Leaning into Retail’s Challenges with Digital Transformation

Digital transformation initiatives have picked up in the retail sector in recent years as store chains compete for brand awareness and sales in a rapidly evolving market. By 2026, retailers’ global investments in digital transformation tools are expected to reach $388 billion, growing by 18% a year.

That may sound like retail leaders are all in, ready to use new technology tools to extract maximum value out of their operations; ready to embrace change and grab the future by the horns.   

But the truth is many are probably not prepared for what’s ahead. Having worked with retailers on technology projects for 15 years, I’m impressed with their ability to build businesses that hold their own and endure in the face of adversity. I’m also impressed with their willingness to integrate new technologies in their businesses. But I’m concerned that they’re not shifting their mindsets quickly enough to adapt to the changes that are coming.

Are they adopting digital strategies that serve both younger and older populations? Are they successfully untangling their “spaghetti architectures”? Are they using technology to win the margin game? And are they evolving their mindsets to do a better job of collaborating with outside experts?

These common challenges apply to retail organizations of all shapes and sizes – large and small, high-margin and low-margin, global and regional, online, and offline. How retailers react to these challenges will determine how well their technology investments truly transform the businesses they run.

Pivoting to Digital While Serving an Aging Population

As Generation Z consumers come of age, retailers face the challenge of catering to two audiences whose needs often conflict with each other. Younger digital natives are earning more money and commanding more attention from the stores they buy from. They’ve embraced the on-demand mentality of being able to research products online, order from their couches and, if necessary, do in-store pickups without having to stand in line. These habits clash with those of retailers’ aging customer base, which is used to visiting stores, browsing, comparing products, and scouting for the best deals.  

So, the challenge looms: How do stores serve their younger populations’ hunger for innovation while not overwhelming their aging populations with too many digital practices? The answer is to make changes – in incremental steps.

The pandemic ushered in a first round of changes. To offer safer shopping opportunities, retailers invested in contactless payments and stepped up their services for in-store pickup. And online ordering accelerated. As long-term customers’ digital uneasiness subsides, more are using technology their adapt longstanding shopping practices.

The future will offer more opportunities to cater to both sets of customers. Home Depot, for example, is upgrading its wi-fi systems to make it easier for customers to design, visualize, and buy materials for their projects. The chain is rolling out new hand-held devices that allow associates to easily check pricing and inventory availability in hand or from more than 40 feet away, which is helpful when serving customers and locating products in overhead storage.

Untangling Their ‘Spaghetti Architectures’

Retailers have long used back-end technologies to run specific aspects of their business. They were among the earliest adopters of ERP, distribution management, warehouse logistics management, and POS. But while these systems continue to work well for their certain purposes, they’re becoming increasingly ill equipped to handle the demands of a growing digital enterprise.

Can the systems connect stock information from the warehouse to the online store to show what’s available? And how is that data reconciled into the POS systems to determine in-store product quantity? Can data be used to predict future demand based on weather or local events? Without a central data repository, retailers find themselves hitting a barrier where they can’t build point-to-point-to-point connectivity in what’s turned into “a spaghetti architecture.”

To compete in the future, retailers will have to create architectures that rethink the entire flow of data through their systems. It’s not just improving interfaces. It’s about making the data architecture data centric.

Betterware de Mexico, a direct-to-consumer seller of home goods and other supplies, created a data-centric infrastructure to improve its ability to keep pace with orders. Increasing compute capacity and deploying a hybrid cloud strategy ensured against system crashes, enabling the chain to make better use of data to optimize its distribution routing strategies. More efficient order processing and delivery helped the company reach more households and grow its market share in Mexico to 24% by the end of 2021.  

Winning the Margin Game with Strategic Use of Data

It’s no secret that retailers operate on thinner margins than most other industries. Walmart, for example, earned $13.6 billion on sales of $573 billion in its latest fiscal year. That’s a 2.39% margin. Every penny saved goes directly to a retailer’s bottom line.

To drive higher profits, retailers will have to make better use of technology to generate efficiencies in their overall distribution engine. They can do this by using data to ensure that they match supply with demand. This is particularly important in the grocery industry where better demand forecasting through AI and machine learning creates less waste, allowing chains to improve their sustainability and make more money.

Salling Group, a Danish department store retailer, provides a glimpse into the future through the success its achieved bringing business intelligence into its real-time merchandising insights. It automatically pulls real-time sales and inventory data from point-of-sale systems at every store, correlating real-time information with historical and seasonal data. This correlation determines precisely what products are needed at each store to meet projected consumer demand. It produces 8,000 reports that are automatically emailed to executive management and all 1,500 stores each morning by 6:00 a.m.

Changing the Mindset and the Culture

To truly transform a business, technology will take an enterprise only so far. The willingness to collaborate with outside experts and try new processes is often as important as the systems designed to derive insights and generate efficiencies.

Until recently retailers’ transformation efforts have often been held back by the operational styles of the leaders in the sector. Many retail chains continue to be run by descendants of the families that started them and ran them for decades, if not centuries. The chains established their strong reputations over time, and leaders preferred to trust their own instincts when it comes to merchandising and distribution rather than rely on outside advice related to IT.

It’s time for retail to change its mindset, in the same way the auto industry has in recent years. In the past car makers bought IT services the same way they bought parts – gathering up vendors and negotiating the lowest price. Now that cars have evolved into data centers on wheels, car makers are engaging with IT suppliers as partners that can help them optimize their use of AI and machine learning algorithms.

Outside IT providers that work on data solutions across industries can help retailers approach transformations from a new vantage point. They can help retailers develop systems that can predict conditions, optimize routes, and create merchandising strategies that connect with the consumer.

That mindset shift is starting to happen. The more retailers go all in, the more they can overcome the challenges that are ahead of them.

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About Christian Reichenbach

Christian Reichenbach is a digital advisor for exploratory, digital business transformations. He advises customers worldwide on how to establish connected economy business models, designs and builds minimum viable products, and drives operating model changes toward a more innovative, efficient, and productive way of doing business. In an edge-centric, data-driven, and cloud-enabled world, he is an evangelist for the role that digital plays in advancing the way we live and work by engineering contemporary experiences. As an enthusiast for digitalization, Christian bridges the gap between technology, user experiences, and business benefits. He also talks with senior executives and runs ideation session to unveil new opportunities for digital business models.