Time to buckle up | Part two: innovation of business models and services



In Part 2 of our “Time to buckle up” blog series, we are discussing how uncertainty created by the Corona crisis has accelerated the shifts towards business model innovation and partner collaboration.


The future is uncertain, but the Corona crisis has created more uncertainty than other crises

In the 2008 crisis, there was a sudden and sharp decline of liquidity. Current levels of financial liquidity are high and interest rates are low. As a result, large (PE) investors will be driven towards higher risk investments which tend to be more transformational in nature. In addition, institutional financial systems (Central banks, IMF, ECB etc.) are currently significantly more resilient and are responding in a coordinated fashion, resulting in a more stable financial environment.


During this pandemic, recovery is dependent on the speed and effectiveness of how we control the virus, making the duration highly unpredictable. In the case of a quick V-shape recovery, retail will experience a crisis, after which we will return to the preceding transformation path, but in an accelerated mode. In the case of an extensive U-shaped recovery, the crisis will be followed by great unpredictability, including the above-mentioned opportunities for high-risk investments.


‘In a U-shape recovery scenario, the balance in the market will be gone, which creates systems that are unpredictable.’

To successfully navigate this high level of uncertainty, retailers, in this fourth wave, will need to truly shift to a one-to-one relationship with customers and embrace a digital innovation mindset. The main goal, which needs to be worked towards continuously, is creating advantaged customer experiences and higher lifetime value. Speeding up these innovations must be facilitated through the use of data and technology such as AI.


Shift 2: Innovation of business models

How to differentiate customer experience through innovation of business models and services


1. The Corona crisis will accelerate the shift to personalization and true omnichannel

Once again, this crisis is shifting how consumers perceive value. Where price and quality used to be differentiating factors, it is now conditional. You cannot compete on the price-quality ratio when it is no longer a factor. Retail winners of this crisis will not fall back on old ways of managing price and value perception, but rather will seek to customize through individualization and personalization. Retailers must enhance their customer experience through personalization of value to emerge strongly from the current crisis. As mentioned above, this means that as part of the fourth phase of digital retailing, retailers create (digital) one-to-one relationships with their customers and use the channels in an integrated way. E-commerce will have to become an integrated part of the retailer’s ecosystem, rather than a separate channel. As a result, we see pure players entering the realm of physical retail in a big way with examples like Amazon GO, Alibaba’s Hema, and Amazon buying Whole Foods. 2. Acceleration of e-commerce pure players at the expense of crowded retail areas

Shopping malls and high streets have been struggling with declining numbers that seem to have been shifting towards e-commerce for quite some time. The concerns surrounding the Coronavirus have magnified this trend, and we can see fewer consumers going back to crowded retail areas in countries where quarantine restrictions have been lifted, like China. This crisis provides a tipping point for e-commerce. It accelerates the position of pure players like Picnic, Bol.com, and Amazon, and is likely to be the basis for higher autonomous growth of players with advantaged e-commerce.


3. Create digitally enabled one-to-one relationships; become a partner for life

The relationship between retailers and their consumers has been changing for some time. Brands that focus on becoming a partner for life, by providing services that enhance the customer experience in addition to their products, have a greater competitive advantage in times of crisis. We see many examples of brands, for instance in sports, fitness, and foodservice, that are using this crisis to deepen their digital customer relationships. Large amounts of data and the ability to use that data to create personal profiles are needed for this shift. Whereas large platforms are constantly improving on their already existing capabilities in this field, these same capabilities are increasingly more accessible to other parties through means of ‘Software/Technology as a Service’ business models.


Even so, retail must prepare for the rapid development of one-to-one customer relationships to create a clear customer experience advantage. To be successful in doing so, you need to embrace digital business models and technology.


‘The next step in the blending of channels will happen as a result of customer-experience innovations that disrupt traditional customer journeys by integrating retail with other (online) aspects of life such as social media or entertainment.’

An example of this would be telling smart home system Alexa that you would like to purchase the jeans that someone is wearing in a particular YouTube video.


Shift 3: Consolidation and collaboration

How to accelerate innovation of customer experience through consolidation and collaboration


1. Leverage the power of collaborations and networks

Prior to the crisis we already saw large ecosystems forming around the leading platforms. Networks were formed by increasing the number of connected parties and thereby its reach and proposition strength. To take advantage of these networks and their beneficial effect, retailers need to position themselves within these networks and ecosystems and create partnerships When the number of players in a network rises linearly, the value of the network will rise exponentially.’ Examples of gaining new ways to reach customers through collaboration can be found in the institutionalized partnerships between Albert Heijn & Takeaway.com, HEMA & Jumbo, and Wehkamp & BCC.

2. Acquiring new digital skills through collaboration or acquisition

It is a core capability of winning retailers to be able to identify and realize synergies through collaborations or acquisitions. The Corona crisis however emphasizes the need to access new digital skills for innovation and different ways to reach your customer. For example, we see acquisitions of digital and data analytics skills by companies such as Lidl who has begun offering cloud services with the stated intent of competing with Amazon Web Services, Nike acquiring data analytics companies, and brick and mortar retailers operating on the technologies provided by AWS and Alibaba.


3. Consolidation through Darwinian evolution

Not all retailers will survive the crisis on their own. For retailers and Private Equity players with financial muscle, this crisis provides an opportunity to raise the game through acquisition and consolidation. Depending on a U or V shaped recovery, the impact will differ. The strong will nevertheless eat the weak, yet the weak can indeed be very big. A rationalization in the number of retailers is a Darwinian consequence of the crisis. A very recent example of this is the fall of J.C.Penny, where Amazon has shown interest in (part) of their store network.


Jumping the curve is about creating a path of micro-innovations rather than big set innovations that take years to complete. Retailers that are able to integrate these micro-innovations and speed up iterations of improvement will become the winners of this crisis. The biggest challenge in doing so is changing the mindset of management to act now and alter what they are doing, rather than repeating more of what they have been doing in the past. Start now.

‘A digital transformation is a cultural transformation rather than a technological transformation. Just start. Every retailer can start a transformation and will gradually expand, but gradually doesn’t have to mean slowly.’

With special thanks to Piet Coelewij,


Contact

IG&H has 33 years of experience in helping clients innovate, deliver superior experiences, and execute their strategies in the retail sector.

Why not arrange a meeting to discuss how we can help?


Authors

Jochem Jansen

E: jochem.jansen@igh.com


Myrthe van Hoek

E: myrthe.vanhoek@igh.com

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