Responding to the threat of ‘digital insurgents’

The past few years have seen an acceleration in the pace of digital transformation in the world of retailing. In some categories, such as book selling, the very existence of physical stores is under threat (although ironically after almost killing bookstores Amazon is now opening its own physical stores!).

Perhaps most alarming for established companies are the ‘digital insurgents’: new-age, ‘pure play’ digital brands able to aggressively to launch and grow in no time at all. Prasad Narasimhan, our Managing Partner in Bangalore, has seen several examples of this in India. Xiaomi rapidly became #3 in the massive Indian smartphone market by selling mainly online and piggybacking on a single retailer partnership, with flipkart.com. Vu has reportedly leapfrogged into the top 3 TV brands in India with no offline presence and OnePlus is leading amongst tech-savvy youngsters in some smartphone markets. “By avoiding traditional retail channels, digital insurgents free up significant monies normally needed for retailer margins,” Prasad reports. “They can divert these savings to fund blockbuster-like launches, premium pre-screenings, limited period offers, innovator-clubs, and many other discontinuously exciting new mix ideas.”

“Traditional brands are often not prepared for the tsunami of retail change, and are blindsided when they get hit,” continues Prasad.”Therefore, step one for your brand is to assess the risk level, including looking at how much the following criteria apply to your category:

  • Online influencers are key to consideration/preference e.g. travel.
  • Consumers are bargain hunting e.g. fashion
  • There is an immediacy to purchase e.g. cinemas.
  • Comparability of competitive offers is facilitated e.g. online insurance.
  • Retail margins have been high e.g. books.
  • Traditional route-to-consumer has been inefficient e.g. many B2B spaces
  • Physical distribution of product is financially viable e.g. high value good like electronics”

The level of threat will then guide your chosen response. Below are six different routes you could take, ranging from roughly from the least radical (threat level is low) to the most extreme (threat level is high).

Route 1: Optimise your online presence

The least radical route is to optimise your presence in the online channels where you are already present. This is a route taken by many consumer goods companies given that a. for now, the % of sales done online in still relatively low (c. 10% or less), b. most consumer product brands have too limited a range to justify their own online store presence. For example, Mondelez announced back in 2015 that it “will continue to add ‘Buy Now’ buttons to owned, earned and paid media platforms across 25 markets, linking to over 130 retailers’ websites”. You click on the button and it takes you to an online retailers’ website.

Route 2. Augment your channel offer – Domino’s

One route for established brands is to augment their existing offer by harnessing the power of digital technology. For example, Domoino’s has made a huge push into ecommerce, with sales through this channel now accounting for a mind boggling 78% of all UK deliveries. The pizza delivery mechanism has stayed the same, via mopeds to your door (you can’t deliver a pizza over the internet, yet); what has been revolutionised is the way of taking orders. Domino’s started its digital drive by offering ordering via the website, and has continued to enhance this channel. It has also launched apps for both the iPhone and iPad with great success. 49% of all online sales are now made using the Domino’s app, which has been downloaded by 11.5 million people.

Route 3: Buy a digital pure player

A second more radical route is to go out and buy a digital pure player. This has the benefit of allowing a company to step-change its digital retail capabilities. For example, Unilever recently bought Dollar Shave Club for $1billion. The online shaving retailer had grown rapidly from its 2012 launch to 1.1 million subscribers, although it is yet to make a profit. Think what might have happened to Blockbuster if it had taken this route. Back in 2000 Netflix’s founder Reed Hastings approached Blockbuster CEO John Antioco and offered to sell for $50 million but was turned down, according to this report.

 

Route 4: Add your own digital channel

The third route is to build your own digital channel to sit alongside your existing retail channels. This requires more commitment and resources than Route 3, as you have to build your own capabilities from the ground up. Gillette launched its own ‘Gillette Club’ online shopping service in the US in June 2015. After only three months they had a 21% share of the online shaving market, compared to 54% for DSC. Gillette have actually beaten DSC to market in the UK. It will be interesting to see how the shaving subscription service war plays out.

Route 5: Create a new digital branded channel

This is a build on route four. Again, you add a digital route to the consumer, but rather than extending an existing brand you create a whole new ‘branded channel’. This route allows more ‘stretch’ from your current position. This is what Nestlé did with the Nespresso brand. Nescafé has continued to be sold through conventional, mainstream retail channels. Nespresso pursues a more premium position with a big focus on online sales. The Nespresso boutiques serve as showrooms to display the coffee capsules and machines, plus provide other services such as drop-off areas for capsule recycling. This route also reduces the risk of issues with retailers who stock your main brand and don’t like you selling the same product in your own digital channel.

Route 6: Transform to go 100% digital

The most radial route is to completely transform your whole business model and route to consumer, as is the case with retail group Shop Direct. “We have fundamentally changed our business,” says Gareth Jones, deputy CEO and retail and strategy director. It is a great example of a company revitalising its core business before it goes into decline. Three years ago, 72% of the brand’s sales came from printed catalogues. Today the Shop Direct brands, such as Littlewoods.com and Very.co.uk are 100% online.

In conclusion, digital insurgents represent a threat, whatever industry you are in. Rather than waiting for them to grow and then trying to respond, a better route is to be pro-active and develop a defence plan.

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