Member Exclusive   //   February 08, 2024  ■  30 min read

Modern Retail Index: The new e-commerce playbook

By Li Lu
01
Introduction

2023 was a year of ups and downs in retail. While many companies experienced financial downturns, such as Rite Aid’s bankruptcy and Macy’s continued slide in revenue, the industry was also presented with key digital opportunities, including the proliferation of AI technology kicked off by OpenAI’s release of ChatGPT at the tail end of 2022. 

According to the U.S. Department of Commerce, e-commerce sales have consistently grown in the U.S. over the last few years. It estimated that e-commerce sales for Q3 2023 – adjusted for seasonal variation, but not for price changes – increased by 2.3% from the second quarter of 2023. In a separate report on holiday spending, the Commerce Department noted that December spending was up 0.6% from the previous month, and up 5.6% compared to 2022. While showing slower growth than during the height of the Covid-19 pandemic, there’s clear evidence that e-commerce continues to expand and become a main channel for retailers.  

But e-commerce, and retail more broadly, do not have a catch-all playbook. Consumers shop differently depending on the category of the retailer, and these behaviors and needs dictate the type of e-commerce experience needed for each industry. To benefit from these growth trends in a competitive environment, retailers must examine the idiosyncrasies of their industry, including how consumers engage with their stores, to determine how to assemble the best digital experience. 

With all of this in mind, Modern Retail has taken a deep look at the top retailers — from big-box stores to pharmacies to specialty retailers — and analyzed the different ways they cater to customers’ online needs. In this Index, we drill down on the core components of every retailer’s business — and the ways they’ve modernized digital platforms to stay relevant with customers. 

Here’s how. 

02
Methodology

The Modern Retail Index (MRI) collects data covering the full year of 2023 from a list of retailers and scores them across a set of key dimensions to arrive at a total index average score as a benchmarking tool. 

In essence, we analyze and rank retailers based on point-in-time data and their performance relative to the other retailers in the index. The e-commerce dimension – our focus in this report – isn’t meant to be the final word on which retailers have the best e-commerce experiences. There are other elements that play into digital experience that are more difficult to quantify — brand equity, assortment and more. Instead, by diving deep into each of our sub-dimensions, we aim to highlight retailers making forward-looking investments and trends within unique retail sectors and business models to uncover dominant and emerging strategies

Within the e-commerce dimension of our rubric, retailers are measured on eight different sub-dimensions: 

  • Virtual product experience measures the performance and features of product display pages. These features on the product page can include the presence of different imagery and recommended products. 
  • Checkout measures the features within the checkout process and the speed and ease at which a customer can finish the checkout process.
  • Reviews measure the presence of a general review feature and any additional functionality.
  • Customer service measures the presence of digital customer service features.
  • Customer benefits measure the presence of different touch points that require customers to volunteer data such as contact sign-ups in exchange for perks, personalization or information. This option measures the presence of touchpoints for non-signed-in members or “guest” customers without an account. 
  • App scores measure the incentives that retailers add to their apps to create new customer touchpoints, such as in-store integrations or tools to keep customers engaged.
  • Social commerce presence measures the retailer’s presence and distribution through external social media platforms, such as Instagram and Facebook.
  • Paid membership measures the presence of a paid membership option along with the benefits it provides. 

Within the collection of indexed retailers, five immediate cohorts were identified: Big Box, Drugstore, Dollar Store/Off-Price, Home Goods and, newly added in this edition, Specialty Retail. The index includes Amazon in its own cohort due to its unique position in the market. 

This year, Modern Retail removed the grocery cohort as the retailers operate on a different model and are far more localized than the rest of the index.

03
Big box leads while department stores react

Walmart and Best Buy dominate in big box 

In the Modern Retail Index, big box has always landed in the top percentile of the rankings, and this year was no exception. The majority of big-box retailers ended up in the top half of the index – with Walmart and Best Buy taking the first and second spots. Their e-commerce dominance was maintained largely due to new innovations in both paid membership programs and applications of emerging tech. 

In fact, the addition of new measurements for paid membership programs this year boosted Best Buy and Walmart’s standing as the only two members of the cohort that offered – and indeed bolstered – membership programs in 2023.

In June, Best Buy overhauled its membership program to introduce a new tiered model featuring an additional mid-priced tier, stating in August that it expected the My Best Buy Membership program to contribute at least 25 basis points of enterprise year-over-year operating income rate expansion – and that it was seeing growth in year-over-year paid membership sign-ups. Its domestic gross profit rate for the second quarter of 2023 rose to 23.1% compared to 22.0% in 2022, results it attributed in part to its membership program. 

Walmart on the other hand has continued to expand its membership program’s benefits. In last year’s index, Modern Retail+ Research noted Walmart’s partnership with Paramount+ streaming services. This year, Walmart Plus added early access to promotional deals, including early access to Black Friday deals and an exclusive weekend of deals in July called Walmart Plus Weekend – a direct competitor to Amazon’s Prime Day. While Target and Nordstrom also offered deals in the same time frame, Walmart was the only retailer in this index that gave exclusive access to paid members. 

In prior years, we noted that some big-box retailers had made investments in AR and VR to improve their product experience, from Walmart’s virtual try-on to Best Buy and Target’s “see it in your space” features. However, consumer interest in AR and VR did not see much development in 2023, with greater interest shown in incorporating emerging AI technologies.

Walmart was the major stand out in the big-box group when it came to AI. Its partnership with Microsoft has allowed the retailer to integrate generative AI into its onsite and in-app search function. The new feature allows shoppers to present statements like “Help me plan a unicorn-themed party” instead of searching for individual items like “unicorn decorations” and “plates.” Walmart’s adoption of AI into its search algorithm focuses on the customer’s digital experience and improves overall site performance in the long term. 

Big box takes first steps into AI investments 

Within the big-box cohort, there were not many significant year-over-year changes to the retailers’ e-commerce experiences. The biggest area of improvement was the number of steps to checkout. In this year’s index, the cohort took an average 3 steps to checkout – that average was reduced to 2.3 steps this year. 

Regardless of a lack of seismic changes, the cohort has continued to perform better than the index average in the e-commerce experience dimension since 2021, with its cohort members typically ranking in the top places. Still, there was some up-and-down movement in ranking within the group this year due in part to the addition of the paid membership sub-dimension.

But despite the lofty e-commerce experience rankings for many in the group, big-box retail did not experience the strongest 2023 financial performance. Just about every retailer in the cohort saw revenue decrease in 2023. Only Walmart saw a revenue increase year-over-year, showcasing its strength as the top retailer in the e-commerce index. On the other end, department stores had the biggest fall in revenue. In the first seven months of 2023, department stores saw a decrease in sales of 1.5% compared to the same period in 2022. 

Kohl’s and Macy’s, in particular, faced a rough financial year, mirrored in their lower e-commerce experience rankings within the cohort, both of which reflect their struggle to stay relevant this year when compared to 2022 and 2021. The two retailers saw rankings fall due to two new key additions to the index, the specialty retail cohort and the paid membership sub-dimension. Kohl’s and Macy’s both underperformed against new retailer additions and also both do not utilize a paid membership program to increase customer benefits. Modern Retail has measured customer benefits since 2021, but many retailers have moved beyond traditional loyalty programs and have started using paid memberships to create new benefits. The lack of a paid membership program has caused Macy’s and Kohl’s to fall behind their cohort members, Walmart and Best Buy, and CVS, a drug store retailer.

“I think the unfortunate thing is, it’s not clear what they can do at this point, because they started so late to address this,” said retail analyst Steve Dennis about department store relevance. “What’s the reason all the people started shopping at TJ Maxx and Ulta and Target and Amazon? What is it they’re going to do to win that business back? Because it’s a declining category as a business model, so if they don’t start gaining back significant market share, they’re just going to slowly sink into oblivion.”

To counteract this, department stores have started integrating emerging technologies, especially AI.

Kohl’s offered a clear example of an AI-powered tactic to generate buzz: The retailer created an AI tool specifically for the holidays called Story Book Magic that allowed customers to input information about gift recipients to create customized stories and gift lists to help inspire gifting ideas. Customized gift guides were a key holiday strategy to help lift Q4 revenue, with gift guides being one of the most used and best-performing holiday marketing tactics – as seen in Modern Retail’s Holiday Marketing and Commerce Strategies report.

On the other hand, Nordstrom employed AI more operationally to help improve functions like customer service and to enhance the retailer’s ability to buy trending styles for upcoming seasons. “We are also focused on what we call our fashion map [which] essentially takes a natural language-based approach with deep learning to interpret images and information from social networks,” said Nordstrom’s CTO Edmond Mesrobian in an interview with VentureBeat. ”This allows us to get to know customers through a natural language conversation, as opposed to keyword searches that are very taxonomy driven and hardcoded. We are continuing to work on achieving AI discovery to get closer to our customers in a personalized way.“ 

While the department stores did not perform well financially, they continued to improve their digital experiences. Kohl’s used a customer-facing AI tool aimed at generating short-term buzz to draw in customers, and Nordstorm used behind-the-scenes AI functions to improve workflows. Both strategies focused on turning around falling revenue. 

Not dissimilarly, the cohort’s top players like Walmart also invested in AI, but from a financially more stable perspective. This allowed them to take their time with building out AI tools and also to shop for technology partners, like Microsoft. 

Given the uncertainty of the market throughout much of the year, department stores found themselves in the position to play catch-up in 2023 resulting in more reactionary e-commerce strategies. The rest of the big-box retailers, like Walmart and Best Buy, remained industry leaders and focused on progressive and forward-looking e-commerce enhancements.

04
Drugstores increase digital to offset a poor financial year

CVS leads in drugstores

Typically, members of the drugstore cohort have not seen much movement in their ranking positions from year to year, as in 2022 and 2021. But this year’s results saw an unexpectedly improved performance from drugstores. CVS, the top drugstore retailer in the cohort based on performance, took fourth place overall in the e-commerce experience dimension, surging ahead by 13 places year over year. CVS’s jump is heavily attributed to the addition of a paid membership sub-dimension. Within the index, CVS had one of the most robust membership programs due to its recent investments – more on that below. Among the cohort, it also had the best financial momentum score, with leeway to invest more heavily in its new loyalty programs.

As was the case with some big-box players, CVS’s improved standing this year was due to its robust paid membership program, CVS ExtraCare. And, to note, it is the only drugstore within the cohort to offer a paid membership option, having recently revamped its program to include both free and paid membership tiers, ExtraCare and ExtraCare+ respectively. What makes this program different from Best Buy’s strategy is the incorporation of an additional business. 

CVS has excelled at linking both sides of its business, non-prescriptive products and pharmaceuticals, through its membership program – a key feature that has allowed it to thrive in the drugstore industry. This competitive offering allows subscribers to access free shipping for over-the-counter and prescription product types alongside additional benefits including discounts on CVS-branded OTC medications and a 24-hour pharmacist hotline – which undoubtedly upsells more products. 

CVS also saw the most customer interest on Google search, retaining its position as the top-searched drugstore just ahead of Walgreens for most of the year. Its popularity among consumers has correlated to its ability to stay afloat during 2023’s financial turmoil, but more notably, being able to reinvest in itself to improve its digital experience.

Drugstores improve reviews for better social proofing

The biggest disruption this year among drugstores was Rite Aid filing for bankruptcy. As a result of that bankruptcy and the company’s poor financial standing, Rite Aid has made few to no improvements to its e-commerce experience in 2023. Therefore, any highlights or best practices that can be gleaned from the cohort this year mainly focus on the progress of CVS and Walgreens. 

That is not to say that Walgreens and CVS had the strongest 2023 financially: Walgreens reported a loss for operating income while CVS cut about 5,000 corporate jobs to save costs. But facing continued competition from more digitally native companies, like digital prescription platforms such as Capsule and Amazon’s new pharmacy program, they took steps to bolster their own digital offerings. 

Similar to the big-box cohort, drugstores invested in emerging technology, with both Walgreens and CVS adding virtual makeup try-on and in-store AR mapping to enhance product discovery and engagement. And CVS announced a new healthcare and pharma-focused app during its December 2023 investor meeting that leverages AI-powered chatbots similar in function to popular generative AI options to create closer connections with consumers. 

As a bright spot for the category, drugstores continue to outperform all other cohorts in the checkout dimension, maintaining the top spot from 2022 and 2021 – performing slightly higher than big box, and 29% higher than the index average. Drugstore retailers’ attention to fast checkout continues to reflect their customers’ focus on buying last-minute necessities quickly. This allows the group to recreate the experience of quick purchases customers make in-store for essentials, like toilet paper or toothpaste. 

The group also saw some gains in the area of customer reviews. Walgreens and CVS now offer verified reviews and pull in external reviews from other sources, such as a brand site’s product page. These new review features are important for “social proofing” – the effect on one’s belief or behavior of seeing the beliefs or behaviors of others – an important social factor for items that have a steeper learning curve, such as health products. By bolstering the review features on their sites, drugstores create an environment to display credible feedback and provide more information to make customers more comfortable when deciding on products that impact their health.

05
Dollar and off-price stores see revenue increases, but face new competitors

Since the index’s inception in 2021, dollar stores and off-price stores have consistently placed toward the bottom of the e-commerce rankings, and they continued to underperform in this year’s ranking against the average retailer in the e-commerce dimension. Dollar General and Dollar Tree both fell in ranks, while Burlington and Ross rose five ranks each. 

This year, Modern Retail removed the grocery cohort due to its different operating model and its more localized focus. Instead, specialty retail was added for its similarity to the rest of the index. As a result, the changes in the ranking for the dollar and off-price stores cohort were due to retailer index changes, rather than performance improvement. 

It should be noted, however, that the cohort’s lower rankings are in part due to the “treasure hunt” mentality that the group, specifically the off-price stores, evokes in customers. The treasure hunt mentality, as explained in Modern Retail+ Research’s 2021 Index, is described as when in-store customers feeling compelled to wander a store’s aisles in search of a unique find or a product at an affordable price, or a “steal.” The “treasure hunt” mentality is a competitive advantage that the cohort leans into because it primarily revolves around an in-store experience. Competitors, and retailers with the cohort itself, have been unable to recreate this experience online and some, like Burlington and Ross, chose to only have an in-store presence as a result. 

While the cohort focuses heavily on in-store strategies, it does use online for specific strategies, in particular the distribution of media. Dollar General and Dollar Tree both have weekly ad deals and coupons on their home pages. The two also allow users to select an option to see inventory for a specific store closest to the shopper. Their online shops advertise the idea of the “treasure hunt” and “steals” and give users a preview of what products are in-store – essentially providing a taste of the “treasure hunt.” While the cohort does have online shopping capabilities, the platform focuses on providing information and heavily pushing shoppers to stores.

Despite placing lower in this year’s ranking, many of the dollar stores and off-price retailers had stronger financial performances in 2023 than the top-ranking players from other cohorts. Interestingly, the cohort’s improved financial performance seems to be tied more closely to external economic factors, including a post-Covid rebound and a consumer shift toward cost-conscious purchases in light of a precarious economy and rising interest rates, rather than strong individual e-commerce strategies. Overall, retail sales were up 5.6% in 2023 compared to the prior year, according to the Commerce Department’s Census Bureau, but shoppers tended to seek out value-driven purchases.

In 2021, off-price stores T.J. Maxx and Ross Stores saw a major jump in revenue from 2020 — up 100% and 106% respectively — as customers returned to in-store shopping after the release of Covid vaccines. Ross’s growth is notable, in particular, because the retailer only sells products in brick-and-mortar stores and, therefore, has no revenue from online purchases. 

Dollar stores were flat throughout 2020 and 2021 but did see higher revenues mid-pandemic as shoppers, many of whom experienced job layoffs or furloughs, sought out lower-priced alternatives. Dollar stores improved slightly in 2022, seeing light revenue increases at an average rate of 7% year over year. (T.J. Maxx was the only off-price store that saw a lift in 2022.)

The cohort as a whole experienced revenue growth in 2023 at an average increase of 7% year over year, compared to the average decrease of -3% from the other cohorts. Although the growth was small, the improvement showcases the cohort’s ability to remain largely recession-proof thanks to its lower-priced items, which customers tend to seek out during an economic downturn. 

Several off-price retailers have been increasing their store counts in response to the recent revenue growth. Burlington planned to open 70 to 80 new stores in 2023, with the goal of opening 500 to 600 stores in five years. Ross said it plans to open 100 new stores, while T.J. Maxx planned 150 new stores in 2023.

T.J. Maxx’s parent company TJX Companies said its inventory improved in 2023 as a result of many retailers offloading their premium merchandise over the prior 12 months. “The third quarter is off to a very strong start and we are seeing tremendous off-price buying opportunities in the marketplace,” said TJX CEO Ernie Herrman in the company’s 2023 second-quarter earnings release. “Going forward, we continue to see excellent opportunities to grow sales and customer traffic, capture market share, and drive the profitability of our company.”

Despite the upward trajectory, retailers within the dollar and off-price stores cohort are not without competition. Some DTC brands have begun exploring partnerships with other rising off-price competitors, such as Offe.Market. Founded in 2022, Offe.Market sells rotating assortments of surplus products purchased from brands. According to Offe.Market, customers can get 30% to 80% off a brand’s full retail price. ​​“The reality is that every brand has excess inventory,” said Rachel Gannon, Offe.Market’s founder. “With smaller brands, the cash flow is tied up in inventory so the sooner they can sell it off, they at least make some of the money back.” Newer off-price retailers like Offe.Market may become real challengers to established off-price retailers as they have more well-developed e-commerce abilities. 

While the dollar and off-price stores cohort may not have the most robust e-commerce offerings when it comes to buying products online, many of the retailers have started offering more emerging technology on their websites and apps. Dollar Tree has added virtual store tours and virtual try-on through AR technology on its app – again, still focusing on that strategy of previewing online what’s in-store. Dollar Tree’s parent company Dollar Tree, Inc. also announced in September that it was launching an upgraded app with a better digital experience for Family Dollar, a sister brand to Dollar Tree. The announcement noted that a similar upgrade would be coming to the Dollar Tree app in early 2024. Likewise, T.J. Maxx offers the “maxx lens,” an AR-powered image search engine, on its app that allows users to snap photos of items and find similar ones for purchase on its website.

06
Home goods outpace other cohorts in emerging tech adoption

Lowe’s and Williams Sonoma lead home goods

The home goods cohort was introduced in the 2022 Modern Retail Index. Since last year, most of the cohort’s members have dropped in ranking. Williams Sonoma was the only retailer to increase its ranking year over year, rising from 13th place last year to the No. 10 spot this year. The cohort as a whole settled into the middle range of the 2023 index. This was a marked shift from last year when the cohort offered a mixed bag of performances, with retailers ranking as high as third place and as low as No. 27. A large part of the shifts come from the addition of the paid membership sub-dimension, but also the cohort’s specific emerging technology investments over the general digital investments that the index primarily scores.

In 2023, Williams Sonoma was the top player in the home goods cohort, rising three spots to No. 10 in the overall index. Meanwhile, Lowe’s fell from first place within the home goods cohort to second place behind Williams Sonoma within the group. A large part of both retailers’ top spots within the cohort can be attributed to offerings within their apps. 

A strong area of performance for Williams Sonoma is its paid membership program, which it calls its “Reserve Membership.” The membership is geared directly toward online shoppers, with all of its benefits being online or in-app only. Benefits available through the membership include free shipping, free virtual classes and access to a recipe app. Additionally, other than Amazon, Williams Sonoma was the only retailer in the 2023 index that used its membership to disperse a secondary avenue of owned media — its recipe app. Williams Sonoma also uses AR technology within the 3D shopping feature on its app.

While the membership program is not a new feature for Williams Sonoma, the retailer has continued to make improvements to it. One area of emphasis is collaborations. Williams Sonoma undertook several collaborations throughout the year, including with Netflix’s show “Bridgerton” and with experts in the field like celebrity floral designer Jeff Leatham. Many of Williams Sonoma’s partnerships include product promotions, but they also feature instructional classes. The classes directly feed into the retailer’s membership program by allowing paid users to attend free classes. 

Lowe’s moved down to second place this year by making marginal improvements to its app. In April 2023, Lowe’s announced its MVP business tools for its “Pro” customers – pro customers are typically professionals who work in home repair or improvement, order products in higher quantities and require business management tools such as in-depth purchase tracking. Lowe’s integrated the business tools, which include online quoting, repurchase shortcuts and order tracking, into its app to allow customers ready access to them. Lowe’s is likely to continue expanding its Pro business, along with other business segments, to offset low performance as new economic realities sink in and the home improvement sector suffers losses.

Home goods continue to lead emerging tech adoption

For the second year in a row, the home goods cohort continued to outperform the index average in all sub-dimensions. Similar to last year, the home goods cohort stood out as the cohort with the greatest application of emerging technologies. In 2022, the cohort represented 50% of AR?VR adoption among all cohorts. In 2023, it accounted for 42% of AR/VR adoption among all cohorts — the slight dip due to other cohorts increasing their own use of emerging technologies. 

This year, one of the biggest trends among retailers within the home goods cohort was their adoption of AI technology, a common theme across the board for retailers in 2023. Five out of the nine retailers in the home goods cohort have adopted some form of AI strategy. Much of this AI adoption can be attributed to the cohort seeing stagnant sales post-pandemic, as consumers returned to in-office work and focused less on home goods purchases, with the cohort as a whole seeing an average revenue decline of -11% year over year. The home goods cohort hopes to bring customers back to their websites and reinvigorate excitement over their products by adopting more emerging technologies, with a particular focus on AI. 

Several of the retailers are using AI primarily to support backend workflows — the most common application of the technology, which includes inventory and data management. The Container Store uses AI to optimize marketing campaigns by gathering real-time data on customer preferences that it uses to convert audiences, while Home Depot uses AI for customer support through chatbots and in-store employee hand-held devices. 

In an interview with the Wall Street Journal, Home Depot Chief Information Officer Fahim Siddiqui shared his enthusiasm about how his company is using AI. “I’m very excited about the power of generative AI, and AI becoming a core part of our technology stacks, both in terms of browse, search, call centers and what associates have in their handhelds,” Siddiqui said. “So that they can anticipate, have the productivity, and really be supportive and helpful — be it the chatbot we write, be it the application, or the device that our associates have in their hands.”

At the other end of the spectrum, retailers like Ace Hardware, Wayfair and Lowe’s are using AI technology mainly for customer-facing applications, particularly to assist in home projects. Ace Hardware uses AI within its “Visualizer” color tool to help customers choose paint colors on its website. In July 2023, Wayfair launched a tool called Decorify that uses generative AI to create virtual rooms and provide design inspiration for customers. The images that it generates are shoppable on Wayfair’s website. 

Finally, Lowe’s offers the most sophisticated AI applications of the group. The company has a dedicated employee team called the “Lowe’s Innovation Lab” that focuses on creating new emerging technology tools. In January, the Lab announced its first AI product recommendation chatbot, the “Lowe’s Product Expert,” which incorporates OpenAI’s ChatGPT technology. Lowe’s has also used emerging technologies to create tools for spatial commerce, an industry offering that brings e-commerce into people’s homes through AR/VR technology.

07
Specialty retail leads industry membership programs

Ulta and Sephora are tops in specialty retail

The index defines specialty stores by their focus on offering a specific product assortment that targets a precise interest or activity. The specialty retail category includes a range of retailers from a variety of industries from beauty to pet care. Retailers in this cohort include: Sephora, Ulta, Barnes & Noble, Dicks Sporting Goods and Chewy. Due to the different product categories among the retailers, comparisons are not often 1:1, such as comparing Barnes & Noble to Sephora. 

The specialty retail cohort is a new introduction into the index this year, and it managed to get two top-10 placements, with the majority of the cohort’s other members placing in the middle of the index. In the cohort, the two top players were both beauty-focused retailers, Ulta and Sephora. It’s important to note that certain categories have seen major financial gains in 2023, with beauty being one of those categories. In particular, the beauty industry has been a major category for online shoppers, where customers shop online at higher rates than other product categories. As a result, it’s not surprising to see Ulta and Sephora dominate the e-commerce dimension due to the emphasis that both beauty retailers and their customers place on online shopping. 

Ulta and Sephora performed exceptionally well in the reviews dimension. Both sites have a heavy focus on reviews to create social proofing, a concept discussed in the drug store cohort. Between the two, Ulta scored slightly higher than Sephora in reviews due to its ability to pull in reviews from other sites. For example, a MAC lipstick can have reviews left by shoppers from ulta.com and it will also pull in reviews from maccosmetics.com. This allows Ulta to beef up reviews, especially for newer products to help customers make purchase decisions.

Sephora uses a slightly different strategy to increase the review count for products on its site. Sephora has an incentivized review program. The retailer will send customers free products in exchange for testing and writing a review for the product. The reviews from free products are labeled “Incentivized” on the review page. Along with its incentive program, Sephora also pulls images tagged on social media into its review section, providing more images for product reviews. 

Specialty retail showcases the strength of tiered membership programs 

The specialty retail cohort’s members had fewer similarities to each other due to the wide range of product categories the cohort includes. But overall, the cohort as a whole performed above the index average. 

Despite the different industries they represent, almost all the retailers in the cohort have adopted AR/VR technology, a common trend throughout the entire index. The only exception was Barnes & Noble. Sephora, Ulta and Dick’s Sporting Goods are the main retailers that have adopted AI tools and use them very similarly to the home goods group – not surprising since home goods could also fall under the specialty retail description. 

Sephora announced plans for its Smart Skin Scan, which will allow customers to scan their faces using their smartphone cameras. The images will then be processed by AI-powered tech and the tool will give recommendations for skincare products. This comes on the heels of Sephora’s previously released and already popular ColorIQ scan that matches foundation colors to skin tones. Ulta announced a similar product through its partnership with Haut.AI. Haut.AI provides tools that allow users to scan images of their faces and skin in order to receive recommendations for skincare products. Haut.AI’s collaboration with Ulta is connected to Ulta’s skincare product category to push its products. Sephora and Ulta use AI to help solve customer questions about which best products are best suited for a situation, and they aim to provide more long-term customer facing strategies with the technology.

Dick’s Sporting Goods applied AI to other e-commerce experiences rather than the direct digital product experiences that Ulta and Sephora aim to provide. The sports retailer partners with software developer Metrical to implement AI tools for cart abandonment and inventory management. Metrical uses AI to target customers who abandon their carts with personalized marketing campaigns. This helps reduce the bounce rate from the site and also brings customers back to the site to complete checkout – common KPIs used for e-commerce. Metrical also uses AI to identify excess inventory and uses flash sales to reduce excess inventory in real-time rather than have the marketing team create campaigns that react slower to inventory changes. 

Another area of strength for the group is membership programs. While the cohort mostly offers non-paid memberships, the group places a large emphasis on creating loyalty programs with high incentives for the customer. 

Sephora has one of the most famous loyalty programs in the index. Its “Beauty Insider” program features a tiered system based on annual customer spending amount, with benefits increasing as customers spend more in a year. The program has several benefits, including free shipping, promo-event access and birthday presents. Recently, Sephora added a gamification component to its program called Beauty Insider Challenges. The challenges, many digitally based, can be tasks such as trying Sephora’s ColorIQ tool or using its buy online, pick up in-store feature. By completing the challenges, customers acquire points that they can later redeem for a variety of benefits.

Similarly, Ulta and Dick’s Sporting Goods also offer memberships based on a customer’s annual spend amount, with increasing benefits the higher the tier and the more the customer spends. Among the group, Barnes & Noble is the only retailer in the group that has a paid membership program. Similar to many other cohort membership programs, Barnes & Noble’s program has two tiers, free and paid. The only retailer that did not have a membership program is Chewy, but it does have an expanded shopping program focused on pet prescriptions, not too dissimilar to the CVS and Walgreens pharmacy branches. 

Other cohorts looking to create loyalty programs can look to the specialty retail group for examples of non-paid memberships that aim to increase annual spending rather than draw revenue from membership fees.

08
Amazon’s strategy goes beyond its own sites

The Modern Retail Index is designed to explain how well traditional retailers create digital experiences. The list of retailers does include some retailers with third-party marketplaces, such as Walmart with Walmart Marketplace, but they represent a minority within the list. As a result, and because of its size and reach across industries, Amazon was confined to its own category and landed below some big-box retailers in its results due to some of the tradeoffs that come from focusing on a largely third-party marketplace. Despite not placing number one in the index, Amazon still casts a huge shadow on its competitors and continues to lead many industry trends.

One of the areas that Amazon has led, and continues to lead, is paid memberships. Amazon’s Prime program has been around for many years and continues to develop further. The program started by giving consumers access to free expedited shipping, a major draw-in point given Amazon’s extensive fulfillment system. Now it includes a streaming package through Prime Streaming, a Twitch subscription, Prime reading, discounts on prescription medication and many more benefits. Amazon’s paid membership program creates extended touchpoints for its consumers outside of its primary website.

And Amazon has continued to expand its Prime services. Recently, the retail giant struck an agreement with Shopify to allow Buy With Prime on Shopify-powered merchant sites. Brands that use both Shopify and Amazon’s fulfillment network can use the Buy With Prime feature from within Shopify Checkout, with payments processed by Shopify Payments within the U.S. This allows customers to use another payment method while shopping, but again requires that consumers belong to Amazon’s paid membership program.

Not only did Amazon agree to work with Shopify, but also it agreed to collaborate with Meta. Ads on Meta-owned Facebook and Instagram show Amazon products that can be purchased within the apps if the user connects them to their Prime account. This has been deemed a win-win for both parties as it encourages consumers to shop through social commerce, a big focus for Meta, while also allowing Amazon to have a new touch point for reaching shoppers. “For the first time, customers will be able to shop Amazon’s Facebook and Instagram ads and check out with Amazon without leaving the social media apps,” said an Amazon spokesperson to CNBC in a statement. “Customers in the U.S. will see real-time pricing, Prime eligibility, delivery estimates, and product details on select Amazon product ads in Facebook and Instagram as part of the new experience.”

Not only does Amazon set the standard for a paid membership program, it will likely become a retail leader in AI technology. Amazon already has a successful cloud computing arm of its company and a physical AI robot, Alexa. And, it is continuing to invest more in emerging technologies. Amazon recently released Fit Insights, an AI-powered tool that provides brands with feedback about product sizing to help them improve future products. The tool aims to reduce return rates from customers who order multiple sizes of an article of clothing, but only keep one item from the order, a behavior known as “bracketing.” 

Along with Fit Insights, Amazon has also developed a new large language model (LLM) called Alexa LLM. The LLM will allow the Alexa device to connect with other APIs to perform customized functions. While a seemingly small step, it is important to note that Amazon is one of the few companies actively integrating AI into real-world devices – with the other notable example being Google.

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Key findings

Big box

  • Just about every retailer in the cohort saw revenue decrease in 2023. Department stores were the most impacted. In the first seven months of 2023, department stores saw a decrease in sales of 1.5% compared to the same period in 2022. 
  • Best Buy revamped its membership program to include a new tiered model and also an additional middle-priced tier. Best Buy said it expected the My Best Buy Membership program to contribute at least 25 basis points of enterprise year-over-year operating income rate expansion.
  • Walmart partnered with Microsoft to integrate generative AI into Walmart’s onsite and in-app search function to better interpret customer searches and inquiries. 

Drugstores

  • Similar to Best Buy, CVS recently revamped its membership program to include a free membership tier and a paid membership tier. The paid membership excels at linking both sides of its business, non-prescriptive products and pharmaceuticals.
  • Rite Aid filed for bankruptcy in 2023, and Walgreens and CVS did not have strong financial performances due to increased competition from more e-commerce savvy companies, like Capsule and Amazon’s Rx program. In response to its competition, the cohort has made digital improvements. 
  • The cohort increased its capabilities in customer reviews. Walgreens and CVS now offer verified reviews and pull in external reviews. These new review features are important for “social proofing.”

Dollar and off-price stores

  • The dollar and off-price stores cohort as a whole experienced revenue growth in 2023 at an average increase of 7% year over year.
  • The cohort is adding more emerging technology to their sites and apps. Dollar Tree added virtual store tours and virtual try-on, while T.J. Maxx offers an AR-powered image search engine. 
  • Retailers within the cohort are not without competition. Some DTC brands have begun exploring partnerships with other rising off-price retailers.

Home goods

  • The home goods cohort has the greatest application of emerging technologies among all cohorts. It accounted for 42% of AR/VR adoption among all cohorts in 2023.
  • Williams Sonoma and Lowe’s took top spots within the cohort largely due to the membership and emerging technology offerings within their apps. 
  • Several retailers use AI primarily to support backend workflows like data management, while others use the tech for consumer-facing applications like virtual room design.

Specialty retail

  • Ulta and Sephora, the top two retailers in the cohort, performed exceptionally well in the reviews dimension. Ulta pulls in reviews from other sites, while Sephora has an incentivized review program in which customers receive free products in return for writing reviews.
  • Despite the different industries they represent, almost all retailers in the cohort have adopted AR/VR technology, a common trend throughout the index. The only exception was Barnes & Noble.
  • Another area of strength for the group is its membership programs. While the cohort mostly offers non-paid memberships, the group places a large emphasis on creating loyalty programs with high incentives for the customer. 

Amazon

  • Amazon has led, and continues to lead, in paid memberships. Amazon excels in e-commerce through its paid membership program by creating extended touchpoints for its consumers outside of its primary website.
  • Amazon struck agreements with Shopify and Meta: shoppers can use Buy With Prime on Shopify-powered merchant sites; ads on Meta-owned sites show Amazon products that can be purchased within the apps if the user connects them to their Prime account. 
  • Amazon recently released Fit Insights, an AI-powered tool that provides brands with feedback about product sizing to help them improve future products. Amazon also developed a new large language model called Alexa LLM.