Retailer equity valuations have been on a rollercoaster ride over the past year, amid significant divergence in the performance of individual companies. 

As the world starts to emerge from the pandemic, it is clear that the rules for value creation have changed for good.

Global stock market performance in 2020 and early 2021 played out in four distinct stages: universal decline, differentiated recovery, amplification - with the retail sector returning to positive territory - and re-rating, as the long-term implications of the pandemic became apparent

Analysis of publicly available data shows that by February 2021, weighted average shareholder returns in retail was up 20%, placing it in the middle of the pack when compared to all other industries.

The most striking feature of the recovery has been the performance stretch, with some companies performing much better than others. 

Amazon

Significant market cap shifts have been driven by the largely digital ‘super 16’, which accounted for 80% of market capitalisation value gain. If Amazon were included, the distribution would be even more extreme, with 36% of total market value gain going to Amazon alone.

Examining the value creators over the past year, three archetypes, using illustrative players, can be identified:

Ecosystem players, such as Amazon

In an evolving economy, retailers are creating broader ecosystems to tap into opportunities and have unlocked multiple new value pools - often well beyond their core businesses - while ensuring that retail remains a powerful growth driver. The top five marketplaces combined achieved a gross merchandise value of close to $2 trillion in 2020 (£1.42tr).

Digital natives, such as Farfetch

The pandemic has accelerated digital participation across both essential and discretionary categories. Most consumers are now comfortable purchasing online and intend to continue doing so, with the strongest intent in apparel, electronics, vitamins and over-the-counter medicines. Notably, the digital native archetype is where UK-based value creators are most prominent.  

Trusted segment leaders, such as Walmart

Walmart store

Incumbent retailers have performed variably during the crisis, with no single category outperforming. The value creators combined the benefits of their leading scale with readiness to capitalise on the acceleration towards omnichannel. Their bold moves and investments prior to the pandemic enabled their vigorous response during the crisis, proving that stores can be a competitive advantage when twinned with the power of digital. 

The three archetypes exemplify the trends shaping the retail landscape. Overlaying these operating models are five strategic approaches that separate leaders from the rest. These approaches will inform new rules for value creation in the period ahead:

  • A compelling proposition has not gone out of fashion

 Value creators aim to be proposition leaders – offering choice, experience, and convenience to ensure they outperform on dimensions that matter most to customers.  

  • Exposure towards growth is a prerequisite

McKinsey analysis shows that the choice of ‘where to play’ drives 65% of growth potential in retail – far higher than in other industries. The players that lead on value creation have maximized their exposure to the highest growth channels, formats, and categories. 

  • Margin pool expansion is key to charting a profitable course

Ecosystem players have shown that broadening commercial relationships, and expanding from B2C to B2B2C, is a productive strategy. Online advertising, platform services and financial services are among revenue drivers that can profitably complement the core business. 

  • Mastery of technology becomes part of the retail DNA

Today’s value creators have deep expertise in tech-enabled execution across channels. Often 15% to 20% of the workforce are technologists, enabling seamless operations online and making stores an integral part of the omnichannel experience. 

  • Speed as a source of competitive advantage

Companies organised to respond fast to shifting dynamics prime themselves for success. A ‘test, learn and scale’ mindset has replaced ‘get-it-right-first-time’ and has been a key advantage among retailers emerging from the crisis more resilient than their peers.