The retail landscape has shifted radically over the past several years, and retailers have raced to meet changing consumer preferences while grappling with increasing complexity and fierce competition. The COVID-19 pandemic has accelerated many of these changes and highlighted a number of opportunities for retailers to come out of the pandemic stronger. Now is the time for retail leaders to rethink their merchandising priorities to help deliver a compelling omnichannel experience for customers, shape levels of service, and further evolve their value proposition.
New McKinsey research on senior retail merchants and their priorities explored the most salient market trends and their impact on retail organizations in the short and long term (see sidebar, “About the research”). The findings highlighted their priorities as merchant leaders and gauged their retail organizations’ readiness to address these macro trends. We believe merchant leaders can focus on six priorities to create the distinctive merchandising value proposition needed to set their companies apart.
Insights from retail’s front lines
Our research revealed that merchant leaders are focusing their current efforts on a few specific market challenges and trends over the next 12 to 18 months (Exhibit 1). Respondents report expecting these same trends to shape the retail landscape for the foreseeable future, although supply chain disruptions and the tight labor market were viewed as nearer-term issues (in the next 12 to 18 months). Across these areas, merchants highlighted the disconnect between their priorities and their organizations’ preparedness to respond.
Merchants highlighted the disconnect between their priorities and their organizations’ preparedness to respond.
Inventory shortages and supply chain fragility are top of mind for most merchant leaders in the near term. The pandemic destabilized retail supply chains around the world, shining a light on weak links and reinforcing the need for resilient, adaptable operations to meet rapidly changing consumption patterns and market dynamics. Although supply chain fragility is the top trend for three-quarters of senior merchant leaders, the vast majority feel their organizations are unprepared. Indeed, less than 10 percent of leaders report being ready to address this challenge.
The competitive labor market, fueled by the Great Attrition, has created near-term urgency for executives across retail sectors. More than 23 million US workers—and counting—have quit their jobs since April 2021. While a majority of respondents think talent is a critical trend, less than 15 percent feel secure in their organizations’ ability to address it.
In addition, retailers are focused on the continued rise of digital—and with good reason. COVID-19 had a “years in months” effect on digital retail and the adoption of omnichannel features by consumers and retailers alike. Online spending has more than doubled over the past five years,1 and consumers are increasingly using digital touchpoints during store purchases and vice versa, highlighting the need for an integrated, seamless experience. Conversely, brick-and-mortar locations are still seen as important factors in shaping the consumer shopping journey (such as to support customer acquisition), but some senior merchants believe that it will become less of a focus over the next three to five years.
In the longer term, respondents cited the use of data, analytics, and automation as the most influential trend. Retailers have access to increasingly more granular and sophisticated data on their customers’ behavior and purchases. This visibility will enable merchandising to accelerate the move from “art” to “science,” particularly for certain categories of business (such as replenishment goods and commoditized products). However, the art of merchandising will always play a critical role. The human touch will remain important in providing a curated, compelling, and relevant assortment to customers.
Six imperatives for merchant leaders
In light of current trends, merchant leaders and their teams need to reimagine the role of the merchant and rapidly invest in a range of capabilities to keep pace in today’s marketplace. Our research underscored six imperatives that are likely to separate the winners from the also-rans over the next several years (Exhibit 2). To make progress, retailers will need to take several specific actions for each of these imperatives.
1. Partner with supply chain and sourcing teams to build resilience in inventory planning and management
In the short term, addressing supply chain fragility is critical to meet the consumer’s greater need for speed. In the long term, building a resilient, sustainable supply chain will be an enabler for other aspects of retailers’ omnichannel offerings.
While strengthening the end-to-end supply chain should be on the broader leadership agenda, merchants should also take this opportunity to reset their operating model and understand the downstream implications of their decisions across a couple of areas:
Diversify sourcing and strengthen the vendor base. Merchant leaders should seek to shift to vendors in countries with lower costs and tariffs, invest in nearshoring, and forge deeper strategic partnerships with existing vendors. In this exercise, retailers must balance cost, speed, and distance while building the capacity to ramp up or down quickly. In addition, there is an opportunity to leverage vendors more as strategic partners and less as transactional seasonal executers by partnering on fabrics (for example, usage, sustainability innovation, and recycled goods), having a more open line of communication (for instance, around capacity needs), and establishing more consistent feedback loops. This would enable retail organizations to more easily forecast future costs. More than 30 percent of survey respondents identified this as a top nearer-term imperative.
Accelerate speed to market. Over the next three to five years, merchants must look to reduce the time it takes to get products on shelves or online. Survey respondents cited this goal as their top priority for the long term. Innovations in the design process, analytics, and new tools can help retailers reimagine their go-to-market calendar, define speed lanes (for example, shorter development cycles for trend-focused products versus longer cycles for core items), and implement agile seasonal processes. The Chinese online fast-fashion retailer Shein, for example, combines its own data with third-party sources to predict trends. Its end-to-end, “consumer-to-manufacturer” model can get goods to market in one to two weeks, on average—or even, in some instances, in as little as three days.
2. Build and activate a next-generation merchandising organization
As consumer journeys become more complex and integrated, with many touchpoints across channels, retailers that operate in silos will be less effective. Ever-rising expectations for personalized, seamless omnichannel experiences have elevated the need for a “360 degree” approach and better collaboration across teams. In addition, merchandising talent will need to broaden the use of customer and transaction analytics to inform decision making across assortment and experience. Changing consumer dynamics—in particular, the continued rise of digital and social commerce—also means merchants must develop a broader skill set that encompasses marketing, greater digital literacy, and data analytics.
The state of the labor market has significant implications for retailers’ ability to retain top merchandising talent, especially in the face of competition from high-paying sectors such as technology.
Merchant leaders should consider several actions to shore up their organization:
Establish new ways of working across merchandising to break down silos. This collaboration can provide a more customer-centric experience. For example, retailers could form integrated cross-functional teams instead of sticking to the traditional functional matrix, or organize around consumer lifestyle segments instead of product categories. In our survey, 64 percent of merchants ranked this action as a top priority in the short term.
Attract and retain diverse talent. To bring in the right candidates, retailers should have a clear vision and goals for their organizations’ makeup in the future. One-quarter of respondents ranked talent as a top priority in the next 12 to 18 months. Of this share, all respondents have made some investments in this area. However, we have seen that consumer and retail companies2 were more likely to put their diversity, equity, and inclusion (DE&I) initiatives on hold, despite evidence of the importance of diversity programs for hiring and retaining talent.
Enhance and evolve the role of ‘traditional’ merchants through upskilling and training for broader skill sets. Retailers demand more from today’s merchants than ever, including increased coordination with analytics, supply chain, consumer insights, and even digital marketing. It is crucial to continue developing merchants across these varied knowledge areas.
Offer more competitive compensation and a clear career path. Retailers will need to consider ways to retain top talent to combat “brain drain.” Despite the stated importance of talent and the acknowledgment among retailers of the highly competitive labor market, less than 5 percent of survey respondents are focused on offering competitive salaries and benefits along with a well-defined progression in the short term (Exhibit 3).
3. Bolster your merchandising value proposition, and reinforce it with customer-centric experiences across channels
Consumer journeys are becoming more integrated. For example, shoppers are increasingly using digital touchpoints during store purchases and vice versa—a behavior that was accelerated by the pandemic. Therefore, retailers should focus on delivering a compelling omnichannel experience wherever their customers shop.
To increase sales and share of wallet in today’s competitive environment, retailers must understand the key drivers of each channel and how shopper priorities and motivations differ across them (Exhibit 4). Our research shows, for instance, that “best prices” are the most important factor in online purchases, while “interacting with products in person” is the biggest driver of store sales.3 Retailers must tailor their channel experiences to play to these factors.
To increase sales and share of wallet in today’s competitive environment, retailers must understand the key drivers of each channel and how shopper priorities and motivations differ across them.
A well-integrated and engaging cross-channel experience is also essential for creating a “closed loop” to retain customers. If a retailer cannot address a need in one channel, it must consider where else it can meet consumers and how to prevent them from leaving.
Merchant leaders seeking to develop new omnichannel experiences should focus on several actions:
Get the omnichannel basics right. Offering options such as “buy online, pick up in store” (BOPIS) and omnichannel inventory can enable retailers to delight customers through frictionless, enjoyable, and easy-to-use modes of engagement.
Articulate and deliver on a unique product and merchandising value proposition across channels. One-third of respondents, led by apparel and soft-lines companies, cited a unique merchandising value proposition as their organization’s top nearer-term imperative. Several retailers serve as valuable examples: Amazon’s endless aisles and extreme convenience, Moda Operandi’s curation and novelty, and Glossier’s content and community.
Create immersive, digitally led experiences online and in stores. New digital tools can give customers new ways to discover and engage with products. Beauty retailers and brands have led the way in this area. For example, L’Oréal’s augmented-reality tools enable customers to try on products virtually, and SK-II’s “smart store” uses AI and facial-scanning technology to assess customers’ skin.
Use social commerce to interact digitally with consumers. Implementing new ways for individuals to be heard can increase customer loyalty and foster online communities that translate to the real world. For instance, Food52’s online community provides input on product development, and Beautycounter makes its in-store studio available to influencers for livestreaming.
4. Invest in analytics to increase profitability and free merchants to focus on the ‘art’
Investing in analytics to support the day-to-day foundation of merchandising functions is critical to speed up and improve the quality of decision making and to boost profitability. By integrating data and analytics into operations, merchants can dedicate more time to tasks that require thought, creativity, and a deeper, more human understanding of products and the consumer.
In the short term, merchants should take two actions:
Implement a rules-based, analytics-driven approach for pricing, promotions, and markdown decisions. Such capabilities and insights can, for example, enable dynamic pricing within a defined band based on competitors, resulting in incremental margin improvements. While algorithms can become more advanced over time, even starting with very simple rules that mirror the logic that merchants are using today (for example, minimum and maximum gap to competitor pricing or recommended discounts based on current weeks on hand) can provide material financial benefit and time savings. The end state could also be the automation of all repeatable decisions—across both pricing and assortment—in which standardized buys and pricing increases are taken through a more rules-based approach.
Draw on a broader set of consumer, behavioral, and external market data. When analyzed together, these sources can inform targeted buying and allocation decisions. Customer analytics can also be used to influence product decisions at a more granular level, such as for a specific consumer subsegment. Some retailers have used weather data and demographics to support microsegmented buys.
Looking to the future, retailers should consider more novel ways to incorporate data and analytics into the merchandising universe. They should also seek a more diverse set of data sources instead of an overreliance on historical data. Nearly a quarter of merchant leaders cited as a top long-term priority the use of advanced analytics and AI to influence product development and to rapidly test concepts before they go to market. Examples include web scraping for social mentions and hashtags to inform geographic-specific assortment, as well as third-party solutions such as MakerSights, which allows retailers to test products and concepts with consumers early in the development process.
Looking to the future, retailers should consider more novel ways to incorporate data and analytics into the merchandising universe.
5. Unlock greater value for consumers by expanding product and service offerings
In recent years, retailers have sought to extend their offerings across product categories and services to play a bigger role in consumers’ lives. Traditional retailers that can successfully execute this strategy have the potential to leapfrog the competition, counter challenges from digital rivals, and become a “stickier” platform for consumers.
Retailers can find their next wave of growth in untapped adjacencies (such as products and services bundles or flat fees to access many offerings) while also offering superior value. More important, expanding the scope of products, services, and experiences creates a self-reinforcing loop, provided retailers do it in an authentic, on-brand way. This approach could create an ecosystem of end-to-end services as well as the ability to play across different stages of customers’ lives, strengthen loyalty, increase share of wallet, and unlock additional customer lifetime value (Exhibit 5).
Expand existing offerings to enhance category authority. Partnerships between retailers such as Sephora and Kohl’s, as well as Walmart and Gap, have extended the reach of these brands. Organic expansion, such as Ulta’s salons and Williams-Sonoma’s recipe app, has also allowed them to engage with their customers with greater frequency. Organizations can also accomplish this goal by partnering with or launching third-party marketplaces to drive increased assortment without taking on additional inventory.
Seek to play a bigger role in consumers’ lives. Complementary ventures can meet customers where they are while serving their regular needs. The combination of Macy’s and DoorDash or Target and CVS Minute Clinic locations offer service and convenience beyond the purchase of goods. Walmart pursued a similar angle when it began offering home and financial services. Our survey found this approach is a higher priority for multibrand retailers compared with their vertically integrated competitors.
Offer end-to-end value proposition to customers through participation in the circular economy. Customers increasingly care about sustainability4 and environmentally friendly goods. This trend offers retailers opportunities to use recycled materials to produce new goods (for example, H&M aims to have 100 percent of its products made from recycled or sustainably sourced materials by 2030), to upcycle products (such as UNIQLO’s RE.UNIQLO program, which converts clothing donations into insulation), and to launch their own resale platforms, as in the cases of Madewell and Lululemon. Retailers will reap the greatest benefits from such efforts when they are relevant and authentic to their overall portfolio.
Despite consumer buzz about sustainability, less than 10 percent of respondents said greater participation in the circular economy was a priority in the short term, a share that fell to 4 percent for the long term. Only apparel and soft-lines merchants selected this trend as a top priority.
6. Cut through the noise with truly differentiated assortments
At a time when consumers are constantly looking for the next best thing and have a high propensity for switching brands, retailers must give shoppers reasons to choose them—and to keep coming back. Product differentiation is a critical lever, but standing out in a crowded market can be a challenge.
Several forces are contributing to assortment ubiquity in the market, making it more difficult than ever to create and defend a unique assortment. In some categories, such as beauty, channels are significantly blurring across price tiers, meaning consumers are increasingly willing to purchase products at higher price points, as well as specialized items in low-touch environments (for example, prestige skin care sold on Amazon). At the same time, brands are seeking new distribution for growth; in many cases, they are willing to pursue distribution channels they had previously rejected. Lastly, as the barriers to entry for brands in many categories fall, consumers are inundated with a sea of sameness and copycat brands.
Merchants must consider ways to develop and maintain differentiated assortments season after season:
Distinguish assortment through meaningful exclusivity. Retailers can take several paths to achieve this goal, including private and owned brands, exclusive limited-edition assortments, collaborations, diffusion lines, and sister brands, among others. One-quarter of respondents cited assortment exclusivity as a top initiative in the short term.
Develop a clear strategy to identify and maintain a consistent pipeline of new, innovative brands aligned with the overarching value proposition. Consumers are more aware than ever about attributes that can add to a product’s allure, such quality at a lower price and celebrity involvement. Direct-to-consumer brands generating buzz can also contribute to a retailer’s cachet. For example, Nordstrom, Sephora, and Target have established dedicated brand sourcing and incubation efforts.
Deliver hyperpersonalized assortment and product recommendations based on consumer preferences, using advanced analytics to provide relevant assortments. For example, HelloAva deploys AI to power its clean-beauty recommendation engine, and Stitch Fix uses customer data and insights to create personalized assortment boxes for each customer.
As retailers seek to achieve growth and carve out a differentiated position, merchant leaders must ask themselves how their organizations are tracking against these imperatives. Some questions can pinpoint their current position:
- How aligned is the organization on its customer and merchandising value proposition and how the brand shows up across channels?
- Do merchant teams have visibility into omnichannel performance and profit, and are they making decisions based on profit in addition to top-line growth?
- How is the organization thinking about the customer’s end-to-end experience and understanding their paths to purchase as an integrated, omnichannel journey?
- Is the organization investing appropriately in systems, data, and analytics not only to allow merchants and partners to focus on value-added activities but also to support faster and more granular decision making on pricing, promotions, product development, and assortment?
- How can your retailer’s brand extend into new categories and experiences? Could this be achieved through new capabilities or strategic partnerships?
- What is being done to retain the retail workforce? How effectively is the organization attracting, developing, and retaining talent?
- How integrated are merchants with functional partners such as analytics, marketing, and supply chain? How can teams work better to achieve the priority imperatives?
The answers to these questions can help merchant leaders determine where to focus their energy and resources to elevate their function and meet the needs of increasingly demanding consumers in the years ahead.