Asia Pacific Retail in Transition
White Papers | April, 2017
By Asia Pacific
Changing customer behavior, thinning margins, and low brand loyalty are a fact of life in retail. Retailers worldwide have seen their profit margins squeezed, Asia-Pacific included. Omni-channel engagement will become the barometer of profitability as shoppers increasingly demand choice, convenience and service.
Retailing in Transition
At first glance, Asia-Pacific retailers appear to be in good shape. Business is booming and waves of Asian millennials are entering the workforce, consuming at a rate previously
unseen among older, more conservative-minded shoppers. According to the IDC Asia-Pacific Retail Industry Index, retail sales growth for the period 2010-2016 outstripped every other region, turning in a compound annual growth rate of 13.6% with more growth in sight.1 Most noticeable is the percentage increase in online sales (particularly in China), where a rising wave of young and brand-conscious shoppers – induced by social media and big data – are fundamentally reshaping the retailing landscape. But take a closer look, and there is cause for concern. Profits are plummeting!
While this is due in part to increased competition, higher operating costs, and faltering brand loyalty, the real danger lies not with the external market, but with internal resistance to digital transformation. While traditional brick-and-mortar retailers are quick to point the finger at higher operating costs, inventory bottlenecks or fickle consumers, we see evidence of a more fiendish culprit, and it comes in the form of channel cannibalism!
Continued Power Shift to the Customer
Take a stroll down any Asian urban high street and “On Sale” signs abound. Retailers are slashing prices to grab market share, while keeping the advertising and promotion efforts in high gear. In a high-growth market like Asia, discounting can work if volume sales are sufficient, but with a slowdown, the model can, and will most likely, implode.
The scalawag is e-commerce. Consumers are reaping the rewards of faster, easier and cheaper access to goods and services, but the retailers who make it all happen are paying a big price. For many, it’s a matter of surrendering profit for cash flow and as any economist will tell you, this strategy will sooner or later run out of rope. According to a recent Ecommerce Foundation report, Asia-Pacific online sales turnover was estimated at US$1.361 trillion in 2016. That’s a 28.4% jump from the preceding year. In fact, Asia represents the largest e-commerce region in the world. China alone accounts for 33.7% of global e-commerce sales, compared to 26.2% for the United States.2
Today’s shoppers are armed with real-time data, and the ability to arbitrage pricing – ensuring themselves of the best possible price on any item imaginable. Retailers are compelled to generate dynamic pricing strategies to stave off competition, not just from rivals, but from their own online channels, effectively cannibalizing their own business. In fact, the whole nature and tenor of shopping has changed to such a degree that many retailers are questioning the value of maintaining physical stores.
Pick any mass merchandizing or specialty store in Asia and you can see young customers producing smart phones, not wallets. They rifle through displays, snapping photos of labels and checking online prices. They line up for fitting rooms and leave heaps of discarded clothing in their wake. “It’s enough to make you crazy,” said one senior executive charged with developing a retail presence for major overseas brands. "It begs the question, why are we spending so much on real estate if all the buying is happening virtually,” he says.
Therein lies the problem. The retailing industry is in a state of rapid transition but retailers are reluctant to give up what they know in favor of what they must do. Unfortunately, leaders of many retail organizations don’t know when to make the transition. The reality is that less successful retailers, hoping to improve their profit margin, continue to chase growth by opening new stores. However, their retail chains risk collapsing under their own weight.
Beyond Window Dressing: Adding Clicks to Bricks
Online sales are in hyper-drive, but nowhere more so than in China where last year 15.5% of retail sales were executed online.3 Merchandizers are grappling with the fact that fancy storefronts, exotic displays and customer-friendly shopping environments don’t always
generate the requisite level of sales to keep a store afloat. For the big brands that have traditionally banked on their marketing, brand and display prowess, it’s a harsh wake-up call. “We know we need to move faster by reducing our store presence while enhancing our digital channels, but many of us were born into classic retailing and have become addicted to store openings as a measure of our success,” says one Asia retail executive now confronted with lower margins and higher costs.
The issue for retailers in Asia isn’t the growth, but the profit. Not wanting to miss the
e-commerce surge, many retailers have deployed digital “tactics” in recent years to make mobile and online purchasing quick and easy for their customers in the hopes of attracting and retaining new customers. For many, this has meant investing in siloed consumer-facing technologies. These include mobile applications, click-and-collect services, location-based customer engagement models, and social channel specific content. What they ended up doing was driving a discounting cycle that lifted sales, but lowered margins.
There’s no room for complacency. In order for Asia’s retailers to deliver sustainable growth, they must innovate and integrate their channels, hone their distribution and sales models, and empower their front-line sales teams, whether in store or via digital channels.
Leadership is at the heart of this sea-change. Traditional retail executives may have the operational expertise to manage inventory and drive sales plans, but do they have the wherewithal to create a new shopping paradigm for customers that demand anytime/anyplace access to goods and services?
Even as retailers race to update their physical and virtual front doors to attract always connected shoppers, they face increased competition, sagging sales, and higher operational costs.
These challenges are fueled by internal resistance to identify and hire a new breed of retail leader that can act as a change agent to effectively blend traditional and digital sales channels.
The move in this new direction is inevitable and now it’s only a question of which retailers will move the fastest. IDC predicts that digital transformation investments in the Asia-Pacific region (excluding Japan) will double by 2019, drawing funds away from store capital.4
The Inevitable Move to Omni-Channel Integration
While the intention is to create a frictionless shopping journey to attract, inspire, and ultimately retain customers, retailers may face post-implementation pitfalls if consideration isn’t given to omni-channel integration. The overwhelming amount of data volume churned out by these touch points exponentially increases the complexity of customer engagement. If this complexity is not properly qualified and processed, efforts to enhance the customer experience could falter or even collapse. To avoid this, retailers must take a step back and consider the implications of creating too many front-end customer “experiences” without properly developing the IT infrastructure, data collection and management, and CRM processes to retain customer loyalty versus eliciting a one-time purchase.
When asked in a recent IDC Asia-Pacific Retail Industry Trend survey to spell out their top considerations, retailers said that better retail operational experience and development of new customer segments were key.5
It’s an understandable response from conventional retail leaders, but is it enough?
The convergence of brick and click is forcing Asian retailers to redesign their retail sales channel strategies and has shifted the balance of power in favor of customers. Consumers now demand instant access to a wide amount of product information, to decide what to buy, where to buy, at what price, and what payment method to use. A recent IDC Retail Insights’ study revealed that omni-channel shoppers spend on average 30% more compared to single channel shoppers.6 The opportunity for retailers to work across new channels has seen an explosion of consumer touch points and data, but this increase in channels has left many retailers focusing on “activities” instead of “outcomes” preventing them from focusing on capturing and analyzing customers’ data.
As retailers race to capture this opportunity and embrace digital transformation to attract today’s “digitally connected” customers, they should remain focused on business outcomes. An end-to-end review of current processes across lines of business, capturing every touchpoint with the customer, is essential. The goal is to create systems and processes that will continually, and consistently, offer the customer their next “best experience.”
However, most retailers do not have the skills and tools to merge the external and internal drivers that will successfully impact the organization’s business processes and direction. Because of this, it is difficult to clearly articulate the objectives, let alone the vision, to transform the business. Retailers also face difficultly creating an effective digital transformation roadmap, which must identify key milestones on the journey to integrate digital into the brick and mortar.
As an organization weighs this transformation, there are a number of key motivations
for digital transformation that all retailers should keep in mind. The endgame is omni-channel. Getting there has less to do with the sales and marketing bells and whistles, and more to do with the clear and concise integration of the business, tailored entirely around the customer experience.
Interconnected Retail Experience: Home Depot
A notable example in creating an omni-channel customer experience is Home Depot. Among the slew of investments to drive business growth, the $80 billion U.S.-based home improvement company set aside $5 billion for new stores, technology and online investments as well as supply chain and integration. One of its major goals was to transform the customer experience across all its channels. After developing a strategy that included input both from employees and customers, the company successfully consolidated its entire order management system to create “One Home Depot.” Now, regardless of whether in a store or online, employees see one view of the customer, regardless of channel engaged, improving employee productivity and creating a more seamless customer check-out experience.
With the added major challenge of incorporating its legacy IT system, the company hoped to streamline back-end manual tasks, such as packing, receiving, and returns, and then focusing more on customer needs. In order to reach the goal, Home Depot automated its replenishment system, freeing resources to expand customer engagement, and ultimately driving increased sales.
As a brick-and-mortar retailer facing the digital age, Home Depot also realized that customers today rely on online research when comparing prices, pushing the company to implement a dynamic pricing model against competitors such as Amazon. A key challenge for Home Depot was to eliminate silo operations as a goal when creating its digital transformation roadmap. Beyond this, the company also encouraged employees to “own” different parts of the roadmap, ensuring accountability for the process transformation.
Ultimately, putting the customer at the center of digital transformation helped Home Depot to spread a culture of “end in mind” among employees, giving guidance and a clear vision of desired direction and outcome. In terms of workspace transformation, Home Depot constantly looks for technology talent – both among recent university graduates as well as within the IT industry – to ensure it remains competitive as well as focused on innovation.
To achieve digital transformation success, business leaders must know whom to hire (talent and skill), how to train them (development strategy), and what technology is required to make them more effective. The first step requires constructing a clear picture of your business processes and your current talent assets. To better understand the business value of sourcing and recruiting new talent, map the interaction of people, processes, and applications. This will help your organization to alleviate, if not outright eliminate, silos of talent.
As the organization progresses in its omni-channel vision, organizational processes and culture will also need to evolve to support the shift. Digital change and success requires collaboration across all business units and all levels. It is recommended that business leaders take a structured, roadmap-driven approach to ensure initiatives and investments deliver maximum value while also producing consistent results for leaders and employees. However, it is inevitable that issues will arise. In order to address these challenges, retail business leaders should be able to answer these questions:
- Are my new talent investments aligned with my strategic digital transformation objectives?
- Which criteria should I use when sourcing, comparing, and selecting new talent?
- How do my workforce and technologies support current and future business activities?
- What is the best approach to streamline my workforce portfolio with the goal of maintaining flexibility while planning to undertake new IT projects?
As technologies and business ecosystems continue to experience increasing rates of change, retailers will need to transform ever faster to stay at the same stage of workforce transformation maturity. Is your retail organization ready for transformation in the digital age?
IDC Asia-Pacific Retail Industry Trend Survey 2016
IDC Asia-Pacific Retail Industry Trend Survey 2016