Retail has major problems in
benefitting from digitization

A new study at Mid Sweden University shows that physical retail has major digital
challenges.
– The most remarkable thing is that in retail there are no direct connections between profitability and digital maturity. This means that many of the investments that have been made so far have obviously not contributed to either increased profitability or increased efficiency, says Fredrik Hammargården, commercialization manager at Indivd and one of the researchers behind the study.

Within the Department of Business Administration at Mid Sweden University, Fredrik Hammargården, together with Ida Rothe, has carried out a study focusing on the digital maturity of physical retail and how it should best be able to increase its profitability. As part of the study, a quantitative survey was also included among a large number of CEOs in Swedish retail organizations within B2C.
The study shows that Swedish retail organizations have major challenges when it comes to managing digitalization and becoming digitally mature. This is despite the fact that physical retail has never before invested so much in digital technology as in recent years.
– The most remarkable thing is that there is no direct connection between profitability and digital maturity. This means that the investments that have been made have obviously not contributed to either increased profitability or increased efficiency, says Fredrik Hammargården.
The study concludes that physical retail should review and improve governance of its digital strategies.
– The store chains must also ensure that they have sufficient resources and opportunities to collect and analyze the necessary data to be able to create a more technocratic decision-making.

Unprofitable investments
It is well known that companies that perform well in digitization surpass their competitors and can reduce costs by up to 90 percent. This is one of the reasons for the strong growth of e-commerce at the expense of the general profitability of physical retail.
Globally, retail invested USD 12.5 trillion in digitization in 2019. However, the study surprisingly shows that there is no clear link between the digital maturity of trade organizations and their profit margin.
– Retail investments in recent years have neither contributed to increased profitability nor efficiency. A probable explanation for this is the lack of customer and business data. Lacking the ability to effectively use strategically important data to measure success and inform strategies. There is also no opportunity to measure the effectiveness of digitization projects. There is much to suggest that profitability has never been one of the goals for the trading companies’ digitization projects, but the carrot has instead been the opportunity to test and try new technology, says Fredrik Hammargården.

Intuitive versus data-driven decisions
The study further shows that the majority of retail organizations do not feel they have a high level of digital maturity, while at the same time they do not feel convinced of the necessity of digitization. Other research also suggests that retailers traditionally prefers intuition and untested assumptions before using data. The development of the industry is mainly triggered by inspiration and imitation of other players in the industry.
– There are many indications that the digital investments in physical retail in recent years have been based on intuitive decision-making. The consequence of this is that forward-looking digital investments instead risk exacerbating profitability problems. They become counterproductive, create negative effects and reduce the organization’s overall ability to create results.

New organizations required
The study also confirms the hypothesis that retail organizations with a higher degree of organic organizational structure experience themselves as more digitally mature than those with a higher degree of mechanistic organizational structure. The more organic an organization is, the higher digital maturity it feels it has.
– Digitally mature organizations need to adapt the organization’s view of digital innovation. They also need to improve governance by giving employees the opportunity to create better strategies with the help of new technology and customer and business data. The risks and the biggest barrier are about the organization and not the technology. Improperly implemented strategies can reduce profitability, efficiency, competitiveness and the organization’s overall ability to create results, says Fredrik Hammargården and continues:
– In the physical retail, there has been a great lack of strategically important data, at the same time as there is a great shortage of people with an analytical background, both in their own organizations and among the suppliers.

Focus on data
The results of the study clearly highlight that physical retail should review the view of digital innovation and improve governance by giving employees the opportunity to create better strategies using digital technology.
– Retail should continue to value intuition, but also to a much greater extent ensure that there are resources and opportunities to use customer and business data. If there is no opportunity to effectively use strategically important data to measure success and inform strategies, then there is also no opportunity to measure the effectiveness of digitization projects, says Fredrik Hammargården and concludes:
– Dare to try and experiment is incredibly important, but if you experiment without data collection, the digital investment quickly becomes an unprofitable blow in the air. It does not lead to increased profitability, efficiency or long-term learning, concludes Fredrik Hammargården.

Footnote: The study is funded by Indivd, where Fredrik Hammargården is responsible for commercialization. Indivd is working to develop a platform for anonymised insights for the physical retail.