Ever since Netflix made the pivot from a DVD mail-order business to streaming video-on-demand (SVOD), it’s been besieged by the likes of Hulu, Amazon Prime Video, and free-to-stream sites like Pluto.tv that have tried to play catch up.

They realized the future of video streaming was primarily via on-demand.

Part of the reason is the shift of consumption patterns towards the internet. Millennials have brought the cord-cutting phenomenon to the mainstream and they’re no longer interested in 24/7 cable television but would rather stream sports, movies, and shows on their own devices.

Asia Pacific is viewed as a laggard to this dynamic. The proliferation of cheap, pirated DVDs plugged the problem of access to the latest Western movies and TV shows. But the web changed everything: as more households came online, Asian consumers warmed to the idea of watching content directly on their phones.

The dawn of a new era?

The benefits of SVOD are undeniable. There’s a far richer user interface and experience than linear television. Streaming devices also aren’t clunky and fixed to a certain place like a television is and with Asian consumers flocking to smartphones, the opportunity to sidestep television directly is very real.

According to App Annie, the time APAC consumers spent consuming video on their phones grew by 300% between 2015 and 2017. This ferocious rate of growth was double the global average in the same time period.

Asians are consuming a lot of video. Source: App Annie

While impossible to quantify the effect of this systemic shift on the Asian pirated DVD market, it’s fair to say that purchasing DVD players is going out of vogue, especially with younger consumers.

A rapid surge of wireless high-speed broadband networks and mobile data connections mean users have a wider library of content to choose from, and more channels from which to acquire it i.e. YouTube, torrents, and streaming services like Netflix, iFlix, HOOQ, ViKi, Viu, & others.

The SVOD market was valued at US$51.6 billion in 2016 and projected to grow by an annual rate of 8.93% until 2022, eventually settling at US$86.1 billion.

North America will occupy the largest market share, but the majority of growth will be driven by Asia Pacific.

Goes to show why players like Netflix & iFlix are doubling down on their efforts to win over the Asian consumer.

The race for dominance is on

For its part, iFlix, which has raised $300 million and counts companies like UK’s Sky Television as investors, explains that the very reason for its existence is to switch consumers over from pirated DVDs to licensed content.

Comparisons to Netflix are inevitable, but the Kuala Lumpur-headquartered startup has tried to downplay this impression.

CEO Mark Britt told TechCrunch that the two streaming companies don’t share the same target audience.

iFlix, with its price point of about US$3/month caters to the mass market, while Netflix, which is significantly more expensive at about US$10/month is trying to capture the “global elite”, he affirmed.

The Malay company, which now operates in 25 countries across Asia, the Middle East, and Africa, relies on local teams to lock in licensing deals and enhanced payment options via partnerships with telcos & banks.

That’s radically different than Netflix, which allows anyone around the world to sign up (excluding China, North Korea, & Syria) provided they have a functional credit card. This factor alone precludes the overwhelming majority of consumers in Southeast Asia (excluding Singapore).

Most Indonesians, Filipinos, Thais, and Malaysians don’t possess credit cards and this situation won’t change drastically in the near future.

Netflix understands this bottleneck towards acquiring new users. During a visit to Singapore in 2016, CEO Reed Hastings told journalists that they need to start offering more payment options in markets where there’s low credit card density.

It’s been almost two years since that visit without significant developments.

Netflix did partner with Lazada to offer six months of free streaming with every Live Up membership – opening itself to an affluent population and more points of entry into ASEAN as Live Up is introduced in other markets.

But so far the streaming giant hasn’t adopted any hyperlocal strategies for each specific country.

It certainly doesn’t seem like it’s preventing the company from continuing to scale into unchartered territory. Only last month, it was officially valued at US$100 billion after declaring that it added over 6 million new subscribers in Q4 2017, reaching 117.58 million subscribers globally.

While iFlix doesn’t publicly reveal its total subscriber base, but chairman Patrick Grove told Hollywood Reporter that they expected to breach the 5 million mark in 2017.

So iFlix has a more hyper-localized strategy, is focused on mass-market consumers, and offers a number of flexible payment options. On the other hand, Netflix is relatively expensive, needs a fast and stable internet connection, but offers better content, HD quality video, and popular original programming.

Which streaming provider is winning over consumers in Southeast Asia?

Our survey results

ecommerceIQ initiated an online survey with majority of respondents from the Philippines and Indonesia. For full transparency, overall sample size was small, but the insights generated are fairly discerning.

Let’s repeat the prior assumptions that we outlined. Senior executives at iFlix believe their product is skewed towards the mass market and tailor-made for viewing on mobile devices with slower internet speeds.

This is why iFlix allows users to download content on their phones in order to view it later. It also deliberately keeps prices low to reach an audience that may not be able to afford Netflix.

Netflix is slowly starting to build local teams, and by extension, is incorporating a local strategy, but it’s still isn’t as laser focused on Southeast Asia as some of its peers.

42.4% of survey respondents said Netflix is their go-to video streaming platform of choice. A similar number chose YouTube. iFlix was actually tied with Viu (which is focused on providing Asian content such as Korean TV and anime) – with 6.2% each.

Let’s put these numbers in context. The Philippines actually has some of the slowest internet speeds in Asia Pacific.

Both countries have low rates of credit card penetration. There were 8 million people who had credit cards in Indonesia, which translates into just 3.2% of the population. The Philippines actually follows the same trend when judged in percentage terms; 3 million credit card holders in 2015, representing roughly 3% of the population.

No credit card? No problem. Source: Informedmag

Despite structural bottlenecks, the data seems to show that Southeast Asian consumers will find a way to pay for the service if they truly desire it.

iFlix has partnerships with local telcos and banks; users can opt to pay from prepaid mobile phone balance and bundle data deals from their provider.

But only 3% of survey respondents actually said they would like to see more payment options and no one indicated that the reason for choosing a provider in the first place was because of ease of making a payment.

It gets more interesting.

Only 9.1% of respondents said a cheap price point was the reason to opt for the platform in the first place. That makes iFlix’s value proposition a relatively weak factor in winning over the Asian consumer.

The ability to download content to watch later ranked as the highest priority for them, followed closely by access to a large range of Western entertainment, original productions, and an excellent user experience.

12.1% said they opted for their video streaming platform of choice because of its range of local television shows and movies, putting it at 5th priority overall.

The insights slightly negate messages from senior executives at iFlix. CEO and co-founder of iFlix Mark Britt told Variety last year that “almost every assumption about subscription video-on-demand that is based on Western metaphors has failed in developing markets […] we are learning those lessons quicker than others.”

But is that view correct? Our findings seem to indicate that streaming media consumption in Asia isn’t a whole lot different than Western habits.

Research from eMarketer in 2017 said iFlix trailed Viu in Indonesia. The same report said iFlix was marginally ahead of Netflix, but the results could have been skewed because Netflix was blocked for a long time prior to the publishing of the study.

Source: eMarketer

eMarketer also quoted AIP Corporation and said that 39% of Filipinos with an internet subscription had signed up for iFlix, but the corresponding figure for Netflix was much higher, at 60%.

What’s the takeaway?

Southeast Asian consumers might be price conscious but they’re willing to pay a premium for services that add value to their lives. The Netflix brand is known for a vast library of content. The recommendation engine is intuitive and strives to understand a user’s preferences.

The results are also consistent with our analysis of the ride hailing space in Indonesia where consumers don’t simply opt for the cheapest player – they are willing to pay for a comfortable, safe ride, and an enhanced user experience.

The Netflix marketing and product teams have also invested considerable time and resources to build an aspirational brand through social proof, and storytelling.

Its original series such as ‘House of Cards’, ‘Stranger Things’, ‘Orange is the New Black, & ‘Master of None’ command far higher viewership figures than any other SVOD providers. The term ‘Netflix and Chill’ is almost household parlance now.

When consumers sign up for Netflix they gain social validation: they can share updates on Facebook, tell their friends, and be able to participate in discussions about latest episodes. Sure, iFlix is cheaper but can it engender the same kind of excitement?

Southeast Asia’s inbound tourism industry has grown by an annual average of 7.9% since 2005 and the region now accounts for over 30% of international expenditure in this sector.

But as high-end and mid-market hotel brands strive to attract a greater number of tourists to fill up their rooms, they might be missing out on an emerging demographic: the domestic Asian millennial traveler who is more likely to opt for a budget hotel.

According to E&Y, millennials and millennial-minded travelers are far more cost-conscious and experience-focused than their predecessors.

This view is augmented when you consider travel preferences in Asia. The top three requirements for travelers looking for recommendations within the region are to help them save money, make travel more comfortable, and to save time.

Preferences of APAC travelers. Chart: Amadeus

Millennials are increasingly likely to ditch glitz and glam for minimalism and function. And with travel within APAC democratized by the likes of no-frills carriers such as Air Asia, it’s only a matter of time before complementary industries start riding this wave too.

The budget hotel industry has certainly witnessed greater investor interest in the past couple of years looking to solve a key problem – standardization. It’s often that travellers booking online even after combing through ratings & reviews are commonly surprised upon arriving at the hotel.

The idea to club together existing hotels, upgrade their facilities to ensure safety & comfort, and bring them under a unified brand was popularized by India’s OYO Rooms. The startup has raked in US$450 million in funding primarily by Softbank.

Since 2000 the Chinese tourism industry has also witnessed a surge in budget hotel franchises, aiming to address the historical issue of lack of standards, safety, trust, and reliability. Franchises like the China Lodging group and 7 Days Inn are now worth billions.

ZEN Rooms is another startup that operates on a similar model and was brought to Asia by German startup incubator Rocket Internet in mid-2015. It’s now present in seven countries across Asia, namely Indonesia, Singapore, Hong Kong, the Philippines, Malaysia, Sri Lanka, and Thailand.

At the time of launch, the company pointed to the expanding nature of regional travel as a critical factor in its decision.

“…in terms of accommodation and travel, Southeast Asia behaves like one big country. There is a lot of inner-country travel. Indonesians travel from Jakarta to Bali, Malaysians from one city to another. There is a lot of inter-region travel, from Jakarta to Singapore to Bangkok to Kuala Lumpur, for example,” said co-founder Kiren Tanna while speaking to TechCrunch.

Most travelers in Asia like to journey closeby. Source: Euromonitor

In 2017, ZEN Rooms received a fresh capital injection of US$4.1 million adding further credence to its business model. New investors joined the party, namely Redbage Pacific and SBI Investment Korea.

And the Rocket Internet-backed startup isn’t the only contender in this space. Companies like Reddoorz, Nida Rooms, and Tingall have all propped up aiming to cater to an ostensible gap in the market. Cumulatively they’ve managed to attract US$10 million in funding so far.

Another competitor is Goldman Sachs-backed Red Planet. Its model is slightly different; rather than partnering with existing budget hotel operators, it chooses to own and operate its own properties. The company has over US$200 million in funding purportedly because it’s not an asset-light model, but is trying to solve the same pain points of uniformity of service.

“The [budget] hotels in Southeast Asia lack efficiency in many aspects and that eventually translates into substandard customer satisfaction,” explains ZEN Rooms co-founder and global MD Nathan Boublil to ecommerceIQ. “That’s the difference between Southeast Asia and the West. We want to improve the budget hospitality market with better sales and distribution, technology, and lowering the cost of procurement.”

“The Southeast Asian market is largely made up of small “mom-and-pop” hotels with no structural efficiency, which penalizes both guests and the hoteliers themselves. In the end, prices have to go down and the service level has to go up so that domestic and regional travelers can fully access travel,” he adds.

The Philippines in focus

The Philippines has rapidly emerged as one of ZEN Rooms’ largest growth areas.

Nathan says the dominant budget hotel chain before them only had 11 hotels on board which his company has surpassed since, although he declines to disclose the total number of partners they have.

11 certified budget hotels compared to the 6 million international tourist arrivals in the country in 2016 presented a large gap in the market and existing infrastructure – a fact alluded to by Domingo Ramon Enerio, Chief Operating Officer of the Philippines Tourism Promotions Board.

“We ended 2014 with 4.8 million tourists; this year we’re hoping to reach 5.2 to 5.5 million. We estimate that the demand for Philippine tourism is in excess of 10 million – meaning these are people who want to visit the Philippines but couldn’t for several reasons, whether it’s flights or not enough rooms or information,” he explained to Philstar in 2015.

The government has also aggressively promoted tourism in the island-drenched nation under the “It’s more fun in the Philippines” banner.

Hence according to official estimates, there’s still a gap of about 4 million inbound tourists who would like to visit the country but aren’t able to do so. This doesn’t factor in domestic tourists who might be put off by similar challenges of finding suitable rooms. So the total number is likely to be higher.

In the Philippines, ZEN Rooms first piloted a project to bring serviced apartments under its banner in addition to regular hotels. This has grown to be immensely popular with the category running at 95% occupancy and an average customer rating in excess of 9, according to Nathan. There’s 200 such budget serviced apartments in Manila alone with plans now to introduce the category in Kuala Lumpur.

Domestic travelers account for 50% of ZEN Rooms’ customers, with regional travelers making up an additional 30%.

In the Philippines itself, domestic travel is being fueled by an emergent middle-class, strong GDP growth, and a larger number of households with young children.

A larger number of households with young children are fueling tourism in the Philippines. Source: Euromonitor

The push towards branded serviced apartments does bring ZEN Rooms in competition with property owners on Airbnb but Nathan says they’re succeeding due to economies of scale and lower prices.

Typically Airbnb owners can’t offer things like late night check-ins or daily housekeeping unless they partner with a management agency like GuestReady. This also drives up costs as the agency will typically charge a commission.

Nathan points out that ZEN Rooms’ existing operations drive synergies between the two business units. As they’re already helping improve the level of service in budget hotels, the team can leverage its expertise and manpower towards serviced apartments. This helps facilitate things like late check-ins and quality controlled daily housekeeping.

The French entrepreneur is taking a long-term view of the market.

Really, we’re just starting our expansion in Southeast Asia, the region is huge and inter-country travel is growing very fast,” he notes.

Southeast Asia is, in fact, the world’s fastest-growing travel region according to the World Travel & Tourism Council.

And there’s little doubt about a palpable sense of optimism engulfing the region: 80 million new consumers came online via their phones last year, representing a 31% increase as compared to 2016. Asian millennials are also addicted to social media, internet shopping, and increasingly rely on the web for travel & tourism research.

It’s time for no-name, obscure hotels to partner up with players like ZEN Rooms in order to gain more exposure, efficiency and latch on to emerging millennial travel needs.

In a not-so-shocking move last month, retail giant Target acquired a grocery delivery startup for more than half a billion dollars to better compete with Amazon in the US.

Given the latter’s influence on the state of retail over the last decade, there has been a wave of excitement and fear sweeping the industry on a global scale.

The gradual consumer preference for digital has forced traditional businesses, predominantly in developed markets, to restructure internally or shut down. Case examples include retail leaders Macy’s, Sears, and American Apparel, whose legacies are now read about in bankruptcy stories.

Today’s headlines are revealing retail behemoths getting pushed to a corner by a new breed of entrants shaking up the retail status quo with business models revolving around ecommerce, omni-channel, click and collect. These new companies also tend to execute faster, reach further and understand how to utilize the goldmine that is the internet.

But understanding that “digital disruption” or “retail innovation” is needed within a traditional corporation isn’t merely enough to bring about real change.

The speed at which businesses incorporate digital channels will determine their chances at survival and relevancy to the next generation of consumers.

But by the time they come around to asking, “am I moving fast enough to catch up to my competitors?”

It’s already too late.

Shopping sprees in the West

Companies in the US felt heat from the Amazon Effect much earlier than India or Southeast Asia did, ensuing panic in direct competitors like Walmart, Target and Home Depot and forcing them to act quickly.

In the last two years alone, large corporations like the above invested over $5 billion in acquiring digital companies to beef up their portfolios.

While most of these companies have the capacity to carve out resources to build their own ecommerce operations in house, the pace at which the internet industry moves doesn’t wait for employees to learn “Digital 101”.

Not to mention the additional pain points such as internal resistance, lack of ecommerce talent and channel conflicts. Large corporations in general tend to struggle when venturing outside of their core competencies. The quickest way to patch up your business is to buy what you don’t have.

In regards to Walmart’s total $4 billion acquisition spree,

“Walmart is buying a new consumer base — upper-middle-class people who normally wouldn’t shop at Walmart — and these new relationships would bring higher margins.” — Jim Cusson, president of retail branding agency Theory House

And the “buy what you don’t have” trend is prevalent across the industry as more traditional players gobble up digital startups. In the last eight months alone,

Walmart [retailer]: acquires Bonobos for $310 million in cash and last mile delivery startup Parcel
Sodexo [food management]: acquires majority stake in Paris-based online restaurant and food delivery startup FoodCheri
Home Depot [retailer]: acquires online business of retailer of textiles and home decor products The Company Store
FTD [flower delivery giant]: acquires on-demand flower startup BloomThat
Target [retailer]: acquires same-day delivery startup Shipt
Luxico [luxury home rentals]: acquires US-based text messaging platform for hotels Hello Scout
Albertsons [grocery retailer]: acquires meal kit company Plated
McKesson Canada [healthcare supply chain]: acquires marketplace for natural healthcare and beauty products Well.ca

“Quality exits like this don’t stem from a ‘for sale’ sign tacked to the door.” – Chris Arsenault, board member at Well.ca

Of course, the enormous price tags of these acquisitions could be spent on buffing up the in-store experience but the returns would take a long time to see whereas Target’s own online sales growth from Q1 2015 to Q3 2017 show how successful the company has been able to leverage ecommerce.

Target ecommerce growth from 2015 to 2017. Source: Bloomberg

While an acquisition may seem like a quick, easy solution, there are numerous factors to consider to avoid backlash such as price point adjustments and consistent branding. Without understanding how digital can compliment the current business model, it’s likely the new asset will simmer and die in a couple of years. Simply put, don’t buy ecommerce for ecommerce sake.

Absorbing a digital company on the other hand brings about mountains of data, new customers, a solid brand, fresh talent and a seat at the hippest place where everyone hangs out, the internet.

Movement in the ASEAN region

As with most trends, they eventually infiltrate markets on a global scale and Southeast Asia is no exception. Even a couple of years before Amazon’s lackluster entry in Singapore, a few traditional retailers took the acquisition route to capture digital opportunity early.

Sephora bought online beauty retailer Luxola in 2015, Central Group acquired fashion e-tailer Zalora Thailand in 2016 and last year announced a joint venture with Chinese internet giant JD.com.

What has driven this flurry of activity by corporations across the world?

It is avoiding what Jeff Bezos describes as “Day 2”. An idea explained nicely by Bezos in his letter to stakeholders:

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.” – Jeff Bezos

Which day does your company operate in?

THE BACKGROUND

Asia Pacific really likes their whisky.

The gold liquid makes up 40% of multinational alcoholic beverage company DIAGEO sales in Asia, compared to only 25% of its global sales. One of the brands that sit under the behemoth is Johnnie Walker, the world’s most widely distributed blended whiskies.

The immensely popular liquor started out life in 19th century Scotland when John “Johnnie” Walker began selling it from his grocery shop. It was his son, Alexander Walker, who took the elixir global with a simple distribution model.

Shippers would take the bottled whisky with them on their journeys around the world, sell them, take a commission and handover remaining profits to the firm. Over 100 years later, the brand sells over 120 million bottles across 200 countries in bars, restaurants, breweries and lounges.

Four bottles of Johnnie Walker are consumed every second” – Pittsburgh Post-Gazette 

So the question arises, if in today’s digital world, people can order clothing, groceries, razors and even pets online, why not alcohol?

Companies like Drizly, Saucey, Paneco, Wishbeer and yes, Johnnie Walker, are attempting to offer their own solutions to ensure that consumers can enjoy a drink at any time of the day, but not many have found lasting success.

The Challenge

After shutting down its luxury e-tail site “Alexander & James” after a short four year run, DIAGEO publicly acknowledged that it was struggling to find success in online direct-to-consumer, referring to it as,

A pot of gold at the end of the rainbow that you need to keep on chasing.”

The company recently lost its place to Kweichow Moutai as reigning liquor market leader in China as the Chinese taste shifted to premium brands, especially for gifts and elaborate events.

DIAGEO Online

Moutai’s market capitalisation reached $71.5 billion on the Shanghai exchange in April, while Diageo’s London capitalization is $71.1 billion. Source: FT and Bloomberg.

In light of the company’s closure of “A & J” earlier this year citing that “consumers don’t look for specialty shops online”, the company is shifting focus to sell its products on platforms like Amazon and Tesco.

A partnership with a mass marketplace is appealing for two reasons; (1) it already has a large audience and (2) enables the sale of DIAGEO products online.

“We can raise awareness, but if they can’t buy the products, it’s void. [The partnership with Amazon] gives us that complete circle – we can entertain and educate viewers with how-to guides, and then make it as easy as possible for them to make the purchase,” said Johanna Dalley, World Class Global Director at Diageo Reserve.

“It’s the perfect storm – we are creating content that inspires people to buy our brands, and we can directly look at conversion and click-through rates.”

But what happens when strict regulations in emerging markets like Thailand prohibit the use of photos or celebrities to promote the brand’s lifestyle?

THE STRATEGY

Big C, one of Thailand’s largest retailers, offers a range of beverages from beer to wine online but the website states it cannot display any photos/logos/names of alcohol due to the country’s Alcoholic Beverage Control Act.

DIAGEO Online

Big C product selection for liquor on its website. Thailand has banned the promotion of alcoholic beverages sales but many companies risk the fine.

On the other hand, Wine Connection and Wishbeer, both operate websites in Thailand that contain photos of wine bottles, craft beers and sales. The companies are risking the 150,000 – 200,000 THB ($6,040) in hopes of a stronger payout.

A fair assumption given a recent study found that approximately 30% of Thai people started to drink alcohol after seeing images of their favourite celebrities posed with drinks.

If DIAGEO is willing to risk the fine, which no reports indicate it has ever been enforced, it has a strong direct-to-consumer opportunity in Southeast Asia – especially Thailand, Singapore and the Philippines – because of the region’s growing online adoption and preference for spirits and beer.

DIAGEO Online

Source: Chartsbin

DIAGEO, in particular Johnnie Walker, has long been eyeing emerging markets. Brazil, Mexico, Thailand, and China are some of the brand’s top seven global markets.

How has the company approached selling in these markets?

In Diageo’s case, the company has created a four-part ecommerce strategy:

  1. Developing a strategy and getting its ‘house in order’ (internal restructuring, hiring, etc.)
  2. On-trade and off-trade strategy
  3. Activating ecommerce channels (strategic partnerships with pure players, delivery companies, etc.)
  4. Direct to consumer through individual brand websites

Anyone looking at DIAGEO’s key moves in the online space cannot say the company hasn’t tried.

In 2016, the company announced a partnership with Deliveroo to offer an ‘alcohol-on demand’ service called thebar.com in certain areas in the UK. It’s a similar and popular strategy like Wine Connection’s partnership with delivery company, honestbee, in Thailand.

DIAGEO Online

honestbee home delivery of Wine Connection products.

Charles Ireland, Diageo GM for Great Britain, Ireland and France, says DIAGEO is spending more money on digital platforms like Google, Facebook, Instagram and even dating app Tinder, than traditional media for the first time. The goal is to use videos and other forms of content to educate and raise awareness.

“There is a shift towards content marketing within Diageo more broadly. In terms of monetisation, we will see more partnerships with Amazon from a commercial perspective. Other retailers are content hungry too, and are looking for content for their websites. [We will] provide them with content if it helps people click through to purchase,” said Dalley.

THE FUTURE

In Asia, the demand for alcohol is not the problem when beer sales consistently outpace GDP growth like in Vietnam since 2009. The biggest challenge is lack of awareness and oscillating regulations.

“In terms of direct to consumer [selling], I think there are consumer goods companies that are doing it quite successfully, but we haven’t quite hit a successful formula yet and we’re continually working on it,” says Charles.

Keep walking Johnnie, you’ll get there.

GUEST POST BY: JEFFREY TOWSON

H&M and Zara are two companies I pay a lot of attention to in China.

  • They have great business models. Fast fashion is really impressive in general.
  • They are popular with Chinese consumers.
  • They are both following market leader Uniqlo in terms of expansion into second and third-tier cities.
  • They seem to be growing steadily, despite slowing growth in apparel overall.

Overall, both look like big winners in China going forward. But I think there are two potential threats emerging. More on this in a second. First a quick diversion.

I keep a list of questions that I think are both important but difficult. These are things I try to figure out over time. One of these questions is “will fast fashion work the same in China as elsewhere?”. As exemplified by Zara and H&M, fast fashion has been a stunningly powerful business model. It continues to expand in the Europe and US – and is now growing in emerging markets. But it’s still not clear to me how well it will do in China, where consumers are fickle, competitors are ferocious and mobile/ecommerce appears to be changing almost everything in retail.

My answer to this question, thus far, is that the Western fast fashion giants are well positioned for China and for rising Chinese consumers.

The Zara and H&M business model has been studied extensively. It relies on syncing consumer behavior in stores with centralized design/manufacturing capabilities. Zara is the more extreme case with manufacturing in-house and re-design and shipping done on almost a weekly basis based on customer purchases. H&M, in contrast, has most of its manufacturing outsourced to Asia.

This “quick reaction” apparel platform makes great sense in China. If >50% of a season’s merchandise is re-mixed and re-designed during the season, that enables you to change with rapidly changing Chinese consumers. In this, “quick reaction” has a strength (i.e., reacting in real time to changing tastes) where many other Chinese consumer-facing companies have a perpetual problem.

This operating model also enables them to push discount versions of the latest designs from the fashion capitals (Paris, Milan, etc.) to China stores in a couple of weeks. Having design centralized in Europe also probably helps these stores in China. It is a differentiating strength relative to both local Chinese competitors and to “slower fashion” houses like Gucci and Prada.

Overall, fast fashion still looks like a great approach for rising Chinese consumers.

One more quick aside

(skip to the below points if you’re reading quick).

One of the benefits of fast fashion is you can have multiple style waves instead of 2-3 fashion seasons per year. One result of this is that consumers tend to come in more often as there is frequently new stuff to see. This, in theory, gets you greater revenue (people come more and buy more). You also get a greater “share of the consumer mind” (a Warren Buffett term). Greater frequency of consumer activity generally creates a stronger brand and a better relationship.

Financially, these frequent style waves also show up as less discounting of goods (a perpetual problem in fashion retail), higher revenue, and better working capital. That’s the theory anyway. And H&M and Zara do produce tons of cash, which they can then put into more scale and more stores. It’s a powerful approach when compared to traditional department stores or luxury fashion houses.

That said, it’s not clear to me that you get these same benefits in China. In particular, I don’t know if you see the same increased visits and branding benefits. Cycle times are already pretty fast in China. Most of the textile/apparel production is actually done in China / Asia. And I’m not sure you have the same historical expectations for a seasons’ new merchandise to contrast with. So I’m not sure about the revenue and gross margins of this model in China. Gross margins are typically 60% elsewhere.

Ok. Back to my main point, that there are two threats to the big China dreams of these fast fashion giants.

Threat 1: Ecommerce, mobile, and O2O are happening fast in China – and these companies are not real fast at this stuff.

Retailers are pretty much ground zero for changes in Chinese e-commerce, mobile, and online-to-offline activity. Digital transformation is hitting this sector like just about no other (except maybe auto and transportation).

First, the rapid adoption of everything mobile in China is transforming the interface with consumers. It is no longer just about walking in the mall and then going into a nice store like it might happen in Sweden. The Chinese customer experience is already a combination of the mall, a store, your activities in various online ecosystems and a rapidly developing logistics/delivery network. The two words you hear over and over in Chinese retail are digital and delivery. How this offline-online mix is going to play out and what “new retail” is going to end up looking like is unclear. But Chinese retail is where it is happening really quickly.

Against this rapidly changing Chinese retail landscape, here are some disturbing facts. Zara didn’t have an online store until around 2010 (about a decade after the Gap). And H&M didn’t start online sales in the US until around 2012. They also didn’t open a shop on Tmall until 2014. These companies are notoriously slow in digital stuff.

Both Zara and H&M are awesome in inventory and logistics. That is their strength. They have a powerful supply chain that connects retail activity around the world with centralized design and manufacturing, almost in real time. But they have been pretty slow when it comes to ecommerce and mobile. And these are precisely the things that are happening quickly in China – and that their Chinese competitors are particularly good at.

Threat 2: The local Chinese competition is moving upmarket.

You also need to consider the recent actions of the Chinese apparel giants such as Peacebird, Heilan, and Septwolves. They operate about 10x more stores than the foreign companies. Zara, H&M, and Uniqlo have 200-500 stores each. Helian and Septwolves have 2,000-4,000 stores each.

These big local competitors have historically been cheaper but they are now upgrading and moving upmarket. They are going to increasingly challenge Uniqlo, Zara, and H&M, especially as they continue to expand into second and third-tier cities.

When you combine #1 and #2, things get really interesting. What happens when you combine rising Chinese competitors with big digital, mobile and ecommerce disruptions? Does that change the fast fashion business model that has been so powerful in so many countries? This is the question I have been thinking about.

Anyways, that said, both H&M and Zara do appear to be in great shape in China right now. They both continue to open tons of China stores each year. They have a nicely adaptable model that is well-suited to the continually changing preferences of Chinese consumers. And Chinese consumers keep getting wealthier and wealthier. So that is all pretty great.

These companies may well turn out to be unbeatable in China, just like in most other places. But I am keeping an eye on these two particular threats to their China plans. We’ll see.


The first version of this article was published here

THE BACKGROUND

IKEA. There is no other furniture brand as iconic as the blue and yellow giant famous for its ready-to-assemble flat-pack furniture, dizzying warehouse stores,  and difficult to pronounce product names (GRÖNKULLAFYRKANTIG).

The Swedish giant claims its beginning started in 1926 when founder Ingvar Kamprad was born but it was only at the tender age of 17 when he started a mail order business selling pens, watches, jewelry, and picture frames after receiving seed money from his father.

Furniture would be introduced into the company’s product offering five years later and become a success.

IKEA ecommerce

Ingvar Kamprad, the founder and senior adviser of IKEA, is the world’s 10th richest man. Source: Aftonbladet

Six decades later, IKEA’s 300+ stores around the world require over 1%of the global supply of wood to make over 100 million pieces of furniture. No business can come close to the Swedish conglomerate’s size…right?

THE CHALLENGE

While no furniture business has been able to even remotely achieve the same brand identity and global scale that IKEA has in the last 60+ years, the world’s shift to ecommerce has forced the company to re-think its retail strategy.

The biggest threat comes from low-cost manufacturers going direct to consumer by following a “Warby Parker business model”, popular examples include Interior Define and Bryght in the US.

“By cutting out high-rent showrooms and warehouses, big-budget ad campaigns and big-name designer, these companies can offer great prices and bring in greater profits.” – NYT

“This year has been quite challenging in terms of sales. After many years of good sales, this year we have seen weaker launches, stiffer low-price competition and changing consumer behavior. We are revising sales targets downward for the year, but remain very optimistic and ambitious,” Jesper Brodin, IKEA CEO, then MD, told a global suppliers’ conference in Almhult earlier this year.

“People are making choices in different ways. Retail is getting tougher, and there is a bigger fight for the marketplace than ever before. We need to be much more aggressive and the price-volume equation, which is part of IKEA’s DNA will help us.”

With the success of ecommerce companies like Amazon making headlines everyday, IKEA, along with every other retailer in the world is being reminded that retail is evolving and the traditional company finds itself having to learn new tricks.

THE STRATEGY

While late to the online shopping scene, up until 2016, the company was officially present in 28 countries and offered ecommerce in 14 of them. Even with no new ecommerce ventures in 2016,

IKEA recorded at 30% jump in online sales to $1.6 billion, a small fraction of total sales but nonetheless impressive.

“We weren’t one of the early adopters but we’ve matured in our thinking about it,” Peter Agnefjall, former IKEA CEO told the New York Times. “We realised this is not a trend, it’s a megashift.”

The company has never been one to shy away from innovation. Its successes include its in-store cafeteria and very own startup incubatorfocused on food innovation, disruptive technologies, customer experience, disruptive design, sustainability, manufacturing, supply chain, and analytics.

It’s not then surprising to learn that IKEA has become one of the first to actually incorporate VR into its brand new mobile app launched only yesterday.

IKEA Place is part of the first wave of augmented reality apps that work with Apple’s new ARKit technology and iOS 11 to allow customers to “place” furniture in their apartments. While late to the show, the company has managed to outpace other pure players.

IKEA ecommerce

IKEA Place uses VR to allow users to easily visual what a piece of furniture will look like in their homes. Source: IKEA

Its push into applications could be attributed to world’s growing affinity for the mobile phone and by analyzing its own customer behavior. In Australia, the company’s website pulls in 40 million visits per year – 50% of which comes from mobile.

At this point in time, IKEA sells its products only on its own websites but has dabbled in the idea of establishing an official presence on Amazon but no confirmation has been made by the company yet.

There has however, been a partnership between IKEA’s “smart light bulbs” and Amazon’s virtual assistant device Echo to promote the latter’s line of smart home products. Owners of IKEA’s voice controlled light bulbs will be able to adjust the brightness of the bulbs through voice command by not only Alexa but Google and Apple’s Siri as well.

IKEA ecommerce

IKEA Smart Light Bulbs controlled by voice command.

“Unlike other companies, IKEA doesn’t fear the cannibalization of offline channels by online channels.

This is not without precedent, IKEA’s UK online store becoming the region’s largest outlet, without absorbing sales from existing stores.

“It’s just one among our many initiatives to make our products available for as many people as possible. And we are seeing big opportunities by leveraging upcoming digital technologies to their fullest,” said Inter IKEA Group Chief Executive Torbjörn Lööf.

THE FUTURE

IKEA Group is aiming for 50 billion euros in sales for 2020 and to open 18 new stores by end of year. It also has been eyeing growth opportunities in India and Southeast Asia but execution has taken much longer in these emerging markets.

As a fully independently owned company, IKEA must ensure that an average of 30% of the production value of sold goods should be sourced from within India, and within five years of the initial investment. As ecommerce is new to the Scandinavian company, it must test various fulfillment models including pickup points, third-party depots and the use of small-format stores for click and collect.

But the company hasn’t stopped making strides towards its aggressive target and continues to invest heavily in ecommerce. IKEA recently announced that a shoppable IKEA webstore would go live in Singaporein two weeks and in Malaysia in 2018.

IKEA ecommerce

Jesper Brodin, IKEA CEO. Source: dagensps.se

New IKEA CEO Jesper Brodin, who recently succeeded Agnefjall in May this year, will focus on building multi-channel retailing in almost all of its markets before 2017 finishes. He definitely has a tough job ahead moving the giant forward.

But according to Agnefjall, the CEO job involves “working 365 days a year, 15 to 16 hours per day”, which explains the admirable dedication founder Ingvar Kamprad still has for the company.

“Oh, I have so much work to do and no time to die,” he said.

Amen to that.