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The future of retail ecosystems in Asia
Asia is the powerhouse of today’s retail industry, thanks to its strong sales growth and world-leading adoption of internet shopping. Roughly half of all retail growth in the world will come from Asia in the coming five years, with online sales accounting for 70% of the region’s growth from 2018 to 2020.
However, it is not just the headline numbers that are commanding attention, but also the retail ecosystems that are powering much of the region’s stellar performance.
Retail ecosystems are vast, interconnected groups of consumers, retailers and partners. Their spectacular growth in Asia — their spiritual home — is being studied by retail executives from all over the world.
Ecosystems start by combining “sticky” consumer services such as e-commerce, gaming or chat in a single platform or app. These attract a huge base, which in turn draws retailers looking for easy access to a critical mass of consumers.
And they are growing fast. In China, it took Tencent’s WeChat app just seven years to accumulate one billion users; its ubiquity enabled it to partner with JD.com and extend its presence in the e-commerce market, all the while using the vast amounts of data generated within its ecosystem to create personalised customer experiences.
Alibaba, meanwhile, rapidly expanded from marketplaces such as Taobao to create complementary businesses in payments, logistics and data analytics. It can use data from 600 million customers to create personalised recommendations; its Hema supermarkets, meanwhile, are just a part of its push into physical retail. Indeed, such ecosystems are no longer internet-only phenomena.
These two Chinese rivals were not the first to develop retail ecosystems. That honour goes to Amazon. But they tailored the model to the local conditions expertly, creating more open versions that flourished in the fragmented Chinese market.
The continued evolution of retail ecosystems will not be uniform, however. The factors that shape their growth in any particular country include urban density, population age and delivery costs, as well as the scale and maturity of bricks-and-mortar retailers and their online rivals.
STRATEGIC CONSIDERATIONS
These factors combine to create four types of ecosystems, which all raise different strategic considerations for retailers weighing how — or whether — to participate. Not participating is a fifth option, with its own potential risks and rewards.
The first option is a scale-open ecosystem, meaning it is both massive and open to all retailers as an alternative to building their own platform. Examples include Alibaba and Tencent, where thousands of Chinese retailers sell their wares.
Open ecosystem partnerships can give retailers access to rich data, new traffic, marketing synergies, cost-effective logistics and a capex-light asset model. Yet they also bring risks, such as disintermediation by the ecosystem’s own label, or less control over price-setting and the overall consumer experience.
Instead of partnering with an existing open ecosystem, you also could try to set up your own. Becoming an open ecosystem makes sense if your retail partners don’t compete and you can monetise scale advantages that others can’t replicate.
The second type is a scale-proprietary ecosystem, built by a retailer that partners with other companies to provide services for its own customers only. These systems grow more slowly and today tend to be formed by offline market leaders developing their omnichannel models. Within its proprietary ecosystem, for instance, the South Korean chain Emart has expanded into areas such as payments.
Building a proprietary ecosystem through strategic partnerships or alliances can reduce the need to make big investments in e-commerce, last-mile fulfilment, analytics and other capabilities. It helps if a retailer has privileged assets, such as customer data, that can attract other participants. The retailer also needs a lure for customers to keep coming back, such as a strong loyalty programme.
The likes of India and Indonesia do not have the smartphone penetration and logistics infrastructure of South Korea, or the same preponderance of big bricks-and-mortar retailers. Such conditions support emerging ecosystems — the third type. In India, for instance, Walmart hopes its 77% stake in the local e-commerce market leader Flipkart will develop into an ecosystem akin to those of Alibaba and Tencent in China.
India is one of the few markets where Walmart, Amazon, Alibaba and Tencent all compete and are investing in domestic partners — while also taking on home-grown rivals such as Reliance Industries. As infrastructure and other conditions improve, Indian ecosystems will most likely follow the winner-takes-all path of China, whereas those in South Korea are likely to remain less consolidated.
PROPRIETARY APPROACH
The final type can be described as nascent ecosystems and can be found in Australia, Japan and other countries that are less favourable to ecosystem development because of factors such as low population density or an ageing population. Retailers in these countries are likely to pursue proprietary ecosystems. For example, Coles in Australia is in the early stage of constructing a proprietary system. Its partners include the loyalty programme Flybuys, which provides customer data, and MuviNow, which provides video streaming services.
Of course, retailers are not bound to join or create an ecosystem. Bucking the trend is an option for a minority that are strong enough to build a potent omnichannel presence along more traditional lines. The autonomy this offers is attractive, but the investments required are sizeable; a go-it-alone retailer cannot afford to overestimate its access to capital, cost leadership or delivery prowess.
Others might evaluate their options and choose to sell, potentially to an ecosystem player. With retailing changing so drastically, sometimes that is the best way to maximise shareholder value.
Either way, retailers in Asia and beyond cannot afford to underestimate the massive implications of the ecosystem boom. In many ways, ecosystems have introduced a variant of musical chairs. There are only so many choices to make — and retailers need to make them before the music stops.
Melanie Sanders is a Bain & Company partner based in Melbourne. Derek Keswakaroon is a Bain & Company partner based in Bangkok. To read more on this topic, visit https://bit.ly/2IiGbTp
Source: https://www.bangkokpost.com/business/news/1671336/the-future-of-retail-ecosystems-in-asia