Report: Retail innovation for a competitive advantage

Today, consumers are used to making online purchases with a single click, whether it be via a social media channel, an app, or a store platform. They expect to receive online deliveries in 30 minutes or less and shop in virtual stores in the metaverse. Rather than physically trying on clothes, they use augmented reality smart mirrors from the comfort of their home or tap into GenAI-assisted shopping, which offers hyper-personalized, gamified journeys. While these technological advancements may sound more like futuristic fantasies to some retailers, this is actually the new reality retailers need to embrace if they strive to stay ahead in an ever-evolving market.

Innovation is the driving force behind these advancements, providing retailers with a competitive edge. According to recent research from BCG and the World Retail Congress, innovation leaders who invest significantly in new technologies and strategies outperform their peers by a wide margin. These retail leaders allocate an average of 13 percent of their annual revenue to innovation, reaping a 21 percent return on investment (ROI). In stark contrast, retailers who may be dawdling behind and invest a mere 3 percent in innovation will only have a 9 percent ROI, according to the new report "How Retailers Use Innovation to Gain an Edge."

Retail innovation: the keys to staying ahead

However, the path to innovation is fraught with challenges. Even the most forward-thinking retailers struggle to keep pace with rapid technological advancements and face a shortage of skilled talent. But, despite these hurdles, their commitment to innovation remains strong. According to the report, based on insights from 436 employees at international retailers across 11 sectors, both retail leaders and dawdlers plan to increase their innovation investments over the next three years, with leaders projecting a 38 percent increase and dawdlers 8 percent. To maximize these investments' impact, retailers should focus on fostering an environment where innovation thrives. 

Investment strategies of innovative retail readers

According to the report, innovation leaders in the retail sector focus on e-commerce to cater to increasingly sophisticated consumer needs, boosting gross merchandising value (GMV) and enhancing profitability. The three primary investment areas for innovation were found to be: retail media (44 percent), marketplaces (42 percent), and social commerce (39 percent). Additionally, these retailer leaders are prioritizing customer service chatbots, fulfillment excellence, augmented reality shopping, personalization, loyalty programs, and voice commerce capabilities. Overall, this strategic focus aims to drive significant growth and competitive advantage in the digital marketplace for the surveyed retailers.

Retail media: a growth driver

Taking a closer look at retail media, leading innovative retailers are establishing retail media networks that allow brands and third parties to purchase advertising space on their platforms. This approach leverages the rich customer data retailers possess, providing targeted, high-conversion advertising opportunities. Innovative retailers benefit significantly from this model, with network margins reaching 60 percent to 70 percent of advertising revenue, far exceeding typical retail margins. The report noted that the retail media sector is poised for rapid growth over the next three to five years, as currently, three-quarters of suppliers allocate part of their marketing budgets to retail media, with two-thirds planning to increase their investment. Companies like Walmart expect a significant portion of future profits to come from retail media and other digital services.

Innovative retail leaders investing in retail media are enhancing their offerings by expanding ad formats to include programmatic targeting across the web and social media, next to offering omnichannel packages that combine digital and in-store advertising. They utilize advanced targeting and personalization tools for relevant content delivery and detailed campaign insights and extend services to non-traditional advertisers like insurers and furniture assembly providers. This strategic focus on retail media is driving substantial revenue growth and providing a competitive edge, with revenue projected to grow from 95 billion USD in 2022 to between 190 billion USD and 220 billion USD by 2027. Retail media networks enjoy a 65 percent profit margin, much higher than typical retail margins, and 75 percent of consumer-packaged goods companies currently invest in retail media, underscoring its growing importance.

Marketplaces: dominating e-commerce sales

Another key investment area, according to the report, is marketplaces, with 42 percent of innovation retail leaders investing in marketplaces this year. Marketplaces allow retailers to collect commissions on third-party sales while offering a broader product range and streamlining operations. Generating 67 percent of global e-commerce sales, marketplaces dominate the retail e-commerce landscape in 93 percent of countries, according to a separate BCG analysis. Despite their rapid growth, they remain relatively new and are not yet dominated by single players, giving first movers a significant advantage. For example, Amazon pioneered the marketplace model with innovations like same-day delivery and Fulfillment by Amazon, significantly increasing its user base and transaction volume. Other retailers like Macy's and Kingfisher are launching specialized marketplaces to cater to specific categories. Emerging players like Chinese retailer Temu, which reached 1 billion USD monthly gross merchandise value nine months after launching, focus on low prices by shipping directly from manufacturers while incorporating games and entertainment to boost customer engagement.

Social commerce: the future of shopping (?)

The last main investment area is social commerce, the blend of social media and e-commerce. A new concept, it sees brands and influencers selling products directly on social platforms, enhancing engagement and conversion rates. Among the innovation retail leaders surveyed for the report, 39 percent are prioritizing social commerce as a key investment area. This trend is particularly strong in East Asia, with China leading the market, where one in five e-commerce purchases occur through social commerce. Platforms like Taobao have revolutionized shopping with features like livestream events, contributing to rapid sales growth. In the West, social commerce is gaining traction, as 74 percent of consumers' buying decisions are influenced by social media. In 2023, Amazon introduced Inspire, a short-form video and image feed in its shopping app, to enhance consumer engagement, increase the time users spend on the app, and improve conversion rates, while major social media platforms like Instagram, and TikTok are integrating social commerce features to boost consumer engagement and sales conversions.

The report argues that retailers, regardless of their innovation maturity, face significant challenges in their innovation journeys. Keeping up with rapid technological changes, especially in AI and GenAI, is a major hurdle. One-third of innovation leaders experience delays due to the need to integrate new solutions with legacy systems. Finding and retaining skilled talent is another critical issue highlighted in the report, with 26 percent of innovation retail leaders identifying it as a primary challenge. Fast-evolving technologies and competition from tech giants like Google and Meta drive talent scarcity. For retail dawdlers, budget constraints were found to be the main obstacle, limiting investment in innovation pilots and resulting in lower returns and further reduced funding.

Success factors for innovation in retail

What sets innovation retail leaders apart from the rest is said to be linked to them taking bold steps to shift industry and customer expectations, with half of the survey respondents aiming to reshape the market rather than just responding to customer insights. They were found to effectively collaborate with external partners, with 57 percent working on innovation projects with outside parties and 33 percent acquiring external capabilities. Unlike dawdlers who often rely on in-house innovation, innovation leaders diversify their efforts. Nearly two-thirds of leaders were found to spread their innovation funding across multiple initiatives to maximize ROI, using robust governance to track progress and support successful projects.

Furthermore, retail innovation leaders said they excelled by integrating six key success factors. They align their innovation initiatives with broader corporate strategies, securing executive commitment for talent and budget. These leaders invest in big data and analytics, adopting modular micro-service-based tech infrastructures to drive parallel innovations across the business. In addition, they strived to foster innovation through dedicated teams, incentivize grassroots innovation, and use agile working methods to reallocate resources efficiently. A culture of creativity and experimentation is promoted from top management to frontline workers, supporting continuous learning and rewarding innovative ideas. Decision-making forums, regular budget reviews, and clear KPIs were found to guide the prioritization and assessment of innovation projects among retail leaders. Lastly, innovation leaders maintain a balanced portfolio of low-, medium-, and high-risk projects, investing in high-risk, high-reward ventures to gain a competitive edge, unlike dawdlers who focus on lower-risk projects.

Adopting leading innovators' practices to gain an edge

According to the report, retailers looking to ignite their innovation engines should be willing to adopt the practices of leading innovators. This involves aligning innovation with strategic goals by establishing a clear vision and positioning executives as champions. Building an innovative culture was found to be crucial, as is encouraging grassroots ideas, rewarding experimentation, and accepting failure. Creating fit-for-purpose governance and risk management structures is also critical, as they allow for high-risk experimentation and projects. Retailers willing to become more innovative should also augment their operating models by collaborating with external partners to complement internal capabilities and accelerate innovation efforts.

Finally, the report noted that reviewing and modernizing the data and technology stack is essential to begin any innovation path, with investments made to update infrastructure to support new initiatives.