Industry
Retail
Omnichannel Experience & Intelligent – The Future of Retail
Highlights
- The Amazon Effect, often referring to the disruption of brick-and-mortar retail stores by online shopping giants like Amazon, is creating uncertainty for traditional retailers.
- This is forcing traditional retailers to reimagine their business models and adopt innovative strategies to compete and survive in the new retail paradigm.
- Through the lens of our business lever framework, we analyze the strategies of leading retailers in different emerging markets to survive, rather thrive, in a world increasingly hinged on e-commerce.
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Disruption in retail
The Amazon Effect refers to the disruption in the offline retail market because of an increase in e-commerce activities.
By serving more than 300 million customers worldwide in over 100 countries, Amazon is bringing in a new retail revolution with its wide assortment, low pricing, and customer service. With Amazon set to launch and scale its online marketplace in multiple new markets across South Africa, the US, and the UK by the end of 2024, retailers in the region are facing the competitive heat.
While being a market leader in online commerce, Amazon is still reevaluating its brick-and-mortar approach. This move came into light after Amazon reported the closure of all its Book, Pop-up, and 4-star physical stores in 2022 and the subsequent shut down of its physical apparel stores in November 2023. Recently, Amazon also announced its plans to delay the expansion of the brand’s grocery chain, Fresh, to reexamine the business model and growth potential. Amid these recent developments and Amazon’s growing dominance, some traditional stores have reinvented themselves to emerge winners while others have perished.
A reimagined model
Amazon, in particular, has become a case study in continuous innovation.
These innovations have paved the way for new e-commerce players to establish themselves in the retail space. To combat this onslaught, some leading traditional retailers have borrowed a page from Amazon’s playbook and completely reimagined their business models. So, what are Amazon’s creative initiatives to tackle challenges of the retail world? And how are leading retailers responding?
The answer can be found in the company’s market penetration strategies in various growth markets such as India, Brazil, Australia, and Turkey across six business levers—assortment, price, fulfillment, omnichannel, in-store experience, and payments. Additionally, innovative strategies pursued by leading traditional retailers that helped them reinvent themselves into a customer-centric agile model can also offer insights.
The competition way
One approach to surviving the onslaught of Amazon is to compete directly with the online giant.
This can be done by amplifying the business levers presented below.
An infographic illustrating the six key business levers traditional retailers can use to compete against Amazon. The levers include assortment range, fulfillment capabilities, omnichannel capabilities, in-store experience, payments, and price.
Figure 1
The six key business levers traditional retailers can use
Figure 1
While this approach has the potential to help gain market share and insulate Amazon’s influence, there is always a risk of succumbing to the brand’s financial muscle and market dominance. We discuss a few strategies to navigate the new retail paradigm.
Price: The dynamic pricing and low-cost play
Amazon is one of the pioneers to bring dynamic pricing from the airline world to the retail world. The company’s unparalleled strength in analytics enables it to change prices on its products every 10 minutes, giving it a great advantage to undercut traditional retailers.
While very few traditional retailers are competing in the price war against Amazon, a major Indian multi category retailer has stood out with its innovative low-price model.
The retailer has positioned itself as a value retailer through an every-day- low-price strategy by owning all stores, eliminating rentals, focusing on select high-moving products, negotiating hard with suppliers for cash and volume discounts, and charging a slotting fee.
Assortment: The seller onboarding and private label play
A crucial factor in Amazon’s growth has been a huge army of third-party sellers, and these sellers accounted for more than half of the total units sold in Amazon stores. While entering any new market, Amazon deploys a set of innovative programs to attract sellers. For instance, Amazon India’s Chai Cart and Studio on Wheels – Amazon Tatkal initiative helped increase online awareness. Later, the company launched local shops and Fulfilled by Amazon initiatives to onboard more sellers.
Similarly, multiple traditional retailers have adopted both organic and inorganic growth strategies to onboard sellers.
Organically, retailers focused on bringing exclusivity to their assortment portfolio. An Australian retailer bought about 7,500 exclusive products, and a major Indian retailer entered exclusive partnerships with Michael Kors and Armani. The other play has been the rapid expansion of their private labels. A market leading Brazilian retailer, for example, expanded an affordable private label range to enhance its fashion offering.
The other route was through mergers and acquisitions. The aforementioned Indian retailer rapidly grew its assortment base with the acquisitions of brands like Hamleys, Zivame, Clovia, and Urban Ladder.
Fulfillment capabilities: The quick commerce and last-mile delivery
Across different markets, Amazon has followed a cluster-based expansion strategy for fulfillment stores. To further tackle last-mile delivery problems, Amazon launched initiatives such as Flex, to encourage onboarding independent flexible delivery partners and, pick-up and drop-off (PUDO) locker and counter network as parcel pick-up and drop-off locations to leverage the community advantage and ensure fulfillment at smaller locations deeper within the country.
Retailers have responded by using their vast store networks as fulfillment centers for the last mile. They have made additional investments in warehouse automation and in building high-speed logistics networks through a set of dark stores.
Few Indian retailers have also created their own network of local grocery stores as franchise partners that will sell and fulfill deliveries to consumers in their respective neighborhoods. Leading retailers across multiple advanced economies have partnered with instant delivery platforms such as Uber Eats and Deliveroo to enter the 10–20-minute delivery model. To achieve the less-than-five-minute pick, pack, and sort time, retailers are also investing heavily in automated micro fulfilment centers.
Omnichannel capabilities: The counter marketplace play
As traditional retailers gain a digital advantage, Amazon is gradually gaining an offline advantage through its brick-and-mortar brands like Go and Fresh. With its recent acquisition of Fresh Foods, Amazon is focusing on competing in the ‘everything store’ space, where consumers can no longer distinguish between the offline and online worlds.
To counter this marketplace advantage, multiple traditional retailers, have either launched their own marketplaces, acquired, or partnered with other established marketplaces, and partnered with stand-alone e-commerce players.
Brands are also ramping up omnichannel sales through initiatives like direct-to-boot and click-and-collect and integrating online channels with messaging platforms like WhatsApp.
In-store experience: The smart store play
Amazon’s physical locations are serving as platforms to test out advanced technologies rather than driving footfalls using trademark technologies like ‘just walk out’ and smart commerce, to provide a quick and seamless shopping experience without the hassle of checking out.
In-store experience could probably be the primary differentiator between Amazon and brick-and-mortar retailers, and a way for traditional retailers to gain back their lost advantage.
Retailers are equipping their stores with advanced digital technologies like scan and go, queue trackers, and service automation to transform their legacy stores into smart stores. A major Indian electronics retailer has enhanced their store with endless aisle kiosks and digital kiosks with augmented reality and virtual reality capabilities guided by in-store assistants.
Payments: The wallet, credit, and insurance play
Amazon Pay is the company’s answer to the need for a secure third-party payment solution. Rather than entering credit card information for every order, customers can buy with a few button clicks.
Amazon has been strengthening its wallet interoperability and credit business by partnering with leading credit card brands and offering buy now, pay later (BNPL) options for online purchases.
Retailers in Brazil and Australia are effectively competing in the payments space. The focus of these brands has been on the development of digital credit cards to build a strong card base, enable instant pay terminals, and acquire other financial service firms.
As a counter to the Amazon Pay initiative, leading retailers are also investing in building their own wallets and have started offering flexible payments in the form of BNPL.
The way forward
Leading retailers have also proved that competition is not the only way to navigate the retail world.
A few innovative retailers have succeeded through the co-opetition way (co-operating with competitors) by launching products in collaboration with Amazon. This list further extends to other leading retailers that use Amazon’s varied capabilities such as online listings, reverse logistics, and direct-to-consumer channels.
And, for the first time ever, the e-commerce share of retail appears to be flattening. The pandemic’s e-commerce spike is slowly decelerating overall as the online spending of consumers across advanced economies, including the United States is at or below the pre-pandemic levels. Though these trends must be evaluated from a perspective, the early hints of e-commerce saturation pose many questions. How persistent was the e-commerce surge? Are shoppers returning to physical shopping? Can pure e-tailers sustain in this omnichannel world? Is this trend a sign of the growing sophistication of traditional retailers?
Considering the dynamic nature of consumers, the traditional retailers must be prepared for what’s coming next. Figure 2 illustrates recommendations for retailers to improve existing capabilities and build new ones to serve customers better.
An infographic depicting recommendations for retailers to sustain in an omnichannel world. Retailers must explore competitive pricing models and provide flexible payment options. They must launch targeted private labels and standalone stress. They must strengthen their omnichannel and fulfillment capabilities. Finally, they must enable data driven retailing and strengthen the loyalty ecosystem.
Figure 2
Recommendations for retailers to sustain in an omnichannel world
Figure 2
The mantra for succeeding against the Amazon Effect for traditional retail is to significantly level up efforts on delivering a consistent, superior customer experience by amplifying the business levers that align with their purpose.
