In 1985, Herbert George Wells initiated the imagery of “The Time Machine” and the ability to travel into the future. Though the idea of time travel is far from novel nowadays, reality is much more shocking. COVID-19 is the name of the retail time machine. It has changed consumers’ priorities, consumption patterns, and accelerated the adoption of technology.
Digital capability investments have been companies’ priority for some time now. In April 2019, a survey by BCG indicated that 50% of respondents considered investments in digital capabilities to be a top priority. Only one year later, amidst the pandemic, the number jumped to 75%. Evidently, the current situation has established a sense of urgency regarding digital transformation for companies. Leaders across all industries are looking to not only survive but adapt to new market dynamics. Retail is a prime example of this matter.
Consumers and Market Drivers
Consumer confidence is one of the most relevant aspects that drives retail. There is lot of uncertainty regarding the duration of the pandemic, the economic downturn, and changes in consumption patterns. General consumer sentiment is uncertainty about the future, in greater proportion in geographies where social distance measures remain strict.
The current health and economic situation have resulted in a redistribution of consumer spending and decreases in spending power. Consumers’ priorities have shifted towards basic commodities, such as personal care products and groceries. At the same time, the new social reality of “life-at-home” has driven consumers’ purchases towards streaming entertainment, e-sports and online shopping for home improvement items, among other things.
The New Reality
1. Online Retail Ecosystems
A 2018 publication by Bain Capital, entitled “The Future of Retailing: The Asian Ecosystem”, presents the creation of retail ecosystems as the driving force that has led China and South Korea to become retail powerhouses.
These ecosystems are characterized by the creation of omni-channel models (offline-to-online) that combine several consumer services, such as e-commerce, automated customer services, entertainment, and payments into a single platform. In a nutshell, retail ecosystems are a one stop-shop for consumers that could include all-in-one solutions to other vendors providing access to both consumers and services.
Retail ecosystems not only attract a large customer base, but also give retailers access to a large set of competences, from advanced data analytics to cloud services, providing them with a capital-light alternative to building their own capabilities. Through increased collaboration with technology and analytics’ companies, these ecosystems make data the main competitive advantage for achieving a one-to-one customization that enriches consumer experiences. In this way, these ecosystems become hubs for continuous learning and examination.
Publications that have emerged as a result of the current situation support several key points. One of the key elements is the need of retailers to scale using technology with little use of assets and strategic partners. A second element considers the consumer as the center of every business decision. The third contemplates the creation of continuous processes of experimentation and collaborative learning.
A simple example about the creation of retail ecosystems in present times is the case of Today Bread in the UK. The bakery has turned its small confectionery into a production and delivery center for bread, and more recently, home bakery kits. Also, it has created an online store and enabled payments using Stripe, a strategic partner. Through Stripe, the business is able to build an online store, and gain access to a number of other benefits such as advanced sales analytics and financial products (ie. loans).
Another example of retail ecosystems, explored in Bain’s article, are Amazon and Alibaba’s ecosystems that provide access across consumer-to-consumer and business-to-business marketplaces; financial services and payments; logistics; cloud computing, and brick-and-mortar stores.
2. Other retail models
Apart from retail ecosystems, Bain’s research elaborates on additional retail models. Some companies may strive to access absolute scale as well as increase their local market share leadership. On the other hand, some companies may implement brick-and-mortar models in attempts to reach consumers. Smaller companies with low bandwidth may resort to partnering with other companies to solve strategic challenges for them. Some companies lack access to absolute scale but have strong local leadership positions.
3. Back to local and micro fulfillment
The new concept of “life-at-home” has created the need to reduce time and distances when it comes to shopping and product delivery.
Carrefour has an agreement with Uber Eats in Paris to deliver order in less than 30-minutes. This results in the creation of local economies focused on production and distribution in high density areas. Stephen Kaufman, senior lecturer of Business Administration at Harvard Business School says that “businesses are likely to diversify and broaden their supply chains to become more resilient post-coronavirus, and some manufacturing should also move closer to home in order to gain better control of supply chains”.
On local production, in a study conducted by the Coldiretti association in Italy, 82% of respondents expressed a preference for products with national origin certification in response to the current contingency. On micro distribution, Bed, Bath and Beyond has converted 25% of its stores in the US and Canada into dark stores that will micro-distribute their online sales within the main cities.
Though several experts declare that consumers will return to physical store shopping post-contingency, the truth is that COVID has shifted consumers’ priorities towards additional convenience and more importantly security, maintaining the need for local purchases in all categories, but especially in recurrent basic consumer products.
4. Smooth retail execution
The current pandemic has impacted retail and its operations. First, e-commerce and online grocery has increased significantly, supported on the back end by automation and mobile payments, and will continue to adjust as the new reality comes in place.
As the customer journey evolves and safety becomes a top priority for consumers, stores will have to adapt its operations accordingly. CB Insights discusses some aspects that will impact store execution in the short term, which include: a) remote store service to minimize time in store, b) smarter and contactless shelf monitoring, c) self-cleaning tools to keep surfaces clean, d) virtual try-on to minimize contact with the clothing and items, and e) contactless checkouts.
5. Digital innovation in supply chain
Supply chain will combine best practices and digital innovation to adapt and respond to the new reality. Based on McKinsey few elements that the supply chain of the future should consider are:
- Customer-centric supply chain strategy: meet customers’ needs along any channel
- Digitization and process automation: key technology enabler that uses available omnichannel data, analytics, and supply chain systems along the end-to-end value chain- and includes ecosystem partners
- Operating model and change management: key organizational enabler for the company and its people- captures supply chain potential and delivers exceptional customer value
- Planning, information and flow: key information flow capabilities that access the right products in the right place at the right time — real-time — to deliver according to customer expectations
- Node operations: key physical flow capabilities that ensure competitive cost structures and reliable quality while managing complexity
- Transportation and Logistic Service Provider (LSP) management: key physical flow capabilities that provide reliable, fast service to all customers where it matters, while ensuring competitive transport costs.
- Network and ecosystem of the future: the supply chain’s backbone — provides required speed and flexibility, leveraging information, and partner assets and capabilities
Adapting to 2020 Retail
In summary, retail is evolving at a fast speed. Based on Bain’s report, some imperatives for retailers are:
- Strengthen your differentiation today and prepare for a more innovative future.
- Obsess over customers and their experiences.
- Find the fuel for technology investments.
- Use data to automate more decisions.
- Speed up innovation.
Unlike Herbert George’s book, organizations are not simple observers of future times. They are actors, who despite the many challenges, make decisions of continuous innovation, creating working ecosystems that drive the economy at the micro and macro levels. Although the trends resulting from the present crisis will remain for some time, consumer priorities will continue to change, and market conditions will adapt to “new normals”.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance
Ana Maury Aguilar. Investment analyst at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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