It's time to rethink your retail relationships

Retailers are prioritising non-retail components to grow earnings in a complex operating landscape, while new online non-retail businesses are stepping into retail. That has major implications for consumer brands.

It's time to rethink your retail your retail relationships

 

Amazon released third quarter earnings at the end of October and they were historic for one reason. The former bookseller-turned-everything retailer officially became more of a platform business than a digital store. Amazon reported that net product sales in three months to the end of September were $54.9 billion, while revenue from its services added up to $55.9 billion, its biggest ever quarter.

When Amazon talks about its services, these are some of the areas of its vast enterprise it is talking about: Amazon Web Services - its behemoth cloud computing operation, its $8 billion advertising business, its Prime subscriptions - of which it has more than 200 million - its entertainment division as well as now its growing infrastructure-as-a-service line.

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Edge by Ascential’s Gemma Pinedo, Nick Everitt, Michael Rogosa and Kelsey Regan discuss the changing retail landscape and how consumer brands must engage to grow top and bottom line in 2022 and beyond.

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Wake-up Call

In its quarterly earnings report, Amazon revealed for the first time it has third-party customers for its Amazon One technology, which lets shoppers use their palm to enter, identify, and pay at stores and other venues.

In addition, it said that three new third-party venues have been enabled with the company’s pioneering Just Walk Out technology that allows for a cashierless shopping experience.

This is Amazon’s first quarter ever of this new reality but it will not be the last. While a flip back could briefly occur, Q3 2021 showcases the long-term trajectory of how the company will drive profit for its business.

This should be a major wake-up call for consumer brands.

 

Retailers as platforms

 

Historic retailer transformation

Where Amazon leads, other retailers follow - some faster than others. Some traditional brick-and-mortar retailers, like Walmart and Kroger have already spent the past few years investing in ecommerce capability, supply chain and delivery logistics and customer loyalty programmes to meet growing shopper expectations.  

But since COVID-19 catapulted ecommerce to the front and centre of retail, Europe’s biggest retailers are quickly catching up. Just this year, Carrefour announced a strategic investment in on-demand - quick commerce - start-up Cajoo to speed up grocery delivery and launched a new media and advertising business Carrefour Links. Meanwhile, in the UK, Tesco has launched a pilot with “groceries faster than you” delivery company Gorillas.

For the first time, in its half-year 2021-2022 earnings report, published in early October, Tesco talked about “building unbeatable digital, convenience and loyalty platforms” to drive profitability. This language represents a step change in the direction Tesco is headed - the same direction as Walmart, which has for a good few years been very clear that it is building the next generation productivity loop.

That means that in Walmart’s future operating model, commerce will simply be the baseline of its business - but its focus will be on expanding its verticals, as Amazon is doing in a much more advanced way right now, to keep growing its revenue streams, operating margin and customer base.

 

Complex Times

This historic transformation in the role of retailers is being driven by a number of factors. These include, but not limited to, the more challenging economics of ecommerce and last-mile fulfilment as well as increasing competition from business models which started life in one vertical and are now moving into commerce.

For example, companies like Google, Microsoft, Facebook and other social media platforms are taking a bigger role in retail, while a whole raft of online startups have emerged over the past years primarily focused on the last-mile but now looking to deepen customer retention and further acquisition by adding other services, including commerce.

The ultra-rapid slew of grocery delivery startups, such as Getir, Flink, Gorillas and Jiffy, actually control the entire supply chain. They have their own assortments, sometimes with exclusive ranges, pack from micro fulfilment centres and then control distribution too.

All of these factors put pressure on legacy retailers to change the way they operate and look to margin-accretive services to complement their businesses in the future. The world’s future retail giants will be similar to Amazon’s model today - commerce will be just one spoke of a complex ecosystem with different verticals having different objectives.

 

Retailers as platforms

 

For consumer goods companies, this means that future success will be predicated on having more strategic relationships with your key retail partners - and moving away from the tactical price and promotions conversations, a model which has been broken for a while.

From our experience working with global clients to prioritise resource and investment, the following three key areas will help drive sales and profits in the new world of retail:

  • Understand where your customer is shopping

It is vital in this new era of retail that consumer brands understand which platforms their target customers are using - for social and entertainment, for last-mile delivery, for hotel booking as well as for commerce. New customer expectations are being set all the time in terms of speed, engagement and personalisation by online players which may start off in one vertical, such as on-demand delivery or mobile payments, but then are likely to branch out into others, including commerce, to offer a wider selection of services to their growing customer base. This is what we call the flywheel. The more services that are offered, the greater the stickiness and retention.

  • Prioritise your largest platforms and learn their unique ecosystems

Consumer goods companies must take stock of their largest retail partners and assess whether they still should be prioritising those relationships. Considering that four of the five largest retailers in the world today are pureplay digital platforms - with the exception of Walmart,  which has been undergoing an impressive digital transformation, seeking to combine the best of both worlds - strong physical presence combined with an ever expanding digital ecosystem -- consumer brands must prioritise these platforms and understand where they are expanding, how they are innovating and then align internal capability with that.

Experimenting with joint “test and learn” initiatives in areas where both the brand and retail partner have the potential to win together will be essential. For example, General Mills, Kraft and PepsiCo have partnered with Walmart on a Christmas holiday campaign where Pinterest browsers can add a recipe-worth of ingredients to their Walmart cart and purchase in just a few clicks. This is Walmart’s first large-scale shoppable commerce initiative and we are likely to see much more of this in 2022.

  • Leverage data to inform effective decision making

Customer segmentation will be key in the new world of retail transformation - and that means that real-time data and analytics must be at the heart of strategic decision making. Remove siloes internally to facilitate data management and harmonization. Upskill in areas like data science and storytelling and build strategic partnerships with retailers to share and facilitate the exchange of added-value data.

The consumer brands that will win in the ecommerce-dominated future will be those that understand the value they can add to their retail partners and are well aligned with them on the key areas where there is most mutual gain.

 

If you'd discuss how your company can build a succesful retail partnership with one of our experts, fill out the form below.

 

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