The Future of Retail: Asia’s Ecosystems

In the ever-evolving landscape of Asian retail, the emergence of retail ecosystems is shaping the future of the industry. These ecosystems are extensive networks comprising consumers, retailers, and various partners. They are rapidly becoming the norm in Asia and are expected to play a significant role in other markets worldwide. While the structure and growth of these ecosystems may vary based on specific market characteristics, retailers are faced with crucial decisions on whether and how to participate in them.

Key Insights:

Asia’s Retail Landscape and the Rise of Ecosystems

Asia stands at the forefront of digitalization in retail, with countries like China, South Korea, and India leading the charge. The region has witnessed the highest rate of Internet shopping and the fastest growth in overall sales. Approximately half of all retail growth is expected to originate from Asia in the next five years.

Ecosystems have become a defining concept in Asian retail, representing expansive communities of consumers, retailers, and partners. These ecosystems are fundamentally reshaping the entire retail landscape, compelling retailers to make pivotal decisions.

While Amazon pioneered the concept of proprietary ecosystems, it is in China where this idea has gained substantial momentum. Giants like Alibaba and Tencent have swiftly developed open variants of the ecosystem, serving as one-stop shops for consumers and powerful platforms for retailers to reach vast audiences.

Ecosystems begin by consolidating a comprehensive set of consumer services within a single platform or app, including e-commerce, chat, streaming, gaming, booking services, and payments. This convergence of services attracts a massive customer base, making it highly appealing to retailers seeking easy access to a large consumer pool. For example, Tencent’s WeChat boasts over a billion subscribers and is reshaping the retail experience in collaboration with JD.com.

The Advantages of Plugging into Ecosystems

Participating in ecosystems offers retailers access to a wide range of hard-to-build capabilities. This includes rich customer data analytics, extensive logistics networks, and cloud services. Such access represents a compelling, capital-efficient alternative to developing these capabilities in-house.

The scale achieved by ecosystem players not only allows for reinvestment but also provides a foundation for expanding into new services, formats, and geographic regions. For instance, Alibaba ventured into travel services, futuristic supermarkets like Hema, and Southeast Asia through its investment in Lazada.

The Global Evolution of Retail Ecosystems

Retail ecosystems are not limited to China but are emerging in other Asian countries like India and South Korea. Additionally, ecosystems are redefining consumer expectations and transforming retail value chains in the United States and Europe.

As ecosystems gain influence, retailers must navigate new strategic choices. These choices encompass participation in ecosystems, the risks and opportunities associated with them, and the ability to compete against these ecosystems.

The Natural Progression of Ecosystems in Asia

Ecosystems align with the natural progression of retail in Asia, especially in fragmented markets with relatively few stores per capita. These conditions create fertile ground for digital disruptors to meet the demands of an expanding middle class swiftly.

For instance, Alibaba’s evolution from a platform assisting small Chinese enterprises to a dominant force in e-commerce demonstrates how ecosystems form and expand. By creating marketplaces like Taobao, Tmall, and AliExpress, Alibaba ventured into payments, logistics, and data analytics to cater to its growing consumer base. The resulting scale provided the foundation for further expansion into new services and geographies.

Similarly, Tencent transitioned from a social media platform into a significant player in retail by acquiring various components of the retail puzzle, particularly through its stake in JD.com.

Variability of Ecosystems by Market Ecosystems will evolve differently in various markets, influenced by factors like urban density, population age, smartphone penetration, delivery costs, logistics maturity, and regulatory environments. These factors will shape the pace and nature of ecosystem development.

• Scale Open Ecosystems: These massive ecosystems are open to all retailers, making them ideal for markets conducive to digital disruption by scale insurgents. Winner-takes-all scenarios may emerge in these markets.
• Scale Proprietary Ecosystems: Proprietary ecosystems are built by retailers who partner with other companies to provide services for their own customers. These ecosystems may form in markets with established offline retailers and online service leaders.
• Emerging Ecosystems: Developing markets with improving smartphone penetration, logistics networks, and consumer trust in online shopping may quickly develop competing ecosystems. A winner-takes-all pattern is likely in such geographies.
• Nascent Ecosystems: Markets characterized by factors like low population density, aging populations, or strong offline retail presence may see ecosystem development at a slower pace. Retailers in these regions are more likely to focus on proprietary ecosystems.

New Rules of the Game Ecosystems have introduced new rules to the retailing game:

1. Virtual Scale: Scale is no longer limited to physical assets. Retailers can achieve virtual scale by leveraging the assets of ecosystem partners.
2. Data and Insights: The competitive battleground has shifted to data and insights, as retailers analyze the vast amounts of data generated by e-commerce, social media, payments, and location-based services to offer personalized experiences.
3. One-to-One Personalization: Retailers are transitioning from segmented customer propositions to one-to-one personalization, thanks to advances in Big Data, machine learning, and AI.
4. Instant Gratification: Shoppers now expect virtually instant access and results, demanding that their inspiration and consumption align seamlessly.
5. Enriched Omnichannel Experiences: The concept of seamless shopping experiences has expanded into enriched omnichannel experiences that span social media, gaming, and other ecosystem touchpoints.
6. New Focus on Analytics and Technology: Retailers are prioritizing analytics, technology, and ecosystem partnerships to stay competitive and innovate continuously.
7. Longer-Term Focus: Shareholders now expect retailers to focus on longer-term revenue growth and value creation rather than just short-term profit margins and earnings per share.

How Retailers Should Respond As the retail landscape continues to transform in Asia and beyond, retailers must consider their strategic options carefully. The choices they make will have a profound impact on their future success. Here are the strategic options for retailers:

1. Go Solo: Build a differentiated omnichannel model independently if the retailer possesses the capital, a compelling value proposition, and unique capabilities.
2. Participate in an Open Ecosystem: Join an open ecosystem platform to leverage ecosystem partners’ assets and scale without the need for extensive in-house investment.
3. Create a Proprietary Ecosystem: Collaborate with partners to establish a proprietary ecosystem that offers a unique value proposition to customers.
4. Adopt a Hybrid Approach: Combine elements of the above strategies to create a customized approach that aligns with the retailer’s strengths, market conditions, and customer preferences.
5. Prioritize Innovation and Agility: Regardless of the chosen strategy, retailers must prioritize innovation, agility, and adaptability to respond effectively to evolving customer needs and market dynamics.

In conclusion, the future of retail in Asia is firmly rooted in the development and expansion of retail ecosystems. These ecosystems are reshaping the way retailers and consumers interact, providing unique opportunities and challenges. As the retail landscape continues to evolve, retailers must carefully consider their strategic choices to thrive in this new era of retailing.