It is no news that the concept of brick-and-mortar shopping experience has drastically shifted into a more hybrid experience within the last decade, thanks to the rise of e-commerce and smart technologies. When brands were forced to migrate online during the COVID-19 pandemic, the digital transformation (DX) marathon in retail turned into a sprint.

The digital transformation race

A digital transformation race has started to stay ahead in the evolving retail industry. With customer satisfaction as the center priority for any brand and retailer, digital channels are gaining more and more attention because of their expanding realm of interactions, driving engagement and conversions. It is estimated that 95% of purchases will be made online by 2040, which means e-commerce is opening the doors of opportunity to countless entrepreneurs [1]. With consumers increasingly relying on online shopping, companies across the globe spent $3.7 trillion on customer-centric business technology in 2018, with experts at Globe Newswire predicting the technology’s role in retail will reach $20.05 billion by 2026 [2].

To thrive in this digital race of e-commerce, successful brands are the ones that constantly innovate better virtual shopping experiences and invest in fast delivery, personalization, and post-purchase interaction with consumers. The demise of Topshop - one of the biggest retailers in the 2000s, is a painful example of a company that did not innovate sufficiently. E-commerce-only retailers, including ASOS and Boohoo, have created a so-called ultra-fast fashion phenomenon wherein new trends are introduced weekly. Such frequency is made possible as retailers effectively utilize technology. Some applications include having their online sales data unified and traceable, and using the data to predict future demands. The newly risen e-commerce giants and their shorter lead-time advantage have even threatened the widely successful fast-fashion companies, such as the fore-mentioned Topshop, Zara, and H&M, let alone traditional retailers.

Besides customer satisfaction and increased sales, let’s not forget about other drivers that make brands want to implement digital transformation - cost reduction, streamlined processes, and enhanced efficiencies. Indeed, in a survey of 128 executives, 40% said that the top benefits of digital transformation are improved operational efficiency, 36% cited faster time to market, and 35% pointed out the ability to meet customer expectations [3]. There have been real-life examples of how retailers achieve such benefits with the help of technology. For instance, the European supermarket chain - Carrefour - collaborated with Google to digitally transform both their front-end and back-end operations, allowing customers to voice-add items to their shopping carts, check out, and specify delivery or pickup preferences on the Carrefour website. The company also uses Google Cloud to implement a top-notch ERP system and consolidate data streams across all stores and warehouses. As a result, after just two months, the company saw an increase in e-commerce sales of 30%, a 12% decrease in unused inventory, and a 10% decrease in costs [4].

Digital transformation in retail: Not an easy task

Implementing digital approaches is no longer an option for brands, it is a must. However, it is easier said than done. McKinsey’s statistics on digital transformation show that only 16% of employees believe their company's digital transformation efforts have improved their performance, and 70% of all digital transformation programs fail due to employee resistance and a lack of management support [5].

One of the top challenges retail companies face is the lack of proper IT skills, specifically cybersecurity, application architecture, software integrations, data analytics, and data migration. In the current landscape of tech workers shortage, 54% of businesses claimed that the shortage of technically trained workers is the reason why they are unable to achieve their goals for digital transformation [6]. According to another survey by Gartner, 70% of retail employees claim that their companies are struggling to keep up with the rapid pace of change in the digital commerce industry [7].

Another challenge in the race to digitization is budget constraints. The process of integrating new digital solutions is pricy and demands significant investments in which small retailers take the hardest hit. While many large and medium-sized retail companies have dedicated IT budgets funded by owned and shared profits, small companies based in rural areas rely heavily on funding to finance their digitalization activities. Unsurprisingly, more than 60% of survey respondents indicate a lack of finance as the major obstacle to their efforts to go digital [8].

How retailers can stay ahead

While many tech-first giants like Amazon and eBay have the first-mover advantages, the rest of the retailers can still compete and stay ahead of the digital transformation marathon.

Adopt the technology

Building technological advancements require significant investment. Amazon alone spent $42.74 billion on “technology and content” research and development in 2021, making it one of the top R&D spenders [9]. As most retailers do not have the resources to compete, adopting readily available technology solutions has become a popular choice. The strategy enables instant implementation as the software development process is removed, and service scalability is achieved by effectively utilizing the external IT resource pool. It also brings forward cost-effectiveness with newly emerging licensing and delivery models – Anything as a Service (XaaS) wherein retailers only have to pay for what they use on a subscription basis.

Take a hint at DFS – the biggest sofa retailer in the UK. Identifying AR/ VR technology as a well sought-after solution, with products advertised with VR/AR enjoying a 94% higher conversion rate than those without [10], the company quickly adopted the technology. In early 2020, DFS launched its first-ever web-based AR-powered product try-on in collaboration with Vertebrae – a 3D and AR1 solution provider. The partnership allows DFS’ shoppers to virtually display items in their homes to examine details and assess fit and style, with no application download required. Cooperating with the experienced team at Vertebrae also allows the company to successfully scale its implementation to over 7,000 products. As a result, DFS achieved a 112% increase in conversion rate, a 106% increase in revenue per visit, and a 22X return on investment [11].

Acquire tech startups

It is no easy task to build an in-house team of IT experts. In fact, in the Global Digital Skills Index, nearly 75% of workers cited not feeling equipped to learn the digital skills needed nowadays [12]. It is even harder to build in-house IT capabilities in a short period. Indeed, it took Amazon over 20 years to become a global leading retailer and the largest US e-commerce company. For retailers seeking to quickly reinvent themselves as tech-first, acquiring innovative tech startups is one go-to strategy. According to GlobalM&A, more than 790,000 tech acquisitions by non-tech companies have been announced globally since 2020, with the U.S. being a major contributor. The Silicon Valley alone houses 32.1% of tech firms acquired by non-tech companies over the last 5 years [13]. Acquiring tech companies allow retailers to constantly customize their offerings while actively researching and developing new services that can eventually become a competitive advantage. The ability to do so in-house, especially at a much faster pace than building IT capabilities from scratch, is critical in enabling retailers’ consumer-centric strategies.

Global retail giants are staying ahead in the M&A game. For example, L’Oreal – the world-leading beauty product provider, has acquired ModiFace, an Augmented Reality start-up, in an attempt to reinvent its customer experience and establish itself as a Beauty Tech leader. The acquisition allows L’Oreal to offer virtual makeup, hair color try-on, skin diagnosis, and skin shade assessments. As a result, the company enjoyed relatively high growth in e-commerce sales, with an increase of 60% to account for 27% of L’Oreal’s total sales in 2020 [14]. Similar acquisitions are also made by other leading retailers, including McDonald’s buying Dynamic Yield – a marketing technology and data processing company, and Walmart purchasing Aspectiva – a provider of AI-powered customer feedback collection and analysis.

Digital transformation - no longer a dot on the horizon

Brands need to be where the consumers are, and that is online. While not all retailers are inherently "technology-first," and many struggles to compete with e-commerce giants like Amazon, innovations have become a key competitive advantage. The choice to adopt the technology or acquire a tech startup rests solely on a company’s capabilities, including budget and manpower. But a key deciding factor should be their long-term digital transformation initiatives, and ensuring the decision fits within the defined pathway is critical to digital transformation success.

How to identify a digital transformation pathway? Check out here.

Author FPT Software