E-commerce sales are up. Studies show global e-commerce sales were $4.28 trillion in 2020 and are expected to be $5.42 trillion by the time 2022 is wrapped up. Growth is always good, but it is worrying when it lowers margins, especially in a low-margin business like retail. Retailers and brands have to work much harder - and invest more - for every dollar of profit coming from e-commerce channels. There are many reasons for this, but the bottom line is that their assets were built for bulk and efficiency, not to serve individual customers.
However, the recent acceleration in online commerce, related to the pandemic, has prompted retailers and brands to think differently and double down on their investment, some of which are turning out to be game-changers. If e-commerce becomes as profitable and scalable (or more) than store commerce, we would reach a tipping point for the entire retail and D2C industry. Once considered a distant possibility, here are a few steps retailers are taking to make that dream a reality:
• Reconfiguring the Distribution Network: E-commerce is here to stay and grow. It is just as important to ‘build and sweat’ targeted assets designed for e-commerce, and not only configure the existing assets to serve a dual purpose. Large retailers including Walmart are investing heavily in micro fulfillment centers with automated bots for last-mile packaging and delivery, giving them a distinct advantage in a crowded market. These retailers are able to fill orders with very short turnaround times.
• Operating Alternate Revenue Streams: Retailers and brands have started aggressively using their digital assets to drive profitability. While the cost of marketing is usually high in the online world, the assets can be commercialized. Grocery giant Kroger Co., now allows retail brands to improve their visibility, reach, and profitability. Brands can use Kroger’s first-party data to target advertising and improve sales.
• Differentiating Offerings Beyond Traditional Paradigms: Customers want it ‘fast’ and they want it ‘free’. Both of these dilute margins and do not contribute to repeat business. Instead, retailers and brands would have to look at subscriptions, try-and-return options, virtual experiences, social commerce, and bundled offerings and services that can fulfill customer experiences but simultaneously remain profitable. The Dollar Shave Club is an excellent example of how products can be delivered just-in-time at a predictable cadence (and cash flow!) via a subscription service while customers increase their savings and enjoy the complete product and delivery flexibility.
• Building Unconventional Partnerships: Digital commerce is all about partnerships. The success of marketplaces, partner-owned inventory, diverse and local supply chains, delivery partnerships, etc., have all been instrumental in shaping the ‘Amazon world’. However, effective partnerships can boost sales and profits for traditional retailers and brands as well. Another opportunity is to learn from the thriving e-commerce businesses in Asia, especially India, China, and Southeast Asia. Providers like Amazon and Alibaba are using these learnings to keep ahead in the race.
• Capturing the E-commerce Converts: ‘Functional’ shoppers – people who believe in ‘in and out’ type of behavior – have a greater tendency to shop online. They are usually looking for convenience, authenticity, safety, and discounts. Retailers and brands need to target these shoppers and convert them to their platforms.
Investing in marketing to increase sales for retail partners, setting up systems for micro-fulfillment, helping divert orders to fulfillment centers, and managing scale is challenging for retail brands. However, these are the assets that will support growth. The secret to succeeding with it lies in nimble, flexible, adaptable technology that can quickly integrate with external systems, change workflows and processes, and scale based on business needs. This is what we digital practitioners call a byte-sized approach to transformation.
Giants cast a long shadow, especially if they continue to grow and expand like Amazon. But almost 10 years after the ‘omnichannel terminology came into play, retailers and brands are moving aggressively to cast off the shadow and win in a customer-driven world. While data and technology can serve as powerful catalysts, it is important to anticipate customer needs, drive innovation and accelerate change, to drive both revenue and profitability over the long term.