Findings to sub-question three

Costs are one of the most crucial factors when making a decision about an investment.

As IV6 explains, digitisation has to have a purpose. Each purpose has to have a matching case, which has to be found and developed. This case most certainly also has something to do with costs and benefits. The results to sub-question three were coded by the categories OPEX and CAPEX.

Sub-Q3: How do digital technologies impact the cost structure of retailers?

1. OPEX

Marketing Expenses

Experts see great potential in the decrease of marketing expenses spent to raise awareness. As digital technologies enable retailers to personalize their targeting operations, the scattering loss can be reduced to the minimum, IV1 explains.

Furthermore, the interviewee explains that raising awareness in general will become much cheaper because costs for advertisement in digital channels are marginal and the return on invest ratio is high. IV2 states that data analytics & CRM are the favourable technologies to achieve such development. IV2, IV4 and IV5 also discuss that with the increasing usage of online channels, traditional mass-marketing channels, such as TV and print, which are incredibly cost-intensive and do not allow personalized targeting, are losing power and attractiveness as a means for conducting marketing activities. In the future, retailers will be able to save the investments in such channels, as especially the younger generations do not watch TV as much as in the past and they may conduct their shopping activities solely online. IV8 remarks that the better the targeting of companies works, the lower the chance is of customers returning their products due to dissatisfaction, which can further save considerable costs.

Rent

IV4, IV7 and IV8 remark that digital technologies also help reduce the rent of physical stores by reducing the space required for store operations. Especially in urban areas, rents are increasing dramatically and available space is limited. Hence, it is important for retailers to optimize their utilization of each square meter they rent. IV8 explains that with the implementation of Self-Service Technology and Mobile Payment systems, retailers are able to dismantle more and more checkout areas and use the newly gained space to display more products on the sales floor and generate more sales. Beyond that, IV4, IV7 and IV11 agree that specifically in automotive retail, dealers have the opportunity to reduce the amount of vehicles in the showroom with the help of VR and AR. Customers, however, are still able to experience all models through digital applications, which again can lead to a great reduction in occupied space and a decrease in rent.

Salary and Wages

Experts also emphasize the impact of digital technologies on salary and wages. IV8 believes that in the future the amount of staff necessary for generating awareness within the target audience will head towards zero. In the long run, all jobs regarding this division will be taken over by technology, which with higher precision and higher effectiveness can target the customers without human interaction. Only for the content creation, will it be necessary to employ staff.

Furthermore, experts are convinced that with the implementation of Self-Service Technologies and Mobile Payment Systems, labour costs can be reduced as labour-intensive processes can be further automated. In this context, IV3 and IV4 again refer to the example of McDonalds. With the implementation of self-service kiosks, customers are empowered to place orders themselves and automatically pay either through an app or through the terminal solution itself. The order and payment process is the most labour intensive process for the fast food chain along with the production of the food. These processes can be taken over almost completely by Self-Service Technologies and Mobile Payment Systems. Beyond that, working staff can focus on customer service, which further enhances the experience inside the store, as IV4 explains.

With the implementation of chat bots, IV3, IV10 and IV11 are convinced that labour costs can be further cut. Due to the growing number of channels and touch points it is close to impossible for retailers to answer customers’ enquiries in real time just by using people. Chat bots can replace service staff in many possible ways, the experts explain, as standard questions especially can easily be answered with the help of AI.

On the other hand, IV4 and IV5 also mention the necessity of training employees to work in a digitized environment. The interviewees state that training is often extremely expensive, but at the same time they state that it should be seen as an investment in the company’s future. As innovation never stops, IV5 explains that innovative thinking people are an crucial asset for the sustainable success of one’s business.

IV7 notices that it is not always possible to directly account an increase or decrease in costs to a certain technology, as its allocation is often a problem. The interviewee sees the largest reductions in cost in the saving of time; processes can be optimized and

thus shortened and result in a positive effect. IV6 agrees, also explaining, that the largest potential for saving costs is in the reduction of administrative and manual work.

Repair and Maintenance

IV3 and IV10 also notice that digital technologies often have issues resulting in external service providers being necessary to fix the issue. When a system breaks down, the costs continue to increase, business slows down or comes to a halt and the required maintenance is often costly.

‚To make sure, that it is done well, that’s tough. It all takes a lot of effort, and it’s not a saviour. It can be very costly for retailers.’ (IV10)

Other Impact on OPEX

With the help of data analytics, retailers can adjust to the actual demand of the customer using data calculated with the help of analytics and logistics tools, and retailers have the possibility to improve their return on invest ratio on goods and services as the procurement process can be optimized. IV8 explains this impact with the example of FMCG retailers. By calculating the demand for certain types of products with the help of AI, retailers can reduce the amount of wasted products. By linking internal and external data systems through API’s, this effect can be further strengthened, as factors such as weather and public holidays, which have a drastic impact on the retail industry, can also be taken into account, IV8 also explains.

‘We can relatively accurately say which store under which circumstances generates how much revenue, and that again in which product segments.’ (IV8)

With customers increasingly expecting same-day-delivery and benchmarking retailers with Amazon, logistics have to be further improved and retailers are becoming increasingly dependent on external service providers to achieve customer satisfaction in the delivery phase. The decision on whether to charge customers for such services or not has to be made but OPEX will continue to ensure punctual delivery, IV6 and IV12 conclude.

2. CAPEX Licenses

All digital technologies are always powered by software, no matter if the technology is applied in the physical or online channel. Experts explain that to acquire such software, high license fees most likely have to be paid. These licenses will drive up Capital Expenditure in the P/L. IV5 and IV10 explain that to date many retailers do not yet own the necessary software to either conduct data analytics or personalize and predict aftersales with AI.

Equipment

IV11 explains that with the digitization in retail, the physical store will move towards providing an experience which often comes with a large price tag. The more physical digital technology is, the higher the initial investments are, the experts agree. With reference to Virtual Reality, IV3 discusses the investments that have to be conducted to set up the technology at the physical store. High-performance computers are necessary to produce a clear picture and the latest technology is extremely important to ensure a good customer experience.

IV7 also mentions that the development of applications for such technology is still very costly. Despite the fact that costs have been dramatically decreasing in recent years due to the increasing usage of VR, a high investment is still necessary to develop a virtual world for a retailer’s customers.

IV2 and IV5, both of whom discussed the usage of Robotics, Interactive Digital Signage, and Self-Service Technologies also see an increase in CAPEX. The technologies implemented in the physical store have to be constantly upgraded and out-dated equipment replaced. Such inevitable investments have to be made by any retailer that decides to go digital, IV6 and IV10 explain. IV10 further states that everything around digitization has a much shorter life-span. Hence, retailers are forced to continuously upgrade their setup, to ensure the convince customers and to provide a great on-going customer experience. If this is not achieved, the disappointment can be crucial, IV3 concludes. A lot of retailers implemented digital signage into their stores but then they neither upgrade nor maintain it which results in a very unappealing user experience and a dissatisfaction of the customers.

Summary of the findings

The findings to the third sub-question of the qualitative study show a very homogenous picture. In summary, both OPEX and CAPEX are highly impacted by the implementation of new digital technologies. As initial investments are often high, capital expenditures are most likely to increase especially at the beginning of the adoption of digital technologies as licenses and equipment have to be acquired. On the opposite side, operating expenses can be decreased as marketing activities can be automatized, focussed on digital and less cost intensive online channels allowing a much greater targeting of individuals. On top of that, rent most certainly can be reduced, as through the adoption of digital technologies the amount of space needed can be noticeable decreased. Digital technologies have the potential to decrease labour costs through the automation of labour intensive processes, such as checkout and aftersales service. Staff however needs to be trained or new staff hired, which results in an increase of OPEX.