The McKinsey Global Institute (MGI) , the research arm of consulting firm McKinsey & Company (disclosure: I am an alum) released a report (exec summary pdf, full report pdf) on Big Data and analytics last week. The report makes a number of thought-provoking assertions and I encourage you to take a look.
The basic thrust of the report is that
Analyzing large data sets—so called big data—will become a key basis of competition, underpinning new waves of productivity growth, innovation, and consumer surplus as long as the right policies and enablers are in place.
MGI is known for its careful and rigorous analysis; you won’t find the breathless coverage of a new trend that you typically see in the popular press. For them to write a ringing endorsement of big data and analytics is very noteworthy indeed and bodes well for companies that are embracing data and analytics in a serious way.
I was delighted to see that retail is one of the five industries the report examines in detail. The report starts off the retail section with
In the coming years, the continued adoption and development of big data levers … could increase operating margins by more than 60 percent for those pioneers that maximize their use of big data. Such a boost in profitability would be especially significant in a sector where margins are notoriously tight.
What will produce this impressive margin gain?
Marketing levers can affect 10 to 30 percent of operating margin; merchandising levers can affect 10 to 40 percent; and supply chain levers can have a 5 to 35 percent impact.
I was glad to see that CQuotient’s current areas of focus mapped almost perfectly to the Marketing levers (and, no, we weren’t involved in writing the report :-)). Two eye-popping numbers jumped out in this section.
Amazon reported that 30 percent of sales were due to its recommendation engine.
Targeted e-mails … obtain ten to 18 times the response rate of e-mails that are not targeted.
These numbers support our basic thesis that infusing customer insight into retail decisions can move the needle in a big way.
As one might guess, the potential impact of these levers will vary from subsector to subsector within retail. According to the report,
I was pleased to note that customer micro-segmentation (one of our focus areas) has high-relevance across all sectors of retail. For the most part, I was in agreement with the chart, but some of the areas labeled as low-relevance left me puzzled. For example, why would Assortment Optimization have low relevance for clothing retailers? Localizing assortments, even just size profiles, can have substantial impact.
Nevertheless, the chart is a good starting point for retail executives trying to figure out where the low-hanging fruit might be in their subsector.
End of Part 1. I will complete my summary of the report in the next post.