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McKinsey: Retail Has Only Tapped Half of the Bottom Line Benefit Digitization Could Bring

If digitize or die is the only way forward, companies are more than halfway to death’s door.

In an article on “The case for digital reinvention,” consulting firm McKinsey & Company pointed out that too many companies are too far behind when it comes to tapping the technology that will ensure they live to see a future.

“Digital technology, despite its seeming ubiquity, has only begun to penetrate industries,” McKinsey researchers noted. “As it continues its advance, the implications for revenues, profits and opportunities will be dramatic.”

On average, according to McKinsey, industries are less than 40 percent digitized, and that 60 percent of leftover opportunity is going to start costing them.

The one industry reaching the digital mainstream is media and entertainment at 62 percent digital penetration, though retail follows closely behind at 55 percent digitized.

“Digitization has only begun to transform many industries,” McKinsey noted. “Its impact on the economic performance of companies, while already significant, is far from complete.”

Because the spread of digital technology has increased competition within industries, current levels of digitization have reduced average revenue growth by 6 percentage points, according to McKinsey. And if industries were at full capacity for digitization, the shift would be putting twice as much pressure on revenue growth.

While declining growth rates don’t exactly sound favorable, McKinsey reiterated that these stats are averages across industries and that those industries performing strongly are three times more likely to generate market-beating economic profit than those slower to embrace digitization.

“As companies digitize business processes, profits increase, even though little momentum in top-line growth accompanies them,” McKinsey said. “The biggest future impact on revenue and EBIT [earnings before interest and tax]…is set to occur through the digitization of supply chains.”

While advancing technological capabilities in the supply chain could weigh on revenue growth and profit more than other areas of digitization to start, it could provide the most business opportunity in the longer run. However, very few companies are focusing their digitization efforts on improving supply chains. In fact, just 2 percent of respondents surveyed in McKinsey’s study said their investments are focused on supply chains. The majority of respondents (49 percent) are honing in on upgrades to distribution channels and marketing.

“That focus is sensible, given the extraordinary impact digitization has already had on customer interactions and the power of digital tools to target marketing investments precisely,” McKinsey pointed out. The question now, according to the report, “is whether companies are overlooking emerging opportunities, such as those in supply chains, that are likely to have a major influence on future revenues and profits. That may call for resource reallocation.”

Companies need to be bolder with their investments in digitization, according to the report. Those that are most assertive in their efforts will be able to restore the majority of any loss in revenue and profit growth and position themselves to further surpass more passive competitors.

“Such results will require action across all dimensions, not just one or two—a tall order for any management team, even those at today’s digital leaders.”

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