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AlixPartners: Retailers That Manage to Boost Margins Will Win

Faced with a slew of challenges from every direction, 2017 became a year when retailers adopted a wide range of new strategies and invested in a myriad of new tools. And this year that trend will continue with stores doubling down on those things that have been working and exploring new avenues to drive profits and attract consumers.

In the latest report from AlixPartners, the consulting firm highlights its top retail predictions for 2018.

As has been noted elsewhere, last year’s record store closures weren’t a one-time anomaly. To the contrary, managing director Murali Gokki said store closures could “accelerate.” While it’s not the news anyone wants to hear, it only stands to reason given that the challenges that caused retail contraction in 2017 are still present today.

Chief among these issues is margin pressure, Gokki said, listing e-commerce and fast fashion as just two reasons profits are dwindling. Ultimately, he said, if they’re going to remain viable in the brick-and-mortar space, retailers have to create a draw. “If you can’t convince the customers to come into stores with a compelling assortment or a mix that includes entertainment, you’ll have a tough time,” Gokki said.

Experiences will continue to be the watchword in 2018 and smart retailers will figure out what that means for their customers. AlixPartners said special services and entertainment will take precedence over product for some. Think Nordstrom Local and Bonobos Guideshops.

Part of having the right assortment is being able to cut down on development time, which Gokki expects retailers to get better at this year. He sees more companies looking to slash what used to be a year-long process down to as few as 10 weeks. “We expect many retailers (including established ones) to cut down product development time by as much as 75 percent this year,” the report noted.

By boosting speed to market, stores will be in a better inventory position as well this year. AlixPartners said it expects more retailers to move away from the seasonal calendar as the focus turns to buying closer to need. With less time between concept and the rack, product should better reflect consumers’ tastes at any given moment, leading to better sell-throughs.

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In the face of price pressure from Amazon and the off-price sector, store chains are looking to boost profits through automation and cost cutting as well, the consulting firm said. While we’ve seen retailers replace people for redundant, low skill tasks for a while, this year, we may see more turn to outsourcing. Though many retailers have already taken this approach for their logistics activities and sourcing needs, Gokki said more will outsource areas like back office functions. By reducing those costs, they’ll be able to focus on key needs like customer acquisition, he said.

In addition to outsourcing, the industry can expect more companies to ramp up new skills through acquisitions and partnerships.

“You will see two trends this year. Retailers extending capabilities by acquiring new companies like traditional retailers acquiring digital natives or logistics delivery companies,” Gokki said, pointing to Target absorbing Shipt.

The second trend, he said, will be market expansion or “retailers finding a certain customer base they don’t have access to.” Walmart’s purchase of Bonobos and ModCloth are good examples, since each provides the big-box retailer with a more fashion-oriented crowd. Tie-ups like these are smart, according to Gokki, because the new business doesn’t cannibalize the existing company.

With new customers come new demands. And today’s consumer is steeped in the sharing economy, driven by examples like Uber and Lyft. As a result, “Businesses that give consumers the option to rent or share products instead of buying them will get even more popular this year (especially among Instagram-hungry, cash-poor millennials),” the firm said.

Digital natives are moving the industry forward in another way that will be even more evident this year, according to AlixPartners. These e-com-first companies have a much better handle on data and all of the opportunities it promises. “Traditional retailers are still in the infancy but they’re running out of time,” Gokki said. “The digital natives are forcing them to change the way they use data.”

Gokki said a company like Stitch Fix is a perfect example of how these data-driven businesses are threatening the old guard. By knowing everything about its customers, Stitch Fix is able to deliver goods, sight unseen, that have a high rate of acceptance.

Armed with this data and the latest in AI innovations, more stores will be able to offer a personal touch to their online transactions. AlixPartners said to anticipate the rise of chatbots in apps like WhatsApp and Facebook Messenger.

“For traditional retailers to survive they need to embrace a new attitude to risk, innovate, and break old rules,” according to the report. Echoing the statement, Gokki said, “The elephants have to learn how to dance.”

Looking ahead to the balance of the year, he said the winners will be those that can drive topline sales while also generating margin.

“This is going to be an interesting year for retailers. The good news is the total retail sales are going up and there’s a strong economy that is supporting consumer confidence,” Gokki said. “It just may be a different set of players who will benefit.