5 problems retailers must fix in 2014

Amid aggressive discounting, little foot traffic, a shorter holiday season and severe weather, the end of 2013 was disappointing for retailers. Now with barely any time to catch its breath, the industry is bracing for even larger sea changes, such as mounting privacy concerns after massive data breaches, and retailers' desire to wean consumers off discounts.

As the new year kicks off, retailers are smack in the middle of three to five years of major changes that will redefine the industry, said Alison Paul, vice chairman and U.S. retail and distribution leader at consultancy Deloitte.

Paul hasn't seen change like this since big-box discounters such as Wal-Mart began to gain momentum 50 years ago. "I would say the last time there was this big [of] a change in the industry was in 1960, when many of the big boxes opened up and really opened the huge discount department store," Paul said. The biggest change before that—the invention of modern retailing in postwar America.

"I'm not even sure that either of those compare to this," she said.

The National Retail Federation's 103rd Annual Convention and Expo at the Jacob K. Javits Center in New York on Tuesday.
Bilgin Sasmaz | Anadolu Agency | Getty Images

Adding to industrywide nervousness has been a ho hum end to 2013. Holiday retail sales last year gained 3.8 percent compared to the 2012 holiday, according to the National Retail Federation. That 2013 gain fell short of its forecast 3.9 percent uptick for the sector.

Looking ahead to 2014, industry experts at this year's retail federation convention in New York had plenty of ideas for what's ailing the sector—and possible solutions. Read on for their ideas.

1. Boring physical store experiences

E-commerce was one of the most buzzed about trends in 2013, a year that saw online sales far outpace physical store revenue gains. Despite this meteoric growth, more than three quarters of retail transactions are still made at brick-and- mortar locations. But lately, that in-store experience sometimes has been diluted to transactions, with little engagement between brands and shoppers.

"We started with this theme last year and this year it seems to be resonating even more," said Paul Steinberg, senior vice president and chief technology officer at Motorola Solutions, which provides communication solutions to retailers.

(Read more: Without rebirth, malls face extinction: Developer)

Experts at NRF said shopping needs to be an experience, and retailers should take advantage of their physical assets to build a connection between consumers and their brand.

For example, Intel's booth displayed a full length "mirror" that allows shoppers to try on multiple outfits, then view, compare and share photos of the outfit with friends. Technology from Motorola scans what items consumers bring into the dressing room. Consumers can then tap a screen to order an out-of-stock item before they change back into their clothes.

"A pure transaction is more efficient online ... but retail is far more than just a pure transaction," said Jon Stine, retail industry director at Cisco Consulting Services, a unit of Cisco Systems.

2. Shopping using smartphones isn't great

Although e-commerce made significant strides last year, the capabilities of smartphones are still waiting to be realized. Smartphones are a great place for shoppers to browse items, but conversions to sales are very low. As a result, many retailers are exploring new ways mobile devices can be used in-store.

"The mobile device is essentially becoming the mouse to the physical world," said Jay Yanko, managing principal of retail for Verizon Enterprise Solutions, part of Verizon Communications.

(Read more: Showrooming left in the dust as shoppers go online)

Retailers are exploring mobile apps that track customers as they shop, sending them tailored offers when they reach a certain section of the store; recommending items based on past purchases; or allowing shoppers to program automated shopping lists. Forward-thinking companies need to create an "augmented experience" for shoppers, said Bob Moncrieff, PwC's retail and consumer advisory leader.

NRF: Holiday sales up 3.8% to $601.88
NRF: Holiday sales up 3.8% to $601.88

Lululemon's chief information officer, Allan Smith, for example, pointed to his brand's app, which allows customers to find nearby yoga classes.

But while retailers are beginning to acknowledge the importance of incorporating unique mobile technology into their stores, the trend is still several years away from being widespread, experts said.

Another challenge is where to assign the sales credit when an order is placed online and fulfilled in-store, said Janet Sherlock, chief information officer for Carter's children's store.

3. Reduced privacy in exchange for deals

Of course high-tech sales and personalized recommendations and coupons through smartphones raise all kinds of privacy questions—especially after industry-rocking data breaches for at least two major retailers, Target and Neiman Marcus.

A key industry question is: "Where is the line between helpful and creepy?" Some shoppers welcome targeted coupons, while others prefer not to be tracked. "It's absolutely a fine line and it's one that the industry's worried about," said Brian Girouard, an executive with global IT consultancy Capgemini.

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Experts already have found there are key factors that determine how much information a shopper is willing to share. Age is a big player, as millennials are much more accustomed to sharing data, said PwC's Moncrieff. Others are willing to share data as long as they receive some sort of value in return.

Intel Core i7-based Memory Mirror
Source: Intel

According to a study by Cisco, 52 percent of shoppers are willing to share information with retailers if they get a discount on their next purchase.

The decision also comes down to the particular retailer, as shoppers are more willing to share information with high-end stores, Capgemini's Girouard said.

The most important thing when implementing a mobile strategy, Cisco's Stine said, is respecting shoppers' boundaries. They need to be transparent and educational—meaning if a retailer sets up a camera in its stores, it should tell shoppers it is analyzing shopper behavior, not tracking each person as an individual. They also need to set up a method to allow consumers to opt out of these services.

4. Too much discounting hurting the bottom line

Discounts plagued retailers this holiday, as lower foot traffic had caused stores to slash prices. As a result, a laundry list of retailers have lowered their earnings guidance for the current quarter or 2013. And according to a note from Morgan Stanley analyst Kimberly Greenberger, many stores do not expect the intensely promotional environment to end in 2014.

One way to end this endless hunt for discounts is to innovate on products and unveil new must-have apparel items. "If retailers want to be around for a long time innovation is key, but also a good idea is probably worth exploring if you want to continue to differentiate," said Deloitte's Paul.

(Read more: Retailers' biggest problem right now? The sale bin)

5. Botched retail basics

Fancy brainstorming aside about new products and technology, 2014 largely will be about executing the basics of the industry such as on-time delivery and shoring up security.

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Many at NRF also emphasized that data breaches not only have an impact on the stores that were directly affected, but on the industry as a whole. Industry leaders called for a move away from unencrypted magnetic stripe cards found on most credit and debit cards.

"It's not about one, it's about everybody," Deloitte's Paul said. "What are we doing to protect our consumer data because in the end if you don't have trust, you don't have that consumer."

—By CNBC's Krystina Gustafson. Follow her on Twitter @KrystinaGustafs.