Inside retail’s fragmented future

Some of these drivers, such as convenience and experience, have become commonplace in discussions about the future of retail and current best practice. Others, such as flexibility, rose to the forefront in the past year as the sector adapted to rapidly changing circumstances. These themes will definitely play a key role in shaping the retail sector in 2021 and beyond. 

However, one driver that is not as often spoken about, yet is equally as important, is fragmentation. It relates to the way retail is breaking apart as it is pulled in multiple directions. If we look closely, we can see this already happening in a few ways:

Price points

One of the most obvious ways retail is fragmented is around price points. Deloitte described it as “the great retail bifurcation”. The idea is that across different markets, the most successful retailers tend to fall at either end of the price spectrum. One end is premium, offering unique, bespoke or luxury products at higher prices. At the other end is discount, competing on continually lowered prices. Those who fall somewhere in the middle tend to be the ones who are struggling: they are not cheap enough to attract discount shoppers, but are not premium enough to compete with the luxury buyers. 

This bifurcation fits with a broader economic trend that impacts most developed nations: the death of the middle class. Data from the OECD shows that the middle class has been gradually eroding due to income and wealth distribution changes. However, an important note for retail is that the change is not equal. While overall income and wealth are growing, they are mostly doing so for the upper class, while many who were in the middle are falling behind. At the end of 2019, my colleague Professor Sean Sands and I argued this trend explains some of the challenges traditional department stores have faced in recent years. 

However, we are still seeing these effects as we move through the Covid-era, resulting in the so-called K-shaped recovery. The implication for retailers is that there is an increasing risk of being lost in the middle, and it will be crucial to consider where on this spectrum you are best suited. For many, the appeal of competing on price will be limited as larger operators with economies of scale have an advantage. That leaves the option of providing a unique offer that consumers will be willing to forgo a discount and pay a premium for. 

Locations

Beyond enforced store closures in some states, one of the larger impacts of the d pandemic has been the drastically reduced foot traffic in CBDs as consumers have increasingly worked from home. Academics from the Queensland University of Technology, the University of Tasmania, and the University of Western Analysis recently analysed foot traffic across both CBD and suburban locations across Australia. Unsurprisingly, their analysis showed that foot traffic is significantly down, and remains so, while suburban retail areas are experiencing an influx of shoppers. From that data, they concluded that “Covid all but killed the Australian CBD” and subsequently that “the suburbs are the future of post-Covid retail”. 

This is another example of fragmentation in retail, with the focus shifting from traditional hotspots around CBDs and major shopping locations towards local or neighbourhood locations. While restrictions are now easing, there are also signals that there will be a permanent increase in consumers working from home. This will have flow-on effects on foot traffic in CBD retail locations, and therefore the appeal, revenue and rental opportunities these locations have traditionally brought. At the same time, it has presented an opportunity for retailers and property developers to diversify their focal locations and consider how best to interact with consumers now staying increasingly closer to home. 

Convenience and experience

Convenience and experience are also causing a form of fragmentation. At its core, convenience is about helping consumers achieve their shopping goals however and whenever they choose. An ultimate example of this could be a smart fridge that knows when milk is running low and preorders it to arrive when it’s needed. At the other end, experience is pushing retailers to engage, educate and entertain consumers in unique ways to build deeper relationships. This driver is epitomised by an in-store hands-on workshop where consumers spend time learning to use a brand’s products while being instructed by a professional. 

Consider these two examples, and you’ll see tension. A hands-on instructional workshop is not a very convenient way to shop, while milk automatically arriving at your door is not exactly experiential. This tension leads to the current fragmentation we see where different retailers are increasingly focusing on one or the other of these themes. The big question for retailers is: are convenience and experience truly competing forces that serve different purposes at different times? If so, then focusing on one may be sufficient. Alternatively, is it possible to provide a truly engaging experience that is also a convenient way to shop and also provides a memorable experience?

This is one area of fragmentation where I expect to see interesting and innovative strategies from retailers in the near to medium future. Already, we see convenient options trying to add elements of experience through packaging or delivery methods. At the same time, we see experiences trying to become more convenient, such as Providoor offering at-home fine dining. How these two themes evolve could drive a lot of retail innovation in the next year and beyond. 

Bringing it back together

These are just some of the ways that retail is fragmenting because of competing underlying drivers and themes. Retailers must be cognisant of where they fit across these different divides and others that emerge and be wary of being lost in the middle. 

Another is that where there is fragmentation, there is also an opportunity for collaboration, another of the large driving forces we identified. As retailers become more specialised and focused, there is an opportunity to collaborate with others to fill the gaps. For example, a retailer focused on convenience (e.g. an online pure play) may partner with an experiential retailer (e.g. bricks-and-mortar showroom) for mutual benefit. Experimental collaborations like this have already begun and could be an interesting way for retailers to leverage the fragmented future ahead for mutual benefits.