Digit a l Com m er c eTargeted Research

Digital Transformation Wake Up Call

Uncovering where retailers are putting boots on the ground and allocating budget dollars for digital transformationB Y J O E S K O R U PA

The term digital transformation in retail refers to a radical
rethinking of how to use technology to pursue modernizationand improve revenue streams and business models. Retailers
that pursue a digital transformation strategy are deploying
technology in innovative ways that blur the lines between thephysical and digital worlds.
With few exceptions, the most successful retailers today– the ones enjoying the largest revenue gains – are those thathave made substantial investments over the last few years indigital transformation. A short list of these booming retailers
includes Walmart, Target, Ulta, DSW, Sephora, lululemon,
Nike and Kroger.
The volume of activity devoted to digital transformationby these leaders is breathtaking. It includes everything fromdata-driven stores with curated assortments to cashierlesscheckout, from cloud-hosted platforms to robots in stores, andfrom AI-driven personalization to augmented reality mirrors
and displays.
However, no single technology or project canachieve digital transformation. Instead, the radical shift isaccomplished through a multi-phased, multi-year plan that
redefines traditional retailing and marketplace boundaries.
The shift also requires a new level of collaboration andintegration across departments, divisions and enterprisetechnologies.
It is important to note that a common factor in every phaseof digital transformation is a focus on customer-first strategies
that deliver newfound flexibility and the ability to offer
frictionless shopping experiences and roll out new programs
at marketplace speed.
In this Targeted Research report we zero in on digitaltransformation for the first time to get a better understandingof where retailers are putting boots on the ground andallocating budget dollars for investment.

FIGURE 1

FIGURE 3

Digital transformation strategies having amajor impact on financial performance in 2019

Number one emerging tech area for investment in 2019

Expanding unified commerce/omnichannel capabilities

50%

Cloud software and platforms

47%

Advanced personalized (one-to-one) marketing capabilities

47%

Creating new business models and services

43%

Evolving enterprise architecture approach(i.e. SaaS, PaaS, IaaS, microservices architecture, etc.)

27%

Expanding Internet of Things capabilities

27%

Top challenges targeted for significant investment in 2019
(hacks and thefts of data)

Retiring legacy systems
Pace of competitive developments (external shifts by competitors)
Employee engagement(salaries, training, flexibility, benefits, self-service HR, etc.)
Consolidating databases (CRM, inventory, etc.)
Change management (internal resistance to change)

Turnover and retention in a tight labor market
Fighting security attacks and malware(denial of service, ransomware, etc.)
Enterprise infrastructure/architecture (outdated)
Application integration (too much ongoing maintenance)
WiFi capabilities in stores (need upgrading)1		

The big four digital transformation investment areas for2019 are: 1. Expanding unified commerce (or ominchannel)

Cloud software and platforms

40%

Cashierless or grab-and-go stores

20%

Smart machines in warehouses

13%

Voice-activated capabilities

10%

Smart shelves (RFID and/or computer vision)

7%

FIGURE 4

Topline growth opportunities for investment in 2019

FIGURE 2
Protecting customer data security systems

Digital Transformation 2019

45%
42%
35%
32%
29%
26%
26%
23%
19%
16%
6%

Optimizing digital commerce
68%
Expanding in-store mobile
capabilities
39%
Expanding omni-commercecapabilities inside the store
35%
Expanding last-mile delivery
and fulfillment capabilities
32%
Expanding into new markets
32%
Adding or expanding aloyalty program
29%
Maximizing experiential shoppingin stores (retail theater, digital
touchpoints, display screens, etc.)

16%

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capabilities, 2. Cloud software (SaaS) or cloud platforms (PaaS),
3. Advanced personalized (one-to-one) marketing, and 4. Creating
new business models and services. (See Figure 1.)
Expanding unified commerce (or omnichannel) capabilities,
which was selected by 50% of retailers, is a good example
of an IT strategy that has a decade of history behind it andstill has many retailers struggling to achieve it. Lack of visionand underinvestment have been the chief culprits in the longtransition to omni-commerce, where customer-facing capabilities
are matched with advanced back-end systems.
It makes sense for retailers to offer omni-commercecapabilities such as click and collect or shipping orders fromstores, because shoppers get these services from industry
leaders and expect them from everyone else. However, it doesn’t
make sense to offer these services if they are not frictionless tothe shopper, efficiently managed, and cost effective. These goals
cannot be achieved without modernizing the tech stack, i.e. digitaltransformation.
Shifting core retail functions to the cloud, using either
SaaS or PaaS architecture, is a central feature of every digitaltransformation program and was selected by 47% of retailers
as having a major impact on their company’s future financialperformance.
Advanced personalization (one-to-one) marketing wasselected by 47% of retailers and is a hot topic in retailing today.
The phrase “you can’t get there from here” applies to retailers
attempting one-to-one marketing without a centralized customer

FIGURE 5

Opportunities for investment in 2019 to improve margins andincrease the bottom line
Out-of-stock optimization

58%

Proprietary products and brands

55%

In-store task management

29%

Omnichannel order management

26%

Omnichannel supply chain

26%

AI-driven price management

19%

Returns management

13%

FIGURE 6

Is all the expertise you need to achieve digital transformation
in-house or will you seek external specialist help?

35%In-house expertiseis sufficientR I S NE WS.C OM I DEC EMB E R 2 0 1 865%

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Will seek external
specialist help

2

Digit a l Com m er c eTargeted Researchdatabase and real-time recommendation automation, which arelayered on top of prior digital transformation projects.
Creating new business models and services, which
was selected by 43%, is the last of the big four digitaltransformation areas for 2019. Traditional retailing has
expanded into subscription services, one-click ordering onsocial media, concierge services, voice commerce, one-hourdelivery, hyper-local assortments, pop-up stores and more.
As retailers assess these new options they often ask, can wedo these things? If the answer is “no,” it means they have not
moved deep enough into their digital transformation plan.

transformation and should be singled out for increased
attention – retiring legacy systems and replacing outdated
enterprise infrastructure/architecture.

Opportunities for Growth

The list of top challenges cited by retailers in 2019 is headed byreinforcing customer data security systems (45%) and retiring
legacy systems (42%). These challenges and several others on
the list are frequently cited as problem areas by retailers.
However, two challenges have recently acquired asense of urgency – employee engagement (associated withsalaries, training, flexibility and HR benefits), chosen by 32%,
and turnover and retention in a tight labor market, chosenby 26%. Multi-year growth in the economy has produced
many benefits for retailers, but it has also present several big
challenges in managing their workforce. (See Figure 2.)
Most challenges cited by retailers on the list are perennial
problems, however two have a direct impact on digital

The study examines growth opportunities from both a toplineand bottom-line perspective. The number-one topline growth
opportunity retailers plan to invest in 2019 is optimizing digitalcommerce both online and mobile, which was chosen by 68%.
(See Figure 4.) Although booming for the last two decades,
digital commerce still has strong upside growth for retailers,
especially those that have been slow to capture their fairshare of online purchasing.
Other topline growth opportunities include expanding
in-store mobile (39%), expanding omni-commerce capabilities
inside stores (35%), and expanding last-mile delivery andfulfillment capabilities (32%).
All of the major topline growth opportunities cited on thelist require support by digital transformation projects thatenable the retailer to deliver frictionless shopper experiencesthat inspire return visits and loyalty.
Two big opportunities head the list when we shift tobottom-line projects that increase margins. (See Figure 5.)
These are out-of-stock optimization (58%) and proprietaryproducts and brands (55%).
Other key bottom-line investment opportunities include

FIGURE 7

FIGURE 9

Challenges and Solutions

Areas of in-house expertise with greatest shortage of talent
IT architecture

32%

Data analysts

29%

Customer experience/CRM

29%Store systems

29%

Marketing26%

Merchandising

26%

Store operations

23%

Supply chain

23%

Database

13%

Network infrastructure

13%

FIGURE 8

When replacing or upgrading core applications, which will becloud/SaaS implementations?		

ON-PREMISESPOS			82%74%
Supply chain		 65%Merchandising		
63%
CRM			60%
ERP/Financials
52%
E-commerce		 50%Order management

3		

CLOUD

18%
26%
35%
38%
40%
48%
50%

22%

Percent of IT budget
planned for digitaltransformation
projects in 2019

FIGURE 10

7.4

Importance of setting
digital transformation
goals to future
future successespecially in theareas of enterprisesystems and operations.
(Using a 1-10 scale where 1 iscompletely unimportant and 10 isextremely important.)

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Digit a l Com m er c eTargeted Research

in-store task management (29%), omnichannel ordermanagement (26%), omnichannel supply chain (26%), and AIdriven price management (19%).

viewed as an average and not a guidepost. However, it
represents a significant amount of IT dollars and shows how
important digital transformation is in retail today.

How to Make Digital Transformation WorkMethodology

A key question every retailer must ask when assessing digitaltransformation strategy is: Do we have all the expertiseneeded to achieve our goals in-house or will we need to seek
external help from specialists? (See Figure 6.)
An overwhelming majority of retailers (65%) say they
will seek external specialist help. Many of today’s digitaltransformation projects are new and unproven, so it makes sensethat retailers will not be able to rely on in-house talent alone.
Areas where retailers say they have the greatest shortageof talent are IT architecture (32%), data analysts (29%),
customer experience/CRM (29%), and store systems (29%).
However, the need for expertise is widespread and includes
many other core disciplines. (See Figure 7.) These include
marketing (26%), merchandising (26%), store operations (23%)
and supply chain (23%).
One area where retailers are likely to seek external
expertise is migrating core applications to the cloud. The top
applications for this migration are E-commerce (chosen by50%), ERP/financials (48%), CRM (40%), merchandising (38%)
and supply chain (35%).
POS applications, on the other hand, will remain onpremises with perpetual licenses for the foreseeable future.
(See Figure 8.). Only 18% of retailers say they plan to migrate
POS applications to the cloud, which is a resounding majority.
Finally, we wanted to find out how much of the retailer
IT budget will be devoted to digital transformation in 2019knowing how important the projects are to continued
success in the marketplace. We found more than a fifth(22%) of the planned IT budget for 2019 is targeted for digitaltransformation projects.
Every retailer has different technology needs andbudgetary requirements, a fifth of the IT budget should beThis study was conducted during the month of December
and only senior executives from national or large regional
retailers were invited to participate. The results do not include
any store-level, field-level or regional employees. Only
headquarters-level staff responses were included.

Conclusion

With few exceptions, the most successful retailers today – theones enjoying the largest revenue gains – are those that havemade substantial investments over the last few years in digitaltransformation.
From a 30,000-foot perspective, the four biggest strategicareas where digital transformation investment will occur in2019 are: 1. Expanding unified commerce (or ominchannel)
capabilities, 2. Cloud software (SaaS) or cloud platforms(PaaS), 3. Advanced personalized (one-to-one) marketing, and4. Creating new business models and services.
These high-level strategies are being executed throughprojects that optimize digital commerce (both online andmobile), last-mile delivery and fulfillment capabilities, and outof-stock optimization. All of these projects are being designed
to remove barriers in the purchase process and create africtionless experience for omnichannel shoppers.
The two biggest takeaways in the report are that retailers
believe they will need external expertise to achieve theirdigital transformation goals and that one fifth of IT budgets
for 2019 will be devoted to digital transformation projects.
One fifth is a significant slice of the IT budget pie, but is
it the right amount? Every retailer has different technology
needs and budgetary requirements, but one thing is certain– the quicker a retailer achieves its digital transformation
goals the sooner it will reap the benefits.

FIGURE 10

FIGURE 12

Annual revenue

Retail segment

Less than $99 million

23%

Apparel

10%$100 to $499 million

16%

Grocery/Convenience/Drug

58%$500 to $999 million

10%

Specialty

26%$1 billion to $5 billion23%

Mass market/General merchandise/Discount3%

More than $5 billion

29%

FIGURE 11

Sales Performance YoY
Decreased

19%

Increased up to 5%

65%

Increased > 5%

16%

4		

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