It felt good to see the back of a year that was so difficult for so many people, businesses, and economies. But while there is a lot to look forward to in the new year, the marks left by 2020 won’t disappear entirely. Our world has changed fundamentally, and retail is one of the industries where the forces of change are not only readily visible, but also incredibly strong.
In 2020, retail saw rapid acceleration of several consumer behavior-driven trends that had been gradually underway over the last few years. Online sales for the year are expected to cross the 30%-mark of total retail sales, much higher than the expected 18%. This growth forced the industry to make quick operational improvements and deliver on the product, access, service, price, and experience its consumers demanded. However, we believe that consumer behavior has changed forever. This means that retail will have to adopt many of its ad hoc adaptations permanently.
Keeping this in mind, here are 10 trends we expect for retail in 2021. We divide our predictions into two interlinked dominant forces for the industry: consumer behavior and operations.
Consumers call all the shots
The consumer has always been important for our industry. But consumer behavior now fluctuates faster than ever before, which forces retailers to make operational changes quicker. At the same time, consumer expectations have never been higher. When nonessential stores first closed in 2020, consumers shifted the bulk of their spending online. This en masse movement may have occurred what felt like overnight for retailers, but consumers still expected a seamless experience across all platforms right away. While retailers scrambled for solutions last year, in 2021 consumers will be even more demanding of complete fluidity across all purchase and pickup/delivery options and less forgiving of any snafus. Here’s what retailers can expect:
1. Omni stops being an afterthought: For any retailer expecting to succeed in 2021, features such as curbside pickup, buy-online-pick-up-in-store, ship-from-store are absolute table stakes. Retailers must think through how these options will work in the long run, as the time for putting Band-Aid on fractures between channels is over.
2. Profitability becomes priority: Online orders have historically proven to drag on operating profit, and prioritizing selling by any means is a ploy best left in 2020. Integrate your inventory so there is seamless movement across all channels, which will eventually help grow merchandise margins. The proliferation of buy-online-pick-up-in-store and the expansion of curbside pickup will create a "win-win" answer of speed and convenience for customers and reduced shipping costs for retailers.
3. To win market share, taste the new: In 2021 retailers and brands will join a myriad of marketplaces, as selling through your own channels won’t be enough. Consumers are generally more likely to buy on a platform where they already have loyalty or subscription perks. Retailers will grow paid loyalty programs like Amazon Prime and Walmart+, which provide a recurring revenue stream and drive consumer purchase frequency. Social selling on platforms such as Instagram, TikTok, and Snap will continue to grow, as will livestream shopping. Brands will continue to partner with last-mile marketplaces, such as Instacart, and DoorDash, to increase delivery speeds and remain competitive.
4. Value for money is key as consumers buy less: Most of us learned to live with less during the pandemic. As the economy tightens, expect spending to remain slow, especially for mid-market retail. Retailers prepare by reviewing and resizing their assortment appropriately and making fewer deep buys, which will hopefully result in fewer markdowns and better gross margins. Retailers will also increase private label penetration to provide value for value-conscious consumers. One segment expected to recover quickly is luxury, as consumers with higher discretionary incomes will continue to spend.
5. Sustainability comes back into focus: While the pandemic understandably consumed much of the focus in 2020, demand for sustainability and transparency—both in product and supply chains—will be back. Retailers will continue to embrace resale options, as value-conscious and sustainability-oriented consumers flock to the secondhand market.
Operations get a much-needed makeover
Retail has now learned to live with disruptions. The next step for the industry is to start anticipating them and preparing accordingly. This year, retailers will need to embrace agility across their entire organization to better sense and respond to changing consumer preferences and industry trends. This will mean fixing operational issues that have marred performance and profitability for years. Here are the key trends to expect:
6. Science outweighs the art of retailing: The old ways of working are broken, which means retailers cannot rely on past performance to predict the future. This understanding will result in a widespread adoption of advanced analytics, machine learning, and digital transformation—not just nominally, but as a holistic change that has a direct impact on business decision-making.
7. Real estate transformations sustain: As sales kept shifting online in 2020 and with several stores closed, many retailers used the opportunity to shed unprofitable store locations. To ease shipping bottlenecks, they also remodeled to build mini distribution centers in store backrooms. This trend will continue and accelerate in 2021. Moreover, retailers that had previously sold their locations will explore repurchasing locations as commercial real estate prices fall.
8. Direct-to-consumer continues ascent: DTC has been much talked about over the last few years. It is finally clear that DTC is not just a channel but part of a larger brand strategy. In 2021, expect brands to bypass department stores and make more direct contact with consumers. Brands will deprioritize department stores as a way to generate sales volume, instead utilizing them as something of a mini marketing vehicle. In turn, department stores will expand concession models with their brand portfolio, reducing store costs while allowing brands to show off a wider product range and offer unique customer experiences.
9. Logistics become big part of the puzzle: Online return rates are twice higher than those of in-store purchases. So, as the growth of online sales continues, retailers will look for more efficient reverse logistics solutions. This could be through partnerships that don’t require consumers to even provide a box or a label (e.g., Narvar’s partnership with UPS and Amazon’s partnership with Kohl’s). Amazon will also begin offering Prime Air services to rival retailers, picking up the slack from UPS and FedEx to leverage its investment in aircrafts.
10. The cash blinders come off: Retailers will realize that a cash hole is burning through their balance sheet as they make new investments to meet consumer preferences. These growing investments and high debt loads, combined with increased competition and the inherently lower profitability of the online business, are adding to the strain. Retailers will need a maniacal focus on indirect spending to manage their bottom line. But in the meantime, many more retailers will file for bankruptcy, while those with deep pockets will make opportunistic acquisitions or consolidations.
The industry faced unheard-of challenges and difficulties in 2020. The scramble for survival worked in some cases, but not in all. While the shock of the pandemic has worn off, there is no time to lose. In 2021, retailers will have to be proactive about the business—anticipating problems before they hit, finessing the patchwork solutions of last year so they can sustain without breaking down or losing money, and looking for growth opportunities creatively and with intention.