Implications and imperatives for the retail sector

Retail groups
These typically have an extensive footprint, with some owning a portion of the real estate, and a broad brand portfolio developed through franchises and joint ventures. They act primarily as distributors for major global brands and their own private labels.

Implications
The rise of pure play e-commerce marketplaces is already challenging retail groups. Along with the many conveniences they offer, excellent customer service and technology-driven recommendations and personalization are now entry-level requirements. As the online market grows, extensive product ranges, easy purchase journeys, and constant sales and promotions will put even more pressure on traditional retailers’ margins and continue to eat away at their market share.

The physical store (as we know it) will lose relevance, leaving assets underused or abandoned. While the push to launch proprietary online channels could lead to organizational friction as organizations attempt to balance investment across potentially competing objectives, the retail physical store can still have a crucial role to play in the new normal, provided they reinvent themselves and bring synergies with online channels through innovation.

Imperatives
a. A clear channel strategy
Many major regional retailers have already moved to establish e-commerce channels, with varying degrees of success. This flurry of activity means any retailer contemplating a similar move must step back and develop a clear channel strategy for the long term, with consideration on several fronts:

How much control to retain. Certain products and brands lend themselves to a very particular purchase experience, especially in the high-end and luxury categories, which typically means keeping a hand on the tiller at all times. At the other end of the spectrum, using third-party marketplaces and e-distributors can help get brands online and make money more quickly, however they risk losing control over time as direct contact with consumers—and their data—erodes. Ensuring consistency across channels is paramount.

Potential profitability. A study we led in the GCC indicates that EBITDA contribution from offline stores is highest at 12 to 16 percent, compared with marketplaces where it is in the range of 10 to 15 percent, while owned “brand.com” websites contribute just 6 to 11 percent. While these differences are primarily driven by economies of scale, especially in the logistics space, it’s important to know that chosen channel mix will directly impact profitability.

The level of investment and effort required. Launching a multi-brand marketplace is a viable option for some retail groups, however an upfront assessment of the product portfolio and customer base should be carried out first. For this type of channel to be profitable and drive economies of scale, both the range of products and number of consumers have to be right. Getting the right balance could require additional investment in acquisitions, joint ventures, or equity.

The omnichannel dilemma. COVID-19 has put many omnichannel strategies into question. Retail groups now need to think about how to—or whether to—continue using their large real estate assets. Our own research indicates that offline channels still play an important role when customers are researching products, and also when they want to buy. This indicates an opportunity to continue using physical stores in a meaningful way. From our own experience with clients, when omnichannel is done well, sales in offline stores can increase by as much as 4 to 8 percent—but this has yet to reach its full potential across the GCC.

b. Optimum delivery and fulfillment
Delivery has become a battleground between traditional retailers and e-commerce businesses. With market leaders such as Amazon and Noon investing heavily to place distribution centers close to sources of demand, and running their own last-mile fleets, they can make delivery promises most other retailers are unable to meet.

A recent consumer survey that Kearney carried out in the GCC revealed that delivery expectations are on the rise here. In fact, around 30 percent of respondents expect even faster response times. If retail groups are to have any hope of competing, they will have to use stores as their own distribution centers to get to customers faster (see figure 6).