Future retail profits from new business models: 50%

Retailers continue to face disruption on every side. I help retail leaders to successfully navigate this disruption and drive meaningful change. One of the trends that I've been seeing over several years now is the number of progressive companies exploring new opportunities and new models.

So, in this issue of Retail By Numbers, we’re looking at this trend. In fact, research by Bain earlier this year on this topic really made me raise my eyebrows! It signposts even more major disruption to the retail market as we know it today.

However, as you’ll discover, there is so much that we could cover in this topic so I’ll only be scratching the surface, and only really for only a small segment of the opportunities that exist! There is so much breadth and depth here and it would be great to engage in conversations about how this is or could specifically impact your business.

What’s the number

50%

This is the proportion of retailer’s profits contributed by non-traditional retail business models by 2030.

Research from 贝恩公司 shows that the retail industry faces ongoing disruption over the upcoming years. In turn, a company's profits will come not just from classic B2C retail; they will be delivered by various sources including non-traditional business models.

The volume of profits from these non-traditional models will make a colossal leap from 10% (2021) to 50% (2030).

Let that sink in a moment: half of the profit – still the primary objective for commercial organisations – for a retail company is not from classic retail and the vast majority of this switches in the next few years.

There is also a switching of revenue away from classic models to these new disruptive forms of business. Revenue from non-traditional models jumps from 10% (2021) to 35% (2030). This shows us that the new models carry and contribute to higher margins.

The chart below shows the growth of revenue and profit in what Bain call "beyond trade" opportunities which require new business models.

To dive deeper into "engine 2" research on Bain.com .

If you’re looking for the topline without reading that research or this article, it’s simply this:

Retailers must consider a portfolio of non-retail opportunities to drive profit

Diving deeper

There are two theoretical root causes for this leap in percentage.

1. The non-traditional models expand dramatically whilst the classic model holds ground.
2. The classic model shrinks whilst the non-traditional model holds ground.

Of course, it’s not as simple as these two black-and-white options. When you layer on the complexity of different categories, market segments, geographies, and other factors, there will of course be variation.

Additionally, we should consider the 80:20 rule that tends to apply, i.e. that 80% of the profits tend to be generated by 20% of the companies. This could skew the picture towards the largest retailers who are more likely to expand into new business models.

But never-the-less, the key message remains. There is a load of opportunity in developing new business models. They will contribute toward the bottom line in positive ways and they can also provide robustness and resilience to market fluctuations.

Is the traditional retail business model broken?

We’ve seen a number of impacts to the retail industry in recent years, which have all affected the classic business model.

Evolving customer behaviour – shopping habits have been changing since the advent of ecommerce years ago. But this isn’t only about channels. Values continue to change. Trends evolve which shift spend between categories. Lifestyles evolve and trigger changes to customer wants and needs. And generational trends create a need to evolve.

Fierce competition rages – retail thrives on competition. But recent years has seen the competition scaling up even more. We see our classic competitors continue or even converge together alongside other entrants. Large foreign companies expanding internationally into new territories. Retailers operating from different channels, most obviously the ecommerce natives expanding into different channels. We’ve seen non-competing companies expand sideways into new categories. Meanwhile, barriers to entry are lower than ever meaning micro companies can be trading at an international level with next-to-no investment and at eye-watering speed. And then there are more non-retail companies competing for customers' attention and a share of wallet - I'm thinking of companies like Spotify, Netflix, Google/Apple app stores.

Squeezed spending – the cost of living crisis intensified this significantly (and continues to). But for years now, we’ve seen the middle of the market separate as consumers veer towards everyday low-cost discounters or trade up to the high-end luxury aspect. Individual consumers are even doing this simultaneously, reducing spending in certain categories (like the weekly food shop), to splurge in others (like saving up for a designer handbag). Especially for the mass market, this challenges sales for retailers and exacerbates the impact of fierce competition.

Rising costbase – the other impact of recent years has been the rising costbase. Raw materials, utilities, labour, transport and other costs have all spiralled upwards. Even the cost of cash has increased with interest rates! Coupled with the impact to the sales line, the increase in variable and fixed costs has a triple-whammy impact on the bottom line for the classic retail model.

Operational complexity – but of course, the impact doesn’t end there. As consumers ourselves, we’re all aware of the desire for omnichannel shopping – whether that’s the classic in-store and online integration, or even factoring the numerous digital channels like ecommerce, social media, marketplaces, etc. This all adds more complexity to the model which is non-ideal. But it’s what customers demand and if we don’t respond, they’ll vote with their feet and wallets.

Climate in crisis – Oh yes, and another big one too... sustainability continues to trend upwards in terms of importance and presents new complexity and considerations for all companies.

The classic retail model isn’t broken in as much as it is still possible to generate profitable sales. But it’s significantly harder now than ever before. And this difficulty represents an impact to the bottom line in financial terms. This profitability hit is why retailers must consider non-traditional models.

There are many new business models to pursue

As businesses transition to new models, we will see massive diversification. There are just so many models to consider and select. Plus, the direction of travel suggests that retailers will not just use one new model. Instead, there will be multiple models in place at once, so the portfolio effect will be huge. Given this portfolio effect, there is no set recipe or roadmap to point to what is the "best" business model. It depends on many factors, many of which are specific to the exact situation for any given company.

The new models include:

Marketplaces – Creating a platform for customers to order a vast range of products and have these fulfilled from the manufacturer directly. Many retailers have launched marketplace initiatives in the last 1-2 years with the hope that an expanded assortment leads to sales uplift where there is very little risk and clearly defined profits.

Retail media networks (RMN) – the other big trend that is getting people talking right now. Creating advertising opportunities and shopping data to allow brands to create awareness and understand the consumer. ?But in many ways, RMNs are nothing new. In supermarkets, elements like premium shelf placement, facings, promo and gondola ends, collaborative marketing campaigns and supplier-funded promotions are all essentially funded agreements to drive awareness when the customer is shopping. The big difference is that these activities can now exist across channels and can be supported with data to help personalise and report on. There are plenty of examples of companies that are creating their own RMNs – many have announced RMNs through the past 12 months and companies like Kingfisher plc and Currys plc are announcing the launch of their networks.

B2C services – One of the age-old strategies to increase revenue is to sell more to the existing customer base. This can be extended to selling services rather than products. Essentially this is about helping the customer achieve the end result rather than just supplying the tools to create this end result. Think “done for you” not “do it yourself”. It’s also a useful avenue if there is advanced equipment that wouldn’t make sense for consumers to buy, for example, machines for doing skin analysis. B2C services present a great way to create a complimentary offering and a more complete customer proposition. Boots UK ’s new beauty store in London’s Battersea Power Station shopping destination features a range of these B2C services aligned closely to their core beauty offering.

B2B trade – Another opportunity for revenue increase is to sell the same products to new customers. Now it’s likely that has already been tried for consumers! But looking at B2B opportunities may be an untapped market. This, however, needs different considerations. Bulk shipments, repeat and replenishment orders, discounts, delayed payments, extended returns and other factors are all important for the business buyer. But if you can factor these into the existing operating model, it could present a healthy boost to the sales line of the P&L. Companies like Screwfix and Toolstation have obvious B2B opportunities with tradespeople, however, there are increasing companies who are taking up B2B options like Halfords , plus DTC companies.

B2B services and retail as a service – Over recent years, a number of leading retailers have started to use their scale and operating model to assist other companies to operate. 亚马逊 offers fulfilment services through their FBA (Fulfilled By Amazon) programme plus other similar services. Additionally, earlier this year, Amazon also announced a full end-to-end supply chain service. Ocado Group famously partner with grocers to set up and operate automated grocery ecommerce fulfilment centres. Next has their Total Platform which allows other retailers and brands to make the most of Next’s ecommerce capabilities. THG Ingenuity ’s services are a broad collection of ecommerce offerings including everything from translations and content to tried and tested ecommerce frontends and warehouse picking, all initially created for the main business. 沃尔玛 launched GoLocal, allowing other smaller retailers to make the most of Walmart’s extensive delivery network. And there are plenty of other examples of classic retailers offering classic retail services to other companies.

(As an aside, THG has recently agreed to acquire beauty brand Biossance for a bargain price and it “should be immediately breakeven in THG” because of Ingenuity’s scale and operating model. So, in this example, we have a retailer with a non-traditional model enabling a profitable traditional model!)

There are loads of other broad categories which expand into (financial, tech, healthcare, digital, subscriptions, content, etc!!) and loads of examples of companies following these options, including 亚马逊 , 阿里巴巴集团 , 京东 , 沃尔玛 , 特易购公司 , and others but for the moment, let’s leave it here.

It may also be worthwhile exploring the new business models driven by sustainability. Check out episode 181 of the Retail Transformation Show podcast – either listen online here or on your usual podcast app.

Given the challenges that we discussed earlier, it’s also worth considering the margins that these opportunities present.

Each offering either operates with increased gross margin (e.g., retail media network ads operate at a very high margin) or with reduced investment (e.g. marketplaces where the risk is held by the manufacturer) or a blend of both. There is also the opportunity to scale up operations and deliver cost-effective unit economics (e.g. B2B trade or retail as a service). These opportunities help deliver an improved bottom line.

What’s the catch

So, we know the retail market and the current profitability are strained, yet there are new business opportunities to go after. Simple, right?

Unfortunately not! These new models disrupt the current P&L and business model. On the plus side, they provide new avenues to grow revenues and, crucially, profits. From the negative perspective, they require change and can easily cause all sorts of problems across the company, including upsetting the core business.

Having consulted with clients to define and build various new business models, I know that there are so many aspects and elements to work through and factor in.

• Alignment and prioritisation alongside the existing business strategy.
• Designing and integrating a new operating model into the existing business.
• Defining the new business model, and its implications to financial management and reporting.
• Identifying and understanding new customer segments and types, and how to reach these customers. This is especially crucial if shifting from B2C to B2B as it presents a number of different ways of working and CX.
• Defining measures of success, KPIs and business management approaches.
• Building the platform and infrastructure for this new expansion, including new systems, integrations, interfaces, data flows and more.

We also need to be careful that forecasts are spot on. It’s easy to imagine these new models immediately scaling up. Consider the Amazon Ads business; whilst it delivers solid numbers now, it actually started back in 2012. So, if you started an initiative today, it’s likely to still be scaling to its full potential by 2030!

Don’t forget the change management angle is also a fundamental factor. A change of business model represents a major disruption to the business and potentially to customers too. A new business model creates opportunities for conflict and encourages silo-building within the company – and I’m sure we all have agreed views on functional silos and their impact!

Additionally, don’t take your eye off the core business. Both in terms of delivering day-to-day operations and performance as well as optimising, modernising and expanding the current proposition and operating model. Diversifying the business into new models does make the overall business and strategy more complex and complicated. Yet, the majority of value will still be delivered by the core business in the short to medium term and this cannot be neglected.

The largest retailers are not just pursuing one of these new models. Look at the diversification of Amazon’s business as an excellent example. The portfolio of business models is becoming so successful and sizeable that there are calls to divide companies into separate parts.

阿里巴巴集团 announced they would divide into 6 different parts, where each company would look to pursue a separate IPO as well as dictate it’s own strategy. 京东 also made a similar announcement earlier this year. 亚马逊 have faced similar calls, and recently a THG investor suggested they demerge the business into separate units to maximise shareholder value.

So it seems companies could expand until they divide down into just a classic retailer once again. The world has an ironic tendency to repeat history, and the retail industry seems to be no exception.

What's the bottom line

We know that the retail industry continues to face huge disruption and the classic retail business model faces increasing challenges.

Forecasts from 贝恩公司 indicate that significant portions of a retailer’s value will be delivered through new avenues. There are plenty of opportunities to explore and there are examples of retailers taking advantage already.

However, creating or adopting new business models presents challenges to the operating model, the culture and the core business.

Yet, as we expand the classic retail business in new ways, it also starts to highlight an existential question:

What does it really mean to be a “retailer” now?

There is SO much more we could talk about here – so if you’d like to engage in a conversation to explore how your business is transforming, or the various options you could explore, then book a meeting with me.

Or, please share your thoughts, reflections and builds in the comments.

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?? I'm a retail transformation consultant and advisor, helping retailers navigate disruption and drive change to their business and operating models. Book a meeting to drive your change forward.

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