Retail is a vast sector, ranging from department stores to coffee machines, from the town square to the digital storefront, from the most promising transformations to possible apocalypse. In this post, we’ll explore the retail sector and its unique characteristics.
The retail sector is often said to be one of the most important for a country’s economy because it is a sort of litmus test of an economy’s level of well-being. In a healthy economy, there is high production and, consequently, wealth is reflected on consumption, most of which is concentrated in retail. For this reason, in times of crisis, one of the first sectors to contract is retail, which immediately suffers: consumption is reduced and, consequently, operators who base their business on the sale of food or consumer goods see their revenues fall, with resulting repercussions on employment.
Given that retail plays a key role in developed economies, one thing should not be taken for granted: what do we mean by retail? On closer inspection, this segment is much more complex than you might think, also in light of the enormous changes that have occurred in recent years due to digital transformation.
Retail industry definition
Let’s start, then, by defining the term “retail.”
By “retail” we mean the market that includes all those activities that involve the sale of goods or services by a company directly to the consumer that are usually purchased for personal or family use.
Retailers can be both retail and institutional. Both have one thing in common: they involve a high number of small transactions. Instead, the wholesale market operates between businesses (and not individual consumers); some companies carry out both activities simultaneously.
In Italy, if you search the web for retailers, the most cited examples are large companies like Coop, Esselunga, and Coin, all of which are large-scale retail stores, but not necessarily a representative example of the variety of retailers that exist. In fact, there are retailers of many sizes who sell a variety of goods. This brings us to the next point: retail is an extremely varied segment.
One sector, three segments, 5 types of activities
Usually, the activities included in the retail market can be distinguished in three different macro-areas:
- Food products, which includes all the activities that distribute food and related products to consumers
- Consumer goods, which includes all the activities that sell products, many of which can be reused over time
- Durable consumer goods, which includes activities that provide consumers with longer lasting products such as household appliances, furniture, or cookware.
Obviously, this is not the only distinction that can be made within the sector.
While it is true that retail is a B2C market, there are many ways to achieve this. In light of this, it is possible to make a further distinction within the retail sector. If we look at the different types of retailers, we can list at least 5 different types of activities.
- The first is the so-called “fixed location” retail. This refers to the classic shop where products can be purchased. Generally, this type of retail can be found along street streets or in shopping centers.
- The second category of retail is supermarkets. In this case, the type of products that can be purchased is much wider, ranging from household items to technology and food.
- The third category is discount stores. While discount stores are similar to supermarkets, this category tends to be more food-oriented and typically offers “off-brand” goods, which are sold at retail and generally at lower prices than the supermarket.
- The fourth category is temporary shops. Such types of business may only be open for a limited period of time, usually in high-traffic areas. This is because temporary shops are often part of a marketing strategy, where they have the role of a physical touch point that serves to launch a new product on the market or to consolidate a certain brand.
- The fifth category is vending machines. In this case the store is practically non-existent and the service is completely automated. The interesting thing is that, compared to the past, the types of products that can be purchased from vending machines have increased; they range from food, pharmaceuticals, to small items.
If these are the main, and traditional, retailers in operation, we cannot ignore that new, increasingly important retailers have entered the market.
Welcome to the digital square
With the arrival and popularity of the internet, retail has also adapted to take advantage of the great opportunities offered by digital transformation. In response, two additional categories have been added.
The sixth category is that of internet retail, which basically consists of e-commerce, i.e. platforms where you can browse and buy the products you are looking for and have them shipped to you. On closer inspection, and in some cases, these platforms are nothing more than the digital extension of physical stores and, it’s no coincidence that many retailers envision the integrated use of traditional and digital sales channels in their business, so as to increase the number of consumers who can theoretically buy and, at the same time, reduce inventories.
The seventh category, in reality, can be considered a part of the sixth. We are referring to mobile retail, businesses based solely on a smartphone app that allows the immediate purchase of products without the need to access a website. Also in this case, as with e-commerce, it is rare for a retailer to have mobile as the only sales channel.
In general, the trend is to integrate the different retail categories as much as possible, thus guaranteeing the consumer the possibility to buy both in the physical store and online.
It would seem that digital transformation has been positive for retailers, since the internet makes it possible to sell more products to a much wider, even global, audience. However, this is not necessarily the case.
According to recent surveys, more than 50 million—9 out of 10— Italians access the Internet, a number that is growing year by year. Of these, 93% have visited at least one online store from any device and 77% of them, last year, purchased a good or service online, using a personal computer or smartphone. Against these statistics, it is not surprising that this year, the value of consumer goods purchased on an e-commerce platform has further increased compared to last year, reaching $15.83 billion, while the average per capita spending remained substantially unchanged at around $400 dollars. Similarly, the number of people who purchased goods online in 2019 is also growing steadily, with more than 39 million consumers.
Therefore, everything would suggest that retail is one of the few, if not the only, sector to have benefited from digital transformation, unlike sectors like banking, finance or, above all, telecommunications. But, this is not necessarily the case.
The usual difficulties
It is undeniable that the pace at which digitization is growing in Italy and around the world has significantly accelerated this particular retail segment, which continues to grow.
Even in Italy, e-commerce has grown by 30% and the trend does not seem to be stopping. Compared to 2015, this year, the revenue generated by the entire e-commerce sector in Italy grew by 140% and it is expected that by 2023 there will be further growth in all segments, but especially in electronics, clothing, food, personal care products, and household appliances.
However, this does not mean that traditional retail is in the same condition.
For some time now, smaller retailers have been suffering from competition from supermarkets and large-scale retailers in general who cannibalize the market. In addition, digital transformation has also opened the way for new competitors who threaten both the small neighborhood store and the large retail giant.
For some time now, we’ve been talking about the “retail apocalypse,” which refers to the “flight” of customers from physical stores in favor of e-commerce. This phenomenon is particularly evident in the United States, where an entire website is dedicated to recording all of the “dead” shopping malls in the country. Although the issue has been minimized by some economists, it is undeniable that the sector has suffered. For example, in the US, shopping center visits have decreased by 50% between 2010 and 2013). Even Italy is beginning to think about a possible “Italian-style retail apocalypse,” which underlines how shopping center revenues have decreased from a maximum of 6.4% to 5% in 2019.
But is e-commerce to blame?
It is clear that this situation can hardly be attributed solely and exclusively to the advent of e-commerce.
In this sense, external aspects, such as the progressive slowdown of the economic recovery recorded in recent years, and aspects related to the taste and habits of consumers, who increasingly seem to prefer personalized experiences, online or offline, have also influenced this, and this may have led them to “rediscover” smaller and less “serial” retail.
In any case, what is certain is that digital transformation, if used properly, can become an incredible opportunity for all retailers, especially smaller ones, who can reach many more customers and make their products known in a much more effective way. Also, the consumer appears receptive to this type of transformation.
The challenge, then, is all for market players to understand how to change in order to take advantage of digitization. It is certainly not a simple challenge, but there are some guidelines that you can take and some trends that you can follow to try and ride the market. We’ll be covering this topic in an upcoming post. Follow us on social media to stay up to date with our next posts.