BUILDERS
My first delivery from Young Brothers, my neighbourhood grocery store, was on March 19. The order was put through after lunch, paid for by credit card and delivered at 5PM. Maxi had offered me curbside pick-up 10 days later, while IGA and Metro couldn’t even give me a date. I spent 20 minutes disinfecting everything, although I wasn’t sure if I really needed to… But I saved the 1¼ hours it usually takes me to go to the supermarket, get everything I want, line up at the cash and return home.
I haven’t set foot in a supermarket since. All of the produce delivered to me was of outstanding quality, and the refrigerated goods bore the same best-before dates I would have chosen. They let me know in advance if anything is out of stock, and suggest alternatives for my approval. Hmmm, why didn’t I think of that before?
I couldn’t really say if this home-baked bread boom will continue post-COVID, but the pandemic will hasten the decline of outdated business models and the emergence of new, better-performing ones. Home delivery and e-commerce have likely doubled since January – and everyone understands that they’re here to stay. But there’s more to the story: the e-commerce customer base is suddenly expanding, and we’re headed for a tipping point. The anticipated result? A brutal restructuring in retail, with a rise in brands that excel at digital marketing 4.0, which leverages artificial intelligence, data, networks of web platforms and entertainment.
The neighbourhood grocery store in Outremont that has outdone Provigo, IGA and Sobeys
To understand what’s happening, we need to look at China, where e-commerce market penetration is more than double that of North America.
Here are the 4 lessons we need to learn as quickly as possible.
E-commerce leading to oligopolies
E-commerce requires a lot of capital. In China, it’s mostly controlled by two players with a combined share of 96%: Alibaba (68%) and JD.com (28%). Because of these companies’ technological dominance, their investments in R&D and the quality of the consumer experience they offer, manufacturers don’t build transactional websites anymore. It’s not worth the effort, since Alibaba does it better… at a lower cost. Instead, the brands build “storefronts” right inside the Alibaba platforms. The companies’ external websites focus on providing information and strengthening the brand image.
Amazon is the player that does it better and cheaper here… but its interface quality doesn’t measure up to Alibaba’s right now. So companies that sell technical products and platforms to special client groups can still maintain market share through their sites. Amazon’s yearly R&D spend is $30 billion, however, and online retailers in non-niche markets will find it hard to keep up. Ma Zone Québec offers a more refined interface than Amazon, and its content is more exciting and relevant to Quebecers. Will it succeed? Maybe. But the battle is far from won. Given the investments needed to match the level of service we’ve come to expect from Amazon, the Quebec market may not be large enough to attain the critical mass required to break even.
The retail trade: a complete – and just as brutal – restructuring
China’s retail industry underwent a complete restructuring in just a few years. During the e-commerce penetration process, a dramatic change seems to have occurred at roughly the 10% mark. The business model used by traditional food and electronics retailers, for example, collapsed at roughly the same time digital orders grew to 10% of the market. Companies still in business were acquired by Web giants, which are now implementing a model based on online ordering, home deliveries and target marketing sustained by artificial intelligence and vast stores of data.
In 2015, Alibaba launched Hema Fresh, a chain of neighbourhood grocery stores that does 90% of its sales online and delivers orders in 30 minutes within a 3-km radius. It then assumed control of RT-Mart, one of the country’s biggest traditional supermarket banners, and set out to make it a digital operation. During this period, fresh food sales also skyrocketed at TMall, an Alibaba subsidiary that runs the biggest BtoC digital platform in China. Global giants like Carrefour, Auchan and Tesco – which owned China’s main supermarket banners at the time – capitulated and either withdrew or sold control of their Chinese subsidiaries to local groups. Alibaba’s initiative inspired Amazon, which bought Whole Foods in 2017.
Hema Fresh employees prepare orders for delivery
Major e-commerce applications evolved into entertainment platforms
What has the thinking been, over the past decade, on the future of retail stores? They can only survive through a transformation, by offering a unique immersive experience. The challenge: to captivate Millennials, who grew up in the video games universe. Have they succeeded? Well, Apple Stores offer an exceptional experience while remaining profitable, with a presence in 500 cities worldwide. For the other players, truly immersive concepts such as Nike’s House of Innovation and the Starbucks Reserve Roastery are only viable in the world’s largest cities, such as Paris, New York, Chicago, Shanghai and Tokyo.
The response in China – e-commerce platforms – is viable on a large scale for both urban and rural consumers. The key difference compared to Amazon: while both are sophisticated transactional tools, the Chinese platforms have also become exceptional entertainment spaces. We just can’t conceive of how enticing consumers find the content of platforms such as TMall, the Alibaba subsidiary that now dominates BtoC e-commerce in China. The Chinese spend hours browsing it the way we do Facebook, YouTube or TikTok. TMall uses its AI expertise, coupled with the data it gathers, to create a customized experience and product offer for every visitor.
Starbucks Reserve Roastery, Tokyo
Take a look at the type of promotional event that TMall puts online
The Canada Goose storefront on TMall
TMall has also become an essential distribution channel for most major suppliers of consumer goods in China, and one of the main development platforms for their brands. An online storefront on TMall is a “must” for any high-end brand. Consumers browse through them the way we flip through glossy lifestyle photos in fashion magazines, with one difference: TMall also offers professional videos, detailed technical information and consumer reviews. The subway stations are papered with QR codes that take us into this world. Social media, videos and influencers on the Alibaba ecosystem’s platforms also direct their consumer traffic to brand storefronts on TMall.
Western companies, if they are to thrive, will need to invest and excel in this type of marketing. Contrast the mediocre experience of retail stores with the virtual experience: escapist, rich, omnipresent and accessible to all.
E-commerce is supported by impressive ecosystems
Another aspect that differentiates Alibaba and JD.com from Amazon is the impressive ecosystems they have built around themselves. Both are comprised of specialized e‑commerce platforms, gaming and video streaming companies, social media, online payment platforms, ticket bookings for movies or shows, meal deliveries and logistics firms. These ecosystems enable cost- and risk-sharing, and help augment the experience and rich content to a level unmatched in Europe or North America.
Ecosystems:
Alibaba
Links to TMall have been placed on Youku and Weibo, the Chinese equivalents of YouTube and Twitter respectively. Manchester United, for example, is due to have its own dedicated broadcast page on Youku, from which consumers will soon have direct access to the team’s storefront on TMall. Every transaction in the Alibaba ecosystem is supported by Alipay, which keeps 1% of the immense value generated by all this volume.
Ecosystems:
JD.com - Tencent
JD.com is tightly integrated with WeChat – the largest social network, the leading online service ordering platform and one of the biggest payment platforms in China. Tencent, the company behind WeChat and a major shareholder in JD.com, is also the world’s largest online video game company.
What to expect at the tipping point
North American millennials’ behaviour is starting to mimic that of Chinese consumers. A U.S. study revealed that 26% of their grocery orders are now being placed online – and that figure is growing fast. The e-commerce client base in other age groups also expanded suddenly during lockdown. Growth at Shopify – which sells e-commerce software to small companies – has skyrocketed. The tipping point isn’t that far away.
The end of the traditional retail model
This must be troubling a lot of people in the retail community.
I just received an order from Metro, three months after my first online purchase at Young Brothers. The interface was easy to use. The order was placed Saturday morning and delivered on Sunday at noon. Trucks with three temperature zones. Not bad… except that around 10 products were missing (including peanut butter!), and they hadn’t suggested any substitutes. My order included an arborio rice for a vegan risotto; what I got – without being consulted – was a brown rice/quinoa blend. So forget about impressing my Facebook friends and my in-laws during our Zoom Sunday dinner. I’ll probably order from Metro again, since their product selection is broader than Young’s. Clearly, though, they have work to do.
If the large retail banners were caught off-guard, it’s because they really had no appetite for investing in a business model that could shift store aisles to the background. Their infrastructure and business processes likely can’t support online orders exceeding 5% to 10% of sales.
Alibaba’s Hema Fresh stores in China were primarily designed as warehouses supporting delivery. RT-Mart, a later acquisition, is now rebuilding the back of its stores to support the new business model. In order to handle most of their sales online, North American retailers will have to build new stores, configured primarily for preparing deliveries, and invest in costly renovations for existing stores. That’s what Amazon, with $50 billion in hand, has just started doing with Whole Foods in the U.S.
What will happen to Metro, Loblaws and Sobeys when most of the neighbourhood grocery stores start using Shopify to offer online delivery? What about when Amazon sets up a 2-hour delivery service through Whole Foods? Another question: Once the first of the Canadian “big three” decides to put $2 billion into a top-notch delivery service for the country’s urban markets, how long will the other two banners survive?
This restructuring has already begun elsewhere in the retail landscape: JC Penney, Reitmans, Aldo, Frank & Oak and David’s Tea have sought protection under bankruptcy laws. Camellia Sinensis, on the other hand – Best Tea Website, World Tea Awards – saw online sales leap from 30% of its retail business in 2019 to 55% in the first half of 2020.
There’s no going back. The retail sales model, based on billions in property holdings and 10-year leases, is now a house of cards.
Marketing 4.0 will shake up brand rankings
Brands already understand that they can only maintain market share by offering their products on winning online platforms. Consumers will gladly use Amazon to buy local. Not many, however, have realized the depth of the marketing revolution this change will bring.
Investing in their websites and social media will only be a start. Brands will have to: 1) learn to use available data to target their customers and 2) find out what they’re viewing on YouTube and TikTok. They’ll also need to think entertainment, invest in video content, build relationships with influencers, set up links between platforms and conceive a strategy that integrates them in a relevant way. If they don’t invest in Marketing 4.0 right now, they’ll quickly lose their rankings – in many cases, to brands with younger leaders.
Since 4.0 is complex and multi-platform, brands will also need to forge partnerships, create ecosystems around themselves or insert themselves into existing robust ecosystems.
Could I be mistaken? It wouldn’t be the first time. If nobody springs into action here, the process could take much longer. I wouldn’t bet on it, though: think of Google versus the Yellow Pages, Expedia versus travel agencies, email versus handwritten letters. Over the years, traditional retail stores will more likely be serving an increasingly older customer base… and then be converted into delivery centres, shut down or turned into retail museums steeped in nostalgia, like J.A. Moisan (a 19th century-style general store in Quebec City).
