6 minute read 10 Aug 2020
man holding mobile in front of many blurred lights

COVID-19 sharpens retailers’ focus on technology and transformation

Retailers that pulled back on their transformation and M&A agenda during COVID-19 need to pick up the pace — or get left behind.

At the beginning of 2020, retailers were working hard to transform their businesses to better meet the needs of their customers. In the wake of COVID-19 pandemic, retailers are now experiencing transformative change that’s beyond their control, forcing them to pivot.

Whether it’s stepping into the front line as essential retail or closing stores and furloughing staff, each retailer is trying to navigate a unique situation. Technology has been at the heart of survival for many. Those that have invested in digital and tech transformation initiatives are reaping the benefits, whether they are rebalancing their channel mix to online, rethinking supply chains or inventing new ways to engage customers.

M&A survey how are strategy review actions different than 3 years ago

According to EY Future Consumer Index data, focusing investments in digital and technology will be an important trend in the future. Forty-one percent of global respondents suggested they would be uncomfortable visiting a clothes store, while 43% say they would be uncomfortable going to a mall. Overall, 80% of respondents report having either somewhat or significantly changed the way they shop; 43% suggest that the way they shop will change over the longer term as a result of the pandemic, and 24% say they will change the way they use technology in the future.

As a result of the accelerated shift in consumer trends, we expect M&A to be a key tool to ensuring that technology remains at the heart of renewed transformation initiatives.

Now: Retailers had embraced changing consumer behaviors, but are re-evaluating their transformations

While technology may have been gradually changing consumer behavior over the past decade, COVID-19 has shifted that evolution into high gear. Improving technology is no longer optional — it’s essential for survival.

According to the EY Global Capital Confidence Barometer, earlier this year, 68% of retailer respondents surveyed said they had prioritized new investments in digital and technology. By March, 66% of them wanted to re-evaluate these plans or were already taking steps to change their digital transformation journey. For some, putting their digital transformation vision on hold may have been necessary as they faced liquidity issues. For others that were well-capitalized, fast-tracking their transformation journey could open the door to new opportunities and improve their competitive advantage.

Digital transformation

66%

of retail respondents surveyed in March intended to re-evaluate or take steps to change their digital transformation journey.

Next: Retailers have tested technology, but need to have the skills and capabilities so that they can continue to deliver

Pre-pandemic, many retailers were already well on their way to improving their technology maturity. The pandemic exposed some critical gaps. In worst-case scenarios, grocery supply chains were stretched beyond their resourcing, scheduling, warehousing and distribution capabilities. The pandemic also put product location tracing in the spotlight. Further, in response to sudden demand, many grocers have ramped up their online capabilities not only in volume, but also in terms of underlying processes such as virtual queuing, assortment availability updating, ordering and payment.

EY Future Consumer Index data shows that changes in consumer behavior will only accelerate this trend. Forty-three percent of consumers surveyed were planning to do more grocery shopping and 41% were planning to do more durables shopping online in the future. As retailers move to this new normal, M&A could increasingly be a way for retailers to keep up with the rapidly evolving consumer landscape. Indeed, for over a quarter of retail executives, acquiring new technologies is the main strategic driver for pursuing acquisitions.

Strategic drivers for M&A

26%

of retail respondents in the EY Capital Confidence Barometer said acquiring technology, new production capabilities and innovative startups was the main strategic driver for pursuing acquisitions.

We expect this strategic objective to extend across all deal types. Bolt-on acquisitions complementing current business models and smaller deals for acquiring key capabilities will likely be the most popular. For example, Costco recently acquired Innovel Solutions, a last mile delivery and installation services provider, to help accelerate e-commerce sales of “big and bulky” items.

Almost one-third of retail executives intend to use M&A to acquire transitional capabilities that will change how the company operates, including digital and new routes to customers. For example, retailers across the globe, including Lowe’s, IKEA, Best Buy and a host of other businesses large and small, are implementing curbside pickup systems in response to changing customer preferences.

M&A survey retail planned merger and acquisition activity

However, at the time of polling, the shortage of talent and an inability to keep up with the pace of change were still appearing as significant barriers to transformation. In response, to complement M&A, many retailers have been pursuing alliances to address technology and talent shortages that they are unable to build organically. The key challenge in both of these approaches to addressing talent and capabilities shortages is to continue to retain the acquired talent and successfully integrate new teams into what might be quite a different business environment.

M&A survey retail most significant barriers to transforming business model

Once retailers have resolved their liquidity challenges, overcoming these barriers will need to be top of mind to succeed in the new normal.

Beyond: As consumer behaviors shift, technology will take on new significance. Will all retailers take advantage?

As retailers prepare for a post-pandemic world, their technology vision will assume new significance, particularly in the context of accelerated changes in customer behavior. For example, we have seen grocery retailers adapt at rapid pace to keep society fed. Having proved their ability to adapt, they now need to continue to tap into this energy.

Retailers also need to remember that technology is significant beyond digitization. Retailer respondents in the EY Global Capital Confidence Barometer cited sustainability as a key challenge. The impact of the COVID-19 pandemic has only served to increase expectations around the sustainability agenda. In the EY Future Consumer Index, 40% of respondents view sustainability as more important when shopping compared with their views a month ago. Furthermore, 75% believe that company behavior is as important as what it sells. Technology will be a key enabler for retailers to respond to the sustainability challenge and to drive consumer engagement and create long-term value.

Across the sector there are significant opportunities for organizations with the funds and ability to take advantage. Although slightly more than half of retailer respondents have already embedded or have made good progress against their transformation plans, more than one-third have only taken initial steps or are only considering how to transform. Given how fast consumer behaviors are changing (accelerated by COVID-19), those further behind in their transformation initiative are running out of time, let alone to take advantage of these opportunities. They need to pick up the pace, or risk being left behind.

M&A survey retail current status transforming business model

At the same time, retailers will need to be open to new approaches for collaboration, business models, architectures and innovation at scale. They’ll need to create an agile mindset that enables them to adapt to constant changes in consumer behavior and preferences well into the beyond.

The pace of change is only going to accelerate — retailers need to make the right investments in both technology and transformation to keep up.

Pre-pandemic, retailers were on a journey to transform their businesses. The pandemic turned these journeys into urgent imperatives for survival. Post-pandemic, the pace of change will only accelerate. Retailers that invest in their people, gain the skills and capabilities necessary to fast-track their digital transformation agenda — through organic means, alliances or acquisitions — and invest in the right technology will be best-positioned to thrive now, next and beyond.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By

EY Global

Multidisciplinary professional services organization