2022 brought new challenges for the retail industry as consumers cut-back on spend due to rising inflation and the cost-of-living, and retail brands suffered from supply chain issues and other lingering consequences of the pandemic. Online retail sales fell by 2.8% in November 2022, according to ONS, which it says continues a downward trend seen since early 2021.
While online retail sales are still higher than pre-pandemic, 2023 is expected to be another tough year for brands, as wider pressures shape consumer behaviour.
So, amid all this, how will retail brands target consumers? From pricing to wholesale partnerships and areas of ad spend – here’s a look at four trends that could shape omnichannel retail in 2023.
Omnichannel loyalty programs
Inflation took its toll on retail during the post-pandemic period. New data from Barclaycard states that 2022 UK retail spending fell 0.8% on the previous year, as inflation hit its highest rate in 40 years. Consequently, we are likely to see deeper discounts across the board in the first few months of 2023, as retail brands attempt to shift unsold stock both online and in-store.
We are also seeing consumers increasingly look to value or discount-focused retailers in a bid to spend less. B&M’s comparable sales rose 6.4% in Q4 2022, for example, highlighting the current demand for discount retailers. As such, retail brands (across price points) are re-focusing on retention, with many elevating or revamping omnichannel loyalty programs to offer additional value to consumers, and to prevent them from going elsewhere. Loyalty means more than just traditional discounts of course; an omnichannel loyalty program should offer value across the entire shopper journey, stemming from the analysis of customer data such as purchase history, preferred channels, and demographics.
One example of this is Petco, which has recently unified its two existing two loyalty programs under a single ‘Vital Care’ offering, to enable all members (both free and paid) to access benefits and rewards across its website, the Petco app, and Petco pet care centers in the US. This also follows Petco’s expansion of its premium loyalty program to include small pets such as birds, hamsters, and reptiles, in a bid to win over customers from petcare rivals Chewy, Walmart, and Target.
Target’s ‘Circle’ is another example of an omnichannel loyalty program that has already generated huge success, having amassed more than 120 million members since its launch in 2019. The program is part of Target’s ‘personalisation at scale’ strategy, which offers tailored promotions, services, and benefits based on individual needs and preferences. Target also transfers its loyalty data to its in-house retail media agency, Roundel, to create targeted advertising.
Evolving store formats
According to a Shopify and Ipsos survey, 82% of businesses are confident that physical stores will continue to play an important role in future commerce growth. Indeed, since lockdowns have lifted, physical retail has bounced back – growing at a faster rate than ecommerce in 2021. The role of the physical store isn’t what it once was, however, with consumers increasing using brick-and-mortar in conjunction with digital channels. In its latest commerce trends report, Shopify director of product retail and messaging, Arpan Podduturi, states that “online and offline are effectively one continuous experience. Very few people walk into a retail store without having done their homework. They usually started on their phone. They’re following some brand and they go into stores with purpose.”
Indeed, C&IT’s ‘Connected Retail 2023’ report indicates that consumers are now shopping digital and physical channels at almost identical rates, and consequently, consumers also desire similar capabilities from online and brick-and-mortar stores. It found that reliable in-stocks, easy returns, and efficient shopping journeys are cited by consumers as the most valued aspects of the user experience.
One retailer that has been accelerating its omnichannel strategy is M&S, which is part of its wider aim to enable customers to shop how they want – whether that’s online, via pick-up or in-store. Part of this is its ‘store rotation’ programme to revamp key stores in towns and cities, while closing less productive stores and further investing in digital. Steve Machin, M&S’ Chief Executive explained in the company’s Christmas trading statement how M&S has already seen the benefits of this strategy. “Our new full line and renewal stores outperformed expectations, while click and collect orders increased 20%, and the competitive advantage of M&S’s omnichannel platform was demonstrated by delivering c.50% growth in third party brand sales,” he said. “This was supported by substantial growth in monthly active App users to c.5m.”
Ikea is another example of a retail brand that is evolving its store format to better align with omnichannel shopping, revamping its larger stores to also act as distribution centres. Commenting on the roll-out of its new Canadian stores in 2022, Tolga Öncü, Retail Operations Manager for Ingka Group said: “Globally, around a third of our sales are online – and our physical stores play an important role in this omnichannel reality. As customer behaviours evolve, so do we as a retailer. We are redeveloping many of our larger stores to also ship customer orders in a quicker, more affordable and more sustainable way.”
Ikea has also opened smaller format stores in cities like London and Copenhagen, enabling customers to order online and pick-up in more convenient locations. This strategy seems to be growing traction elsewhere, too. According to a report by Placer, retail brands including Barnes & Noble, Target, and Macy’s are continuing to resize stores in a bid to improve omnichannel strategies.
As well as serving as locations for click-and-collect, other benefits of smaller stores range from the ability to target more specific demographics to the opportunity to experiment with new directions, and to create more personalised shopping experiences. Placer cites Macy’s as an example of success, with month-over-month visits to its smaller store, Market by Macy’s, rising 11.5% in October 2022, while foot traffic to its larger Macy’s store was up just 4.5% for the same period.
DTCs look to marketplaces and the third-party mix
As physical retail grows, ecommerce is slowing down, or at least normalising to pre-pandemic levels. As such, Business of Fashion and McKinsey’s ‘State of Fashion 2023’ report suggests that profitability in direct-to-consumer channels are suffering, partly due to narrow product assortments that mean brands struggle to inspire customer loyalty and repeat purchases. This has also been compounded by various other issues including high return rates, the high cost of digital marketing, and Apple’s iOS privacy changes which has limited brands’ ability to measure social ad effectiveness. Last year, a Big Technology analysis of public DTC companies with market caps of more than $800 million found that the majority were “drastically underperforming” due to “revenue contraction, shrinking margins, runaway losses, or a combination of all three.”
In order to mitigate these issues, we could see more direct-to-consumer brands diversify in 2023, as they seek out alternative revenue opportunities. One way to do this is to partner with third party retailers or wholesalers, which can help both the brand and retailer generate value. Examples we’ve already seen include Glossier and Sephora, and Allbirds and Rei – both DTC brands hoping to increase awareness and boost sales. Last year, Beauty Pie founder Marcia Kilgore also told Econsultancy that a move to wholesale could be on the cards, largely to cater to customers who don’t want to become a member. “So, we’re thinking ‘what could that mean in terms of ways to distribute outside of our website?’ she wondered. “Especially when the times are such that it becomes harder and harder to find new customers by ‘algorithm.’”
As well as wholesale retailers, DTC brands are also partnering with online marketplaces. Much like selling in physical stores, the main benefit is again, increased visibility and potential online sales. Peloton, for example, expanded its partnership with Amazon UK last year to enable customers to buy its products from the marketplace.
It’s not only DTC retail brands that are considering the benefits of marketplaces. A swathe of retailers have also launched their own retail platforms in a bid to expand their product offering and offer consumers even greater choice. Superdrug, B&Q, Farfetch, Walmart, and Macy’s have all done so in the past year, which could drive even further expansion of the market in 2023.
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The intersection of CTV and retail media
Marketplaces like Walmart are not only generating interest as sales channels, but also for advertising purposes, as many retailers continue to flesh out their own retail media networks. The market is becoming a huge area of growth, led by major players like Amazon, Kroger, and Amazon. BCG predicts that the market will grow by 25% per year over the next five years and will account for over 25% of total digital media spending by 2026.
Retail media has not yet caught up to connected TV, however, which is predicted to surpass linear TV by 2024. In line with this, a stand-out trend for 2023 could be the intersection between retail media and CTV, which could spur on a shift in spend from performance display ads to streaming video ads. An existing example of this is Walmart’s partnership with Roku, which enables Walmart to deliver shoppable ads, harnessing first-party data, direct to Roku devices. For Roku viewers, it means that they can buy and pay for Walmart products without shifting to a different device or channel.
Other developments in this space include the announcement from OTT and CTV company Strategus that it is launching a solution for retail media networks in 2022, enabling advertisers to maximise and accelerate the impact of applying first-party data to CTV campaigns.
Elsewhere, Kroger has also added CTV to its retail media offering, enabling retail brands to target consumers using Kroger’s first-party sales data. Cara Pratt, senior vice president, KPM, explained the benefits in a press release. “Streaming is the number-one way people consume TV today,” she said. “That means the majority of TV viewing hours can now be optimized in the programmatic environment. Our retail data precisely reaches households — such as lapsed or infrequent brand buyers — and then matches advertising exposure to store sales to measure brand impact.”
Indeed, the highly engaging nature of TV advertising, combined with retail media’s ability to finally close the loop, could be an unbeatable combination – and one area of digital media that drives ad spend in 2023.