US$506 billion. That's the digital value the retail industry has the potential to generate over the next three years. Looking out over the next 10 years, that number grows to $2.8 trillion in Digital Value at Stake.
Digital Value at Stake (VaS) is a measure of financial gain or loss based on two components: 1) Entirely new sources of revenue or savings derived from digital investments and innovations, and 2) value shifting among players within industries based on how their respective digital capabilities equip them to steal value from rivals.
Believe it or not, retailers realised only 15 percent of their potential VaS in 2015, according to a new Cisco study "A Roadmap to Digital Value in the Retail Industry" released today.
Clearly, digital disruption brings a wealth of opportunity, but retailers must also be positioned to navigate the risk that comes along with it. According to research from the Global Center for Digital Business Transformation (DBT Center), a joint initiative of the Institute for Management Development (IMD) and Cisco, 47 percent of retail executives believe that disruption could put them out of business. In spite of this, only 24 percent have a plan for digital transformation.
The DBT Center research also ranked industries according to their proximity to the centre of the "Digital Vortex." This is defined as the movement of industries toward a 'digital centre', a place where business models, offerings, and value chains are digitised to maximum levels.
- Retail nears the centre of the Digital Vortex. Retail is one of the three industries most vulnerable to digital disruption.
- Close to half of retailers are at risk. Forty-seven percent of retail leaders believe that digital disruption is a high-risk proposition. According to the DBT Centre research, four of today's top 10 retail firms will be displaced over the next five years.
- Leadership is not proactively addressing risk. Almost half of retail executives surveyed do not acknowledge the risk of digital disruption - or have not addressed it sufficiently. Only 24 percent have a plan and are willing to disrupt themselves in order to compete.
- New retailers will emerge. Retailers believe that newcomers, or start-ups, will likely be the biggest source of digital disruption. Nearly 38 percent believe these start-ups will come from inside the industry.
Bottom line: after realising just 15 percent of their potential Digital Value at Stake in 2015, retailers are leaving more money on the table than almost any other industry. According to the analysis, a $20 billion retailer that fully embraces digital business transformation has the potential to save $33 million in IT costs per year, and may generate $823 million in annual earnings before interest and taxes (EBIT).
"Digital disruption has the potential to overturn incumbents and reshape markets faster than perhaps any force in history," said Shaun Kirby, CTO, WARP Accelerated Rapid Prototyping at Cisco. 'Just as Apple and Android devastated the pre-smartphone era of brands, digital disruption is poised to have a tremendous impact on the retail industry over the next five years. If retailers fail to digitise their services, the ones we know as leaders today may become laggards, or even disappear.
Where to Start: Largest Opportunities for Digital Value in Retail
Harness the value of digital. The Cisco study highlights 10 use cases that have the potential to drive the greatest VaS for retail over the coming years. For example, connected ads and marketing can drive $112 billion in VaS, and for cybersecurity that number is $68 billion.
In its new study, Cisco recommends that retailers begin their digital transformation by first determining where they are on their digital journey. Next, build an investment plan that combines the top digital use cases to meet specific business objectives. Finally, retailers should use their investment plan to close the gap between the digital capabilities they need and the business outcomes they desire.