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A Look at the Future of Retailing

Last updated on September 7th, 2012 at 10:59 am

by Terrie Ellerbee/associate editor

From FMI Future Connect 2011

If you build a new grocery store, you are not interested growing sales. You are interested in taking market share because the U.S. has reached the saturation point for stores.

That was the sobering news brought to Future Connect 2011 attendees on Tuesday, May 10, by Dan O’Connor, president and CEO of RetailNet Group LLC, a growth and transformational strategy firm.

“We will discover in this decade that we have too many stores,” he said in his rapid-fire session.

Big-store retailing is past its peak, according to O’Connor. Retailers are earning less and less on capital invested.

The three retail segments that he expects to keep growing in dollar volume are supercenters, deep discounters and stores with “proximity” that carry a limited assortment but have premium price points. The trend now is toward smaller box stores and digital alternatives.

O’Connor said retailing in the United States is in the midst of a major transition. Retailers are marketing to an entirely new customer, one born since 1985. Store-based retailing will take on a different context to meet this customer’s demands.

By 2020, he predicts that 20 percent of all consumption will take place at digital retailers (think amazon.com). Physical stores will have their place the future, but growth will come from new forms of distribution, he said.

The key characteristics of the 2015 marketplace will be that it is digital, transparent and targeted, as well as localized, social and complex.

The not-too-distant future marketplace also will be personalized. That will happen in three areas: marketing, product and, most importantly, price, O’Connor said. In fact, personalization will be taken to new levels, and it will become the standard in the market.

“Retailers spent 25 years developing sophisticated supply chains, and did it just in time for the consumer to say ‘this is what I want, this is where I want it,’” O’Connor said.

What is driving the transition?

The drivers of these shifts in the U.S. retail landscape include the lack of consumer liquidity and a slow recovery. O’Connor sees little hope of this changing any time soon as wages fail to keep up with inflation—which in itself is another significant driver and one that he said is underreported—and as credit and home ownership and equity decline.

He also talked about the rising role of government in the economy. It has a “huge and defining role” in the U.S., he said. At least 20 percent of sales in the grocery channel are paid for by the government in some form.

“Consumer preferences change in times like these,” O’Connor said.

He explored changes that have taken place in the last 40 years. From 1970-90, when those doing the shopping were predominantly mothers who themselves were born in the 1940s and 1950s, brands ruled the marketplace. Wholesalers were extremely important to the industry. There were fewer than 40 types of retail stores. Grocery stores garnered a 25 percent share of total dollars spent.

From 1990 to 2010, when the majority of shoppers were women born 1950-85, retailers took the power from brands and wholesalers diminished in importance, O’Connor said. Consolidation took place at the retail and wholesale level. There were more than 40 types of retail stores. Supercenters, club stores and specialty retailers gained popularity.

Consumers born after 1985 shop in a much more consolidated landscape, but there are more than 50 types of retail grocery stores. In this era, the control belongs to the consumer. It is the shopper born since 1985 that will determine the success of grocery retailers today and in the foreseeable future. This is the consumer retailers must reach and keep.

O’Connor asked who grocery retailers built their store(s) for—was it the shopper born in the 1940s and ’50s, the one born in the ’60s or ’70s? Those are not the types of stores the shopper born since 1985 will seek out, O’Connor said.

It is “imperative” to “create an on-ramp for the next generation,” O’Connor said. The trend now is toward smaller stores and digital alternatives.

The 80/40 consumer vs. the 10/40 consumer

Ten percent of the population consumes 40 percent of goods, O’Connor said. This customer satisfies his or her wants vs. needs with a ratio of 70 percent to 30 percent. This group is more likely than others to shop at amazon.com. This is the 10/40 shopper.

Another 10 percent of the population consumes 20 percent, and their home store is likely to be similar to Costco, where they can get the brands they want to buy. Reward plays a big part in their decisions.

Then there is the 80 percent who consume 40 percent of goods, the 80/40 shopper. Their need-to-want ratio is 90 percent to 10 percent. The 80/40 shopper is very different from the 10/40 shopper. This shopper is trying to buy five meals for five people for $5 a meal or less, O’Connor said. It is important to deliver on this consumer’s “wants.” They are small: holidays and celebrations are their “rewards.” O’Connor suggests studying Latin American markets who know how to care for this huge segment of consumers.

Demographic changes influence retail offerings

An important trend today is the urbanization of America, as the coasts lose population and more people move to the center of the country. They are moving to more populated areas. An urban lifestyle calls for smaller and smarter stores, but with the benefit of proximity they can charge premium prices. Details, including packaging, will have to be considered. For example, a 40-oz. container is too large to lug up stairs and store in a small space.

That ties in with the move to smaller homes. Some people have traded down because of their economic circumstances while others are part of an increasing population of retirees seeking to simplify.

O’Connor suggests following the lead of Japanese big-box retailers when it comes to meeting the needs of aging citizens. Inside the stores, near the front entrance, there is what he called a “senior department.” Everything an older shopper might need is found in this convenient spot. This gives that shopper dignity and privacy when they buy items particular to their needs within the large box.

Retail has traditionally grown to meet the needs of a growing populace, but with birth rates declining in the U.S. because women are having fewer children later in life or because economic concerns are influencing the decision, immigration will be the vehicle for population growth. O’Connor sees “huge pressure to increase immigration” on the horizon.

Technology changes the retail experience

Another big trend is the increase in applications available via smart technology. It isn’t just the devices that are important, but the quality of the connection and the applications being developed that will influence shopping decisions. Retailers will be expected to offer consumers coupons and discounts, gift cards (as well as updates on their remaining balance), navigation to and through the store, recommendations and substitutions for out-of-stock and otherwise unavailable products, and automatic rebates without filling out the paperwork all designed for smart devices.

By 2015, O’Connor said consumers will experience a store in a very different way because of smart technology. Retailers must be ready.

About the author

Terrie Ellerbee

Terrie was Associate Editor at The Shelby Report.


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