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.
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?