ISG Provider Lens™ Retail & CPG Services - Managed Services - U.S. 2024

U.S. retail and CPG success hinges on data-driven agility and prioritizing both customers and workers

The U.S. retail sector is at a crossroads. Regulatory changes, evolving consumer expectations, and rapid technological advancements continue reshaping the marketplace.

This report summarizes ISG’s analysis of significant regional developments from 2023 through 2025. It offers actionable guidance for retail and consumer packaged goods (CPG) clients seeking technology and services to improve their ability to address critical challenges and operate the business profitably while exploring new ways to do business — and for new businesses entirely.

U.S. retail and CPG in 2023: Convergence, pandemic response and digital focus

ISG’s 2023 analysis of U.S. retail and CPG services identified several key developments and trends shaping, influencing, enhancing and impeding business. These included the following:

• Convergence and D2C: We saw retail and CPG companies becoming more alike. CPG companies increasingly embraced D2C sales while more retailers built privatelabel brands. Omnichannel commerce with
mobile, social and online presence became crucial to success.

• Pandemic recovery and evolving customer needs: The COVID-19 pandemic forced digital adoption, leading to an e-commerce boom, and stores increasingly began offering contactless payments and in-store pickups. Customer behavior continues to evolve, with a mix of online and in-person shopping and a need for quick fulfillment options.

• Customer experience at the forefront: Postpandemic, AI-powered recommendations and personalized shopping experiences offered by AR and VR became vital for customer satisfaction. Currently, automation
and robotics are also streamlining business operations in the sector.

• Data-driven decisions: Cloud-based analytics leverage customer data to optimize inventory, predict demand and personalize marketing. The pandemic exposed the need for flexible analytics models using AI and cloud technologies.

• Cloud-first strategy: Cloud computing is the new normal, offering scalability and cost savings. Companies are increasingly migrating their IT infrastructure and applications to the cloud, and service  providers play a crucial role in managing cloud transformations.

• ESG as a priority: Environmental, social and governance (ESG) initiatives are a top concern for  executives. Consumer demand, regulations and investor pressure are driving the focus on sustainability and ethical practices. IT systems play a crucial role in ESG reporting and monitoring.

• Security and privacy as fundamental: Cybersecurity and data privacy are critical with the growing reliance on digital technologies for sales, marketing, and datadriven decisions. Companies need up-todate
security measures to protect data and comply with regulations like GDPR and the California Consumer  Privacy Act (CCPA). Service providers are essential for advice, support and technology implementation.

ISG’s work with clients and providers indicates that the above points are morphing into three contiguous trends shaping the U.S. retail and CPG business — and the value of IT services and solutions — through  2025. The three core developments, with associated solutions, are summarized below.

1. The evolving regulatory landscape: Changing requirements for data privacy, sustainability and labor

• Data privacy: The patchwork of data privacy regulations in the U.S. will likely see increased federalization efforts. Stringent guidelines on data collection, storage and usage will likely be implemented, potentially
mirroring existing regulations such as the CCPA. Such implementations require businesses to adopt robust data governance practices and transparent communication with their customers regarding data use.

– Data governance platforms and management services help classify and manage customer data, ensuring ongoing compliance with changing regulations. Consent management platforms capture and manage customer consent for data use.

• Focus on sustainability: Sustainability concerns are driving regulatory changes in the market.  Regulations promoting ecofriendly packaging, waste reduction and responsible sourcing are rising. Retailers
must adapt their supply chains and product offerings to comply with evolving regulations while aligning with environmentally conscious consumers.

– ESG tools and platforms can track resource usage and waste generation in the supply chain. Sustainability reporting tools analyze data to demonstrate compliance with regulations and environmental goals.

• Labor regulations: The tight labor market is prompting lawmakers to address issues such as minimum wage increases and worker classification. Retailers may need to adjust staffing models, explore automation and revamp employee compensation packages to adapt to potential regulatory changes.

– Workforce management platforms can optimize employee scheduling and labor allocation based on potential changes in minimum wage or worker classification. RPA can automate repetitive tasks, reducing reliance on human labor.

2. The omnichannel imperative: Convenience and personalization take center stage

• Seamless omnichannel experience: Consumers today expect a unified shopping journey across online and physical stores. Retailers must invest in robust inventory management systems that provide real-time
stock visibility across channels. Offering various fulfillment options, such as buy online, pick up in-store (BOPIS) and sameday delivery, will be crucial for catering to diverse customer needs.

– Omnichannel commerce platforms integrate online and offline sales channels, providing a unified view of inventory across stores and warehouses. Order management systems (OMS) streamline order fulfillment across channels, ensuring efficient processing of BOPIS and sameday delivery options. Real-time inventory
management systems track stock levels across all channels, preventing stockouts and ensuring accurate product availability information for customers.

• Hyperpersonalization: Data analytics plays a central role in personalizing the shopping experience. Retailers can leverage customer data to tailor marketing campaigns, product recommendations and loyalty programs, fostering deeper customer engagement and brand loyalty.

– Customer data platforms (CDPs) consolidate customer data from multiple in-house and third-party sources,
providing a holistic view of customer behavior for targeted marketing and product recommendations.  Marketing automation tools accelerate the creation of personalized email campaigns, social media marketing and loyalty program rewards based on customer preferences and purchase history. AI-powered recommendation engines analyze customer data to suggest relevant products based on browsing behavior and past purchases, fostering personalized shopping experiences for customers.

• Embracing emerging technologies: Integrating technologies such as AR and VR can revolutionize customers’ shopping experiences. AR can allow customers to virtually experience how purchases affect their environments, while VR can create immersive shopping experiences.

– AR, VR and extended reality (XR) development tools allow retailers and CPG companies to develop and improve digitalplus-reality experiences for customers. For instance, AR can allow them to use virtual try-on features for clothing or furniture placement visualization. VR specialists can create more immersive shopping
experiences, allowing customers to visit stores virtually or explore product features in a 3D environment. XR consultants can help retailers and CPG companies develop a comprehensive strategy for integrating AR, VR and other XR technologies into their customer experience.

3. The rise of automation and AI and the changing workplace: Utilizing IT to retain human connection and improve business capability

• Automation for efficiency: Automation solutions such as self-checkout kiosks and robotic warehouse assistants can improve business operational efficiency, address labor shortages and reduce costs. However,
implementing automation still needs to be balanced with maintaining a human touch in customer  interactions.

– RPA automates repetitive back-office tasks such as order processing and inventory management, freeing up employees for customer service and strategic initiatives. AI-powered warehouse management systems optimize order fulfillment through automated picking and routing items in warehouses. Self-service kiosks
and chatbots empower customers with self-checkout and basic service inquiries, reducing reliance on  cashiers and frontline staff.

• Workforce reskilling and upskilling: The evolving retail environment necessitates an upskilled  workforce. Retailers must invest in training programs to equip their employees with the skills needed to operate effectively in an increasingly technology-driven environment.

– Learning management systems (LMS) provide online training modules for employees to develop new skills relevant to automation and digital tools. Talent management platforms streamline recruitment, identify skill needs and personalize employee development plans. Employee engagement tools such as surveys, feedback mechanisms and recognition programs foster employee satisfaction and reduce turnover.

• Applying AI judiciously: Rapid advancement in AI’s ability, presence and applications enable potentially significant labor optimizations in the retail sector. Examples include tasks such as order fulfillment, inventory management and customer service inquiries, thus freeing employees for high-value interactions.

– Generative AI (GenAI) increasingly generates product descriptions, social media posts and marketing  materials, reducing the workload for marketing teams. Effectively developed and applied AI anticipates customer needs and product demand, allowing for optimized staffing and resource allocation.

• Future of work: Discussions about employee well-being, flexible work options and competitive compensation packages will continue to gain momentum. Retailers that prioritize employee satisfaction are
likely to attract and retain talent in a competitive market.

– Workforce management tools optimize employee scheduling based on real-time data and customer needs while promoting work-life balance with flexible scheduling options. Compensation and benefits analysis solutions identify competitive compensation packages and employee benefits to attract and retain top talent.

By proactively tackling these major developments, U.S. retailers can position themselves for success in the dynamic retail landscape. Embracing a data-driven approach, investing in technology and prioritizing both
customer experience and employee wellbeing will be critical requirements instead of differentiators in the coming years.

Why and how top-tier IT service providers help retail and CPG firms thrive

Navigating the dynamic retail and CPG landscape requires constant adaptation. Selecting the best-qualified IT service providers can be a game-changer, empowering clients to tackle evolving regulations, prioritize omnichannel experiences and embrace automation for a future-proof business operation. Below is a summary of how partnering with the best-qualified service providers benefits retail and CPG firms across emerging key challenges.

1. The evolving regulatory landscape: Staying compliant and sustainable

• Challenge: A complex web of regulations related to data privacy, sustainability and labor demands ongoing compliance efforts.

• Solution: Top IT service providers specialize in staying abreast of regulatory updates with the offerings listed below.

– Data governance platforms classify and manage customer data, ensuring compliance with evolving data privacy regulations such as the CCPA.

– Consent management platforms capture and manage customer consent for data use, fostering trust and transparency.

– ESG tools and platforms track resource usage and waste generation in supply chains, aiding compliance with sustainability regulations.

– Sustainability reporting tools analyze data to demonstrate environmental commitment and meet regulatory requirements.

2. The omnichannel imperative: Seamless experiences and hyperpersonalization

• Challenge: Delivering a unified shopping experience across online and physical stores is crucial for  customer satisfaction.

• Solution: IT service providers offer the following tools with expertise to create a seamless omnichannel experience:

– Omnichannel commerce platforms integrate online and offline sales channels, providing real-time inventory visibility across stores and warehouses.

– Order management systems (OMS) streamline order fulfillment for BOPIS and same-day delivery options.

– Real-time inventory management systems track stock levels across all channels, preventing stockouts and ensuring accurate product availability information.

– Customer data platforms (CDPs) consolidate customer data from multiple sources, enabling targeted marketing and product recommendations.

– Marketing automation tools deliver personalized email campaigns, social media marketing and loyalty program rewards.

– AI-powered recommendation engines analyze customer data to suggest relevant products based on browsing behavior and purchase history.

3. The rise of automation and AI and the changing workplace: Amplifying human potential

• Challenge: Automation and AI present opportunities for efficiency while requiring a focus on maintaining the human touch in customer interactions.

• Solution: IT service providers can help optimize the human-technology balance in critical ways as follows:

– RPA technology automates repetitive tasks such as order processing and inventory management, freeing employees for high-value interactions.

– AI-powered warehouse management systems optimize order fulfillment through automated picking and routing of items in warehouses.

– Self-service kiosks and chatbots empower customers with self-checkout options and basic service inquiries, reducing reliance on cashiers.

– Learning management systems (LMS) provide online training modules for employees to develop new skills relevant to automation and digital tools.

– Talent management platforms streamline recruitment, identify skill gaps and personalize employee development plans.

– Workforce management tools optimize employee scheduling based on real-time data and customer needs, promoting a work-life balance with flexible scheduling options.

Beyond solutions: Cultivating a competitive advantage

Selecting the right IT service provider goes beyond technology implementation. Service provider partners become strategic advisors who offer:

• Industry expertise with a deep understanding of retail and CPG challenges and trends.

• Scalability and flexibility to adapt to evolving needs and support growth.

• Security and compliance, prioritizing data security and adherence to regulations.

• Cost optimization, identifying opportunities to improve efficiency and reduce IT expenses.

• Change management, supporting employees in adopting new technologies.

By leveraging the expertise of top IT service providers, retail and CPG firms can gain a competitive edge in the market. It empowers clients to navigate the market complexities and thrive in the face of evolving  regulations, prioritize exceptional customer experiences and position themselves for long-term success.

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