Las Vegas – March 6, 2019 – Retail executives seeking to understand the future of the industry need look no further than Bain & Company. This week at ShopTalk, Bain officially launched its Future of Retail initiative with the first in a series of reports examining the evolution of the industry across various sectors, functions and geographic regions.
The retail world—with its relentless big bets on trends and timing—has never been a haven for the faint of heart. Add digital disruption, emerging alternative business models, and changing consumer trends to the mix, and sustained, profitable growth becomes even more challenging. Nowhere is this more evident than in Asia, where dramatic changes are happening and retail is booming.
Asia is leading in terms of retail growth, with growth rates at twice the rest of the world, and online retail growing at three times the rate. This is especially obvious in China, where in 2017 the country’s online retail penetration was 20 percent and its CAGR (13-17) was 33 percent. In comparison, the US achieved an online retail penetration rate of 12 percent in 2017 and a CAGR (13-17) of only 11 percent. Most dramatic is India, which had a CAGR (13-17) of 53 percent, highlighting the rapid growth seen in the market.
These conditions are giving rise to the retail ecosystem.
Bain & Company’s first Future of Retail report, “Future of Retail: Ecosystem Retail in Asia,” shows that these ecosystems are redefining consumer expectations and reshaping value chains, with significant implications for players in Asia, as well as other geographic markets.
Retail ecosystems comprise vast communities of consumers, retailers and partners that are rapidly reshaping the retail landscape. Alibaba and Tencent lead the best-known Asian ecosystems, however this phenomenon is not limited to China. For example, ecosystems are rapidly emerging in India, led by Reliance, Flipkart/Walmart, Amazon, and Alibaba.
Ecosystems deliver a very sticky consumer proposition by combining services like e-commerce, chat, streaming, gaming or payments in a single platform or app, which is becoming almost universally adopted by shoppers. One example is Tencent’s WeChat, which has one billion subscribers and is transforming the shopping experience in partnership with JD.com.
This large customer base is incredibly attractive to retailers as a channel to a critical mass of customers. But more importantly, the ecosystem also provides retailers with access to hard-to-replicate capabilities, such as last mile fulfilment, data analytics and cloud services, through their platforms. Increasingly, these ecosystems are deploying their capabilities into bricks and mortar retailers as well as online, meaning they can exert significant influence over the retail sector.
“What we’re seeing is the emergence of scale open retail ecosystem platforms across the Asia Pacific region that offer retailers a compelling alternative to building and scaling their own capabilities” said Melanie Sanders, Bain & Company partner, who authored the report. “The scale of these ecosystems means that we are seeing a battle emerge between ecosystem platforms in key markets, with the potential for a winner-takes-all situation.”
However, the extent and pace of ecosystem development will not be uniform across geographic markets. The report outlines ten market factors, which explain why ecosystems have developed so rapidly for some Asian countries, including social factors such as urban density and age structure through to retail market conditions such as the scale/maturity of physical retailers in the country.
The emergence of retail ecosystems is creating a new set of decisions for retailers about how to participate in this new retail landscape. The emergence of these ecosystems presents huge opportunities for those playing to win in these markets, but at the same time has the potential to completely change the rules of the game and may mean a loss of control.
“Retailers face a confronting set of choices around how to respond the rise of retail ecosystems,” said Jonathan Cheng, report author and principal at Bain & Company. “At the heart of the decision will be whether the retailer has the capabilities, capital and customer franchise to compete against an ecosystem.”
For incumbent retailers, Bain & Company has identified five strategic options in how to respond to the rise of the ecosystem:
- Play solo- focus on building out a differentiated and competitive omni-channel model and do not participate in ecosystem.
- Participate in the ecosystem- utilize open ecosystem platform and leverage ecosystem partner’s capabilities.
- Build your proprietary ecosystem- build proprietary ecosystem through partnerships, alliances and JVs with key external partners.
- Become the open ecosystem- provide access to and monetize own capabilities, assets and infrastructure as an open ecosystem platform.
- Sell- maximize shareholder value creation by seeking to be acquired, potentially by an ecosystem player.
As digitization of the retail sector continues to expand in Asian and global markets, ecosystems will continue to evolve based on the needs of both the consumers and retailers. By looking at the examples of what’s happening in each market, it is possible for global companies to adopt these platform models and prepare for the future of retail.
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