IBISWorld industry analyst Lauren Magner offers this exclusive insight into the future of retail for Ragtrader readers.
As Australia’s retail sector continues to struggle with weak sales growth, IBISWorld investigates the future of retail over the next five years, and explores the potential opportunities available to retailers that innovate and invest in enhancing the overall customer experience.
Multichannel retailing will increase in importance, as retailers hope to capture consumer demand at any given point in time.
This will involve the continued migration of bricks-and-mortar retailers online, and also vice versa, as previously online-only stores develop a physical presence.
The role of the traditional retail store will be challenged, and large physical footprints no longer required. Technological innovations will include interactive displays, adaptive storefronts, and robot-enabled dressing rooms.
Clicks-and-bricks
While many Australian retailers scrambled to develop online stores in the wake of fierce competition from the online shopping market, this trend is now happening in reverse, with pure-play online retailers expanding to other sales channels, including bricks-and-mortar.
There is no longer any threat that online sales will cannibalise traditional retail store sales, as both continue to adapt and coexist, providing consumers with a seamless and convenient multichannel experience.
Retailers that start out online are recognising the benefits of having a physical presence, as bricks-and-mortar stores hold significant advantages over their online counterparts.
This includes the ability of consumers to inspect and try on products, receive face-to-face customer service, and instantly acquire products rather than waiting for delivery.
As a result, pure-play online retailers are increasingly using multiple channels to engage and connect with customers, by opening up flagship bricks-and-mortar stores that typically act as showrooms for the brand's products.
While the purpose of retail stores has traditionally been to sell products, this is changing as instore experience becomes more important.
As such, the line between traditional retail and online is expected to become increasingly blurred, resulting in hybrid retail models. Hybrid retailers combine the elements of bricks-and-mortar with online to provide an enhanced shopping experience.
Examples of successful hybrid retailers include Sneakerboy and Shoes of Prey.
Sneakerboy's flagship store acts as a showroom for its wide range of designer shoes.
There are no price tags on the merchandise, and consumers use their smartphones to find price, size and availability.
Sneakerboy has no fixed points of sale and the store acts as a showroom, with no purchasable inventory on site, only a range of samples for fitting purposes.
Consumers use instore iPads to explore products and place orders.
Products are then shipped from Hong Kong within a few days.
Online start-up Shoes of Prey, which allows consumers to design their own shoes, migrated offline by opening its first stand-alone boutique in David Jones.
Consumers can design shoes on instore iPads while physically inspecting over 170 different materials.
These next-generation retail models typically translate in higher sales productivity per square metre.
While traditional bricks-and-mortar stores typically devote about 50% of their retail space to storing inventory, the requirement for a large physical footprint is becoming less relevant over time.
As the purpose of the retail store changes with a stronger focus on brand exposure and showcasing product ranges, measurements such as sales per square metre become redundant.
The physical retail store is now just a part of the overall retail experience for the increasingly connected consumer.
Additionally, in the face of rising rent costs, many retailers are reassessing their store portfolios by cutting back on unnecessary floor space and closing underperforming stores.
Technological innovations
The bricks-and-mortar shopping experience is expected to become more automated, with retailers already experimenting with different business models.
US-software developer, Hointer, has developed a system whereby consumers scan the QR code of the item they want, and their chosen size is delivered to an assigned dressing room using large mechanical robots.
While in the dressing room, consumers are able to request different sizes, and have them delivered by the store’s system, and can return items via a chute.
Products that are delivered to the change room are automatically added to the customers’ virtual shopping cart, and can be paid for through a self-serve checkout.
This technology can help retailers to boost sales, improve customer service, shrink floor space, reduce labour requirements, and optimise inventory levels.
As online sales continue to expand a faster rate than traditional retail, boosting their share of total consumer spending, physical floor space will be less focused on driving the sale of products instore and more on engaging and interacting with the consumer.
This includes the use of video content, television screens, tablets and interactive displays in stores to view and order products online.
Retailers are also exploring other avenues to enhance the customer experience by introducing cafes, spas and salons to their stores. For example, Glue Store provides an instore café in some of its stores, offering consumers coffee, beverages and snacks that they can consume as they browse the brand’s products.
Virtual stores and adaptive storefronts are expected to become more common, with some retailers already trialling these technologies.
For example, Woolworths unveiled Australia's first virtual supermarket in 2012, featuring more than 120 items.
Consumers are able to purchase products by scanning barcodes on a billboard with their smartphones, and have them delivered to their home or office within a few hours.
Adaptive storefronts involve interactive digital displays that adapt to anyone standing in front of it.
These displays identify shoppers using Bluetooth technology and reacts to personal data stored on their mobile device, such as shopping habits and preferences.
Consumers can then swipe through personalised content, place products in a virtual shopping cart, and purchase straight from the display. This technology is expected to increase in prominence over the next five years.
Online stores are also innovating with pure-play fashion retailer The Iconic planning to experiment with using drones to deliver customer orders in the next two years.
While one of the downsides to online shopping is the inability to physically try-on products such as clothing and footwear, online retailers are expected to develop new technologies to combat this.
The ability to try on clothing, footwear and accessories virtually via the internet will be aided by advancements in computer programs and website design.
It is anticipated that cameras will be able to take precise body measurements, assisting consumers with choosing the right size and style.
Some industry firms are already adopting similar technology.
For example, online eyewear retailer Sneaking Duck offers a virtual try on service, where consumers can upload a photo of themselves and test out different pairs of glasses.
Mobile sales
Consumers are becoming increasingly tech-savvy and are constantly connected to the internet.
Mobile devices are one of the largest potential growth areas for online shopping, with smartphones and tablet computers already changing the way individuals shop.
The increasing prevalence of these devices will lead to a greater number of consumers accessing online stores via mobile phones.
Industry firms will continue to develop mobile-optimised websites and applications, improving customer navigation and helping to boost impulse purchases.
The use of social media platforms such as Instagram and Facebook to advertise and market products will become more prevalent over the coming years.
The rise of social media and online shopping has sparked demand for new fashion designs and styles on a more frequent basis.
Consumers are constantly exposed to the latest trends from catwalks or clothing worn by celebrities, bloggers and other influential people.
Retailers are increasingly merging s-commerce – sales via social media – and m-commerce – sales via mobile devices – to create an integrated buying platform.
Retailers will often send items to fashion bloggers or celebrities in the hope that they will post a picture of themselves wearing the brand on Instagram, as this directly translates into stronger sales and higher brand engagement.
Instagram has recently added a click-to-buy functionality, transforming into a more results-driven marketing platform.
More than half of small to medium retailers, including new emerging labels, now use social media to drive business, reflecting the rising usage of these platforms by consumers.
Over the next five years, retailers will continue to face a tough and challenging retail environment.
In order to drive sales and boost profit margins, domestic retailers will need to adjust their store format and the number of stores in their network.
Consumer behaviours are constantly evolving as new technology is adopted, and as such, retailers need to facilitate customer purchases through a variety of channels.
By using physical floor space to showcase products rather than store inventory, retailers will be able to save on operating costs and offer a wider range of goods. Introducing new technology in an effective and efficient way will help to boost customer engagement.
Only those retailers that are able to innovate and react to consumer trends will be successful in achieving growth over the period.