2018 is going to be a tipping point in the retail world, one that will see winners exploit new omnichannel strategies, where marketing will be reinvented (again) to exploit the increasing growth of new social media and digital trends. The store will become increasingly experiential, and of course, those that fail to adapt fast enough will disappear. 2018 will be the year when it has never been easier to quickly gain some new customers, yet it will also be more difficult to hold them. Let me explain why.
We’re seeing that the retail world is experiencing a seismic shift driven by three colliding forces — massive price deflation, the great fragmentation of the consumer and the impact of an underlying technology revolution.
How has this happened? First, there has been an ongoing trend toward dematerialization, which has significantly depressed the demand for material goods. It now takes less and less physical matter to produce the goods we consume; but beyond this, people are spending their dollars on things that do not contain physical atoms. For example, services, experiences and digital products, which are not materially tangible, have seen a massive increase in consumer spending, and this shows no sign of abating. To illustrate, from 1987 to 2016 the share of consumer spending on live experiences and events relative to total U.S. consumer spending increased 70%.
Along similar lines, and as has often been observed, the consumer mindset has changed from one of ownership to one of access. Millennial consumers in particular are no longer interested in owning everything they desire.
Moreover, the demographic cliff of aging populations and low birthrates that has negatively affected all developed economies, including the U.S., will only continue to exacerbate the supply-demand imbalance. This means, first, that fewer workers will be supporting more retirees. The issue of depopulation in the developed economies is one of the most significant and least mentioned global trends today. Going forward, there will be both fewer workers and fewer consumers. From a historical perspective, more people were earning money and consuming goods in 2010, relative to the number of children and elderly dependents, than anyone is likely to see again for the next 40 years.
The second of these three emerging tendencies is another huge trend — the great fragmentation of consumer consensus and identity. This hyperfragmentation of consumers across almost every important dimension will continue to be a significant challenge for retailers. People’s lifestyles, cultural traits, attitudes, preferred products, services and experiences in different regions, countries and even cities are rapidly becoming distinct, separate and definable microcommunities. Their tastes, expectations and purchasing behaviors are diverging in multiple directions.
Consumer fragmentation is a critical issue to retailers because it is dampening demand — in the absence of mass trends, consumers feel less compulsion to buy. Also, with the emergence of niche markets, enabling startup companies to satisfy these idiosyncratic tastes increases supply, which is already too high. The lack of consumer consensus is also leading to significant shifts in patterns of consumption. The trends in fragmentation, which is not likely to end soon, pose a direct threat to every mass market and the supply chains designed to fulfill them. And 2018 will be a tipping point.
Finally, we are in the midst of the technology-driven creation of more supply and new business models. The Internet and digital are now all more than bit players in the revolution, changing everything from the time we spend at the malls to how we learn about products to the way crowdsourced delivery will drive new behaviors.
So, what can a retailer do in 2018 to contend with all of this? Every strategy must be built around 7 ‘C’s that together provide a cohesive framework for competing. These are Community, Customization, Connectivity, Convenience, Content, Curation, Control. We develop more on these in our latest book, Retail’s Seismic Shift, but suffice it to say that each of these takes a proactive approach to addressing the deep challenges raised by the unprecedented fragmentation of mass markets.
Michael Dart is a partner in the private equity practice of A.T. Kearney, a global strategy and management consulting firm, and author of Retail’s Seismic Shift (St. Martin’s Press, 2017). He can be reached at Michael.Dart@atkearney.com.