horizon, becoming the “new
normal” (Exhibit 2). Within a tepid overall market,
however, there will be several pockets of strong
growth. Three customer segments that will make
disproportionate contributions to spending growth, for
example, must fit squarely into retailers’ customer-
driven strategies. Each is unique and will require
retailers to adapt their strategies to target the segments
individually.

Exhibit 2
Slower US retail growth may extend beyond the next five years,
becoming the “new normal.”
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 Baby boomers. Some 47 million households headed by people over the age of 55 will account for the
bulk of spending growth in major categories such as food (92 percent), housewares (73 percent), and
apparel (56 percent).3 The segment’s sheer size will drive growth in these categories, but boomers
will also disproportionally spend their disposable income on services and experiences instead of off-
the-shelf products.
 Hispanic consumers. The retail spending of Hispanic consumers will nearly double over the next ten
years and account for almost one-fifth of total retail spending.4 Importantly, Hispanics spend money
differently from other consumers—for example, they spend at least one and a half times more on
children’s apparel, footwear, and fresh food than non-Hispanic consumers do—and retailers will have
to account for this accordingly.
 Millennials. People between the ages of 13 and 30 constitute 15 percent of US consumers. Millennials
are the first group that grew up after the Internet, social media, and mobile became the norm—most
have never known a world without them. They will account for nearly one-third of total spending by
2020.5 Even through the economic tumult of the past five years, the spending of millennials has
grown by 3 percent a year.

The world’s largest store in every

pocket

Over the past decade, US e-commerce has grown at an

impressive clip of almost 18 percent a year.6 It now
accounts for 8 percent of total retail sales. With the
accelerating adoption of mobile—US smartphone
penetration exceeds 40 percent today and is projected
to reach nearly 60 percent in three years—digital
commerce is poised to explode, bringing shopping
quite literally into the palms of many consumers’
hands.7 For some retailers, mobile is already a huge
factor: at designer-fashion retailer Gilt, for instance,
mobile accounts for about 50 percent of daily traffic
and more than 30 percent of total sales. Mobile
technologies will increasingly influence every stage of
the customer’s shopping journey—from personalized
promotions prompted by geotargeting to in-store
research and price checks, as well as to payment
capabilities that offer checkout options beyond waiting
in line. A recent McKinsey survey of digital shoppers
highlights how mobile technology can complement the
in-store experience; for example, almost half of the
consumers who conduct research on their mobile
phones have done so while in stores, and half say
they’re open to the idea of in-store mobile
payments.8 Indeed, while just two years ago mobile
accounted for only 3 percent of e-commerce sales, that
figure will probably rise to 15 percent by the end of
2013.9

Highly personalized marketing

Habits of consuming content have changed

dramatically. US consumers doubled their spending on
digital newspapers in the past seven years, for
example, while halving their spending on print
newspapers.10 As more consumers abandon print
media for digital media, marketers follow: 44 percent
of them now allocate at least half of their marketing
budgets to digital media, up from only 31 percent in
2009.11

We’re already seeing that direct mail and newspaper

circulars are playing a diminished role in retail
marketing. Mass advertising will not disappear
overnight, but its influence is certainly waning. Ads
are shifting toward not just digitization but also
personalization, powered by increasingly sophisticated
algorithms and predictive models that analyze
transaction data and digital-media trends (for example,
what topics are hot on social networks). Already, 35
percent of what consumers purchase on Amazon and
75 percent of what they watch on Netflix come from
product recommendations based on such algorithms.
Company-directed marketing is also competing for
attention with peer recommendations through social
networks, user reviews, and the like. Our research
shows that for the average consumer, peer
recommendations carry ten times more weight than
recommendations from salespeople. Indeed, social
media could well make up 22 percent of marketing
budgets in five years as retailers increase their
spending to facilitate and influence peer connections
about brands through paid ads and branded pages on
social-media platforms such as Facebook, Ibotta, and
Pinterest.

A distribution revolution

Amazon already offers same-day delivery in ten cities

and guarantees one- to two-day ground delivery in the
continental United States. It is not unreasonable to
think that consumers will expect comparable shipping
speeds from all retailers—we expect same-day
delivery to become available soon in at least the top
150 metropolitan statistical areas, which hold nearly 75
percent of the population.12 Furthermore, we believe
retailers will offer shipping free of charge to their most
loyal and profitable customers, as opposed to
providing it only for those who make minimum
purchases. We also expect to see third-party
distribution services evolve and expand. Some
companies may make big investments in distribution
infrastructure and sell it as a service to other retailers,
as Amazon and eBay do now. Others are beginning to
invest in infrastructure to provide convenient and
secure package-delivery locations: lockers and pickup
boxes are appearing in groceries, convenience stores,
and drugstores nationwide, and new services are
sprouting up to let retailers ship packages for pickup at
other retail locations or self-storage facilities.

Consumers have come to expect simple and seamless

processes not only for receiving the products they’ve
purchased but also for returning unwanted products.
Free and easy returns—including the ability to return
or exchange online purchases in stores—are becoming
table stakes.
New retail business models

No doubt, retail competition just keeps getting tougher.

Consider the ongoing blurring of lines between formats
and sectors as retailers try to steal shopping trips and
share from one another (for instance, fresh food is no
longer the dominion of supermarkets alone but is also
increasingly found in warehouse clubs, convenience
stores, pharmacies, and even dollar stores).
Furthermore, players across the value chain are
encroaching on what used to be the exclusive turf of
retailers. More manufacturers are selling directly to
consumers; examples include Apple, Nike, and—via
Vitacost.com—several consumer-product
manufacturers. Tech players are also fighting for
consumer retail dollars: Google offers more than one
billion products for sale on Google Shopping and may
soon open retail stores.13 Additionally, companies
such as craigslist, eBay, and Etsy (home to almost a
million small businesses) are creating marketplaces
where individuals and entrepreneurs can sell their
wares to the masses. Finally, rental and aftermarket-
circulation models, such as Chegg for textbooks or
Rent the Runway for designer fashion, are eating into
traditional demand for retail goods.

Competition is coming from near and far as technology

makes retailing much more global than it has ever
been. UK online retailer ASOS.com, for example,
offers free two-day shipping worldwide for a relatively
small membership fee, and at times as a promotional
offer to all customers. Until recently, retailers didn’t
have to worry much about global competition until
stores started sprouting down the street—nor did they
have an opportunity to access global consumers from
North America—but that is changing as technology
helps break down barriers and generates new retail
business models.

What retailers should do

These trends will put considerable strain on the
traditional retailers’ economic model, with challenges
to both the top and bottom lines. On the revenue front,
the biggest obstacle will come from a channel shift: in-
store purchases will grow by only about 2 or 3 percent
a year, and some formats should see in-store sales
decline by 5 to 7 percent a year. Gross margins will
come under pressure from both price transparency
(retailers will need to keep prices low to stay
competitive) and a reduced share of trade spending
(vendors will allocate fewer trade dollars to secure
shelf space in physical stores and more to promote
brands in the digital realm, where retailers are but one
of many ways to reach consumers). To increase
revenues, gain share, remain profitable, and manage
capital investment effectively over the next 10 or 15
years, retailers must take aggressive action.
Specifically, they should heed the following five
imperatives.

Expand revenue and profit pools

Almost all retailers are investing in multichannel

capabilities, as they should. Yet a more fundamental
reinvention may be needed: Amazon, which most
retailers view as a chief competitor, acts as a
traditional retailer in only 35 percent of its customer
transactions. The majority of the products bought by
Amazon’s customers flow through its marketplace or
its fulfillment services for third-party sellers.

Business-model evolution has been fairly common in

other sectors—consider the well-documented shift of
both GE and IBM from product- to services-based
companies—but retailers have traditionally been slow
to reinvent themselves. As pressure mounts on
traditional sell-through revenue, incumbent retailers
too must find new profit pools. Sears and Wal-Mart
Stores, for instance, are earning “rent” on their digital
assets by establishing third-party marketplaces similar
to Amazon’s. Best Buy is using its store space to
partner with Samsung in more than 1,000 Samsung
Experience Shops, a store-within-a-store format
housed within Best Buy locations.

To maximize the chance of sustaining long-term

growth and profitability, retail executives should be
thinking ahead: to win in the future, how much
revenue should come from nonproduct sales? If retail
sales of traditional products and services drop by 10
percent in five years’ time, do retailers have enough
initiatives in place to discover, test, and expand future
revenue sources? Beyond physical or digital shelf
space, which assets could a retailer exploit?

Create a road map to cut costs

The retail industry’s growth over the past decade has

masked a lot of inefficiency. With the growth outlook
now dimmed considerably, retailers must take a hard
look at operating costs. We believe all retailers should
address three cost levers: direct product costs, the
indirect costs of goods not for resale, and labor costs.
Retailers that tackle these levers comprehensively can
reduce costs by up to 20 to 30 percent, which is what
they’ll need to do in an intensely competitive
environment.

Managing direct costs through vendor negotiations

remains important but is no longer sufficient.
Increasingly, leading retailers use techniques such as
private-label “design to value,” in which they identify
the features consumers value most and redesign
products accordingly, aiming to strip out anything that
increases costs, but not value, to consumers.

Progressive retailers are attacking indirect costs with

similar rigor—for instance, by developing “should
cost” models to reset the dialogue with vendors from
delivering modest year-over-year unit-price reductions
to redefining unit costs altogether. One retailer used a
detailed cost teardown of its in-store technology
hardware to reduce costs by more than 40 percent in
several infrastructure-spending categories. We also see
retailers removing or redeploying up to 30 percent of
costs in store operations and corporate-support
functions by applying lean techniques and accelerating
offshoring.

Retailers should continue to offshore portions of their

support functions, such as finance, HR, and IT, but to
remain cost competitive they may also need to offshore
elements of core retail functions, such as
merchandising and marketing analytics. The most
successful retailers are also taking work out—not only
shifting it to lower-cost models but also eliminating it
altogether. When reflecting on cost structures, retail
executives should ask themselves several questions: do
we understand the economics of our major vendors
well enough to know their true costs and what profit
margins they’re making from our business? Are we
managing the cost of core retail functions and back-
office functions by considering a comprehensive set of
efficiency levers? A negative response to either of
these questions should spur action.

Reduce—and reconfigure—the real-

estate portfolio

As purchases migrate to digital channels, most retailers

will need less physical selling space in stores.
Although some formats (such as groceries) will be
relatively unaffected, others (such as consumer
electronics and toys) will be hit profoundly and could
require square-footage reductions of half or more to
deliver a compelling customer experience and
economics. Retailers are already seeing this
phenomenon, and a real-estate rebalancing is under
way as they reassess what should be sold through
physical space; in 2012 alone, major chains shuttered
approximately 4,500 stores in the United States, and
newly opened stores are some 25 percent smaller than
the average size of existing ones.

We believe retailers should move quickly and take a

hard look at future space needs and mobilize now to
right-size their store networks. Given the sensitivity of
property values to levels of available inventory, the
earlier that retailers shed unneeded real estate the
better off they’re likely to be—and this is especially
true for retailers that own the underlying real estate.
Those that rent space should negotiate to create
flexibility through leases of shorter duration, in
particular for properties with less certain futures.

Real-estate implications also extend to space that will

remain in the portfolio in the long term as it will play a
different role than it has in the past. To win consumers’
loyalty, stores can’t simply be places where products
happen to be sold. For many retailers, future store
layouts will have to foster greater customer learning
and experimentation. Technology will need to be fully
integrated into how stores and employees engage
customers. And the lines between physical and digital
must continue to blur—for example, as stores become
fulfillment and return centers for online orders.
One indication of how we expect the role of stores to
be transformed is evident in the fact that 40 percent of
Best Buy’s and more than 50 percent of Wal-Mart’s
online sales already are picked up in stores. To make
informed network choices, we believe, retailers must
take a long-term view of their real-estate footprint.
How will their core formats’ size and space allocation
evolve in the next ten years? What will be required to
enable new multichannel experiences? Beyond
building stores, what asset-light expansion models are
available when retailers look for growth?

Get serious about using data and

analytics for decision making

Forward-thinking retailers are leveraging the vast

amounts of data they possess and building analytical
muscle to enable targeted marketing, tailored
assortments, and effective pricing and promotions.
Gathering and analyzing data to understand the needs,
preferences, and attitudes of growing consumer
segments, such as Hispanics, baby boomers, and
millennials, will be especially important, as will
understanding individual consumers and customizing
offers on a one-on-one basis.

Retailers should use advanced analytics to make offers

and decisions that are targeted and localized, as well as
delivered in real time. These offers and decisions
should be informed by product preferences and
influences (for example, discounts to consumers who
have “liked” a product on Facebook and have a
desirable network of Facebook friends). They should
also be customized by location (for instance, coupons
that are targeted at regular coffee drinkers of a
competing coffee shop a block away from where the
consumer happens to be) and shopping occasions (say,
an ad for a new bathing suit two weeks before a
planned vacation).

Advanced analytics isn’t just about marketing

decisions, however; data-driven insights can create
value across the full business. Cutting-edge retailers
are using them to tailor assortments at the store level,
to anticipate changes in customer traffic patterns, and
to determine optimal distribution routes, inventory
levels, and allocations, simultaneously enhancing the
customer experience and improving unit economics. A
leading footwear retailer, for example, implemented a
system that links inventory across channels. When a
customer orders a pair of shoes online at full price, the
system looks across the network for the store that has
that pair in its inventory and is least likely to sell it at
full price before the end of the season. The system then
balances the extra cost of shipping that order from the
store against the expected markdown from continuing
to hold the shoes in the store. This exercise determines
whether the order ought to be fulfilled from a store or
from a centralized warehouse. In short, the system
helps the retailer to make real-time fulfillment
decisions that maximize expected profit.

Retail executives should continually assess their

investments in data and analytics to ensure that they
are bringing new insights to the biggest business
problems: what steps is the company taking to turn
data into practical suggestions and actions to increase
revenues, reduce costs, or free up capital? What
capabilities is it building to become a more customer-
centric, analytically driven enterprise?

Rethink assortments and product

offerings

As prices and inventory availability become more

transparent, retailers will not survive just by being
“pass through” sellers of national brands. They will
have to give consumers a reason to choose their stores
over competitors. No longer will consumers shop at a
retailer simply because it happens to be where a
product is distributed. Instead, they will seek out
retailers that provide value in new and different ways.
We believe retailers will need to offer deep product
expertise (that is, they must help consumers decide
what to buy and explain why it makes sense for them)
and a unique product education (that is, they should
help consumers learn how to use the product better and
do this over time, not just during the moment of
purchase). Additionally, retailers must do these things
in an environment that is increasingly experiential (for
example, fitting a golf club or curating a wardrobe
using a “magic mirror,” which employs computer
technology to show customers how clothes look on
them, making the process more efficient and
engaging). Retailers must also make it easy for
consumers to engage when and how they want—say,
from their mobile devices while they are at home or on
the move.

Some retailers could position themselves as the

champions of style or demand in certain segments,
perhaps by developing products and services
specifically for population groups that will drive retail
spending. Macy’s, for example, has embarked on a
major effort to court millennials, including the launch
of 13 segment-specific brands, new destination zones
within physical stores, and a marketing mix that
includes social-media programs and a new blog.
Others could engage their target segments in new ways
to influence products and help curate the assortment.
The use of crowdsourcing—instead of traditional focus
groups—to advance product development could allow
consumers to cocreate products with retailers,
providing another point of differentiation and fostering
deep loyalty and word-of-mouth benefits.

Winning retailers will proactively shape products and

experiences for and with consumers by bringing them
directly into key merchandising decisions. How are
retailers engaging consumers in the development and
curation of new products? How are they tapping into a
broad network of marketplace partners to drive
innovation, excitement, and experiences? How will
they leverage exclusive brands and private labels to
become destinations for consumers?

The retail environment is as dynamic today as it has

ever been. Competition is intensifying and shifting to
new arenas, and consumers are rapidly evolving their
approach to purchase decisions. We believe the trends
that will most affect the industry’s future are evident,
and the imperatives are clear. The time to act is now.
Retailers that do will be the winners when the next
chapter of retailing history is written.

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