Ecommerce is upside down

E-commerce slows down.?We see e-commerce growth slowing to pre-pandemic levels. Retailers embraced digitalisation and invested heavily to sustain business during Covid and are now refocusing. Zalando, the largest German e-commerce company for fashion, has just said goodbye to its (growth) targets or put them on hold. The immediate focus is on strengthening the gross margin, reducing the complexity of the organization (which has increased significantly over the past decade since the company was founded), and making targeted investments in the logistics network and technological backbone. Another prominent example is the largest German fashion department stores P&C. P&C's lack of digitalisation or very late digitalisation is the cause of its weak competitiveness allowed itself to be overtaken by Zalando and Co. Now P&C has gone under the bailout umbrella and is pursuing a ‘store first instead online first’ strategy. In addition, we see more and more partnerships and mergers coming our way. For example, the consolidation in the European Quick Commerce market through the acquisition of Gorillas by Getir (and potentially Flink being the next integration candidate). The synergies that can be achieved as a result help the individual core businesses to become profitable and exploit further growth opportunities.

Profitability first.?Private Equity backed retailers and e-commerce businesses are being pushed to focus on profitability instead of growth while making operational cuts left and right, but also cutting investments in marketing and new customer acquisition. In the short term, this may be an appropriate measure, but to continue growth, this type of intervention can undo two years of continuous growth. Others are cutting back on their investments in technology, which is almost a last resort, as digital transformation is a must for anyone who wants to stay in the game until the end of the century. Many e-commerce businesses grew significantly over the last 3 years to 30-40% in revenue, that expectations to deliver profits are eminent now. This is still for many to proof to deliver, however, I believe that it is key is to converge both into a true omnichannel or better called platform business, which is offline, online and marketplace. Channels don’t matter from a consumer perspective, it’s about creating the best seamless experience which makes shopping fun, easy and everywhere and anytime.

Cash is king.?Most credit lines were extended in the 2015-2020 growth phase and have been exhausted in the last three years. Now refinancing is pending, but it will have to be refinanced at a different interest rate, which will have a significant impact on the already thin EBIT margin in the retail sector. It will therefore become increasingly necessary to act early and with foresight to avoid situations such as insolvency in good time. This does not mean that retailers will go bankrupt, but those who do not prepare for such a situation in good time.

So what?!

1.?Challenge the core.?The company’s business model should now be looked at and tested to proof sustainable profitability. What is our core business? Is it operating profitably? Is our customer base healthy and growing? How is the market and the competition? Is the core business securely positioned until 2030? If not, what operational measures are necessary to optimize the business and make it more efficient? This can be besides a streamlining of the assortment and purchasing, marketing effectiveness, supply chain, customer experience, or operating model. No matter what the market situation is, a continuous work and improvement of the operational processes and the organization should be part of the daily tasks in retail. Also, how to transform the core to meet consumer needs and stay attractive to the market and against competition.?

2.?Reinvent the profit formula.?Growing beyond traditional retail is a must for all retailers. The only question is: what's the best way to do it? Stepping beyond the confines of the core business and into the unknown requires a cautious approach, but retailers should not underestimate the enormous potential of existing assets: They can be the platform for a truly profitable future. Successful retailers will use data to figure out which non-retail opportunities will drive growth, which ones to target, and how to get there (i.e., whether to build, buy, or partner). Even the largest retailers are finding that building themselves can be too slow, too capital intensive and, if they lack internal talent, especially risky. For this reason, more are opting for partnerships or acquisitions.

3.?Expand in the new.?There are multiple domains that offer retailers continued potential for profitable expansion - with options available in business-to-consumer (B2C) and many more in business-to-business (B2B) areas. These assets and capabilities include extensive databases that offer valuable proprietary insights into consumer behaviour; extensive logistics networks that could piggyback on third parties; existing customer traffic in physical stores, on websites and through apps that could be monetized in new ways; cloud and payments technology used for today's core retail operations that could be repurposed for other partners; deep supplier relationships that provide a ready audience for retail media advertising; and a strong brand that can support expansion into financial services, health and other areas where trust is important.

4. Build new capabilities. While they have tremendous potential, new businesses are not easy to build, even in the best of times, and certainly not in an era of rising capital costs, talent shortages and incessant pressure to invest more in supply chains, pricing and other core business priorities. Companies that have been in the physical retail business for a long time need the growth of new businesses. So do digital natives that have been in the business for only a decade or two, or even a few years. In both cases, it's about making the economics of retail sustainable over the long term at a time when the increasing penetration of the online channel is exerting ongoing dilutive pressure on profits. Omnichannel providers that have long operated in physical retail are moving into areas such as advertising, data services, third-party order fulfilment, and financial or healthcare services. For digitally-focused retailers that focus primarily or exclusively on e-commerce, new business expansion can provide a boost to profitability. Many of these companies do not yet have revenues commensurate with their impressive scale; attractive profit opportunities can offset their weak e-commerce margins.

Here are a few examples:

Marketplace.?At Zalando, 36 percent of gross transaction volume (GMV) in the fourth quarter of 2022 was generated by the partner program and Connected Retail, six points higher than in the same quarter last year. At Decathlon, a quarter of online sales came from partners in 2022. But not every business can and should become a marketplace. Is the business ready for a marketplace, and does it make sense? How saturated is the category, the subsector? Is the space available to build a marketplace business? And why? Do we need overall growth, is revenue or GMV the KPI? Certainly, the marketplace business is very attractive to build an "asset light" business, i.e., low inventory and risk, while offering a wide range of products and attracting customers. However, becoming a marketplace operator requires new capabilities, which must be managed at an excellent level to avoid customer and supplier dissatisfaction.

Retail Media.?Online supermarket Ocado makes customer data accessible. British online supermarket Ocado is opening up its servers to media-buying platform The Trade Desk: Marketers using the platform will have access to data on customer behaviour. The aim is to make digital advertising campaigns more targeted, reports Internetretailing.net, pointing out that such data sources are gaining in importance in an era without third-party cookies. Ocado is the first British retailer to take this step.

Social.?We have heard a lot about social, while we ourselves are online in the social media platforms (Instagram, TikTok, Facebook, ... or linked-in) and leave our mark on the net. Many retailers and brands do not understand the opportunities that social media offers and how to ride this wave. Many have started with some activities, but mostly without a strategic approach and, more importantly, without a commercial model that absolutely needs to be embedded in the marketing decision framework to figure out where to allocate spend and how to maximize my MROI.

Time is Now.?For many retail and e-commerce businesses 2023 is decisive year and proof-point to stress test its business models as well as acting now to set the foundation for a sustainable future growth platform. Although, there might be more challenging situations in the future due global economic situation, inflation pressure and interest rates, shrink net household incomes. Many scale retailers, both omnichannel leaders and e-commerce pure plays, are well placed to create new profitable businesses by unlocking the growth potential of strategic assets they already own (or capabilities they already have). Companies must revamp their businesses, cut complexity and invest into the “New”. Retailers are in a unique position to build and scale new businesses. The market is longing for innovative solutions – now retailers can play a pivotal role in building this.

#retail ?#transformation ?#commerce ?#profitability