Report: Retail Leaders Who Invest More In Innovation Will See Higher Returns
New research from Boston Consulting Group and the World Retail Congress finds that leaders expect to increase innovation investments through 2027 by nearly 40 percent.
As consumer needs continue to change and develop, Boston Consulting Group and the World Retail Congress' latest research report finds that innovation holds the key to harnessing a competitive edge in retail.
According to their data gleaned from a survey of more than 400 executives from a cross-section of global retail sectors, innovation investments have a direct correlation to success in retail. Newcomers who allocate resources to technology like AI, operational improvements and e-commerce are even gaining a larger share of the market previously held by industry heavyweights.
Assessing what is at the heart of being a high-performing retailer, Ian McGarrigle, chairman of the World Retail Congress, said the researchers sought to describe the new climate. “It is one where the macroeconomic and social conditions aren't going to help retailers to drive topline growth,” he said. “And it is also a time of incredible technological change that is reshaping the world we live in. So, to operate within that backdrop, retailers are having to realize that the old rules no longer apply and that this is a time that demands radical new ideas and real agility.”
To find the answer, the companies looked to see what set high-performing retailers apart finding that there is a higher willingness to embrace and harness innovation. According to the report, while leading retailers said they are investing 13 percent of revenue in innovation and yielding a 21 percent ROI, those who are only investing 3 percent earn a 9 percent ROI. It's a pattern that the researchers' data shows is also likely to continue with these leaders planning to spend 38 percent more and lagging retailers spending only 8 percent in the next three years.
Still, while data finds that it is imperative to invest in innovation, the authors of the report acknowledged that truly innovating is hard. To ensure profitable investments, they said, executives must “champion new grassroots ideas, launch multiple initiatives rather than only one or two big ones, invest in innovation-related technology and talent, cultivate a culture that breeds creativity and experimentation and develop an innovation ecosystem by collaborating with external partners.”
The companies' executive research found that leaders are focused on a few key investment areas, including operational improvements (71 percent), e-commerce (60 percent) and big data/AI/ analytics (58 percent).
Operational improvements, said the authors of the report, are a short-term priority for executives addressing pressure built across value chains that has been created by inflation and supply chain challenges. Meanwhile, investments in big data, AI and analytics are being made across retailers' value chains, developing roadmaps to drive structured changes for growth.
With e-commerce investments retailers are targeting retail media, marketplaces and social commerce, experimenting to meet sophisticated needs, growing gross merchandising value and improving profitability. Investments in retail media are being set up by innovative retailers on retail media networks so that brands and other third parties can pay for advertising space on the retailers' owned properties and media. The authors of the report said they expect opportunities for retail media networks to grow rapidly in the next three to five years with three-quarters of suppliers already investing at least part of their marketing budgets in retail media offerings.
Forty-two percent of surveyed innovation leaders also said they have invested in marketplaces. According to BCG's analyses marketplaces have become a prevalent business model in retail e-commerce, generating 67 percent of global e-commerce sales. Moreover, BCG found that in 93 percent of countries, marketplaces hold the largest share across all retail business models.
As social media and e-commerce continue to blend, retail leaders are investing in social commerce as one of their top three e-commerce investment priorities. Social commerce has been extremely popular for retailers in East Asia, and according to BCG, is gaining traction in the West as well. Already, 74 percent of consumers are making buying decisions influenced by social media content, making it the time for retailers to jump in.
As retailers look to amplify innovation across their company, BCG and the World Retail Congress called out five key actions to consider: align innovation with strategic goals, build and innovative culture, create fit-for-purpose governance and risk management, augment your operating model by bringing on external partners and review your data and technology stack.
“Leaders invest in new business models to drive top-line growth and improve margins,” said Nate Shenck, managing director and senior partner, global head of retail at Boston Consulting Group. “By sharing the best practices of innovation leaders, this report offers insights into how retailers can ignite their own innovation engines and create competitive advantage.”