\Corporate Innovation Opinion/

European retailers are falling behind in the “new normal”

Digital transformation is happening faster in the US and China, where retailers have invested more in warehouses and supply chains.

By Chengyi Lin

“Who led your digital transformation? Not the chief executive, not the chief information officer, but Covid-19.” The MBA-ish meme went viral after businesses switched to digital channels overnight and employees started remote working around the world.

In the following week, the news media was flooded with commentary and opinion pieces that predicting a “digital new normal”. Now, many countries started to lift confinement measures. Will three major economic bodies come to the same “digital new normal” for retail?

“The speed of digital transformation in European retail is nearly 20% slower than in the US and roughly half the speed of China.”

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Recently, I have conducted research with over 50 European C-level executives in the retail sector and in European e-commerce startups. The results confirmed an increase in e-commerce activities and acceleration in organisations’ digital transformation. Nearly 90% of the responses confirmed either significant or marginal increases in online transactions. Nearly 80% consider Covid significantly or marginally accelerated digital transformation.

However, the speed of transformation remains slower than in other regions. On average, results show that executives feel that the speed of digital transformation in European retail is nearly 20% slower than in the US and roughly half the speed of China.

Who will become more mature in digital retail after Covid? A majority of the executives surveyed believe it will be China. A quarter believe the US will still be in the lead. And over 60% believes the EU will lag behind.

Why is this the case? Here I offer some insights from the research results.

  • Emergency measures enacted “temporary e-commerce fix”. Many EU retailers had to first close their e-commerce channel due to challenges in supply and delivery. Some soon activated in-store pickup. Unfortunately, these “temporary e-commerce fixes” are a classic case of digital frontend interface with human backend support. The orders were filled by store employees hand-picking and bagging items from store shelves. These “temporary fixes” are critical in meeting the increase in e-commerce demand. At the same time, they have strong implications for consumer experiences.
  • Lost opportunity to provide excellent consumer experience and make e-commerce stick. These “temporary fixes” usually take a long time due to the slow “picking” speed and the limited number of available employees. For example, I have personally lined up for 2.5 hours in my car before picking up my order, which is slower than shopping in the store.This trying time “forced” many consumers to try e-commerce or to try it again. Failing to provide an excellent consumer experience could further reduce consumer confidence. This could continue to delay e-commerce adoption in EU retail for both traditional retailers and pure e-commerce players. By contrast, Chinese e-commerce capitalised on the increased demand during this crisis. They rallied additional resources, leveraged existing digital and physical infrastructures and innovated to provide a good customer experience. Both JD.com and Alibaba has seen sustained e-commerce sales after the end of lockdown.
  • Warehouse infrastructure is not configured for fulfilling online orders. EU retailers have few fulfilment centres that can handle a large amount of online orders. Many have recognised this challenge but their actions may not come soon enough to handle the crisis. For example, Carrefour has started to open e-commerce specific warehouses. M&S has entered a partnership with dedicated e-commerce player Ocado, but orders will only start from this September. By contrast, Amazon and Alibaba have developed their warehouse infrastructure for years. Both announced new recruiting during the crisis to increase their capacity. Traditional retailers in the US, such as Walmart, have converted some unprofitable supercentres into dedicated fulfilment centres for online orders.
  • Lack of real-time central coordination in the supply chain. In addition to the dated warehouse infrastructure, many EU retailers were also exposed in terms of the digital integration of their supply chain. For historical reasons, many traditional retailers manage their different tiered stores separately, supercentres, normal stores, neighbourhood stores, etc. For example, I went to three different stores of the same retail brand during the second week of the French confinement. The neighbourhood store was completely out of staples, flour, milk, eggs and oil, while only 3km away, the bigger store had everything but flour and eggs. Just 12 km further, the supercentre had stocks of flour piled up. And the online ordering was temporarily suspended. By contrast, Amazon has digitally integrated system and regional distribution centres that can allow 2nd-day delivery. Alibaba and JD.com, both also integrated local neighbourhood stores and farmer’s markets to serve as both suppliers and last-mile distribution centres.
  • Financial pressure continues to limit investments. In the past years, the troubling economic situation in EU did not support a speedy digital transformation in retail transformation. This, unfortunately, is likely to continue during the Covid recovery phase. Consumer spending is likely to remain low and business continuity will remain under pressure. The key is to protect investment in order to transform digitally.

The moral of the story is that the forced acceleration of digital transformation from Covid does not guarantee a “digital new normal.” The new equilibrium will be determined by consumer needs and satisfaction of their digital experiences and the costs of delivering these experiences through appropriate physical and infrastructures. If EU retailers want to catch up to their counterparts in the US and China, they need to commit to a long-term vision through investment and a proactive shift of their business models.

Chengyi Lin is professor of strategy at INSEAD.

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