In a study conducted by Bain & Company in 2018 titled ‘The Future of Retail: Asia’s Ecosystems’, ecosystems are posited as the next frontier of retail in Asia. Asia presently has the world’s highest rate of Internet shopping, as well as the fastest growth in overall sales volume - with little signs of momentum slowing as evidenced by strong post-pandemic economic recovery figures amidst the phenomenon of “revenge spending” across the region.
What is a retail ecosystem
Ecosystems have been rapidly growing in popularity within Asian retail sectors, and are beginning to emerge across India and South Korea, as well as in the US and Europe. An ecosystem is defined as a “one-stop shop for consumers” which is achieved by combining a series of sticky (highly engaging products and services that promote regular consumption and customer retention) consumer services such as eCommerce, chat, streaming, gaming, booking services or payments into a single, centralised platform or application. This in turn generates network effects, attracting a massive customer base that can be readily leveraged by retailers who wish to access this critical mass of users, thus allowing retailers to reach and serve millions of potential consumers. For example, Tencent’s WeChat messaging app has over a billion users within its “scale-open” ecosystem, and has aggressively expanded its partnership with leading Chinese e-retailer; JD.com to disrupt and radically transform the retail experience through integrating with WeChat’s open platform to allow sellers to reach new customers and exploit previously untapped retail channels such as live video selling.
What does this mean for retailers
By joining WeChat’s ecosystem, JD.com sellers are able to widen their sales funnels significantly by leveraging the WeChat platform’s full stack retail capabilities spanning content marketing, financial transactions and logistics, effectively targeting new customers within WeChat’s vast user base and encouraging conversions by providing customers with a seamless consumer journey from awareness to purchase. Joining an existing ecosystem is certainly a compelling proposition for retailers, providing a capital and asset-light alternative to building out and scaling in-house capabilities, thus allowing retailers to access sophisticated customer networks and benefit from domain expertise in areas like data analytics and communications to supercharge their sales funnels.
Types of ecosystems: joining an existing ecosystem or building one of your own
Multiple formats for adapting the ecosystem model presently exist. Aside from joining an existing “scale-open” ecosystem as in the case of Tencent’s WeChat platform, retailers also have the option of developing their own proprietary ecosystems. For example, offline market leaders with dominant market positioning may seek to further develop their omnichannel sales models by launching joint ventures or partnering with other companies to provide enhanced services only for its own customers.
Notably, certain markets are especially conducive for digital disruption and online retail development. For example, in South Korea or the US - high rates of mobile phone penetration and urban density combined with mature digital and logistics infrastructure underpin the market dominance of retail incumbents that maintain a scalable brick-and-mortar retail footprint in addition to successful digital sales operations. However, due to the entrenched market dominance of such incumbent retailers, this could also potentially impede the pace of widespread digital disruption due to the formation of proprietary ecosystems, closed off to other retailers, rather than ‘scale-open’ ecosystems that allows for broad-based value creation for all participants. For example, in South Korea, incumbents such as Emart built a strong omnichannel retail approach while expanding their proprietary ecosystem concurrently into areas such as payments or marketplace models.
Thus, such markets experience a much smaller extent of ecosystem consolidation as compared to the size and clout of massive ‘scale-open’ ecosystems like that of WeChat and Amazon in China and the US respectively. As a result, proprietary ecosystems will likely persist as the predominant model in such geographies, and will continue to shape their local retail landscapes going forward.
What lessons retailers can learn
Ecosystems definitely have significant implications for the nature of competition in the wider retail landscape. Joining a ‘scale-open’ ecosystem is a potent lever for value creation for nascent retailers or startups who are able to effectively integrate ecosystem capabilities and operate at scale in a virtual and asset-light manner. However, market leadership economics and societal backdrop also play a role in helping retailers make informed strategic decisions.
In certain geographies, the formation of proprietary ecosystems by incumbent market players has an adverse effect on the ability of smaller retailers to compete effectively. In such cases, without incumbent market share, achieving scale and developing one’s own proprietary ecosystem is an uphill task for smaller retailers. Thus, in order to maximise value for all stakeholders, smaller players in such a market dynamic can consider partnerships or acquisitions by dominant companies in order to reap the benefits of being a part of a proprietary ecosystem. However, such actions necessarily come with an equity ownership tradeoff - which some founders may be unreceptive towards. On the other hand, building out proprietary ecosystems is an effective strategy for dominant market players who wish to entrench their market power and enhance their service capabilities. However, this definitely comes with its own set of risks such as high capital commitments and uncertain payoffs, or even cultural mismatches when undertaking strategic acquisitions and partnerships.
Hence, players must carefully weigh whether the benefits of third party scale achieved by joining or creating an ecosystem is worth the costs. For example, retailers have to be wary of cannibalising their core business when exploring potential acquisitions or partnerships with competitors. Alternatively, retailers with access to capital and compelling unique value propositions can opt out of participating in ecosystems entirely and focus instead on building a differentiated omnichannel model that will allow them to retain market share and remain competitive amongst larger players.
Moving forward: The Phygital future
The Covid-19 pandemic has undoubtedly accelerated the phygital movement (a term used to describe omnichannel retail operations conducted across both physical and digital customer touchpoints) across retail industries, as retailers were forced to embrace digital retail models like eCommerce amidst sporadic lockdowns and supply chain disruptions in order to sustain operations.
Phygital retail has long become a commonplace practice especially in today’s increasingly hyperconnected world, and eCommerce has become an almost de-facto standard for retailers. Therefore, ease of product discovery and consumption is no longer sufficient to entice and retain customers. Instead, retailers must be able to offer an enriched customer experience across all touchpoints. Therefore, embracing ecosystems could very well help usher in the next phase of phygital retail, allowing retailers to operate with greater efficiency, as well as dramatically enhance their value propositions and service capabilities by integrating with or developing an ecosystem.