MAG Insights

Digital growth and adoption bring both opportunities and challenges for retail. What are the retail trends; how will retailers need to pivot, or should they stay the course? Whether you are a luxury retailer, restaurant, or a merchant that sells produce & flowers, agility has proven critical for success in meeting the changing needs of consumers and their changing shopping behaviors.

Trends such as outdoor dining, menu simplification, and digital menus accessible by way of QR codes will likely continue for the foreseeable future. Some of these initiatives reduce costs as other aspects continue to increase costs for retailers.  A few examples include cost of labor with higher wages, restructured pay, and improved employee benefits required to attract employees that were forced to find alternative work this past year as certain verticals experienced a downsize of indoor guest visits. 

Another current trend in operational costs impacting retail is supply chain issues.  I suspect this will be a trend to last a few years but eventually solve itself.  In the interim, though, nearly half of small businesses are experiencing supply chain challenges pushing them to either pay exorbitant costs for supplies or experience significant delays in merchandise. These challenges have led to small businesses having to sell seasonal products at a discount to get them off their shelves.  And has anyone been able to find a bike store with bikes in stock? Since March our local bike stores have had such limited supply, it’s hard to understand how they survive.

Small businesses are feeling more of the burden for the current supply chain challenges given they have less negotiating power to push back, absorb the impact in their margin, or otherwise raise prices; however, large brands have also been impacted.  Even Ford announced downtime at five North American factories through mid-May due to a global semiconductor shortage.  This has impacted the cost of vehicles due to decreased supply.  Also, considering this chip shortage, preparing office conference rooms adequately with equipment to support effective hybrid, in-office and remote, work options has been a challenge for companies preparing for the pending return to the office.

Last year’s supply chain issues that fuel retailers faced, such as availability of technicians, manufactured parts, and equipment, and lack of certified solutions in some cases, impacted their ability to implement EMV chip acceptance at automated fuel dispensers (AFD), and many of those issues are still at play. As a result, only half the AFDs are today prepared to fight the $450 million in projected magnetic stripe counterfeit fraud plaguing the United States.  And, yes, the petroleum retailers without chip acceptance enabled are absorbing counterfeit fraud losses as of April 2021 – a burden that was delayed for a short time yet the reasons for the delay remain at play today.  

Additional fluctuations between supply and demand caused by many factors have impacted the retail industry in other ways.  Companies that sell produce were initially challenged with customer concerns regarding tainted produce in-store as many buyers touch the avocados, vegetables, and fruit before selecting their items.  As a result, the surplus initially caused food waste.  Some produce distributors, working with merchants, got creative by leaning into this opportunity to deliver products to families in need during this time of excess inventory.  Produce sales recovered as consumers realized the immunity benefits and suppliers allocated more capacity to retail customers like grocery chains during the pandemic.  Although as the restaurant industry starts to recover its on-site operations, distributors are now finding a shortage of some products restaurants rely on.  In addition, demand has changed because of the menu simplification efforts during the height of the pandemic mentioned earlier causing shifts in demand of products.  Restaurants, hotels, and food-service operations are coping with big price swings on staple ingredients and erratic availability.  As restaurants re-open there will continue to be strains on supply chain for the foreseeable future.

What about trends in payments?  Of course, we have all seen a surge in touchless payments enabled through online commerce with products delivered across a variety of channels (delivery and curbside pickup) and mobile payments in-app or at the point of sale.  These trends will likely continue. 

One call-out is the interest and growth of quick-response (QR) codes.  QR codes are relatively cheap to deploy, easy to use, and available to any customer with a smart phone.  QR codes provide flexibility in the customer experience. A consumer can scan a QR code displayed by a merchant (merchant-presented) or the merchant can scan a QR code displayed on a customers’ phone (consumer-presented).  This flexibility enables experiences that can fit best the operational environment unique to each retailer.  Data, which is much more robust than other touchless payments such as contactless, can be passed in the transactions. This offers additional use cases beyond payments that QR can offer including loyalty, receipt and coupon delivery, marketing, and engagement.  Although slow to gain traction in the U.S., QR is expected be a trend that continues to increase as more players trial ways to leverage it to enhance overall customer experiences.

There are also increasing trends in alternative ways retailers are engaging customers beyond their brick and mortar stores.  Brick and mortal retailers rely heavily on in-person engagement opportunities that allow associates to upsell consumers which is more difficult to do online.  As a result, retailers have had to create engagement through vehicles such as digital chats or Facetime personal shopping to drive re-engagement and virtual sales.  Social media has been a huge platform for retail over the past several years and seems to have significantly increased this past year.  Social has enabled experiences such as live shopping on Instagram and pre-sale trials of messaging and product offerings to gauge consumer interest and demand before broad scale production.  As social grows, these approaches to engagement will as well.

Customer returns continue to be a source of increased cost and complexities for merchants, and over the past year merchants have seen a massive increase in volumes.  The National Retail Federation reports that $428 billion in merchandise was returned in 2020 in part due to customers have not had the opportunity to touch, feel and try on the products due to the shift in digital shopping.  Online returns almost doubled prior years with eight percent of those online returns labeled as fraudulent.  The recent acquisitions by PayPal and Affirm of Happy Returns and Returnly, respectively, reflect the increased challenges companies have had with such product returns and the focus of the industry on finding more economical and targeted solutions to the increased returns.

As we all know, restaurants have experienced an explosive shift to digital alternatives.  As an example, Chipotle’s digital orders are up over 130 percent now accounting for over 50 percent of sales for the first time.  An unintended consequence of this shift to digital is the surge in pricing not only due to the higher cost of acceptance for online transactions but also from third-party aggregators that offer delivery options for restaurants that may not have had sufficient or any distribution to support customer demand of home delivery during the pandemic.  To better manage those increased costs, some retailers have invested in a white label approach to delivery.  It seems the convenience delivery offered pre-pandemic that grew during the pandemic will continue post-pandemic.

A recent Mastercard report suggests as much as 30 percent of the shift to digital payments is permanent. Unfortunately, the higher cost of acceptance for non-face-to-face transactions I mentioned has always been a challenge.  With digital growth and the variety of digital experiences, the traditional card not present versus card present model is ripe to be replaced with authenticated versus non-authenticated transactions.  Yet, the old model continues to be supported and leveraged in this time of retail financial challenges with the introduction of increased interchange rates predominantly targeting the e-commerce transaction effective this past April 2021 with select delays until 2022.  The result of Visa and Mastercard’s increases is a $1 billion dollar impact to the retail industry.  My expectation is this trend will be countered by growth of competitive alternatives to traditional global network card payments, such as an increase of consumer to business real-time payments, the introduction of digital currencies, and improvements in support for PIN less debit online.

During the pandemic, the demand for ride-hailing trips dropped overnight and, as a result, Uber and Lyft drivers had to shift to alternatives for income.  Some shifted to food delivery such as Uber Eats, Door Dash, or Grub Hub.  Lyft launched an on-demand delivery service to provide essential goods, including groceries, meals, and medical supplies to those in need during the pandemic.  Anecdotally, these drivers earn more income driving for these essential goods delivery services as compared to the ride-hailing services.  This appears to have impacted the supply of ride-hailing drivers available causing delays in securing an available driver and increased rates due to surge pricing.  I hope this trend ends soon as travel gets back on track, but it is unclear how long this might last.