The Future of Retail: Eight Rules of the New Game

If you are a retailer and you want to understand the future of retail, you should take a closer look to Asia, which is home to the fastest Internet shopping and to the fastest growth in overall sales. Asia is also home to the retail ecosystem: the entire retail world is being reshaped by consumers and partners, and retailers are forced to make some essential changes to their business.

The retail ecosystems consist of a series of services such as e-commerce, chat, streaming, gaming, booking services, and payments in a single app or platform. These platforms attract lots of customers and collect lots of data, so it’s convenient for retailers to access this big amount of consumer data.

One example of an ecosystem is Chinese giant Alibaba, which was born in 1999 as a website that helped small Chinese companies to sell internationally, and then expanded with the creation of C2C and B2B marketplaces, such as Taobao, Tmall, and AliExpress. This led to the creation of new businesses in payments, logistics, and data analytics to understand customer’s needs. Now Alibaba is developing offline retail through acquisitions and partnerships with local players.

Ecosystems are not all the same, they take different forms in different places and could develop faster in some markets than others.

There are 10 factors which dictate the speed of ecosystem development and the type of the ecosystem: 

•       Urban density
•       Age of the population
•       Smartphone penetration
•       Delivery costs
•       Logistics maturity
•       Data regulatory environment
•       Online trust concerns
•       Prevalence of legacy bricks-and-mortar stores
•       Scale and maturity of bricks-and-mortar retailers
•       Scale and maturity of online retailers

Apart from these 10 factors, there are 4 different types of ecosystems.

Scale open ecosystems

These ecosystems are open to all retailers as an alternative to build their own platform. Alibaba and Tencent are two major examples.

Scale proprietary ecosystems

These ecosystems are not open to all retailers, but they are built by a retailer that partners with other companies to provide services for its own customers only. 

Emerging ecosystems

Countries like India and Indonesia lag in smartphone penetration and logistics infrastructure. As a result, their online retail penetration is relatively low. Yet, their lack of scale bricks-and-mortar retailers, combined with high density, means that they can potentially develop competing ecosystems rapidly as smartphone penetration, logistics networks and consumer trust in online shopping—a big issue in India—all improve.

Nascent ecosystems

Countries like Australia and Japan exhibit a combination of characteristics that make them less favorable for ecosystem development. Those conditions may include low population density, an aging population or a mature bricks-and-mortar presence. Unless scale online insurgents emerge to spur rapid changes, retailers in these countries will likely become followers in omnichannel innovation, taking the path of scale proprietary ecosystems.

New rules of the game

As ecosystems become an important part of the retailing landscape, companies need to rethink the assumptions that have helped them grow in the past. The rules are changing.

Rule 1. Relative scale has always been important for leadership economics … now scale can be virtual and asset-light. Instead of own the assets, retailers can easily plug into someone else’s platform.

Rule 2. A network of well-positioned stores still matters … but data and insights are the real competitive battlefields these days. Vast amounts of data generated within e-commerce, social media and payments are useful for retailers to create a personalized customer experience. 

Rule 3. Segmented customer propositions are being replaced by one-to-one personalization. In the past, retailers segmented customers and offered them targeted value propositions. Now, data, machines and artificial intelligence can help to know more about each individual customer and make personalized offers. For years, retailers have grown by segmenting customers and offering them targeted value propositions. 

Rule 4. Convenience is still king … but shoppers now expect zero lag between inspiration and consumption. Online shoppers, used to instant access and instant results now want to buy goods online and have them delivered at their door within 30 minutes, for example (this is what Hema does with customers living within 3 km of its stores. 

Rule 5. A retailer’s seamless omnichannel shopping experience (in its physical stores and e-commerce site) has been replaced by the seamless, rich and fun omnichannel experience across all ecosystem touchpoints. It is no longer sufficient to make it simple for consumers to find, buy and accept delivery of an item in an online-offline world. Now, retailers need to offer enriched experiences for multiple needs, such as social media and gaming, across the ecosystem. 

Rule 6. Merchandising, vendor management and operations still are essential … but now retailers need to build muscles for analytics, technology and managing ecosystem partnerships. Digital insurgents are quickly gaining ground by heavily investing in digital capabilities and aggressively hiring engineers. To remain competitive, incumbent retailers need to become equally ambitious—and make changes. For example, as they partner with digital businesses, they will need to learn how to manage those partnerships.

Rule 7. Leading retailers have long lived by the “innovate or die” mantra … now they have to do it quicker. With the rapid pace of change and the growing threat from digital insurgents, established retailers need to build a culture that allows for agility and continuous testing and learning to enter new categories and businesses that serve unmet customer needs.

Rule 8. Shareholders expect companies to meet short-term profit-margin and earnings-per-share targets ... now companies must manage shareholder expectations around a longer-term view of value creation. Investing to build digital capabilities can be capital-intensive and is likely to hurt profits until a retailer achieves scale. Short-term targets make it harder for incumbents to raise cash than digital insurgents, which are valued on expectations of exponential growth over a longer-term investment horizon.

How to behave?

Play solo: Retailers can decide not to participate in an ecosystem but to focus on building their own differentiated and competitive omnichannel model.

Participate in an open ecosystem: Use an ecosystem platform and the ecosystem partner’s capabilities.

Build a proprietary ecosystem: Create partnerships, alliances and joint ventures with external partners

Become an open ecosystem: Provide access and monetize one’s own capabilities, assets and infrastructure.

Sell: Maximize shareholder value by seeking to be acquired, potentially by an ecosystem player.

In conclusion, ecosystems constitute an important part of the new retail strategies and also a challenge for retailers to tackle the customers and situations of the future.

If you want to know more about ecosystems and how to use their potential to market Asian countries, reach out to us at info@textereadvisor.com