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THE FUTURE OF RETAIL : THE AGE OF CONVERGENCE ,
PART 2
By Gino Dizon , Yukiko Tsukamoto and Marc-André Kamel
Gino Dizon and Yukiko Tsukamoto are Partners based in Bain & Company Manila and Marc-André Kamel is a Partner at Bain & Company based in Paris .
In the last edition of this publication , we outlined how retail was entering an age of convergence characterized by the blurring of boundaries between incumbent retailers and digital insurgents .
That ’ s partly because incumbents and tech-first retailers have become more evenly matched in the wake of Covid-19 . Prior to the pandemic , the overall momentum was with digital natives . Amid store overcapacity , many traditional retailers were struggling to adapt to the rise of e-commerce , competition from discounters , and waves of innovation . At the same time , ecosystem players such as Amazon , Alibaba , and JD . com were gaining share , partly by supporting their retail offering with profit generated by their extensive nonretail activities .
Covid-19 accelerated bankruptcies at surprisingly few store-first retailers . More striking was the number of incumbent retailers that gained a second wind . Some were in categories that experienced stronger demand in the pandemic , such as grocery . Others moved with the speed of digital natives to extend their existing omnichannel capabilities , adopt nimbler ways of working , and strengthen both sales and profit .
Ecosystem players and online marketplaces continued their relentless march during the pandemic . Our analysis shows that they captured about 60 % of global retail growth between 2013 and 2021 , solidifying a dominant position in key markets .
However , the drastic shift in sentiment about tech stocks has put ecosystem players under more pressure to generate profits , rather than relying on stellar revenue growth to enthuse investors . Tighter funding in tech is already having an even bigger impact outside ecosystems , threatening the existence of some innovative digital newcomers that had been competing hard with incumbents . Easy access to capital had masked the fact that these businesses were subscale and lacked a proper profit engine . The failure of the weakest of these ambitious lossmakers , along with a greater focus on retailing basics at stronger players , should help improve the overall profitability of digital-native retailers , offsetting the impact of the tougher funding environment and higher customer acquisition costs .
So , the playing field has been leveled to some extent , with incumbents emerging from the pandemic in stronger shape than many might have predicted , and tech-first retailers facing a few headwinds after years of mostly enjoying tailwinds . This equalization should allow executive teams ( and investors ) to see more clearly the imbalances that remain , most notably in scale .
Scale was already crucial in retail . Now convergence is making it even more important . Incumbent retailers still face the challenge of somehow matching the vast sums tech-first players are investing in digital tools , data analytics , and other technology . Now , digital natives are also riding two horses at once , continuing to pour money into tech while funding a new push into physical retailing ( and a more asset-heavy balance sheet ).
Only scale can pay for transformations like these , by allowing companies to raise capital more easily , invest more in the business ( both in terms of capital expenditure and price-cutting ), and amortize assets across a larger base .
What else will retailers need to do , beyond building scale through mergers and acquisitions or organic growth ? It ’ s a given that tomorrow ’ s industry leaders will have an elevated purpose and greater sustainability . They will continuously recharge their business by realizing cost reductions every year .
Incumbents and first-wave digital natives will also “ tech up ” by upgrading legacy infrastructure ; by using technology , data , and automation to improve and accelerate decision making ; by increasing spending on innovation ; and by gauging whether , when , and how much to invest in new digital opportunities such as nonfungible tokens and the metaverse . Beyond that , we think winners will do the following :
Undergo a customer epiphany . The customer will increasingly shape decisions , not the channel . That ’ s a key light-bulb moment . Knowing how consumers behave in your store or on your website won ’ t be enough . Retailers will instead need a holistic understanding of how people live , work , shop , and amuse themselves , partly gained through integrating external data from social media and other sources .
Excel at omnichannel 3.0 . The future is omnichannel , and retailers will have to push the boundaries of what ’ s possible to stand out . That means coming to grips with web3 digital innovations and applications such as blockchains and the metaverse . But resource constraints require ruthless prioritization of the most promising omni 3.0 bets .
Grow beyond trade . Opportunities include retail media , data monetization , and other digitally enabled revenue streams . Retailers can gain further resilience by creating or extending consumer or business-to-business ecosystems and expanding in circular markets .
Play talent Tetris . Most retailers must play a tricky game of “ talent Tetris ” to become the employer of choice in tighter labor markets . Winners will also respond quickly when innovation makes some jobs more value-accretive than others , all the while investing heavily in technology and automation . Some are standing out by offering attractive compensation and high levels of responsibility .
The age of convergence is dawning — and it ’ s rich with promise .