Retail is nothing if not volatile right now.
In fact, according to Deloitte’s latest Retail Volatility Index, volatility—or disruption in the industry—has increased 250 percent since 2010 and $200 billion more of retail sales are being “traded” among competitors.
“On the surface, the broader retail market appears tepid, but underneath that surface, there is a lot of commotion,” Deloitte Consulting principal and co-author of the study, Jacob Bruun-Jensen, said.
The market has become increasingly fragmented as small and mid-level retailers snag share from their traditional counterparts, contrary to the consolidation (the big getting bigger) that retail had known so well.
“Traditional retailers are being subjected to death by a thousand paper cuts where the competition is no longer the big box retailer across the street, but rather a myriad of new players—this represents a sea change for the industry,” Kasey Lobaugh, principal with Deloitte Consulting and chief retail innovation officer, said. “Conventional wisdom might also say the loss of share by traditional retailers is simply an online vs. bricks-and-mortar battle, with traditional retailers losing the e-commerce game—which our research also shows to be untrue.”
One major contributor to the market’s fragmentation has been technology platforms.
“Tech-savvy, agile retailers are being enabled by large trading platforms such as Amazon Marketplace,” according to the study. “In addition to the direct threat from Amazon as a retailer, Amazon has also enabled smaller players to grab market share and drive further fragmentation in the retail market.”
Amazon helped third-party sellers grow their gross margin value (GMV) by an estimated $40 billion between 2010 and 2015, making up an estimated 24 percent of total Amazon GMV. It also enabled sellers to generate $47 billion, growing by 54 percent compound annual growth.
Further adding to the fragmentation is the shift in consumer behavior.
“More and more, the data suggests that consumers are choosing experiences over physical product, shifting spending away from more traditional retail categories,” the report noted. Spending on air travel, restaurants and all things digital were up in 2015, and Millennials were on track to spend an average of $750 each on media alone last year.
These factors, according to Deloitte, point to the need to understand retail’s disruption beyond just brick-and-mortar versus online.
Of the top 25 brick-and-mortar retailers, 16 have “robust and growing” e-commerce sales that have consistently outperformed the broader e-tail market, Deloitte said.
“Between 2010 and 2015, these brick-and-mortar retailers grew their e-commerce business by an average of 20.9%, compared with a 15 percent growth rate in the overall market—indicating these retailers are actually taking share from those others who operate in the e-commerce space,” according to the report.
The retail industry can point fingers at a slew of ills that spurred the lackluster 1.3% growth—the super dollar, consumer lack of spending, odd weather—whatever minimizes the blow when financial statement time rolls around.
All of those issues aside, however, analysts say retail’s problem may be more structural than cyclical, which would mean most playbooks are in need of a rewrite.
The difference between companies that get that and those that don’t, will be that the former tries to “operate” their way out of retail’s present mess while the later tries to “innovate” their way out of it.
The innovators will find ways to stay nimble, establish strong points of differentiation, adopt and use new technologies, and ultimately find their footing amid the volatility. Retailers assessed over the 2010-15 period that have combined highly differentiated offerings and improved experiences for their consumers delivered earnings before interest, tax, depreciation and amortization (EBITDA) growth of nearly 15 percent on average, and 10.7% revenue growth, analysts noted.
“Despite what retailers may be feeling, we believe we are still in the ‘small numbers’ early phase of disruption, but we believe that technology is a fundamental driver, and much like Moore’s Law, as technology advances, the disruption will advance at an increasing rate.” Deloitte said. “We believe the analysis here confirms that the retail market is being disrupted but, in our opinion, the technology you may read about on the front-page of the popular business press—like artificial intelligence, 3D Printing, Internet of Things, augmented reality—are not causing the disruption.”
It’s web browsers, mobile tech, fast Internet and data exchanges that are driving the disruption. And more than just impacting the way consumers shop, these technologies are breaking down barriers to entry, enabling what the report called “the decoupling of the value-chain.”
No matter the disruption being felt at present, emerging technologies have yet to truly impact the retail industry, and as such can’t be given credit for much of the disruption so far. However, Deloitte expects these technologies will continue to drive exponential and disruptive change.
“In other words, looking out the rearview mirror may seem to show carnage, but looking out the front windshield would tell you to fasten your seatbelt, as we haven’t seen anything yet!” Deloitte said. “If 100 years of retail consolidation can be upended with first and second generation technology, it is not hard to imagine how disruptive these next generation technologies might be.”