The Phygital way
By Danilo Broggi
LONGITUDE N.116
This new buzzword heralds a technology to bridge the digital and the physical world with the aim of providing a unique interactive experience for the user. Covid-19 or not the future of business will be more flexible. Hybrid is key to understanding it.
June 16, 2017 was a surprise: Amazon announced that it planned to acquire Whole Foods at $ 42 per share, in a takeover deal valued at $13.7 billion. Amazon’s offer represented a 27% premium to Whole Foods’ closing price of the day. The acquisition was a reflection of both the sheer magnitude of the grocery business – about $800 billion in annual spending in the United States – and a desire to turn Amazon into a more frequent shopping habit by becoming a bigger player in food and beverages. After almost a decade selling groceries online, Amazon failed in making a major inroad as consumers have shown a stubborn urge to buy items like fruits, vegetables and meat in person. Amazon's stock soared, earning around $15 billion.
The addition of Whole Foods takes Amazon’s physical presence to a new level. The grocery chain includes more than 460 stores in the US, Canada and Britain with sales of $16 billion in the previous fiscal year.
Following this acquisition, Amazon enhanced its Prime service and paved the way for Amazon Go – a cashless supermarket currently active in Seattle and other cities in the United States, as well as in London. At the same time, it launched the Amazon Fresh service for same-day food delivery in various cities around the world, including Milan.
Walmart, the largest company in the world by number of employees – about 2,200,000 – has taken the opposite path: from a supermarket where Americans are used to buying any product – including weapons – to an e-commerce giant. It was not an easy task, including the acquisition of Jet.com in a deal valued at $3.3 billion.
However it is still Amazon that holds an undisputed leadership in the online sales sector, in the US as in other countries. Amazon has been on a multiyear offensive to open warehouses closer to customers so it can deliver orders in as little as two hours, and Whole Foods stores will further narrow Amazon’s physical proximity to its shoppers. The stores became locations for returning online orders of all kinds. Amazon also used them to cut delivery times.
The Covid-19 pandemic inevitably accelerated changes in consumption habits and caused digital purchases to grow. Despite that, many still miss interacting with sales associates and the personalized service they can get going into a store, and they are not yet ready to give it up.
In the face of this duality, there’s a new concept that tries to bring the best of e-commerce and brick-and-mortar retail together: “phygital”.
In the United States, online grocery sales increased 54% in 2020 to nearly $ 96 billion. Last year, the number of digital grocery shoppers aged 14 and over (at least one purchase during the year) grew 42.6% with a turnover of over $ 130 million . Analysts predict that by the end of next year, more than half (51.3%) of the US population will buy digital groceries. “Continued growth in digital grocery will now depend more on purchase frequency than new buyers entering the category”, Andrew Lipsman eMarketer principal analyst at Insider Intelligence reported last February. As a result, the recent news of Amazon's interest in acquiring Esselunga, the largest supermarket chain in Italy, is no longer surprising.
The phygital trend seems unstoppable.
It distinguishes itself from other marketing tactics with its multichannel focus where the consumer’s purchasing process is fluid and familiar.
Look at the so called “live shopping”. Influencers driving all-out sales online with incredible success have led Amazon to triple its profits in the first quarter of this year. In China it prompted the Beijing authorities to intervene. Taobao (Alibaba), Douyin (ByteDance) or Kuaishou (Tencent) generated staggering sales volumes in China in 2020: the influencer "Xinba" for example generated more than €250 million in sales in just 12 hours, or more than €21 million per hour. At the same time, a lot of fake products, pyramid schemes, unfair practices raised buyers’ discontent and quarrels, forcing the Cyberspace Administration of China (CAC) and the State Administration for Market Regulation (SAMR) to control this business with the aim to protect consumers’s rights and above all the Chinese state capitalism’s hegemony. Since May 25 it is forbidden to promote fake products, falsify the number of views, promote pyramid schemes, gambling and fraud. The "sales platforms" will have the obligation (already in place) to keep their sales videos for 3 years minimum and hire new moderators – controllers whose task will be to supervise the sessions. The same influencers must imperatively provide their true identity and be subjected to reviews (social credit rating system) that will be periodically transmitted to the competent authorities.
In another sector, Carnival cruises, to capitalize on the phygital marketing experience, is using a technology on five of its ships (but soon there will be 11) called the Ocean Medallion, a bracelet scanned by thousands of sensors on the ship, as well as in the terminal, allowing the traveler not only to get rid of keys and wallet and have an excellent wi-fi in any condition but to live a more digital experience that accompanies him throughout the journey as well as a more personalized service.
This hybrid model also affects other important sectors such as banks and financial services in general, which are more regulated and therefore more difficult to attack from this point of view. Recently, just to mention two opposite cases, we have seen the consolidation of the partnership between Metro Bank, the leading bank in the UK retail and commercial sector and the Dutch Backbase, a leading provider of technology for engagement banking. In the opposite direction, Ozon, Russia's second largest e-commerce operator, intends to acquire a banking license as its CEO Alexander Shulgin said in an interview last April in the Financial Time. It should be noted, however, that its biggest rival in online shopping, Wildberries, has bought the Standard-Credit Bank , and the largest Russian bank, Sberbank, plans to consolidate and expand its e-commerce and logistics business by promoting an "ecosystem" that offers customers everything from shopping to food delivery to streaming movies as well as of course financial services. Sberbank has unsuccessfully sought a partnership with other major Russian e-commerce players such as Ozon and Yandex. It means that “phygital” is becoming an obligatory direction even in more mature and regulated sectors. Not to mention Ant Financial, the Chinese fin-tech controlled by Alibaba Group which did not exist five years ago and which today is worth $150 billion – Goldman Sachs is worth 99. It is a business model based on the Alipay platform with over 1.3 billion active users (June 2020) which in 2020 processed transactions for the astronomical figure of $17 trillion dollars. Certainly the volumes, the number of users and the accountability of Alibaba have played a decisive role in this incredible success. But that's not all: Ant Financial's "310" loans require three minutes for application development, one second for approval and zero human interactions!
It is a winner, to the point of making Beijing very jealous!