It’s a pivotal moment in the retail industry—one in which a retailer’s decisions could affect its performance over the next decade or more. In this episode of the McKinsey on Consumer and Retail podcast, two authors of the recent article, “Retail reset: A new playbook for retail leaders,” discuss the sweeping changes happening across the industry and the implications for retailers. An edited transcript of the conversation follows. Subscribe to the podcast.
Monica Toriello: “It now sounds like a cliché, but that doesn’t make it any less true: the retail sector has experienced as much disruption in the past five years as it has in the previous 25.” That’s the opening sentence of an article that was recently published on McKinsey.com, titled “Retail reset: A new playbook for retail leaders.” It describes the dramatic changes in the retail landscape among not just consumers but also suppliers, employees, and investors, and how these changes are challenging the historical definition of what a retailer is and what it takes to be a successful retailer. That’s what we’ll be talking about today with our guests, two of the authors of that article. Both of them advise and work closely with some of the world’s leading retailers, so they’ve seen a lot of experimentation and innovation in the industry.
Steven Begley is a partner in McKinsey’s New York office. Steve has worked with apparel retailers, convenience stores, department stores, and grocery retailers. He knows a lot about pricing, private label, e-commerce, and automation, and he has written articles about each of these topics.
Also here with us is Becca Coggins, who leads McKinsey’s global retail practice. Becca is a senior partner based in the Chicago office. She’s worked with a vast array of retailers, hospitality companies, and media companies, advising them on strategy, assortment, customer experience, and large-scale performance transformation.
Thanks to you both for your time today. Let’s start with a broad question: What’s the biggest, most interesting thing happening in retail right now?
Steven Begley: What’s most surprising to me is the divergence between how consumers say they feel versus what they’re actually doing. For instance, consumer sentiment is around 2008 or 2009 levels, according to the latest numbers we’ve seen—yet consumer spending is still relatively strong. Over the summer, we saw retail sales up year over year. We think the uptick is coming from lots of places, including from consumers who are splurging, which I’m sure we’ll talk more about later. It’ll be really interesting to see how this trend plays out as we get into the fourth quarter of 2023.
Becca Coggins: That’s a great point, Steve. From an industry structure perspective, it’s been a few years of quite high highs and quite low lows. We went from hundreds of thousands of store closures to consumer spending actually being quite robust through the pandemic—if anything, we were supply constrained. And now we’re seeing a bit of a mixed picture in how consumers are spending. So we see retail executives trying to find their footing in terms of what comes next. Over time, the long arc of the industry continues to be toward more and more consolidation of economic profit coming from a smaller group of large retailers.
The power of generative AI in retail
Monica Toriello: You both were on this podcast three years ago, at the peak of the COVID-19 pandemic, and at that time, retailers moved fast to meet consumers’ needs. Consumers started doing curbside pickup and buy online, pick up in store [BOPIS]. Retailers had stood up these offerings very quickly, right? They found solutions and innovated fast because they had to. And for the best retailers, it’s a muscle that they’ve continued to exercise since then. What are your favorite examples of postpandemic retailer innovation or agility?
Steven Begley: To your point, retailers got religion during the pandemic around agility. As you mentioned, we saw things like BOPIS and curbside pickup get stood up quickly—and retailers have really leaned in and built that muscle, and now these propositions have become core to the overall retailer’s value proposition.
These days, what I find most impressive is how quickly some retailers are embracing generative AI [gen AI] not just as a way to drive efficiencies in their businesses but really as a way to elevate and enhance customer experience—and even associate experience. A year ago, gen AI wasn’t on the radar for most of society, and now we see retailers who are using gen AI to create personalized creative content or to offer omnichannel 24/7 selling assistance.
We know of one retailer that’s starting a journey to use gen AI to synthesize what store associates are saying on their headsets, come up with better answers to customers’ and associates’ questions, and communicate those answers more clearly to the staff. Those staff are pretty often coming to their managers or to people in the store support center with questions like: How do I address this particular customer need? How do I work with this particular system in the store?
The retailer is saying, “We can communicate the standard protocol for all of these things. But we want to learn from the employees and then communicate back, through their headsets, what’s working versus what’s not working.” The retailer is planning to use gen AI to learn what’s happening in stores at a more rapid pace, and then to have a more consistent message coming back down across their network of stores to ensure a cleaner, more consistent customer experience. We think there’s even an opportunity to help improve inventory availability in that particular use case.
So it’s a really interesting period for the retail sector. They’ve learned a lot about how to be agile during the pandemic, and now we’re starting to see them embrace that agility as gen AI comes onto the scene.
Becca Coggins: I think it’s fascinating to see how gen AI has captured the imagination of retailers—and, frankly, the economy at large. Where we see it deployed most effectively is as part of an overall strategy around AI and advanced analytics, not just gen AI in a vacuum. That said, there are a few places where we most commonly see traction in retail.
The first, like in many other industries, is in customer care. I heard an MIT1 professor say something like, “The question isn’t whether gen AI can help provide a better customer care experience; the question is whether it will be before or after the end of this year.” That’s how quickly this innovation is taking off.
The second area is personalized content. In the personalization journey that many retailers have been on, one of the bottlenecks has been generating segmented or personalized creative content. It’s quite hard to do; it could be millions of iterations. Companies are leveraging gen AI to answer questions like: What’s the appropriate content for a given segment or microsegment, or even a given individual? This is a very high-impact use case and it is starting to get more traction.
The third area is maybe less common in core retail, but we certainly see it in the service networks of retailers and in some of the adjacent industries: it’s using gen AI to get better outcomes from service calls. How can I have a better diagnosis? How can I help a service agent get to a better solution the first time? It’s a service angle, similar to customer care. And leading-edge retailers are doing some of the things Steve is describing—using gen AI to improve in-person service, even.
Steven Begley: I think gen AI is one of those topics that your employees and your customers are going to be embracing in their personal lives, so if you don’t start experimenting with it in your business model, they’re going to bring it there anyway. It’s like SMS texting or WhatsApp, both of which have come into the professional context. So, as a retailer, there’s not much of a choice but to lean into gen AI and start to use it in your business.
Becca Coggins: If anything, consumers are saying, “OK, what’s next, retailers? How will you continue to raise the bar on convenience and on value?” They’re ready for retailers to get back to the “fail fast” or “release new innovations at speed” mentality. Consumers have shown they’re willing to embrace innovations.
How retailers can increase ‘share of life’
Monica Toriello: One of the things you talk about in your article is the rise of the “zero consumer.” I’ll just summarize for our audience what the zero consumer’s characteristics are: zero boundaries, meaning they shop both online and in-store; zero loyalty, meaning they try different brands, products, and retailers; zero patience, meaning they won’t wait more than two or three days for delivery; zero midtier, meaning they’re buying either the value offering or premium; and concern about net zero, meaning they care about sustainability.
There’s a lot to unpack there, but one of your recommendations for retailers to win the zero consumer is that they should pursue greater “share of life,” as opposed to just share of wallet. In other words, if you’re a retailer, you need to give consumers more reasons to come to you; you need to offer them new ways to incorporate you into their life. What are some unique or unexpected ways in which retailers are successfully capturing greater share of life? What are you seeing out there?
Becca Coggins: Successful strategies are founded on the notion that consumers are in charge. The retailers that embrace consumer-driven commerce are the winners. Those companies are saying, “This is not about a category. It’s about the relationship that we have with the consumer—and we can extend that relationship into automotive services. We can extend it into travel. We can extend it into categories that are beyond the four walls of our store.”
You’re starting to see that in more and more creative ways as retailers think about: What is a retailer’s role in providing healthcare? What is a retailer’s role in providing telephony and connectivity? I think we’ll see more new and fresh versions of how that ecosystem dynamic or share-of-life dynamic manifests as retailers embrace consumer-driven commerce.
Steven Begley: I think retailers understand the need to go after greater share of life. That’s part of why we’ve seen such an expansion of subscriptions and membership models, in particular, over the past couple of years.
But it’s also important for retailers to go beyond the core of what we would call omnichannel retail—or even go beyond services. It’s about entering new businesses that complement or derive synergies from other parts of the retailer’s footprint. We’ve seen quick-service restaurants [QSRs] move into the banking world, for example. Many retailers are talking about: How can we do a better job of partnering with airlines or cruise lines? I think we’re still in the early innings of this whole increased-share-of-life concept.
Becca Coggins: It’s nascent in the US market. We’re seeing more advanced versions of it in Asia and parts of Latin America.
Steven Begley: That’s right.
Monica Toriello: I’m sure there have been failed experiments in this, though—retailers that tried and failed to either build an ecosystem or participate in one. Can you point to some lessons learned from those not-quite-successful experiments? What pitfalls should retailers watch out for? Because it can seem like the opportunities are endless. If a QSR can be a bank, what can’t it be?
Steven Begley: I think the biggest risk here is not being selective about what you won’t do, as much as what you will do. We’ve seen retailers try to do a little of everything while not necessarily doubling down on a handful of things, and that leads to fragmentation—not just of management focus but also of capital. When that happens, the root cause is often too much of a rule-by-consensus culture. I would argue that, aside from the initial days of the pandemic in 2020, the bar for decisive but also inspiring leadership in retail hasn’t been as high as it is right now.
Becca Coggins: I think the other failure mode is saying, “It would be great if we could get our consumers to buy X, because that would be a margin-enhancing category; it could be really attractive from a P&L perspective,” versus saying, “What distinctive capabilities do we have, and what are our consumers actually looking for? Where is there a gap in what they’re being offered today?” and then finding a way to offer that to consumers in a way that’s accretive to your economics. That might mean, by the way, that the model by which you do it is different—it might be a partnership instead of an owned capability.
Steven Begley: We refer to a lot of those businesses as “beyond retail,” meaning business lines that extend beyond the core omnichannel retail offering. Our work suggests that, for most retailers, less than 10 percent of their revenue sits in those businesses today. But within five years, those businesses could be as much as 40 percent of the profits. And I think the investor community will continue to push the sector to invest here. So if you’re a retailer, I think you need to move into this beyond-retail space, but being selective about where you will and won’t play is incredibly important.
On frontline and corporate talent
Monica Toriello: Let’s talk about talent, which is one of the big challenges in retail. We’ve long known that frontline attrition and retention are tough, and they continue to be. But retailers now also need to attract new kinds of talent, outside the traditional retail talent pool, to do some of these things you’ve been talking about—whether it’s tech talent, data scientists, or people to run these new services that retailers are now offering. What are some creative and effective ways that you’ve seen retailers attract and keep the talent they need?
Steven Begley: It’s important to look at both the front line and headquarters. For the past few years, most retailers have been focused on the front line, for obvious reasons. Within headquarters, we’re seeing a lot of increased demand for data science and for deep critical-thinking skills, powered by AI. As we all know, those capabilities haven’t always existed in all corners of retail. Some of the creative things we’ve seen retailers do is establish partnerships: How can retailers work with their suppliers to bring some of the talent over from suppliers into the retail environment for a while, and send it back out? We’re seeing a lot of retailers experiment with that right now.
Another piece of the talent equation is to create career ladders that start in the stores and can lead all the way up to corporate headquarters. I can tell you that some of the most seasoned operators and executives I work with in retail started out in stores. That is an important part of what makes the sector tick and something that shouldn’t be lost. I think we’ll see more retailers starting to look at the front lines to say, “Where is our highest potential talent? And how do we create ladders for people to come up into the corporate environment and develop those skills over time?”
Becca Coggins: From a frontline perspective, as we’ve surveyed retail frontline employees, we’ve found some pretty interesting patterns. The first is that what they are seeking, above any hard benefits, is flexibility: the ability to influence their schedule, their location, the different types of jobs that they might do and that they could qualify for. Yet employers are quite disconnected from that. They think employees are seeking mostly hard benefits. You see this continued disconnect.
We think those retailers that can reset that employee value proposition for the front lines—including, as Steve mentioned, thinking about career ladders that start in the store—will increasingly be the winners. Employee value propositions that embed flexibility and career advancement will be key to winning the next generation of retail.
Monica Toriello: Flexibility is a tough one for the front line. What are some creative ways that retailers are giving frontline employees flexibility?
Becca Coggins: Some of the best examples we’ve seen have been retailers that have invested in scheduling flexibility. They’re able to let employees swap shifts with one another or take shifts in smaller increments—three hours instead of six hours, as an example. A lot of that can be managed through systems, so the manager doesn’t have to do things from the top down. Some of the most forward-thinking retailers have created almost a mini “gig workforce” within their own workforce.
Remember, retail is the largest private-sector employer in the country, so some of these are quite large pools of people. They can say to a frontline employee, “As long as you get certified to do a specific task or a specific job, you can seek a schedule that allows you to mix and match those things.” They’re creating flexibility not just from a schedule perspective but also from an intellectual curiosity and personal-development perspective.
Another thing we see retailers investing in is education programs, whether it’s skill-based, like certifications in technology, or more classic secondary education. Reskilling is a very important dynamic for retail front lines because the jobs to be done five years from now will look different from the jobs to be done in retail right now.
No better time for private labels
Monica Toriello: Given the “zero midtier” and “zero loyalty” consumer, there’s probably never been a better time for private labels, right? What are you seeing in the private-label arena? Should retailers be thinking about private brands differently than they have in the past?
Becca Coggins: We’re seeing just that, Monica. There hasn’t been a better time for private labels. More specifically, we see consumers seeking value, and increasingly in the form of private labels. Add on to that the idea that you can often find a better margin profile for a retailer or clearer differentiation—and, in some cases, both of those. So it looks like a moment to stack wins: delivering better value to consumers, creating a signature product or product line, and often at a better margin profile than the national brand equivalent.
Penetration in private label tends to be sticky: once we see growth in private label, which has been growing at twice the rate of national brands over the past three years, we expect that is likely a pretty sticky movement. So we believe now is the time to really think about your private-brand offering—where and how it’s distinctive, from both a value and offer perspective—and meet consumers where they are in this moment.
Steven Begley: I agree with that. We’re having a real moment in private brands. I would say we’ve turned a corner in private brands in American retail: they have a seat at the table and are an important part of the assortment architecture. To Becca’s point, right now there’s a real push toward value, and private brands historically have played an important role there. At the same time, in American retail, we’ve seen private brands finally have permission to extend into the other tiers as well. Whether in grocery, home, or apparel, you now have private brands at moderate and even high price points in the portfolio.
Historically, European markets and Canada have been very good at this. But what’s interesting now is that retailers in Latin America and Asia are interested in what’s happening in US private brands because they’re looking at the amount of innovation that seems to be happening in a very short period of time. I think there’s a lot that can be learned from that.
What’s keeping CEOs up at night
Monica Toriello: The retail reset, as you call it, affects every primary stakeholder group in retail. It’s a lot for CEOs to think about. What’s the hardest part of all this? What’s keeping retail CEOs up at night? What’s their top-of-mind, highest priority, toughest-to-crack challenge?
Steven Begley: Not all executives will say it this way, but we talked about the zero consumer—and I think a lot of retail executives are worried about the consumer. Consumers have always had a high bar for what they expect from retailers. That bar is rising. They’re becoming even more choosy about where they spend their money, they’re shopping differently, they’re switching brands and retailers more frequently, and they’re a lot less patient than they used to be. You see it in what they expect as far as shipping standards and minimum order values, for example.
I’d argue that’s what makes the spot we’re in so exciting. With all of this change and disruption comes innovation. That’s why, in the article, we say that what you do in the next two to three years could have a material impact on your performance in the next five, ten, 15 years-plus.
I spend quite a bit of time with CFOs—many of whom have cleaned up their balance sheets in the past couple of years—and they’re starting to contemplate how they’re going to handle debt maturities or refinancings that will need to happen a few years down the line, in what increasingly looks like will be a higher interest rate environment than the last time they did this. So, in the CFO office in particular, folks are starting to think ahead: What is the performance trajectory of the business over the next couple of years? And how do I make decisions now that put me in the best possible position to manage those types of events as they come due?
Becca Coggins: At the risk of skirting the question, Monica, I’m not sure it’s one topic specifically, but rather the idea that we are operating at a speed unlike what has been the historic norm and at a level of uncertainty that is far higher than the historic levels of uncertainty.
Retail executives are having to think about making some pretty big calls, many of which might challenge convention. For example: Where am I putting my capital? Is it in stores? Or is it in technology? How am I thinking about my employment models, my relationship to the workforce, etcetera? A lot of these things are changing in pretty fundamental ways against this backdrop of hyperspeed and high uncertainty. It’s a very difficult moment to make some of those big calls.
The 2023 holiday season—and beyond
Monica Toriello: We’re coming up on the holiday season, which, for many retailers, accounts for a significant percentage of their annual revenue. If you could offer one piece of advice for retail executives as they enter this all-important season, what would it be?
Steven Begley: You’re right, Monica. The most important thing for most retailers should be focusing on executing holiday 2023 with excellence. As you mentioned, Q4 is a make-or-break quarter for most of the industry, so keeping an eye on the ball there is critical—especially as we look back at the past few years and recognize that, for most of the sector, we’re trying to lap multiple banner years in a row. So executing holidays is the number-one priority.
More broadly, now is a really important time for retail sector leaders to be thinking about the next five to ten years. We know the business model is being disrupted. We know that the concentration of economic profit for the sector is increasing, meaning we’re seeing fewer and bigger winners over time. Now is the time to be creating a vision: What will your business look like a decade from now? What business lines will you be in and not be in? What does that complexion of revenue and profit pools look like? And how are you going to get there?
Becca Coggins: I fully agree. Job one is to deliver a delightful holiday to your consumers, particularly recognizing this duality that consumers are feeling: they’re seeking value, but they also want to splurge. We’ve seen, in the past several years, a real willingness on the consumer’s part to protect holiday traditions and to spend during the holidays. Delivering a joyful holiday to consumers is job one.
I think Steve hit the nail on the head, though. As we look back at periods of disruption in the economy and how the retail industry has responded, there’s a very clear pattern. Retailers that are aggressive on growth—finding those pockets where they can be differentiated, where they can lean into consumer-driven commerce—while also being very mindful of resetting the cost base for what their business needs to be, are the companies that come out of a period of uncertainty or turbulence faster. And not only do they recover faster but they also see the advantage that they create stick for the better part of a decade.
So these are pivotal moments in which we see the industry reshape. We think we’re in one right now, hence the title of our article: retail reset. So for retailers, the job is to deliver holiday, get some wind in your sails, and then think about your journey over the next decade.