While the retail industry has experienced drastic changes in the past decade, the pace of disruption has only increased since the pandemic. Consumers now buy more on digital channels, demand faster fulfillment and engage in omnichannel capabilities in all parts of the shopping process.

These changes are happening as material shortages, tariffs, inflation and COVID-19 continue to disrupt the supply chain and labor markets. While most retailers have acclimated to the "new normal" and initial shock of the pandemic, they must prepare to operate in a state of continuous disruption.

Retailers need to adapt to these changes through revisiting staffing models, pricing, automation and partnerships in the marketplace.

Diversify supply chains and enhance fulfillment

Sourcing and logistics in the retail industry are more complex than ever. Retailers are under pressure to move products faster and across greater distances while offering competitive prices and operating on lower profit margins. More than 80% of consumers now expect faster and more flexible shipping and fulfillment options, according to the National Retail Federation.

To mitigate the growing risks of supply chain disruption, retailers must seek greater sourcing diversification across regions and suppliers. They can also reduce downstream bottlenecks in fulfillment and distribution by enhancing ship-from-store and curbside capabilities. Many now use back rooms as minidistribution centers to fulfill digital orders and get products to consumers faster. For example, Bed Bath & Beyond converted a fourth of its stores into fulfillment centers and shipped 36% of online orders from its stores in 2020, according to an article in Supply Chain Dive.

Today, companies are rethinking how to get goods to the customer in the last mile within hours of the order. While Domino’s focused on its own delivery network decades ago, retailers now have multiple third-party solutions that enable them to offer home delivery without building out their own network. For instance, retailers such as Target, Sam’s and CVS now use companies such as Shipt and DoorDash to offer same-day delivery on many products. Home Depot also recently partnered with Walmart to offer faster delivery through its GoLocal network.

"These partnerships allow retailers to meet the expectations of their customers with modest disruption to their current operations," said Marc Passalacqua, managing director at Huron.

Balance inventory with pricing promotions

Over the past 18 months, retailers have experienced shortages in everything from toilet paper and laptops to frozen waffles. While retailers faced their own challenges in buying some products, they also hesitated to overorder inventory in a period of market uncertainty. 

Retailers in all subsectors must buy tighter by using inventory planning and pricing promotions to balance inventories with customer needs. One key is to revisit inventory levels based on supply chain issues and other macroeconomic risk. While some retailers are moving to smaller stores with less inventory, others are minimizing in-store inventories and augmenting technology to transact online orders.

Retailers can also adjust and reduce their promotional levels to better align with consumer demand and the overall value that is being provided to customers with various shipping options and distribution channels. By identifying the value of specific items or types of transactions available to consumers, retailers can optimize the return on each transaction. "Retailers that understand the value they provide to their customers will be able to increase prices on goods that may have been impacted by supply chain issues," Passalacqua said.

Automate to reduce labor pressure

The retail industry has also faced mounting labor challenges since the start of the pandemic and faces the most difficult hiring market in generations. Up to 42% of retail workers are now considering leaving the workforce, according to a survey by Zipline. Many retailers are raising wages to keep and attract the talent they need. Walmart announced in September 2021, a raise of $1 more per hour for more than 565,000 store employees. Costco and Dollar Tree also recently announced price increases because of a combination of rising product and labor costs.

"The labor pressures have begun to impact this holiday cycle. Many retailers now have no choice but to pass on those costs or find ways to operate with reduced staff," Passalacqua said.

Retailers can do several things to adapt to the new labor market. One way to optimize labor is to smooth online orders that are shipped from stores to other locations that have lower volume. Also, reducing urgent corporate requests and non-value added store activities can also help reduce conflicting priorities and stress on staff, which allows employees to focus on the customer that ultimately will drive sales. Ultimately, reducing employee turnover is critical and increasing wages in addition to reducing certain activities will help increase morale and motivate employees. Target announced in early October it would pay an extra $2 per hour to store and service center employees who work peak days during the holiday season.

Finally, retailers should strive to automate everything they can. Even back-office automation and process digitization can have a big effect on the sales floor, reducing the labor requirements. "Everything that can be automated, should be automated," said Harmit Singh, chief financial officer at Levi Strauss & Co., in a recent editorial.

As supply chain and uncertainty push inventory levels lower and market pressures increase costs, retailers need to identify areas of opportunity to improve profitability through pricing action or efficiencies.

For more insights on Huron retail capabilities contact [email protected].