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DISRUPTING RETAIL FROM THE INSIDE OUT
THE ROLE OF ENGINE 2 BUSINESS BUILDING TO SECURE RETAIL ’ S FUTURE
By Michael Egan and Shyam Unnikrishnan
Image from www . greenbiz . com
Michael Egan is an Expert Partner and co-leader of APAC Business Building ( Next ) practice at Bain & Company based in Bangkok . Shyam Unnikrishnan is a Partner at Bain & Company based in Bengaluru .
Retail is facing a tumultuous period .
Consumer preferences and expectations are rapidly evolving , supply chains are struggling , and the lines between digital and physical are becoming less distinct . All of these factors present significant obstacles to growth and profitability in the retail industry .
Whether you are a physical retailer , an omnichannel player , or an entirely digital storefront , you ’ re probably assessing your primary operations and noticing a disparity between their growth potential and your long-term scale ambitions .
At Bain & Company , our research clearly points to continued market volatility for core retailing ; however , we do see successful players emerging by moving beyond their core retailing roots and investing wisely in new “ Engine 2 ” businesses . In fact , we believe that these new engines of growth could account for up to 50 % of leading retailer profits by 2030 .
Building new businesses and capturing this growth is not without risk . Your organization has been developed to manage a retail business — asking it to pivot to an entirely different endeavor presents numerous challenges , and getting it wrong could cause the new venture to fail and can impose greater strain on your core business . Ramifications can include financial and human resource distraction , potential damage to your brand reputation , and a decline in employee morale , among other pitfalls . It is critical that you adopt a fresh approach to building Engine 2 businesses .
The Retail Engine 2 Playbook
At Bain & Company , we ’ ve identified three of the most critical moves necessary to enable success with Engine 2 business building during our time working with dozens of leading retailers around the globe : leverage your strategic assets ; approach with an investor ’ s mindset ; and adopt an agile , entrepreneurial working approach .
Leveraging strategic assets . The first question is where you should play . As a retailer , you are sitting on numerous strategic assets — from your customer base to your supply chain — each of which can position you to win in new markets .
Take advertising as an example . Bain ' s research indicates that 59 % of advertisers see unique benefits in retail media networks , and 60 % believe stricter data privacy regulations will increase their importance . In 2022 , Amazon ’ s advertising business alone earned $ 37.7 billion , including a 19 % Q4 year-over-year increase , with significantly higher operating margins than either its core or its Amazon Web Services ( AWS ) businesses . Notably , over half of Amazon ’ s 2022 net sales originated from segments beyond its traditional online and physical stores .
Clearly understanding customer needs and how your brand can extend to solve those needs will help you learn which assets to leverage . Consider a Southeast Asian quick-serve restaurant that recognized its
traditional business couldn ’ t fulfill its growth ambitions . To expand , they initiated a deep dive into how customers viewed their brand and what made them unique , and used this to identify and prioritize new Engine 2 opportunities , including moving into various consumer product categories .
Using an investor ’ s mindset . When evaluating and choosing which opportunities to pursue and how to manage the business-building effort , consider an investor ’ s mindset . This means analyzing the new business not just as a stand-alone entity but by how it may also benefit your core . Once you decide to pursue the opportunity , it means maintaining strict vigilance on key performance indicators and allocating funds as you see the venture meet its goals . If the venture starts to waver , make hard decisions around either pivoting or shutting it down .
Bain worked with a large APAC e-commerce platform and identified their extensive user data as a valuable resource that enabled them to optimize their platform ' s revenue through improved upselling and cross-selling while creating a new revenue stream by offering consumer insights and market data to brands in the market . Throughout the journey , the company had clear performance goals in mind and only scaled its investment as success became apparent .
Adopting an agile , entrepreneurial approach . Finally , building new ventures is not the same as managing your day-to-day business . It requires a greater degree of risk , an adherence to agile principles of rapid experimentation with real customers , and a willingness to work at speed while also protecting your ovevvrall brand . This typically means setting up new teams that are dedicated to the cause and can work independently from the core , certainly in the early phases of growth . It may also mean partnering with others who have capabilities that complement your own .
One example of this is a leading APAC food retailer . To meet growth goals , they realized the need to venture beyond traditional food shopping into new categories and consumer occasions . Aware that these new businesses differed from their core , they built entrepreneurial teams to fast-track market entry and partnered with entities that were much nimbler than their traditional vendors . They strategically structured the interaction between these teams and the core business , balancing core protection while ensuring the new teams could operate efficiently and rapidly reach their market with sufficient independence .
The rising significance of Engine 2 expansion , required by both established retailers and digital natives , reflects the transformation of modern retail . It aims to make retailer economics sustainable for the long term . While moving beyond the core business involves challenges , retailers should not undervalue the potential of their existing assets as a foundation for future profitability , and they should recognize that a playbook exists to succeed in these new endeavors .
Singapore Economic Development Board and Bain Bain & Company is an appointed venture studio partner of the Singapore Economic Development Board as part of its Corporate Venture Launchpad 2.0 program , designed to enable companies to incubate and launch new ventures from Singapore .
Michael Egan is an Expert Partner and co-leader of APAC Business Building ( Next ) practice at Bain & Company based in Bangkok . Shyam Unnikrishnan is a Partner at Bain & Company based in Bengaluru .
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