Here’s what you should know today.
1. Ikea is mulling 3rd party ecommerce sales
Ikea is mulling selling its ready-to-assemble furniture and home goods online through third parties.
In a statement emailed to Retail Dive, the company stated: “At IKEA we are curious and want to explore new areas and get new insights on how to reach and serve more of the many people. One part of that is that we are open to the idea of piloting and testing making IKEA products accessible through other online platforms than our own.”
The logistical sweet spot may be why the company has been so slow to ecommerce. Former Ikea CEO Peter Agnefjall attempted to spin Ikea’s slow migration to digital into a positive, saying last year that its late entry into online commerce could allow more nimble mobile capability from the outset. “We could have been faster, I could agree to that,” Agnefjall told CNBC last year. “But by being late we can skip a step in the technology development, straight to mobile and tablet.
Online furniture sales have emerged as a major growth area in ecommerce, rising 18% in 2015, second only to grocery. Some 15% of the $70 billion U.S. furniture market is now online, according to IBISWorld data.
Read the rest of the story here.
2. India’s Supr Daily raises $1.5M to expand its milk and grocery delivery service
The Supr Daily service is designed to bring formality and order to India’s chaotic system of morning milk deliveries.
Government reports suggest that as much as 68 percent of milk is ‘tainted’ as delivery people will water their milk down in order to get more bags and income for their lot. The milk can include additives like detergent, caustic soda, glucose, white paint and refined oil to mask coloration.
Milk is the main hook for Supr Daily service but customers can also buy every day essentials like bread, eggs, butter and coconut milk to save regular trips to the shops.
3. Recommended Reading: Selling stuff is no longer the point of retail stores
That’s the future of retail, according to a new breed of startups that have embraced physical stores as places for “brand experiences” rather than mere sales. Consider Outdoor Voices, an athletic apparel brand that has gained a cultlike following among young, primarily female fitness enthusiasts.
The company’s four stores are home base for gatherings like “dog jogs,” community yoga, and brunch parties. As CEO Tyler Haney explained at the TechCrunch event, its stores “are not about revenue, but community.”
In the middle of it all are the upstarts, among them Glossier, Outdoor Voices, Warby Parker, Harry’s, Bonobos, Rent the Runway, Everlane, and Cuyana.
They are leveraging newly available real estate to experiment with boutiques, showrooms, and pop-up shops. Using physical spaces to build offline community has another advantage: It’s one place where Amazon doesn’t care to compete.
Read the rest of the story here.
Here’s what you should know.
1. Facebook launches new shopping format
Facebook’s new platform, ‘collection’, increases the “likelihood of discovery and a purchase” by featuring a primary creative video or image above relevant product images.
Adidas used the platform to drive sales for its a new garment and complementary products, and saw a 5.3x return on ad spend
“People who tapped on the ad were instantly taken to a full-screen shopping experience that included complementary Adidas products to complete the look.
Tommy Hilfiger used the platform to for a marketing campaign targeting smartphones and saw a 2.2x higher return on ad spend. “Our mission was to make every look immediately available to all consumers worldwide,” said Avery Baker, chief brand officer, Tommy Hilfiger.
Read the rest of the story here.
2. Alibaba’s finance arm to allow financial institutions to set up shop in investing app
Ant Fortune, the investing app of Ant Financial Services Group (Alibaba Group’s finance affiliate), unveiled its new “Fortune Account” platform which will allow third-party financial institutions to set up shop inside the app.
With the new system, Ant Fortune will be able to transform into a business-to-customer marketplace
The app currently works as a retailer that features and sells selected financial products from its sister companies or third-party financial institutions. With the Fortune Account, third parties will be able to sell their own products to users directly and publish content on the app.
Read the rest of the story here.
3. Recommended Reading: ‘People aren’t spending’: stores close doors in ‘oversaturated’ US retail market
This week, Credit Suisse downgraded the retail sector, saying the outlook had become bleaker than it had anticipated in large part because of events in Washington. Other analysts have shown similar pessimism.
“The US market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel,” said Richard Hayne, CEO of Urban Outfitters, anticipating that retail retrenchment would continue “for the foreseeable future and may even accelerate.”
While retail executives are keen to state they do not plan to abandon bricks-and-mortar retail entirely, many now tend to see it on equal terms with online operations. Streets are hollowed out by web-based competition, and is increasingly viewed as a tool to be used by consumers“showrooming” – browsing – before buying online for less.
Read the rest of the story here.
With pure play online brands around the world adopting offline channels, which retail strategy is really the way to go? Is an online-to-offline (O2O) approach feasible for your brand? David Jou, founder & CEO of Pomelo, one of Southeast Asia’s best performing ecommerce fashion brands, shares his views on today’s definition of a “retail experience” and what it means for his company.
A few months back, I had a very memorable meeting with a prominent Indian investor. He was the number one ranked student among all Institutes of Technology in India back in his days as a student, sold his first company for a hefty sum to Amazon and now heads up one the leading venture capital firms in India. His perspective is particularly interesting because India over the last decade has experienced one of the steepest adoption curves for ecommerce globally.
I was given a bit of time to pick his brain at his office.
“Ask him your hardest questions, because he’s an absolute genius.”
I sat down, launched into a quick introduction of myself and Pomelo and got him up to speed about my margins, growth, the brand, our competitive advantage, the team, our factory etc. etc. I looked over and asked,
“Does that all sound good?”
“Yes, that all makes sense.”
“So, you think this all makes sense?”
“Yes I think you’re absolutely spot on and you’ve figured something out.”
So there it was, we were on the same page and the discussion could continue.
With the groundwork in place, I decided to ask him a question Pomelo had been considering over the past few months.
“Should Pomelo spend its capital on creating an offline retail footprint or on marketing its mobile app?”
I had asked this particular question to many before and heard variations of “forget offline, you’re online! Why would you want to deal with a non-scalable, hassle-filled business model that’s crowded and competitive. You’re exactly where you want to be. Double down!”
Without hesitation and much gusto he answered,
Astonished, I asked, “why?”
“Even 5–10 years from now, best case scenario, only 10–15% of retail spending in your markets will be online. 85% of spending will still be offline.”
So there it is. For the coming years, offline will remain an important part of the 360 retail experience. Think of Warby Parker, Amazon, Bonobos in the US who have all opened offline stores. Now how can online players really take advantage of clicks to bricks?
1. Provide concrete incentives to visit your offline location
Spend time with your team to figure out the ‘why’ behind your offline project. Why would your target customer come to this particular location and what benefits do they get from coming to it? Opening a flagship store for the sake of it isn’t a good enough reason, answer these questions first:
- Is it to showcase your physical product because it shows better in the real world?
- Is it to alleviate a particular barrier to purchase that exists in your category?
- Is it to provide a space where you can build a community?
If your “why” is to drive more sales or a generic “to increase awareness”, it will be hard to determine if you’re set up for success or failure. Imagine the location you’re contemplating is really a physical billboard to drive customer acquisition and that the metrics you track should be on that basis.
Amazon recently picked up a lot of attention following the launch of Amazon Go, an offline grocery store that boasts zero queues and no check-out. The major realization was that Amazon could reinvent the grocery store experience by getting rid of lines and cash and draw in more users online through a highly attractive offline experience.
2. Scrap traditional retail conventions
The key to success is to provide a differentiated experience and scrap traditional retail conventions. Remember that you’re not in the business of building more efficient candles, you’re after the next light bulb. Figure out how to disrupt the traditional store format that reigns in your category.
One great example is New York based workwear website MM.LaFleur that has become famous through a product it calls the “Bento Box”, a mail-ordered shipment that comes with four to six ready-to-try wardrobe staples.
The brand’s approach to its offline experience directly mirrors the Bento Box philosophy. Stylists curate a selection of products based on a survey customers fill-out when they book their appointment online. A lot of players in traditional retail would say the cost of having a personal stylist on hand for an unpredictable amount of customers is highly inefficient and consequently won’t scale.
MM.LaFleur’s success would suggest otherwise; they’re launching a showroom in Washington DC this March, in addition to a showroom in New York and pop-ups scattered the country.
3. Have a built-in digital marketing plan
One thing I would say is if you build it, they will not so simply flock. If your brand is considering an offline location, you have most likely built up a loyal following on social media, your email database and an efficient conversion funnel online. The trick here is to take the same approach with offline as you did online, and fully utilize it for your brick & mortar venture.
One of the best examples I’ve come across was by fashion label Marc Jacobs at the Marc Jacobs Daisy Pop-up Tweet Shop in 2014. The three day pop-up store in lower Manhattan used tweets and Facebook posts as viable payment methods, where customers walked out with products after tweeting or posting a picture about the pop-up event.
The pop-up was a huge success and the brand received a ton of PR via social engagement to reinforce the fun playful character of the brand all at the same time. This concept was later replicated at a few additional Marc Jacobs locations, including London.
What’s next for Pomelo?
Multiple mall staples in the US, such as BCBG and JC Penny are struggling to keep stores open. Long-standing department stores Macy’s had to shut down multiple stores, while scrambling to launch ecommerce strategies to stay afloat. Ironically, purely digital brands are beginning to adopt offline strategies, most notably eyewear startup Warby Parker and Rent The Runway. If the death of pure play retail is indeed true, then what is stopping Pomelo from pursuing an offline store strategy to become a global fast fashion powerhouse?
BY DAVID JOU, FOUNDER & CEO OF POMELO
Read more about David Jou in eIQ’s SPARK 40
With 600 million people, a growing middle class and rising internet penetration, Southeast Asia is often considered as the next gold rush for ecommerce. Alibaba’s $1 billion landmark acquisition of Lazada — Jack Ma’s largest overseas acquisition to date — happened here earlier this year. But headlines and hyperboles aside, how big is the opportunity for ecommerce in Southeast Asia exactly?
The $88 Billion Opportunity?
Little data exists on the current and projected size of the ecommerce market in Southeast Asia. Part of this is because it’s still a nascent industry and, as a result, legacy institutions like government and research firms are still playing catch up. Part of it is also due to the fact that C2C ecommerce, estimated to be anywhere from one-third to half of total ecommerce GMV, is mainly unregulated and untaxed. It doesn’t help that the majority of C2C in Southeast Asia actually happens on social platforms like Facebook and Instagram, facilitated by conversations on messaging apps like LINE and Facebook Messenger.
Having said that, several reputable organizations have taken a stab at assessing the size of ecommerce in this region. One of the earliest attempts at market sizing comes from AT Kearney in collaboration with CIMB. Published in early 2015 and titled ‘Lifting the Barriers to E-Commerce in ASEAN’, the report estimates the current market size at $7 billion (as of 2013), and projecting a future potential of $89 billion.
More recently, Google partnering with Temasek, released a report titled ‘e-conomy SEA: Unlocking the $200 billion digital opportunity in Southeast Asia’ that sizes the current ecommerce market at $5.5 billion (as of 2015) and foresees it to grow into an $88 billion market as early as 2025. However, it’s important to note that Google and Temasek paint only a partial picture as they are leaving out C2C and P2P marketplaces such as OLX, Carousell and Instagram because of difficulties in obtaining data.
Western vs. Chinese Ecommerce Growth Models: Why Existing Estimates on Southeast Asia’s Ecommerce Potential Are Wrong
$88 billion seems like a big deal but as soon as you put it in context, one may start to wonder if this is the right number. The US ecommerce market today is a $394 billion market. But then again, and quite obviously, the US is a much more mature ecommerce market and both Amazon and eBay are older than some of the junior staff on my team. What about China? China surpassed the US in 2013 to become the world’s largest ecommerce market in terms of GMV.
And today, Chinese ecommerce is a $700 billion market, making up about 13% of total retail in the country. With a population half the size of China, shouldn’t the future potential of ecommerce in SEA be a little bit brighter than a mere $88 billion?
Things become even more interesting when we look at the projected 2025 numbers and normalize them based on population size. This metric gives us an idea how much an average person spends on ecommerce in a given year. We’ve done this calculation below for key SEA markets as well as benchmark countries like the US and China:
A couple of things stand out here. Obviously, China is still the world’s largest ecommerce market reaching $3 trillion GMV and 25% penetration. By 2025, the average Chinese shopper is expected to spend north of $2,000 per year online, almost triple the amount Singaporeans will spend online and catching up quickly to Americans who, 10 years from now, will be spending almost $3,000 on ecommerce annually.
The other interesting bit is emerging SEA countries represented here by Thailand and Indonesia. Google and Temasek’s report projects ecommerce in these two markets to reach $11.1 and $46 billion, respectively. This number in and by itself is impressive but when normalized with respect to population size, the ecommerce GMV per capita numbers are disappointingly low — $155 and $157 for Thailand and Indonesia, respectively. Perhaps there’s an explanation for this.
US and Singapore’s GDP per capita are obviously much higher than that of emerging markets like Thailand and Indonesia, people have more money to spend in general, and China’s not exactly a developing country anymore with its GDP per capita projected to reach $14,000 by 2025.
Yet if we compare China and Thailand in the table below, we can see that Thailand’s GDP per capita is estimated to reach $11,000 by 2025, which is higher than China’s GDP per capita today and not far from China’s projected 2025 number. However, based on current ecommerce projections, Thailand’s per capita online spend will only be $155 or 1% of household purchasing power.
This doesn’t make sense given that Thai consumers do have spending power and retail makes up a large part of Thailand’s economy as evidenced by below retail penetration and GDP per capita numbers. Even if accounting for the missing C2C and P2P part—let’s say the other 50%, bringing the $155 to roughly $300—this number is still low compared to China today.
From 2006 to 2016, China’s ecommerce GMV per capita grew 127x. It’s hard then to believe that Thailand’s GMV per capita will only grow 9x over the next decade, especially given that Thai people are already spending more online on a per person basis today than Chinese did at the beginning of the Chinese ecommerce boom around 2006. This only makes sense if we assume SEA’s growth markets like Thailand and Indonesia will grow at a modest, Western-style pace of 18% (US 2000-2015) and won’t be growing at China ecommerce’s last 10-year CAGR of 68%.
As we’ll soon find out, the reason for this discrepancy is the faulty application of a Western-centric ecommerce growth model whereas the right model to size up ecommerce in emerging SEA is actually the Chinese model of hyper-growth.
Brothers From Different Mothers? Emerging Southeast Asia Ecommerce Has More Similarities With China Than Anything Else
The fallacy of existing projections is that they’re often based on a Western-centric model, in which the West is seen as the tried-and-true path towards ecommerce. However, for various reasons explained below, SEA ecommerce resembles China more than markets that developed earlier such as the US, Europe and Japan. As a result, we should be expecting high double-digit hyper-growth similar to the one China experienced over the last decade instead of the more gradual year-on-year progress of more legacy ecommerce markets.
1. Lack of offline retail infrastructure
“Why did internet ecommerce grow so much faster in China than in the USA? Because the infrastructure of commerce in China was bad. Unlike here, where you have all the (physical) shops: Wal-Mart, K-Mart, everything, everywhere. But in China, we have nothing, nowhere. So ecommerce in the US is just a dessert; it’s complementary to the main business. But in China, it’s the main course.” — Jack Ma, Alibaba Founder and Chairman
Bangkok and Jakarta are home to some of the most high-end malls and department stores across the region such as Central World, Paragon and Grand Indonesia. However, once outside of the capital cities, there’s much left to be desired. China is very similar, with most offline retail concentrated in tier 1 cities such as Beijing, Shanghai, and Guangzhou.
Retail GFA (Gross Floor Area) per capita is 2,200 sqm in the US versus 500, 500 and 100 sqm in China, Thailand and Indonesia, respectively, according to data from CLSA. As a result, the majority of consumers in Thailand and Indonesia have no choice but to shop online, especially those outside the bigger cities. Based on aCommerce aggregate numbers, 70% of orders are from outside Bangkok.
Like in China, all this is expected to accelerate ecommerce growth at a much higher pace than in legacy markets.
2. Cash-on-delivery as the dominant payment method
The lack of credit cards didn’t deter ecommerce in China from growing at 68% annually over the last decade. With a less than ideal financial system, logistics and delivery companies ended up filling the gap by offering cash-on-delivery (COD) solutions. In its heydays in 2008, COD was 70% of total B2C transactions in China. However, by 2014, Alibaba’s Alipay had surpassed COD as the dominant payment method, with over 85% of 11/11 shoppers expressing a preference towards using Alipay vs. only 21% for COD.
Today’s SEA is eerily similar to China 10 years ago. With credit card penetration in the low single digits, COD has become the dominant payment method, with 74% of transactions in emerging SEA paid through cash based on data from aCommerce. Like China, SEA ecommerce won’t rely on COD forever. With Lazada’s acquisition, Alibaba now is executing its master plan to bring Alipay and Ant Financial services into the region.
3. Lack of cross-border ecommerce due to high import duties and taxes
Cross-border ecommerce in China was never a big thing until recently, with the establishment of government-approved bonded warehouse zones which allow for faster international shipping times and lower fees. Global brands and retailers can now tap into the lucrative Chinese market by setting up stores on platforms like Tmall Global and JD Worldwide without having a costly physical presence in the Middle Kingdom.
Prior to this, ordering abroad was limited for many Chinese consumers due to high import duties (30%). (These import duties still apply to merchants who are not licensed to sell in China’s cross-border ecommerce network, e.g. ordering directly from Amazon.com).
Similar to China, SEA’s growth markets like Thailand and Indonesia today have prohibitive import duties and taxes. This lack of a level global playing field puts the pressure on developing a strong local ecommerce ecosystem which is what we’re seeing right now with the ecommerce bloodbath in Indonesia.
4. “No-Tail” ecosystem
Internet adoption in China and emerging SEA countries didn’t reach critical mass until the mid-2000’s. These markets skipped most of the Web 1.0 and “Web 1.5” booms and jumped straight into Web 2.0, leading to the formation of what we call a “No-Tail” ecosystem. As a result, digital advertising in these countries has lagged behind that of more mature markets like the US and Japan where companies like Facebook and Pinterest often see selling ads as the most obvious—and sometimes only—way to make money.
Lacking a mature advertising environment, Chinese internet companies have had no choice but to look at commerce to monetize which has lifted the Chinese ecommerce industry to its present day juggernaut status.
“While US firms focus on ad revenue, Chinese companies have become pacesetters in ecommerce,” reports The Washington Post.
“You go on Facebook and you can’t even buy anything, but on WeChat and Weibo you can buy anything you see,” said William Bao Bean, a Shanghai-based partner at SOS Ventures and the managing director of Chinaccelerator, in the very same Washington Post article.
Uber didn’t lose in China because of lack of deep pockets; the ride-sharing giant lost because it was battling a competitor that was focused on long-term ecommerce monetization, not on short-term transportation revenues.
Similar to China a decade ago, emerging SEA has an equally nascent advertising market. “There are not enough local publishers therefore not enough spend from advertisers,” said Lichi Wu, an SEA ad tech expert previously with Google and AdMob.
With “walled gardens” like Facebook and Instagram dominating all content creation, there’s not a strong enough force to break the vicious chicken-and-egg cycle. Faced with the grim reality of low RPMs (revenue per 1,000 impressions or pageviews) many online businesses have embraced ecommerce as a business model.
It’s not surprising then that one of the most popular sources of “passive” income in Thailand and Indonesia is buying merchandise from Taobao and AliExpress and reselling it for a margin on Facebook and Instagram, whereas in the US stay-at-home entrepreneurs often resort to blogging, SEO and affiliate marketing to generate advertising income.
Sizing Up Southeast Asia Ecommerce Based On The China Ecommerce Growth Model
Looking at all the previous metrics, we can observe similarities between emerging SEA ecommerce today and China in 2006. For example, Thailand’s 2016 ecommerce GMV per capita and ecommerce penetration numbers are comparable to China in 2006. (Granted, and to be precise, based on these numbers Thailand ecommerce in 2016 is already ahead of China in 2006.)
To benchmark where emerging SEA ecommerce could be roughly 10 years from now, let’s look at ecommerce GMV per capita as percentage of national GDP per capita. This metric should give us an idea of an individual’s ecommerce spending power relative to living standards. We can’t really use China’s 2016 ecommerce GMV per capita because Thailand’s GDP per capita by 2025 will be higher than China in 2016, resulting in us underestimating the potential.
China’s ecommerce GMV per capita as percentage of national GDP per capita is 6% in 2016. Multiplying this with Thailand and Indonesia’s projected GDP per capita for 2016 we’ll get $711 and $533 ecommerce GMV per capita. Then applying this to the projected population count, we’ll get a $51 and $157 billion ecommerce market size for Thailand and Indonesia, respectively. Contrast this to Google and Temasek’s projections of $11 and $46 billion and we can see how much money is left on the table.
Taking Google and Temasek’s 2015 Thailand and Indonesia numbers and including an estimate for C2C, let’s say 30%, gives us the starting point for our annual projection. Then averaging out annual growth to reach the $51 and $157 billion numbers, we’ll get the below annual projections. In this scenario, new CAGRs are 43% and 50% for Thailand and Indonesia, versus the previous ones of 29% and 39%.
Without adjusting for Singapore, Malaysia, Philippines and Vietnam (former two don’t follow the China model), we’ll get a total projected size of at least $238 billion. Indonesia’s re-adjusted ecommerce projection of $157 billion alone is bigger than the original $88 billion estimated for all six SEA markets combined.
This revised projection does justice to the true potential of ecommerce in Southeast Asia and explains why everyone here is doubling down, with Alibaba acquiring Lazada for $1 billion, Tokopedia having raised $248 million to date, and MatahariMall just fresh off a $100 million round. Like in China ten years ago, those that invest in ecommerce early and take a long-term, strategic outlook will end up owning the biggest chunks of this $238 billion — not $88 billion — ecommerce goldmine in SEA.
BY SHEJI HO, CMO AT aCommerce
Amazon just had its greatest quarter ever. Revenues hit $29.1 billion versus the projected $27.99 billion, citing a 28% year-on-year growth. More importantly, it marked Amazon’s fourth consecutive profitable quarter, reporting $513 million in net income, the highest ever in the company’s history.
As a result, Amazon’s stock price peaked at a record $767.74. Over the last two years, Amazon’s stock has more than doubled while those of its traditional retail peers like Macy’s have remained flat or even declined. And this is just the beginning of Amazon’s growing success and decay of the traditional retail model.
A colleague asked me a few weeks ago which stocks I would invest in. “One, Tesla, and two, Amazon,” is what I answered. Little did I know he had regrettably sold his Amazon shares a few years back expecting it to decrease in value.
Why would someone want to invest in Amazon stock at such a peak price? Very simple. Amazon’s dominance and stock value will only keep increasing with the ongoing global structural shift from offline retail towards ecommerce. Ecommerce penetration in the US today is “only” 7.7%.
Can you imagine Amazon’s stock price when this number hits 50%? Never mind economic recessions impacting people’s purchasing power, America’s consumers – Amazon’s home field audience – will keep on buying even if that means borrowing more money from the Chinese.
Short-term, traditional metrics impede long-term strategic vision for traditional retailers
When speaking to traditional retailers across Southeast Asia about doing ecommerce, the question that always comes up in one way or another is, “What’s the Cost of Sales (CoS) for investing into and growing my ecommerce business?”. In ecommerce and the tech space, many of us are familiar with using metrics like customer acquisition cost (CAC), customer lifetime value (CLV), and return on investment (ROI).
However, the metric that resonates most with offline retailers is cost of sales, which is essentially marketing investment divided by revenues. It’s the percentage of revenues that traditional retailers allocate for marketing spend in their annual budgeting.
CoS for traditional retailers often hovers around the 5% mark, driven by legacy organic offline traffic and brand awareness. For ecommerce, especially during the first few years and depending on how aggressively the business acquires customers to grab market share, this number can be somewhere between 50-150%. Obviously, this is much higher than the number traditional retailers are accustomed to and, as a result, is often a major deal breaker for offline businesses thinking of moving into ecommerce.
Fortunately, CoS goes down when the number of SKUs online increase, leading to more organic traffic, higher basket size, and more frequent repeat purchases. In the long run, as ecommerce businesses are able to build up their customer database and find multiple ways to monetize it (more on this later), CoS will decrease and potentially be comparable to comfortable offline retail channel values. aCommerce internal data shows an example of a multi-category online retailer in Thailand starting at approximately 25% CoS and trending down to 5-10% at the end of year one and 5-8% by end of year two.
Unfortunately, most of the traditional retailers in Southeast Asia fail to adopt a long-term vision and never make the initial jump into ecommerce. The lack of talent in the region exacerbates the issue as many retailers have no choice but to put offline retail people into ecommerce positions whose mindsets aren’t wired to think beyond the next holiday season.
Controlling the last-mile: It isn’t about selling more physical products, it’s about who owns the customer
Traditional retailers often see ecommerce as just another store but online. This legacy mindset prevents them from seeing the grand scheme of things.
Unilever didn’t buy Dollar Shave Club (DSC) for $1 billion for better razors, it bought the direct relationship DSC has with more than 3 million male dominant members and the potential to sell them adjacent products and services. Rather than going through retailers like Walmart, Unilever can now go direct to its consumers with all the benefits including higher margins and deeper customer insight.
Alibaba didn’t buy Lazada as a distribution channel for more Chinese products, it bought the direct customer relationships and distribution power to bring in higher margin products and services such as payments and insurance.
It’s only a matter of time before Jack Ma brings his trojan horse Ant Finance and all its associated products such as Alipay (third-party payment platform) and Yu’e Bao (online mutual fund) into Southeast Asia. Alibaba’s foray into insurance through Zhongan and its recently announced partnership with AXA shows us a future where Alibaba can increase its average revenues per user through selling non-physical products online.
Xiaomi pretty much gives away its smartphones for free by selling it at close to bill-of-material prices. Their goal is to amass a huge user base and monetize through selling them peripheral products, plush toys, software, and online and mobile advertising. With over 170 million users as of 2016, Xiaomi has more users than Snapchat (70+ million) and is catching up to LINE (220 million).
Pure-play, Internet first retailers are bringing their game to traditional offline retailers
Traditional retailers still believe they have one unique advantage over pure-play retailers: their physical stores. All the hype and buzz about omnichannel retailing has been a ray of hope for the Macy’s and Walmarts of our world. Even as Macy’s shuts physical stores, it has been ramping up its omnichannel game by transforming the surviving ones into show rooms and mini-fulfillment centres for in-store pickup of online orders.
Today, the company no longer breaks out online sales in its investor reporting, arguing the lines have blurred between website and stores. Walmart, having missed the ecommerce boat, has doubled down on omnichannel as well, expanding its ‘buy online and pick-up in store’ initiatives to around 30 markets in the US.
Unfortunately, even that advantage is slowly being eroded as pure-players are quickly moving offline, not so much for distribution but more as an extension of their online brand.
“By opening stores, brands have increased consumer awareness and subsequent site traffic. These disruptors saw the Internet as a way to establish a proof-of-concept and access cheap capital before making the leap to retail.” — L2 Inc
Warby Parker has 12 retail locations across the US, with plans to open seven more. The same applies to Birchbox, the online subscription beauty retailer, which has a flagship store in SoHo in New York and is planning to open at least two more by end of 2016. Even Amazon launched its first physical store in Seattle in late 2015 with a second one planned for Southern California.
Contrary to traditional retail merchandising strategies, these stores typically go beyond the “big head” of products and focus on displaying as many product variations as possible, including “long tail” SKUs. The objective isn’t to sell in the store; the goal is to get customers to experience the brand and the products so they’re more likely to buy online.
“These stores carry little physical inventory onsite and are instead designed to help customers zero in on their ideal sizes and fits. This approach echoes that of the company’s website, giving every single item its own opportunity to shine.” — Erin Ersenkal, Chief Revenue Officer of Bonobos.com
It’s not hard to imagine Alibaba and Lazada opening offline stores across Southeast Asia to serve as marketing and branding channels. With the shortage of online and offline customer acquisition channels and increasing cost-per-clicks in emerging Southeast Asian markets like Thailand, Indonesia, and Vietnam, having your own proprietary offline channels provides a strong competitive edge over traditional retailers as well as online peers.
The role of ecommerce for traditional retailers
Traditional, offline retailers are left with two choices when it comes to ecommerce adoption:
1. Ecommerce as another store branch
Treat the online store as another physical store and benchmark it based on the same cost of sales metrics (Eg. 5%), or in Jack Ma’s terms, “Ecommerce as a dessert, not the main course.” Don’t expect hypergrowth with this approach due to short-term metrics ruling out any big, upfront investment. The long-term threat here is that brands being sold by the retailer will cut the retailer out and go direct to consumer themselves as they get the upside of higher margins, customer data, and transparency. Unilever’s move to buy Dollar Shave Club is to do just that, and razors are just the beginning.
2. Ecommerce as the channel to own customers
Use ecommerce as a scalable and cost-efficient channel in the long term to acquire and own direct customer relationships. Later, use these relationships to sell more products, both physical and non-physical, especially higher-margin products like financial services (insurance, loans) and advertising. By owning more customers, retailers increase their bargaining power vis-à-vis brands that increasingly take the option to cut out retailers and go direct.
Not all retailers in Southeast Asia are settling for ecommerce as just another store branch. Lippo Group’s MatahariMall is one example. With top-down support and a long-term outlook from John Riady, heir to the Lippo empire, MatahariMall.com is quickly becoming the number one competitor to Lazada in Indonesia. Moving beyond only retail, MatahariMall is also going into payments and financial services through a partnership with Grab. In Thailand, Central Group is stepping up its ecommerce game with the recent acquisition of Zalora Thailand and Vietnam, and Cdiscount Vietnam.
It’s evident that in order to survive, traditional offline retailers like Matahari, Central Group, or The Mall Group need to successfully reinvent themselves to take on the foreseeable onslaught of pure-play, Internet-only retailers like Lazada moving into their territory.
Traditional retailers also need to worry about online brands cutting them out entirely and adopting a direct to consumer model, something already bubbling in the works for brands like Nike. However, the best bet is on the smart retailers who can carve their own ecosystem, own customer relationships – most of which are increasingly digital, and monetize through a multitude of ways (eg. insurance, advertising, services) and not by peddling products at increasingly low margins. Then, and only then, will the traditional retailer as a distributor survive the disintermediation brought upon them thanks to technology.