Modern Retail Index 2022: How top retailers’ digital business models stack up

In 2021, the dominant narrative across our Modern Retail Index reports was the return to stores after post-Covid vaccine and the enduring effects of the pandemic on retailers. Now in the 2022 edition of the Index, the thought on everyone’s mind is a looming recession. In the transition between 2021 and 2022, the retailers covered in our analysis saw a slowdown of online sales after the rapid increase of digital revenue during the pandemic. 

Faced with more meager consumer spending, many retailers are laying off employees in order to prepare for hard economic times. The CEOs of both Wayfair and Amazon highlight this change, with Niraj Shah, CEO of Wayfair admitting that “we scaled our spend too quickly over the last few years,” and Andy Jassy, CEO of Amazon, acknowledging that Amazon “hired rapidly over the last several years” after the company’s workforce increased by nearly 75% during the pandemic. Despite cuts, retailers continued to focus on investing in new features in hopes of future payoff.

In the face of a shifting retail landscape with new demands and dynamics, the Modern Retail Index (MRI) aims to provide an in-depth look at how these businesses have evolved their digital strategies to handle uncertain times. This research framework analyzes the maturity and breadth of a retailer’s digital strategy, not the retailer’s performance across all business aspects. As such, the scored dimensions have a focus on digital capabilities: E-commerce Experience, Ease of Fulfillment and Financial Momentum.

Now the results are in. This report will provide in-depth analysis of the X factors buoying or buffeting retailer’s digital futures: their financial momentum and performance. You’ll also find an overview of our complete findings as well as an overall ranking of retailer performance across dimensions.

For more detailed analysis on our other dimensions, check out the other reports in this series.

Read our full report on the E-commerce Experience Dimension here.

Read our full report on the Ease of Fulfillment Dimension here. 

The Modern Retail Index (MRI) collects data from a list of retailers, buckets and scores the data into dimensions and creates a total index average score as a benchmarking tool. Retailers are given a deviation percentage from the index average to denote above or below average performance. The average changes depending on the list of retailers and the time period of data collection to show a snapshot of the retailer space at specific points. 

The index uses three main dimensions that are further broken down into sub-dimensions to measure a retailer’s performance. They are presented here in the order in which they impact our model, from most to least heavily weighted:

• The E-commerce Dimension deep dives into sub-dimensions of the online shopping experience to create a better sense for which retailers have made forward-looking investments and how they ladder back to their unique retail sectors and business models. The dimension’s subdimensions include: virtual product, checkout, reviews, customer service, customer benefits, app and social commerce presence.

• The Ease of Fulfillment Dimension focuses the retailer’s ability to get the end product into the consumer’s hands when purchases are made through its e-commerce platform. The dimension’s subdimensions include: fulfillment options, post purchase, returns and payments.

• The Financial Momentum Dimension gives a picture of the retailer’s performance and the rate at which revenue has increased or decreased within a 6-month period of time. Absolute revenue is also measured to take into account older retailers that make up a large portion of market share but do not grow as quickly as new retailers. The dimension measures profit and operating margins to better understand the efficiency at which the retailer runs. Please note that the index does not separate financial momentum into digital versus brick and mortar. The dimension’s subdimensions include: total revenue, revenue change, profit, profit margin and operating income.

Within the indexed retailers — chosen by highest overall revenue — five immediate cohorts were identified: Big-box, Drug Store, Dollar Store/Off-Price and Home Goods. The index includes Amazon in its own cohort due to its unique positioning in the market.

While many experts are discussing the chances of a looming recession, many of the retailers in the index have already experienced a slowdown in revenue growth. In 2022, indexed retailers saw an average revenue increase of 2% quarter-over-quarter in the first half of the year. If 2021 was a year of recovery for retailers after the release of the Covid vaccine – retailers saw an increase of 23% in 2021 – 2022 saw a slowdown as markets balanced out after a year of compensatory consumer spending post-lockdown. Looking ahead, average revenue change will likely decrease as the market heads further into a possible recession and as more companies continue to lay off employees.

But not all financial indicators were down. Average operating income percent and profit margins stayed at healthy levels of 5% and 32% respectively. This was on par as compared to 2021, with last year’s index showing an average of 7.2% for operating income percent and 29.1% for profit margin. While companies saw dips in sales during 2022, retailers managed to keep profitability pretty even with 2021 by maintaining operational optimizations, in part by leaning on layoffs to reduce costs. 

Big-box retailers excel in e-commerce and fulfillment, but see growth slow

As a group, big-box retailers performed high in terms of both e-commerce experience and ease of fulfillment, but that didn’t always translate into strong financial momentum. While the cohort had higher average revenue and profits compared to other cohorts, they performed at an average rate in growth, with slightly under 2% revenue growth quarter-over-quarter. In both of the other dimensions, the cohort made either incremental changes now or invested in bigger future plans that have yet to give returns. As a result of this slower movement toward digital evolution or a sharp shift in tactics, the big-box retailers have succeeded in maintaining their revenue in 2022. 

A standout in the cohort was Nordstrom. The speciality retailer saw an exceptional growth rate of 17% in quarter-over-quarter revenue. Despite its high revenue growth, Nordstrom has a below-average operating income ratio at 2%. This outcome makes sense in light of Nordstrom’s current strategy: For many years, it has tested the waters with a variety of investments, such as launching its smaller Local Stores in 2017, in the hope of finding a winner. With the number of investments it makes every year, its operating income decreases due to revenue being funneled into supporting these new experiments. 

2022 was no exception. Nordstrom leaned more heavily into its shop-in-shops concept and continued to build out options for brand partners. While the retailer does see immediate payoff from its continued investments, it also offers a warning to others that new investments often come at the cost of lower margins. 

Drugstores make heavy investments to diversify post-Covid offerings

CVS ranked number one overall when it came to financial momentum, while Walgreens and Rite Aid fell towards the bottom of the dimension. Though its members landed on different ends of the index, the cohort followed similar spending and investment strategies in 2022. 

In September 2022, CVS agreed to acquire Signify Health, a health risk assessment company that provides medical home visits and virtual appointments before connecting users with follow-up care. The acquisition aligns with a statement CVS executives made during the company’s investor day in December 2021, in which they said the company was planning a “capability-based acquisition.” The acquisition follows CVS’s 2018 acquisition of Aetna, which boosted its pharma business. 

“I think the biggest factor contributing to CVS’s growth is their continued shift to focusing on providing health services,” said Brad Jashinsky, director analyst at Gartner. “This has been in the works for a number of years now.” CVS’s movement into this field is expected to continue, and its e-commerce investments will likely shift from its standard site to its pharma e-commerce options — an app and a specialty pharma site.

Walgreens is not far behind CVS: The competing retailer already has a majority stake in VillageMD. In November 2022, Walgreens Boots Alliance’s VillageMD announced a deal to acquire medical care centers operator Summit Health, which owns CityMD, to further increase its reach within healthcare offerings. Although Walgreens fell to the bottom of the dimension ranking, its investment in VillageMD helped provide a buffer. In its Q4 2022 financial statement, the drugstore retailer reported its healthcare segment brought in $622 million sales, indicating that its diversification strategy helped the retailer – at least in a topline sense. 

“These dynamics have made the [drugstore] businesses look for other opportunities,” said Neil Saunders, managing director of GlobalData, a retail consulting firm. “One of these comes from a deeper push into health care,” he added, noting that health care is “relatively recession proof.” 

Despite lack of digital, dollar store and off-price retailers see wins as consumers penny pinch

Despite lower performance in the e-commerce and fulfillment dimensions, the dollar store/off-price cohort placed in the middle of the index in financial momentum, outperforming a number of big-box retailers. The dollar store subgroup gave a strong financial performance, with both Dollar General and Dollar Tree having positive year-over-year growth. Both of the retailers’ CEOs attributed the achievements to customers trading down higher priced items for lower priced dollar store items — driven by anxiety over a looming recession. 

In the off-price subgroup, only T.J. Maxx, the sole off-price retailer in the index with a shopping-enabled site, saw positive growth, while Ross Stores and Burlington Coat Factory both saw decreases. Although T.J. Maxx did see increased sales, TJX Companies CEO and President Ernie Herrman said on an earnings call, “U.S. comp sales for the second quarter came in lighter than we expected as we believe historically high inflation impacted consumer discretionary spending.” 

According to John Tomlinson, the global director of research at M Science who covers off-price retailers, the big culprit for TJX’s traffic slowdown was discretionary spending moving toward other leisure activities. “There’s also a ton of travel this summer, so people likely weren’t out shopping as much,” he said.

Home goods have mixed performance due to distribution models and audiences 

Similar to big-box, the home goods cohort was a mixed bag of performances. Home improvement retailers, Home Depot and Lowes, ranked at the top of the cohort, while online-only retailers, Wayfair and Overstock, fell to the bottom. The traditional brick-and-mortar-based stores, such as Restoration Hardware and the Container Store, settled into the middle of the dimension’s ranking.

At the top, Home Depot and Lowes saw big wins in profit margins in 2022, while Ace Hardware saw lower profit margins. A key to the two winners’ success was their renewed focus on professionals rather than DIY customers. After DIY trends declined after the decline of stay-at-home orders and behavior, professional customers received renewed attention. 

Neil Saunders, managing director of GlobalData, noted that “the real driving force of the sector is now the professional who continues to be busy with construction, repairs and remodels.” ​​ Home Depot has traditionally had a robust pro-program that includes special delivery options and discounts. Lowes has been building up its program to continue to compete with Home Depot, while Ace Hardware has fallen behind. 

In the middle of the pack were many of the traditional retailers, which ranged from high-end to accessible products. Regardless of the retailers’ price points, they performed similarly to one another. In particular, Restoration Hardware and the Container Store saw about the same level of financial momentum – 5% quarter-over-quarter growth with 52% profit margins and 1% growth with 57% profit margin respectively. Compared to home improvement and online furniture stores, traditional stores did not see the same volatility after the release of the Covid-vaccine, instead experiencing relatively steady revenue growth and profit. 

At the bottom sat the online-only retailers, Wayfair and Overstock. The digital-purchase-based furniture stores both have had difficult years and, in particular, saw a decrease in sales as consumers started spending less time at home as the pandemic wound down. In fact, Wayfair lost almost 2 million customers in its second quarter of 2022. While Wayfair did see a drop in customers, the retailer does have a best-in-class virtual product experience within the cohort – and possibly across the index. With tools like its AR 3D room planner and its wide range of home goods products, Wayfair is still able to hold onto a strong market position. YipitData, a data insights tech company, found Wayfair had the largest share of the furniture shopping market — 14.41% — in its 2022 Home Goods Market Share Index. Considering its wide range of features, products and market share, it seems the online home goods retailer has taken a page from the big-box cohort and is making investments now that will hopefully bear fruit in the year ahead. 

Amazon grows but experiences tension where it overstretched 

While Amazon saw revenue growth in the period covered by the 2022 Modern Retail Index, in the quarters following data collection, Amazon reported heavy impacts from external factors. During its Q3 2022 earnings call Amazon’s CFO Brian Olsavsky warned that widespread inflation, increased fuel prices and rising energy costs have affected the company’s sales growth. 

Much of the retail giant’s investments are in logistics and fulfillment. Amazon added more than 450 warehousing and fulfillment centers to stock, sort and move items over the last two years. But as e-commerce sales have slowed in recent months, Amazon has been left with more warehouse space than it needs. As a result it has pivoted and monetized these spaces with a new paid service, Amazon Warehousing & Distribution,  to let sellers use its fulfillment centers and warehouse space for long-term stockpiling and automated distribution. The retailer’s new program signals a change in its plans from focusing on growing new e-commerce sales to looking for new revenue streams. 

While Amazon has struggled in 2022 to utilize its fulfillment centers, the retailer has sought opportunities even in the face of an economic downturn. Andrew Lipsman, principal analyst for retail and e-commerce at Insider Intelligence told Modern Retail that “two key areas of savings, in the near term, at least, are automation and saving on capital expenditure.” Amazon, compared to indexed competitors, has spearheaded automation efforts and has been heavily investing in robotics and other emerging technologies to optimize warehouses and reduce cost. 

With the threat of a recession exerting pressure on all cohorts, each one has responded with different e-commerce experience strategies. Some have leaned into existing strengths and best practices, doubling down on improving things like foundational site experience. Others moved into new industries to capture new consumers and boost anemic revenue streams. Ultimately, each cohort must respond to unique consumer behaviors and product assortments that shape their online platforms and prepare them  – for better or worse – for a recession’s financial impact.

Big-box remains focused on fundamentals, making incremental improvements to site fundamentals, like reviews

• While the cohort has not made significant shifts in e-commerce experience, it remains best-in-class in this area.
• Top performer in the index, Macy’s, raised in rank due to social commerce investments.
• The biggest winner and retailer that saw the biggest increase in rank year-over-year, Kohl’s, focused on improving its fundamental site features.

Drugstores add new business into the dual business model

• CVS and Walgreens have started adding healthcare services into their business model.
• As a result of the business model shift, drugstores will likely focus on digital prescription and healthcare sites to further bolster those revenue streams.
• Non-prescription digital sites will see slower improvements due to the focus on pharma and healthcare platforms.

Off-price and dollar stores eye opportunity in the recession

• Many off-price stores remain offline and have no shoppable websites.
• Dollar stores see a bump due to customers looking for cheaper alternatives as recession concerns continue to grow in consumers’ minds. 
• Dollar Tree adds Pinterest commerce into its folds – a particularly strong play due to dollar-store DIY projects that the social platform hosts.

Home goods excels in virtual product options

• The cohort excelled in the virtual product sub-dimension, in particular through the cohort’s high investment in AR technology. The group accounted for 50% of retailers that incorporated AR technology.
• The cohort also performed strongly in the reviews sub-dimension, providing the customer with more information and additional social proofing.
• Lowe’s stands out in the cohort and among home improvement competitors with a live streaming strategy that focuses on DIY projects to highlight its product assortment.

Amazon continues to stretch, but feels more competitive heat

• Amazon has continued to build out new branches and enter new retail categories, including: pharma, apparel, home goods and gaming. 
• In particular, its move into pharma places a big emphasis for other drugstore retailers to up their prescriptive e-commerce experience to stay competitive and retain buyers. 
• While the retail giant casts a long shadow across the retail industry, it’s not to say that it isn’t challenged by other retailers, particularly by new competitive subscription offerings.

Read our full report on the E-commerce Experience Dimension here.

As supply chain challenges, customer expectations and competition continue to exponentially increase, retailers have had to revisit the ways they deliver their products to consumers. Some retailers have made tech investments, anticipating future payoffs down the road, while others have completely revamped stores or warehouses to meet the expectations of today. Regardless of the route, it’s clear that each cohort’s customers and product assortment greatly impact the fulfillment strategies both in terms of operational efficiencies and customer satisfaction.

Big-box focuses on the future and looks to emerging technologies

• The big-box group did not see large changes to their customer-facing fulfillment offerings, but many added new technology, such as robotics, to their supply chain —  anticipating future payoffs. 
• While most of the cohort decreased in standing, Walmart increased in ranking year-over-year, moving up five places by expanding its delivery options and adding new features.
• Retailers, like Target and Best Buy, have also shifted their warehouse and store strategies to turn stores into fulfillment hubs for digital orders.

Drugstores localize to support prescription delivery

• The cohort outperformed other groups in the payments score: 47% above the index average and 4% above big-box. All measured drugstores added new payment methods to their sites.
• With vaccines becoming more common, the cohort has seen dips in sales without the halo effect from demand for Covid vaccines. As a result of this dip, drugstores have started to refocus efforts on their prescription business.
• Drugstores have doubled down on prescriptions by focusing on local fulfillment in order to keep up with new competitors.

Dollar stores and off-price models don’t focus on fulfillment

• T.J. Maxx was the only store that moved up in rank. The retailer made improvements to its product accessibility score by adding order online and pick up in store, albeit only at select locations. 
• Dollar stores realized certain services needed a tech upgrade. Dollar Tree partnered with Shipt to allow for new expedited shipping and also added a new buy now, play later feature with PayPal Credit.
• Because of the business model, the cohort did not score well in fulfillment. Overall product prices are lower than standard MSRP and the retailers would incur higher costs if more shipping options were added. 

Home goods has the most diverse strategy pool

• Brick-and-mortar home goods stores had more fulfillment options than online-only, and those retailers tend to follow strategies seen in the big-box group.
• Online-only stores Overstock and Wayfair primarily focus on diverse payment methods and low-threshold free shipping, which was significantly lower than the rest of the cohort.
• High-end furniture retailers concentrate efforts on their select showrooms to sell bigger-ticket and customizable products rather than selling and fulfilling online.

Amazon leads the dimension — offering a glimpse at the future of fulfillment

• Amazon ranked first in the fulfillment dimension. The retail giant has always been at the forefront of fulfillment strategies, both supply chain and consumer-facing.
• Amazon has partnered with Affirm and Venmo to start accepting new forms of payments.
• The retail giant announced its first ever completely autonomous mobile warehouse robot, Proteus, to assist with a wider variety of potential uses for its warehouse staff.

Read our full report on the Ease of Fulfillment Dimension here.