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Can connectivity help narrow the growing retailer gap?

With e-commerce continuing to fuel consumer expectations, traditional retailers may find new, tech-driven use cases are just the boost they need.
Claus Gerckens

Associate partner in McKinsey’s Zurich office, specializing in consumer retail logistics and technology, media, and telecommunications

Abhiram Ramprasad

Associate partner in McKinsey’s Chicago office, specializing in e-commerce and retail

Martin Wrulich

Delivers innovation and strategy expertise for telecommunications and high-tech companies around the world

Advanced connectivity has already spurred a major evolution in retail, from e-commerce to analytics and automation-driven efficiency improvements in forecasting and inventory management. Yet with large-scale online pioneers (such as Amazon) dominating markets, retailers aiming to stay relevant will need to embrace a much bolder transformation.

Razor-thin margins have typically made the industry hesitant to launch big, long-term bets on technology, opting instead for limited-scope investments that promise a return in less than three years. But the payoff from a large-scale implementation of advanced connectivity could be significant. Research by the McKinsey Global Institute (MGI) and the McKinsey Center for Advanced Connectivity (MCAC) suggests that deployments of such technologies in retail could unlock $420 billion to $700 billion in new GDP value by 2030.

The most promising opportunities in which to reap these rewards lie in capturing data and analyzing it in real time, with a high degree of reliability and security. Such advances are key to an industry that needs to provide the kind of convenience and personalized shopping experience e-commerce customers have come to expect. Three use case types in particular illustrate the potential value at stake.

End-to-end product visibility: Better visibility across the supply chain gained with use of trackers, active RFIDs, weight sensors, computer vision, and other technologies can help retailers more successfully manage inventory at the product level. This should improve warehouse operations, reduce stock-outs, and generate valuable customer data. Deployed at scale, this could deliver $100 billion to $160 billion in cost savings and additional revenues of between $60 billion to $100 billion.

Frictionless in-store experience: Artificial intelligence (AI) and geofencing can direct shoppers to products they want by remembering their preferences, while augmented reality can help them see exactly how a product performs. RFID scanners, payment beacons, trackers, AI, and machine learning could eliminate checkout, allowing consumers to pay for merchandise in-store as easily as they do online. These applications could reduce costs by $150 billion to $250 billion.

Enhanced personalization: Personalization can increase sales by 15 to 20 percent, but fewer than 10 percent of retailers are using digital strategies to personalize their customers’ shopping experience, according to a recent McKinsey survey. Algorithms can use data collected across channels to deliver personalized promotions in real time, while AI can give sales associates customer insights to make highly targeted product recommendations. Such tactics could add $230 billion to $400 billion in revenues.

Making the effort to implement these kinds of use cases is critical for all retailers to remain relevant and competitive, but not all are positioned to benefit equally. Retail is rapidly being stratified into three different categories, with varying levels of capital and capabilities (exhibit). So while these use cases should help large traditional retailers keep pace with e-commerce giants, they could well widen the gap between both of these groups and relatively smaller industry players.

The level of services integration would vary across retailers depending on their scale and main distribution platforms.
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Large e-commerce players, for instance, have the scale and financial capacity to integrate and support use of cutting-edge technologies in their operations, segmenting customers at an increasingly granular level. Large traditional retailers are similarly well suited to take advantage of data capture and applications, though they would need to develop (or buy) a stronger technology backbone and new capabilities such as analytics. Smaller players, however, lack the scale and capital needed to fully benefit from enhanced technology, though they can deploy off-the-shelf solutions.

Furthermore, advanced connectivity and modernized platforms offer the opportunity for larger players to optimize their end-to-end supply chain and participate in the wider ecosystem, integrating parts of their services into partnerships with other parties, such as online players or other non-competing consumer companies.

One factor that should help the whole range of retailers take this technological leap in the next decade is the falling costs of the technologies themselves. Prices are expected to continue to decline for key enabling technologies such as sensors and RFID trackers, cloud storage capacity and computing power, and AI and analytics, strengthening the case for a more ambitious investment than the industry has typically made.

And this kind of shift is critical. The approach the industry has embraced up to now, investing primarily in legacy technologies and testing new initiatives slowly in pilots, will likely not deliver on the full potential of advanced connectivity. Use cases need to be rolled out across the board, from distribution centers to stockrooms and checkout, not just at one point in the value chain. This will require comprehensive implementation and investment at the company or group level, rather than the siloed approach retailers traditionally use to make investments.

The obstacles may sound daunting, but given the current competitive situation in which retailers find themselves, they have less to lose, and everything to gain, by making a large-scale bet on advanced connectivity.

This post, part of an ongoing series, was adapted from the recent MGI/MCAC discussion paper, Connected world: An evolution in connectivity beyond the 5G revolution.

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