Product Configurators

McKinsey Report - Retail’s outperformers: Lessons in value creation

Niklas Rose

15.11.2024- 8 Min.

McKinsey Report - Retail Value Creation Charts

The retail landscape is more competitive than ever before. With rapidly changing consumer behaviors, supply chain disruptions, and razor-thin margins, retailers—particularly those without the immense scale of giants like Walmart or Nike—are facing unprecedented challenges. But does that mean small to mid-sized retailers are doomed to fall behind? Absolutely not.

As an increasing number of retailers embrace new technologies like 3D shopping experiences from platforms like Newbeemountain, the ability to compete at the highest level no longer solely depends on size. In fact, a recent analysis of over 280 publicly traded retailers demonstrates that by taking bold steps, retailers of any size can position themselves as high-performing value creators.

A Snapshot of the Retail Industry's Challenges

Retailers today face a host of obstacles that make value creation tough:

Consumer unpredictability: Preferences and behaviors are shifting constantly, thanks to factors like digital trends, social media influence, and economic uncertainty.

Supply chain disruptions: In recent years, issues with global supply chains have caused rampant stock shortages, frustrating both retailers and consumers.

Labor market volatility: Retail is particularly susceptible to fluctuations in labor markets due to its reliance on frontline workers.

Thin margins: Retail is notorious for its slim profit margins, making even minor macroeconomic changes, capital costs, or shifts in investor expectations deeply impactful.

As if that weren't enough, the data shows that value creation is becoming increasingly concentrated among a shrinking number of mega-retailers. Today, just a small group of retail giants with revenues exceeding $50 billion account for most of the value created in the industry. What's even more alarming is that nearly one in four retailers now destroy value, up from just one in six 15 years ago.

Can Smaller Retailers Create Value?

Despite these daunting facts, the answer to whether smaller retailers can create significant value is a resounding yes. Through innovative technology, a relentless focus on customer experience, and disciplined execution, smaller retailers can move from the bottom to the top tier of value creators.

Retailers offering cutting-edge 3D shopping experiences, such as those provided by Newbeemountain, demonstrate that innovation is a powerful equalizer. By leveraging digital tools to create interactive, personalized shopping experiences, they can compete with even the largest brands.

McKinsey Report - Retail Value Creation Chart 2

Bold Moves for Value Creation

So, what exactly are these bold moves that enable smaller retailers to rise above the competition? The analysis highlights five critical strategies:

1. A Multipronged Growth Strategy

Retailers that have moved up the value chain have done so by accelerating growth in three key areas:

Core business growth: Identifying and capturing market share in existing products and services.

Adjacency expansion: Moving into related product areas or markets where their brand equity can carry over.

Breakthrough innovations: Making high-return bets on new business models or technologies, like 3D shopping experiences that allow customers to visualize products before purchasing.

By capitalizing on new demand trends—such as the rise of casual wear, home-based activities, or downshifting consumer spending—these retailers have shown remarkable agility in adapting to market conditions.

2. Investing in Technology and AI

Top-tier retailers have also succeeded by rewiring their technology and organizational structures around advanced digital capabilities. From AI-driven recommendations to sophisticated 3D configurators like those offered by Newbeemountain, technology is a central pillar for improving customer experience, capital efficiency, and growth.

In fact, 3D shopping experiences are revolutionizing how customers interact with products. Imagine walking into a store or visiting an online shop, configuring clothing items in real-time, and viewing a virtual model of how they look. This type of personalized, interactive experience is driving higher customer engagement, satisfaction, and ultimately, loyalty.

Retailers that invest in AI, enterprise technology, and digital tools are positioning themselves to outcompete others by becoming more efficient and agile. According to the analysis, movers (those who have transitioned from low- to high-performers) are 1.9 times more likely than others to accelerate growth by leveraging such technology.

3. Relentless Customer Focus

In today's competitive market, personalization is everything. Leading retailers are continuously optimizing the customer journey, from awareness to purchase and beyond. This includes precision-targeted marketing, AI-powered product recommendations, and loyalty programs designed to create "stickiness" among customers.

Retailers that prioritize personalized shopping experiences, such as Newbeemountain's 3D configurator for fashion, can stand out in a crowded marketplace. The ability to create bespoke clothing designs based on individual preferences and visualize them in 3D has proven to be a major differentiator.

4. Cost Discipline with Strategic Investments

Another key factor that distinguishes successful retailers is their ability to manage costs while making strategic investments in growth. Movers grew 1.5 times faster than nonwinners, and they achieved this without sacrificing efficiency. By maintaining a disciplined approach to both cost of goods sold (COGS) and selling, general, and administrative expenses (SG&A), these retailers were able to unlock growth without eroding their margins.

What's particularly striking is that 42% of the "movers" managed to improve their capital efficiency, increasing their capital turnover by 0.5 times or more.

5. Smarter Capital Allocation

Retailers who have succeeded in creating value have also implemented smarter capital planning processes. They don't just allocate resources for growth; they ensure long-term accountability and disciplined execution to deliver expected returns on investment (ROI).

As bold investments in automation, AI, and interactive experiences (such as 3D shopping tools) become essential, retailers must ensure they have robust governance in place to guide capital expenditures effectively.

The Results: Value Creation for All Retailers

The results of this comprehensive study are clear: scale is not destiny. While larger retailers tend to have advantages due to sheer size, smaller retailers can still punch above their weight by focusing on bold strategies, innovation, and a deep understanding of their customers' needs.

For instance, companies like Newbeemountain have carved out a niche by offering 3D configurators, enabling consumers to create custom fashion items and visualize them instantly. This type of interactive experience is not only revolutionizing the in-store and online shopping experience but is also driving new revenue streams, brand loyalty, and differentiation from competitors.

McKinsey Report - Retail Value Creation Chart 3

The Numbers: How Big is the Impact?

According to the analysis, the retail sector’s economic profit doubled over the past 15 years, growing from $67 billion in 2010 to $159 billion in 2023. However, this value is concentrated, with the top decile of retailers accounting for 81% of the sector’s economic profit from 2020 to 2023, up from 66% in the previous decade.

While this might suggest that smaller retailers have a hard time competing, the study also found that 24 retailers—many with revenues under $10 billion—managed to move from underperformers to top-quartile value creators. These retailers improved performance across multiple dimensions, including EBITDA margin and SG&A efficiency, growing 1.5 times faster than their competitors.

Conclusion: The Future is Bright for Innovative Retailers

Despite the increasing concentration of value among large retailers, smaller and mid-sized players can still thrive by making bold moves and embracing technology. Offering innovative, personalized experiences like 3D configurators, and focusing on customer engagement, efficiency, and smart capital allocation, allows retailers to create substantial value even in volatile market conditions.

For retailers looking to make their mark, now is the time to invest in digital tools, customer-centric strategies, and the next wave of retail innovation. Whether you're offering unique in-store experiences or interactive online platforms like Newbeemountain’s 3D fashion configurator, the opportunities for growth and value creation are endless.