Retail Digital Transformation: One Size Doesn’t Fit All

As in many industries, diversified business models may be critical for retailers seeking to enhance shareholder value, manage strategy risk, and improve returns on innovation investments

The retail experience has been radically transformed from what it was only a few decades ago, largely driven by technology and data. The industry is defined by an ever-shifting mix of physical and digital assets and strategies that represent a way forward for generating value and promoting resilience.

While the shift began in the earliest days of the internet when traditional brick-andmortar activity began occurring online, the retail sector today involves a complex mix of organisations that have moved in many directions – in and out of storefronts and warehouses, online and offline – as business models continue to morph.

Some organisations began on Main Street and moved into digital platforms. Some have done the reverse. Others may still exist in only one dimension or the other, although this is becoming less common.

The retail industry’s multi-decade digital transformation journey provides a glimpse of what may be achievable in other industries. As retail organisations continue to evolve their innovation strategies to respond to newer trends and demands, data regarding modern business models may provide insights about opportunities to consider and explore.

Revenue Multiplier Effect

Deloitte’s research reveals that four foundational business models often display significantly different financial results, depending on how they leverage technology. Each revenue model has a multiplier worth twice the value of the model before it, which is called the revenue multiplier effect. Value is assigned based on scalability of offerings. The first two models are:

• Asset builders. Traditional producers use capital to make, market, distribute, and sell physical products. Physical assets are key determinants of performance and value. These organisations receive approximately $1 in valuation for each $1 in revenue and grow 2% to 6% annually.

• Service providers. These organisations hire people to provide services in a lower-capital model that yields higher returns. They typically receive $2 in valuation for each $1 in revenue and achieve growth rates closer to 6% to 12% per year – approximately twice that of asset builders.

Two additional models build business around digital technologies, platforms, and licensing. These models move above the digital divide, where the infusion of technology acts as a differentiator in enabling growth and scalability, which drives margins. These models are:

• Technology creators. In this model, organisations such as software developers, biotechnology firms, and other franchise or subscription businesses use capital to develop and sell intellectual property. The market pays about $4 in value for each $1 in revenue in this model – roughly doubling the usual returns for service providers.

• Network orchestrators. Organisations such as social networks, credit card companies, stock markets, and similar organisations build networks to create, market, and sell goods, services, or information. For these types of organisations, the market pays approximately $8 of valuation for each $1 of revenue; growth rates can reach 20%, approximately doubling returns again.

Revenue Multiplier in Retail

While the retail sector grew up on asset builder and service provider models, many have pierced the digital divide to become technology creators and network orchestrators as well. Indeed, successful retailers often embrace more than one of these approaches in their strategies, and they move among the models in different patterns, going both above and below the digital divide.

Not all retailers with an online presence are at the same maturity levels in their digital transformation journey. For example, many brick-and-mortar retailers are monetising intangible assets to transform their online presence, logistics, and customer networks while some e-commerce companies are gaining a first-mover advantage using customer data.

Meanwhile, some retailers with an established presence in the online marketplace are acquiring physical assets to gain a footprint in the brick-and-mortar space and diversify their business models. The correlation between retail business models and an organisation’s ability to build greater shareholder value often depends on how and in what combination it leverages both tangible and intangible assets.

Retailers seeking to mitigate risks to their strategy, create new revenue streams, and maximise shareholder value can explore opportunities by considering capabilities across the various business models, including those that leverage digital technology and those that do not. These organisations may be able to maximise value by considering what capabilities they can combine across models, not necessarily at the exclusion of capabilities in other models.

Diverse Models, Strategies

With the sector’s diverse opportunities and players, a key to growth may be a diverse business model as well. A strategy involving multiple platforms can leverage the benefits of scale and physical footprint along with technology and IP licensing opportunities while also growing digital networks and communities. This approach has helped some of the largest retailers build new revenue streams and maximise shareholder value.

Consider, for example, how some retailers are tapping into big data to create licensed products that bring in revenue both from subscription as well as customer interactions on the network, similar to the way digital wallets have developed in the financial services industry. As another example, some retail companies are entering arrangements where they earn commission revenue from interaction among buyers and sellers or hold inventory and resell it, much as online hospitality companies market and sell airline tickets or hotel rooms.

In many industries, the movement to more digital-intensive business models is somewhat linear, beginning with traditional asset builder or service provider models and moving up to leverage digital technology. In the retail sector, shifts have been more fluid. Retail companies with physical assets have moved into online offerings while others began online and then added brick-and-mortar capacities, perhaps to build proprietary retail solutions and then license them to other sellers.

In contrast to large retailers, some niche companies are focusing on mid-tier and smaller retailers to develop retail management solutions for sellers on their platforms. Such an approach can establish a direct correlation between sales on the platform and services leveraged for the marketplace, cultivating higher returns in the network orchestrator space.

Even during periods of market-led disruption, the retail industry has seemed comparatively less affected and has continued performing well, demonstrating tenacity and resilience. Diverse business models have played an important part in fostering such resilience. Retail organisations exploring how to mitigate downside risk and seize risk that represents opportunity can consider a dynamic mix of business models involving both traditional and digital methods consistent with evolving market scenarios.