“IN OUR WORK in the retail sector, we see automation reshaping business models and the broader value chain,” said McKinsey Consultants Steven Begley, Bryan Hancock, Tom Kilroy, and Sajal Kohli in a new report.
The think tank sees that the retail space is changing quickly. To survive, businesses will need to automate.
According to the report Automation in retail: An executive overview for getting ready, margins in the retail industry are constantly under pressure as a result of intense competition, growing e-commerce, and rising costs.
While many experts speak broadly of the issues, McKinsey uses data to paint a more vivid picture:
“Our analysis suggests that typical grocery and hypermarket retailers face 100 to 150 basis points of margin pressure, and typical specialty apparel or department stores 350 to 500 basis points.
“A comprehensive automation program can significantly offset these headwinds. Automation initiatives across store, supply-chain, and headquarter functions can generate 300 to 500 basis points of incremental margin, which retailers can reinvest in their growth opportunities.”
The report also finds that the biggest bottleneck to automation is often internal and not external.
McKinsey’s consultants point out that inertia in retail businesses cause them to steer clear of automation despite an abundance of evidence and use cases proving that the technology can help speed up things by up to 65 percent.
Typically, the inertia is a direct result of budget cycles followed by most organizations, and a tendency to mimic the previous year’s capital spending. It’s a trap that leaders need to make a conscious effort in order to escape.
“Our corporate-finance research suggests that two-thirds of companies fall into this trap. For these players, more than 90 percent of a given year’s capital expenditures simply reprise those of the preceding year.”
Given the think tank’s understanding of the industry, it believes that automation is somewhat critical to the industry. Those that aren’t already implementing automation risk falling behind.
McKinsey’s report presents an analysis of Amazon Go that explains why the e-commerce giant’s brick and mortar concept store is a prominent disruptor in the industry.
“Our outside-in analysis of the profit-and-loss impact of Amazon Go technologies hints at a high return on investment (ROI).
“We believe that Amazon can expect a five to 10 percent top-line improvement thanks to additional transacting traffic from reduced wait times and the use of customer insights to optimize assortments and personalize promotions.
“Reducing labor costs and deleveraging the fixed-cost base can drive a 2 to 4 percent increase in earnings before interest, taxes, and amortization”
The consultants point out that their analysis doesn’t factor in the potential benefits that commercializing customer data and insights can accrue to the firm, and yet, the gains look significant. No wonder Amazon intends to start 3,000 stores in the US by 2021.
At the end of the day, there’s plenty of evidence indicating that automation is the need of the hour for retailers that want to stay relevant and protect their margins.
Retailers who haven’t started with automation projects already will need all the help they can get to ensure they can accelerate their journey and catch up with peers in the market.
Build teams to maximize automation opportunities
McKinsey’s consultants have worked with several retailers and find that those that want to truly leverage automation and all of the digital transformation solution in the industry must build teams that are more agile and effective.
Structurally speaking, the think tank foresees retail organizations rethinking their operating models with far fewer layers.
While automation makes retail operations up to 65 percent faster, employees must shoulder more responsibilities, and leverage (real-time) data and analytics to make smarter decisions more quickly.
Obviously, this means that employees will need to be trained and built into a workforce that can be redeployed to more for the business.
McDonald’s self-service ordering kiosks, for example, save time for employees — these employees have been trained to offer table service to customers (in Hong Kong and other cities) which significantly (and directly) boosts customer experience and satisfaction.
McKinsey’s report does point out that as the demand for physical and manual skills declines, the need for technological skills, as well as social and emotional ones, will rise quickly in every sector, including retail.
Therefore, businesses need to reskill and retrain employees quickly — on digital and other key skills.
The report argues that although reskilling takes a lot of planning and effort, it does tend to offer a higher return on investment than hiring.
“On average, replacing an employee can cost 20 to 30 percent of an annual salary, reskilling less than 10 percent. Reskilling existing employees also allows a retailer to retain institutional knowledge and saves the ramp-up time needed to onboard new hires.
“Furthermore, reskilling is more likely to earn goodwill from employees, customers, and governments alike. This goodwill can have tangible benefits; approximately 40 percent of transformations fail because of employee resistance, so a reskilling campaign can mitigate that risk.”
It’s precisely for this reason that companies such as Walmart and IKEA constantly work on re-training and re-skilling their employees for new roles that the organization will have and areas that the organization needs support with.
At the end of the day, McKinsey does acknowledge that there’s a social impact to retailers automating their facilities and operations — but highlight that they need to plan and support their staff and prepare for the future simultaneously.