1、Retail Practice Automation in retail: An executive overview for getting ready The winners in the sector will be those who understand the implications of automation and act quickly to respond to them. May 2019 ?/Getty Images by Steven Begley, Bryan Hancock, Tom Kilroy, and Sajal Kohli Retail is under
2、 pressure. Margins are stressed from all sides: higher costs to manage e-commerce supply chains, growing demands from suppliers to pass on raw-material cost inflation, higher investments to match new competition, and steadily rising labor costs. At the same time, the customers expectations continue
3、to surge as digital natives and disruptors alike raise the bar for personalized serviceon the back of what, at times, is an advantaged cost structure. As retailers struggle to adapt, and even to survive, they increasingly pursue automation to address margin strain and more demanding customer expecta
4、tions. Automation, however, is a new capability for all but digital natives, and the sophistication in approach varies accordingly. Over the past three years, the McKinsey Global Institute has conducted a broad-based research initiative on automation across sectors. This research has shown that abou
5、t half of the activities in retail can be automated using current, at-scale technology. While this number is alarming, the change will be less about job loss and more about the evolution of jobs, the creation of new ones, and reskilling. Only about 5 percent of all jobs can be fully automated with c
6、urrent technology, and automation will lead to the creation of jobs as companies invest in growth. New realities In our work in the retail sector, we see automation reshaping business models and the broader value chain. Lets start with four new realities we observe among retailers. 1. Margin pressur
7、e has made automation a requirement, not a choice Retail-margin pressure is mounting, driven by more intense competition, investment in e-commerce, and pressure to increase wages. While these cost pressures are not new, many retailers have already exhausted traditional cost-reduction levers. Unable
8、to pass on costs to their customers in this hypercompetitive environment, retailers are using automation to support and bolster margins. These pressures are consistent across retail subsectors. Our analysis suggests that typical grocery and hypermarket retailers face 100 to 150 basis points of margi
9、n pressure, and typical specialty apparel or department stores 350 to 500 basis points. A comprehensive automation program can significantly offset these headwinds. Automation initiatives across store, supply-chain, and headquarter functions can generate 300 to 500 basis points of incremental margin
10、, which retailers can reinvest in their growth opportunities. 2. The bottleneck to automation is internal, not external An assessment of available automation technologies shows that they can already operate a typical retail grocery store with up to 55 to 65 percent fewer hours. The critical componen
11、ts include electronic shelf-edge labels, self-checkout terminals, shelf- scanning robots, and partially automated backroom unloading. These technologies have been proved at scale and offer internal rates of return higher than historical retail hurdle ratesyet few retailers are moving quickly to impl
12、ementation. In some cases, the bottleneck is a lack of skills and capabilities. But one of the biggest challenges is the inertia of the business. Retailers struggle to break free from the soft tyranny of budget cycles and the replication of last years capital spending. Our corporate-finance research
13、 suggests that two-thirds of companies fall into this trap. For these players, more than 90 percent of a given years capital expenditures simply reprise those of the preceding year. Only one-third of companies are dynamic reallocators, consistently shifting 30 to 40 percent to different business uni
14、ts or new uses over five to six yearsthat is, a reallocation rate of 5 to 6 percent a year. Dynamic reallocators 2Automation in retail: Preparing for the future of work enjoy disproportionate rewards: growth in total shareholder returns nearly three percentage points higher than those of other compa
15、nies over an extended time period. 3. If you arent already implementing automation, you are falling behind Amazon, which has made headlines with its Amazon Go retail concept, has been the most prominent disruptor. The company now operates ten Amazon Go stores, in three US cities, and the tech giant
16、has ambitious expansion plans: 3,000 stores by 2021. Our outside-in analysis of the profit-and-loss impact of Amazon Go technologies hints at a high return on investment (ROI). We believe that Amazon can expect a 5 to 10 percent top-line improvement thanks to additional transacting traffic from redu
17、ced wait times and the use of customer insights to optimize assortments and personalize promotions. Reducing labor costs and deleveraging the fixed-cost base can drive a 2 to 4 percent increase in earnings before interest, taxes, and amortizationto say nothing of the further potential from commercia
18、lizing customer data and insights (Exhibit 1). Amazon is not alone. Faced with disruption and the opportunity to expand margins, select incumbent retailers are also investing in automation and artificial-intelligence (AI) technologies at scale to enhance both the customer and employee experience. Ta
19、ke, for example, Kroger Edge: digital shelves (which the retailer rolled out across 200 stores in 2018) that display prices, nutrition facts, coupons, and video advertisementsall dynamically updatable from a central source. Eventually, Kroger plans to link the shelves to shoppers smartphones, allowi
20、ng an increased level of personalization. Ahold Delhaize and Albertsons have announced partnerships with Takeoff Technologies, a company Exhibit 1 Our estimates suggest that Amazon Go delivers signifcant top- and bottom-line beneft through automation technology. 1 Earnings before interest, taxes, an
21、d amortization. Source: McKinsey analysis Impact on top line, % Impact on bottom line, % 23 34 1 2 12 24 01510 23 24 01 Added convenience Labor-cost reduction Deleveraging fxed-cost base Depreciation Operating proft EBITA Data/insight monetization Tailored assortment Personalized promo Out-of- stock
22、 reduction Sales uplift 3Automation in retail: Preparing for the future of work that builds automated miniwarehouses for the robotic in-store fulfillment of digital orders. Other retailers are exploring technology use cases for employee activities. Target and Walmart have invested in autonomous clea
23、ning robots that save hours of its associates time. Walmart has also rolled out virtual-reality headsets to train associates, as well as the FAST Unloader technology to automate the backrooms of stores. If recent headlines are any indication, the adoption of these technologies by retailers will acce
24、lerate. 4. The automation opportunity is bigger than operations Much of the discussion about the future of work in retail has focused on the use cases for automation and AI in stores. However, supply-chain and head- quarter functions (such as merchandising) will also be affected massively. Consider
25、merchandising. Today, automatable activi- ties account for approximately 30 to 40 percent of the time of merchants, who, for example, spend about 20 percent of their time on merchandise- planning activities. Advanced planning systems can automate historical analytics and generate predictive scenario
26、s, significantly reducing the time needed to plan merchandise and empowering merchants to make faster decisions. Similarly, dynamic systems with web-scraping and predictive impact analytics could automate pricing and promo- tions. Automating these and other time-intensive processes will enable merch
27、ants to increase the time they spend on more strategic activities, creating value for the enterprise (Exhibit 2). Automation can also make HR processes more efficient and provide leaders with new insights for a successful people strategy. One retailer we know, for example, designed an app-based hiri
28、ng tool to streamline the recruitment of store associates. At the start of the project, the recruiting process was difficult. Each candidate would provide almost 50 documents and visit the companys offices up to five Exhibit 2 Automation will have an impact on most elements of the merchant role. Pro
29、jected impact of automation by core merchandising activity Merchandising planning Supplier management Category strategy Inventory replenishment and markdowns Assortment Space planning Sourcing Pricing and promotion Product design and development Negotiation SignifcantLight Moderate SignifcantLight M
30、oderate 4Automation in retail: Preparing for the future of work times; end-to-end, the whole thing took an average of 45 days. To make matters worse, about 40 percent of the associates hired left within six months. To solve these problems, the company established an agile, cross-functional working t
31、eam, which created minimum viable products in just ten weeks: for candidates, a mobile-app tool to help browse jobs and apply for them; for HR managers, a web- based tool to screen and identify potential hires. Now implemented in more than 1,000 stores, the solution has not only reduced hiring time
32、by more than 80 percent and store administrative hours by 20 percent but also improved the quality of new hires through the application of advanced analytics to applications. Supply chains offer several more automation use cases, and retailers are at the forefront of implementation. Target and Walma
33、rt have partnered with Swisslog to build warehouses with automated case picking. Ocado sells its Smart Platform, a proprietary e-commerce warehousing solution, to other retailers. More broadly, automated smart robots can store, retrieve, depalletize, and transport productsall while calculating optim
34、al routes through a warehouse. Drones and robots can also be used for security and safety surveillance and for quality checks. Battlegrounds to survive and thrive In this section, we explore the critical imperatives for retailers as they build the workforce of the future (see sidebar, “Is your manag
35、ement team actively preparing for the future of work?”). 1. Organizational structures and ways of working must be transformed Adding technology, by itself, is not enough. Retailers must also rethink their operating models across stores, distribution centers, and headquarters. Automation creates orga
36、nizations with far fewer layerseach employee is responsible for a more diverse set of responsibilities. Real-time data and analytics will empower faster decision making. Consider a store that employs shelf-scanning robots, effectively automating a large part of a traditional store-department-manager
37、s role. The instructions of a robot rather than a department manager guide stockers, who now work more efficiently and can therefore be cross-trained to perform additional in-store activities, such as providing service to customers or picking online orders. Meanwhile, retailers must reconsider the o
38、rganizational structure, since they no longer provide a career path from stocker to department manager to store manager. Stockers must now move laterally through multiple teams while building leadership skills through outside training and executive exposure before moving on to leadership roles in st
39、ores. To fully unlock the benefits of this technological transformation, extensive adopters of automation and AI are exploring more agile ways of working. Structurally, this means shifting from strict hierarchies and siloed functions; instead, “teams of teams” are built around end-to-end accountabil
40、ity, with flexible resources that improve work flow. These teams are empowered with real-time data, and decisions are purposefully decentralized to cultivate a bias to action. 2. The redeployment of labor is a strategic opportunity missed by most Efficiency is often perceived as the primary motivato
41、r for adopting automation technologies, but among retailers, innovation is the ultimate way to survive. As they implement automation technology, they create a large bank of hours with a trained and trusted workforce. The opportunity to redeploy a portion of these hours to more valuable activities pr
42、ovides an opening for a differentiating kind of innovation. Several grocers, for example, are creating new roles for in-store pickers and e-commerce distribution centers. One example of near-in redeployment is Ahold Delhaizes e-commerce investments, which will add 150 new jobs to the local economy i
43、n Lancaster, Pennsylvania. Meanwhile, McDonalds has not only introduced table service in restaurants 5Automation in retail: Preparing for the future of work but also rolled out self-service ordering kiosks. Best Buy has pushed further into adjacent services, creating new customer-service roles in it
44、s In-Home Advisor and Total Tech Support programs and retraining employees for them. In the years to come, we will see additional retailers explore shifting labor into other, further-out uses, such as home health care or installation services. 3. Retailers must prepare for skilling and reskilling at
45、 scale As the demand for physical and manual skills declines, the need for technological skills, as well as social and emotional ones, will rise quickly in every sector, including retail (Exhibit 3). Faced with the skill gap created by the future of work, retailers have three options to acquire tale
46、nt: hire new employees, outsource to gig workers and external partners, or reskill current workers. While hiring may appear to be an ideal solution, the rapid growth of technology companies and the digitization of incumbents have diminished the avail- able skill pool. Companies report that an inabil
47、ity to source talent is the main reason for delaying digital transformations, and this is hardly surprising; we estimate that digital skills are available in only half the needed quantity and agile skills in only a quarter. Retailers therefore cannot assume that hiring and outsourcing will bridge th
48、e skill gap, and this leaves a mandate to reskill employees. Although reskilling takes a good deal of effort, it often offers a higher return on investment, in the longer term, than hiring; in fact, the business case for reskilling can be 1.5 to three times better. On average, replacing an employee
49、can cost 20 to 30 percent of an annual salary, reskilling less than 10 percent. Reskilling existing employees also allows a retailer to retain institutional knowledge and saves the ramp-up time needed to onboard new hires. Furthermore, reskilling is more likely to earn goodwill from employees, customers, and governments alike. This goodwill can have tangible benefits; approximately 40 percent of transformations fail because of employee resistance, so a reskilling campaign can mitigate that risk. For these reasons, we believe that reskilling will be a large part of
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