McKinsey Group: Five trends challenging retailers

Retail’s landscape over the next five years, powered by such trends as smart phones, sweeping demographic shifts, and radically transformed consumer expectation, could be Kryptonite for brick-and-mortar stores, creating more painful change than in the last century.

While e-commerce is helping to fuel this change, analysts with McKinsey Group recently point out that brick-and-mortar stores should still account for up to 85% of U.S. retail sales in 2025.

The McKinsey Report pinpointed five trends that should matter the most for those retailers hoping to survive long-term. McKinsey expects retailers are facing a new normal of slower growth that may extend beyond the next five years. Most industry forecasts suggest that U.S. retail growth over the next five years will average 3% to 4% annually, well below the 5% to 7%  yearly growth seen in the decade prior to the recession.

DEMOGRAPHIC CHANGES
“Within a tepid overall market, there will be several pockets of strong growth. Three customer segments that will make disproportionate contributions to spending growth, for example, must fit squarely into retailers’ customer-driven strategies. Each is unique and will require retailers to adapt their strategies to target the segments individually,” the report states.

Baby boomers
Some 47 million households headed by people over the age of 55 will account for the bulk of spending growth in major categories such as food (92%), housewares (73%), and apparel (56%).

The segment’s sheer size will drive growth in these categories, but boomers will also disproportionately spend their disposable income on services and experiences instead of off-the-shelf products.

Hispanic consumers
The retail spending of Hispanic consumers will nearly double over the next ten years and account for almost one-fifth of total retail spending. Hispanics spend money differently from other consumers. For example, they spend at least one and a half times more on children’s apparel, footwear, and fresh food than non-Hispanic consumers do. Retailers will have to account for this accordingly.

Millennials
People between the ages of 13 and 30 constitute 15% of U.S. consumers. This generation is the first group to grow up after the Internet, social media and mobile became the norm – most have never known a world without them. They will account for nearly one-third of total spending by 2020. Even through the economic tumult of the past five years, the spending of millennials has grown by 3% a year.

MULTICHANNEL PUSH
Over the past decade, U.S. e-commerce has grown at an impressive clip of almost 18% a year. It now accounts for 8% of total retail sales, according to the report.

This trend will accelerate. U.S. smartphone penetration exceeds 40% today and is projected to reach nearly 60% in three years. For some retailers, mobile is already a huge factor. At designer-fashion retailer Gilt, mobile accounts for about 50% of daily traffic and more than 30% of total sales.

McKinsey expects that mobile technologies will increasingly influence every stage of the customer’s shopping journey, from personalized promotions prompted by geotargeting to in-store research and price checks, as well as payment capabilities that offer checkout options beyond waiting in line.

A recent McKinsey survey of digital shoppers highlights how mobile technology can complement the in-store experience; for example, almost half of the consumers who conduct research on their mobile phones have done so while in stores, and half say they’re open to the idea of in-store mobile payments. Just two years ago mobile accounted for only 3% of e-commerce sales, that figure will probably rise to 15% by the end of 2013.

PERSONALIZED MARKETING

As more consumers abandon print media for digital media, marketers follow with 44% of them now allocating at least half of their marketing budgets to digital media, up from only 31% in 2009, according to McKinsey.

“Retailers once got customers by putting the right product out at the right time, hoping the right customer would see it,” said Steve Noble, a principal at the McKinsey Group. These days, “35% of what consumers purchase on Amazon and 75% of what they watch on Netflix come from product recommendations based on such algorithms.”

At the same time, he said stores are grappling with the realization that their own marketing and messaging has far less impact on potential customers than customer reviews and rankings.


DISTRIBUTION REVOLUTION

Amazon already offers same-day delivery in 10 cities and guarantees one- to two-day ground delivery in the continental United States. It is not unreasonable to think that consumers will expect comparable shipping speeds from all retailers, the report states.

“We expect same-day delivery to become available soon in at least the top 150 metropolitan statistical areas, which hold nearly 75% of the population. Furthermore, we believe retailers will offer shipping free of charge to their most loyal and profitable customers, as opposed to providing it only for those who make minimum purchases,” McKinsey noted.

NEW RETAIL MODELS

Retail competition keeps getting tougher blurring of lines between formats and sectors as retailers try to steal shopping trips and share from one another, McKinsey noted.

Players across the value chain are encroaching on what used to be the exclusive turf of retailers. More manufacturers are selling directly to consumers. Examples include Apple, Nike and several consumer-product manufacturers.

Tech players are also fighting for consumer retail dollars: Google offers more than one billion products for sale on Google Shopping and may soon open retail stores. Additionally, companies such as Craigslist, eBay, and Etsy (home to almost a million small businesses) are creating marketplaces where individuals and entrepreneurs can sell their wares to the masses.