COVID-19: An Inflection Point For E-commerce

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By Sunil Chauhan, Assistant Manager (Technology, Media and Telecom), Business Research & Advisory, Aranca

Following the outbreak of COVID–19, e-commerce has been rapidly gaining traction. E-commerce companies have managed to beat the odds by adopting a flexible approach in terms of transforming their business models and leveraging emerging technologies. However, to ensure success in future, they need to constantly align their objectives with evolving customer requirements. This can be achieved with the help of digitization and by building a roadmap for growth around it. Similarly, for traditional retail to retain relevance in the post-COVID–19 era, pursuing an e-commerce/omnichannel strategy is crucial.  Digital technology vendors can play an important role by helping traditional retailers in chalking out a detailed strategy that leverages their existing strengths, addresses their unmet needs, and is designed to offset weaknesses. The objective of this article is to help e-commerce companies and digital technology vendors understand how they can acclimatize to the new normal.

How is the retail landscape evolving?

COVID–19 has impacted most industries by creating shortage of manpower and resource crunch; disrupting supply chain; and affecting the movement of goods and services. In the retail industry, brick-and-mortar businesses have borne the brunt of the disruptions.

UK-based National Association of British Markets (NABMA) estimates that 40% of traditional physical stores may have to down their shutters forever. Similarly, retailers in the US are battling with uncertainty created by sharp decline in business. A survey by PYMNTS suggests that almost 58% of small and medium-sized retailers in the country will not survive the crisis.

On the other hand, the social distancing and shelter-in-place mandates seem to have worked in favor of e-commerce—online orders have soared, new customer segments have come up and basket sizes have increased.

In fact, e-commerce orders in the US and Canada grew 129% year-on-year in April. Online transactions have specifically increased for categories such as grocery—while online transactions accounted for only 3–4% of spending on grocery in the US before the pandemic, the proportion has increased to almost 10–15%, according to Bain & Company. Buy online pick up in store (BOPIS) and buy online ship to store (BOSS) concepts have gained significant traction—BOPIS orders increased 87% year-on-year from late February to March 2020, as per data provided by Adobe Analytics.

Overall, online shopping may well develop into a trend for the long term. In its April study, Morning Consult reported that close to 25% of consumers in the US are not likely to feel at ease shopping in a mall for over six months. While it may be the need of the hour, if consumers prefer contactless delivery and online payment options, and, most importantly, are getting accustomed to the experience, it could well become a habit and ultimately the only way to shop. A Bain & Company survey shows that online grocery sales, as a percentage of total sales, are likely to remain high at 5–10% even after the crisis is over.

E-commerce has finally come of age; how can it retain the momentum?

Despite the shift toward online shopping, the industry continues to face several operational challenges: disruption in supply chains, closure of warehouses, shortage of last-mile delivery personnel, etc. Several tactical and strategic initiatives have been taken to overcome these.

E-commerce companies tweaked their existing technology solutions and fast-tracked the implementation of several new solutions, some of them on an experimental basis.  For example:

1. Amazon tweaked its buy box algorithm to prioritize speed over fulfilment preferences. Earlier, the buy box algorithm usually favored ‘Fulfilled by Amazon’ sellers over ‘Fulfilled by Merchant’; but not anymore. Providers that can deliver faster were prioritized.
2. To meet the unprecedented demand from customers, Ocado, one of UK’s leading online grocers, launched an experimental program to automate its warehouses. Robots pick and pack customer orders.
3. Target uses a robot, Tally, to monitor inventory and pricing in its store in San Francisco. Tally may soon be a fixture in all Target stores.

To offset last-mile delivery challenges arising due to surge in demand and labor shortages, the companies are also partnering with ride-sharing companies. For example:

1. Indian online grocery stores BigBasket and Spencer’s Retail, and Walmart-owned Flipkart tied up with Uber to manage last mile delivery.
2.   In the US, Amazon and Lyft joined forces. The relationship proved mutually beneficial as Amazon was facing a manpower crunch, while Lyft drivers were suffering from a slump in the ride-hailing business.

The initiatives not only demonstrate the ingenuity, resourcefulness, and resilience of the e-commerce ecosystem but are also indicative of its immense potential. This has prompted several players to change their business models. In India, food delivery platforms such as Swiggy, Zomato and Box 8 as well as restaurant chains such as Domino’s have started delivering groceries to their customers via their app. Some companies have actively started pursuing the inorganic growth route; Netherlands based Just Eat Takeaway, a food ordering and delivery marketplace, recently acquired Grubhub, its US-based peer, in an all stock deal worth over US$ 7 billion.

As the world inches toward normalcy and e-commerce companies look to consolidate their position in the retail landscape, they must maintain their value proposition. Shoppers are fickle-minded and to ensure their stickiness in the post-COVID–19 era, companies need to focus on forward-looking indicators that help identify trending product categories, brands and SKUs, and keep track of customer loyalty and churn. Ensuring seamless back-end operations such as logistics, warehousing and last-mile delivery will also be critical. Applying AI, data analytics, machine learning and other technology-based solutions could help achieve these objectives. To succeed in the post-COVID–19 era, e-commerce companies will need to seek answers to the following questions:

• How are customers’ online shopping needs likely to evolve over the mid- to long term?
• How will demand growth vary by product categories? Which of these show the most potential?
• How must business models evolve to cater to these changing needs/preferences?
• Which digital capabilities will enterprises need to develop? Can they do it on their own?
• Which use cases can be prioritized? What should the transformation roadmap look like?
• Who can be their partners in the digital transformation journey?
• Which strategies should enterprises focus on to ensure competitive advantage?

How can digital technology vendors reshape traditional retail?

Traditional retailers can survive the situation by building an online presence. They will need to ensure uninterrupted service for customers both online as well as offline. Customization of experience will be also equally important since this can not only promote customer loyalty but also drive the top line. For instance, it has been found that personalization can lead to almost 1–2% increase in grocery sales and more so in other categories; overall marketing and sales costs can also be reduced by 10–20%.

This is where technology vendors such as Shopify and Magento can play an important role. Some of the most critical digitization initiatives – digital advertising, payment processing, inventory management, and shipping and logistics services – require technical expertise that most traditional retailers might lack. Technology vendors can help retailers, both big and small, in rapidly implementing these.

Market opportunity for such vendors can be gauged from the fact that Shopify already has over 1 million merchants partnering with it. Between March 13 and April 24, 2020, the number of new stores created on its platform went up by 62% compared to the prior six weeks.

As technology vendors target emerging opportunities, they will be compelled to seek answers to the following questions:

• Which traditional retail segment is most or least affected?
• Has there been a change in retailers’ attitude toward online/omnichannel commerce?
• What do they value more now? Is there any change in their expectations from technology vendors?
• Are their spending patterns and priorities likely to change?
• Do they have concerns about establishing online/omnichannel presence?
• Do they prefer any specific value-added services?
• Which customer segments offer the most attractive opportunities? How can these be tapped?

What is next for digitisation in retail?

As the pandemic subsides, digitization and automation of the retail landscape is expected to pick up in the near to mid-term. To succeed in the new era, it is critical for stakeholders to assess their current level of preparedness, identify and prioritize use cases, and plan their next steps. Having an implementation roadmap that factors in the priorities and resources and is aligned with their goals and objectives is critical. Furthermore, for traditional retailers, partnering with an experienced and capable technology partner would help as most of them lack the knowledge required for undertaking digital transformation. Lastly, appropriate key performance indicators to be defined and continually monitored to ensure transformation is on track.

Emerging technologies will lay the foundation for the next generation retail landscape. Hence, it is critical for all stakeholders to formulate and implement their unique strategies focused on transformation so that they can regain, maintain, and accelerate their growth when the current challenges subside and a new normal emerges.

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