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Retail Health Clinics Eye a Larger Piece of the US Primary Care Market by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market

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The utilization of retail health clinics (RHCs), also known as convenience care clinics, peaked during the coronavirus outbreak, with people rushing to get COVID-19 vaccinations or treatment for minor ailments when access to other care settings was restricted. FAIR Health (a non-profit organization managing a repository of 40 billion claim records) indicated that the utilization of RHCs increased by 51% from 2020 to 2021. Accordingly, the US retail health clinic market grew from US$1.78 billion in 2020 to US$3.49 billion in 2021 (as per estimates by Fortune Business Insights). With increasing familiarity and utilization, are RHCs set out to play a bigger role in the nation’s healthcare system?

RHCs move beyond low-acuity care

RHCs began with the concept of providing low-acuity care, spanning from minor illnesses and injuries to occasional visits for vaccinations or wellness screening. Increasingly, retailers are eyeing a larger share of the primary care market by making inroads into chronic disease management. Several are even expanding into mental and behavioral health.

  • Vaccinations

In 2022, nearly 40% of the patients at the RHCs came in for vaccinations. Much of this footfall can be attributed to the public health advisory recommending booster shots for COVID-19 vaccination. Even though the need for COVID-19 vaccinations is gradually expected to decline, the pandemic has established RHCs as a convenient venue for vaccinations. Before the coronavirus outbreak, about 50,000 adults died every year from ailments that could be prevented by vaccines, highlighting the value offered by RHCs in immunization delivery.

  • Diagnostics

During the pandemic, RHCs became a key provider of COVID-19 testing. Almost all the RHCs today have point-of-care testing capabilities. Flu and strep tests, lipid tests, pregnancy tests, glucose tests, etc., are among the diagnostics tests commonly offered at the RHCs. As RHCs aim to expand their services to penetrate deeper into the primary care market, the scope of diagnostic services is likely to widen. For instance, Walmart, which opened its first RHC in 2019, provides EKG tests and X-ray imagining services on-site as well.

  • Chronic disease management

In 2022, the Centers for Disease Control and Prevention (CDC) estimated that six in ten adults live with a chronic disease. This data indicates the vast opportunity this segment has to offer, and RHCs are vying for a piece of it. Analysis by Definitive Healthcare suggests that, in 2022, about one in ten diagnoses at the RHCs was related to a chronic condition. Nearly 6% of the claims were with the diagnosis of diabetes (Type 2 diabetes mellitus without complications and Type 2 diabetes mellitus with hyperglycemia).

As the opportunity for RHCs to contribute more to chronic disease management is vast, retailers are focusing on evolving the clinic offerings to provide treatment for chronic conditions such as diabetes, hypertension, chronic obstructive pulmonary disease, kidney disease, etc. For instance, in 2020, CVS launched HealthHubs, an enhanced RHC format, offering a larger suite of services including chronic disease management.

RHCs are able to provide chronic disease management at a lower cost. For instance, in 2022, the average charge per claim for Type 2 diabetes mellitus without complications was US$160 at an RHC compared with US$367 at a physician’s office, whereas for Type 2 diabetes mellitus with hyperglycemia, the average charge per claim was US$255 at RHC vs. US$639 at a physician’s office. Given that a chronic disease requires continuous long-term care, patients see RHC as a cost-effective and viable option for chronic disease management.

  • Mental and behavioral health

In early 2022, the Harris Poll data (based on a monthly survey among 3,400 people over the age of 18, physicians, and pharmacists) indicated that 41% of Gen Z and younger millennials were suffering from anxiety or depression conditions. However, the same study found that only 16% of those struggling with these mental conditions were comfortable seeking treatment from a therapist or mental health professional. A mystery shopper study (conducted in 2022) investigating 864 psychiatrists across five US states indicated that only 18.5% of psychiatrists were taking appointments for new patients with a significant wait time (median = 67 days). A person going through a breakdown or depression needs immediate attention. Thus, the low availability of psychiatry outpatient new appointments is concerning and one of the main reasons why mental health issues remain under-treated. With walk-in appointments and easy accessibility, RHCs are well-positioned to fill this gap.

Leading RHC chains have forayed into mental and behavioral health services. In 2020, MinuteClinic (an RHC chain owned by CVS) started offering mental and behavioral health counseling services. The company also added Licensed Mental Health Providers to its staff at select locations. In the same year, Walmart announced counseling services for US$1 a minute in partnership with Beacon Care Services, a subsidiary of Carelon Behavioral Health (formerly Beacon Health Options).

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market by EOS Intelligence

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market by EOS Intelligence

Patient-centric approach differentiates RHCs from traditional providers

Definitive Healthcare estimates that as of March 2023, there were 1,800+ RHCs, of which 90% were owned by retail and pharmacy giants CVS (63%), Kroger (12%), Walgreens (8%), and Walmart (2%). Noticeably, the consumer-centric concepts and learnings from the retail segment have helped RHCs improve patient experience and satisfaction. Implementation of proven retail strategies is, in turn, defining and shaping the convenient care model and setting apart the RHCs from traditional healthcare providers.

  • Omnichannel engagement

Omnichannel engagement is a key retail concept enabling companies to offer a seamless consumer experience across various touchpoints. Health Care Insights Study 2022, based on a survey of 1,000 US-based respondents, indicated that four in ten people had a virtual consultation in the past year. The same study suggested that ~70% of the respondents think that the virtual consultation is better or about the same as the in-person visit. RHCs, owned by big-box retailers and pharmacy giants, are seizing the omnichannel opportunity by complementing their in-person visits with virtual care services.

MinuteClinic (owned by CVS) started piloting telehealth services in 2015. In 2021, the company provided 19 million virtual consultations, of which ~10 million were for mental and behavioral health. The Little Clinic (owned by Kroger) stepped into telehealth services following the country-wide shutdown due to the coronavirus outbreak in March 2020. In 2021, with the aim to extend virtual care, Walmart Health acquired MeMD, a 24/7 telehealth company providing on-demand care for common illnesses, minor injuries, and mental health issues.

  • Walk-in appointments

The average wait time for a primary care physician appointment in the 15 largest cities of the US was 26 days, as per Merritt Hawkins survey data (2022). RHCs typically accept walk-in patients. Moreover, RHCs are open for extended evening hours and over weekends when primary care physicians are not available. This allows the patients to visit an RHC at their convenience.

  • Geographic proximity

RHCs benefit from the wide footprint across the country established by their owners, the big-box retailers. For instance, CVS, operating 1,100 retail clinics across 33 states, indicated that more than half of the US population lives within 10 miles of a MinuteClinic as of March 2022.

However, currently, there is a geographic disparity as the majority of the RHCs are located in urban areas, with only 2% serving the rural population. From the business perspective, it makes sense to concentrate on the metropolitan areas targeting high-income populations. Moreover, just like traditional healthcare providers, RHCs also find it challenging to hire qualified staff to work at remote locations. However, as the popularity and utilization of RHCs increase, expansion to rural areas may come as a natural progression. For instance, Walmart is uniquely positioned to capture the rural market opportunity by leveraging the presence of its 4,000 stores located in medically underserved areas as designated by the Health Resources and Service Administration.

Dollar General is the first retailer to step up and penetrate this unserved market. In January 2023, Dollar General, in partnership with DocGo (a telehealth and medical transportation company), piloted mobile clinics set up at the parking lots at three of its stores in Tennessee. This initiative is Dollar General’s first step into retail healthcare, and there is no clarity yet on whether the company is looking at the in-store clinics model.

  • Fixed and transparent pricing

RHCs have fixed pricing for different types of treatments offered, and the treatment costs are communicated up-front to the patient. The Annual Consumer Sentiment Benchmark report based on a survey conducted in January 2022 indicated that 44% of the 1,006 respondents avoided care because of unknown costs. It is evident that besides the concern over affordability, the anxiety and fear around uncertain costs are making patients avoid healthcare services. RHCs help patients to evade this anxiety through cost transparency.

  • Multiple payment options

At RHCs, patients receive a more retail-like experience at the time of the payment. Besides the common mode of payment such as cash and cards, the RHCs also allow for contactless payments, including digital wallets, tap-to-pay platforms, touchless terminals and, thus making the payment process faster, simpler, and more convenient. This aligns with the growing popularity of contactless transactions. 80% of US consumers used some form of contactless payment mode in 2021, as per a survey of 1,000 US consumers conducted by Raydiant (an in-location experience management platform).

  • Technology and automation

Technology and automation have been an integral part of modern retail. A reflection of this is seen in an RHC setup. For instance, at CVS MinuteClinic, the reception is a form of self-service kiosk. The patient is notified of the wait time (if any) and directed to fill out the electronic forms to share important personal and health-related data. The information submitted by the patient is directly shared with the healthcare professional on-site, who then confirms the details and proceeds with the diagnosis and course of treatment. Details of the diagnosis and treatment, along with the bill payment receipt, are automatically shared with the patient at the end of the visit. The communication for follow-up consultations or other reminders is automated. The process is highly streamlined and backed by automation.

Moreover, in the RHC model, the application of technology can be seen not only to improve patient experience but also to support clinical decision-making. For instance, in 2019, CarePortMD RHCs (owned by Albertsons grocery stores) started using the autonomous AI diagnostic system called LumineticsCore to detect a leading cause of blindness in diabetic patients. Such technological additions reduce the chances of human error, thus eliminating potential liability issues as well as increasing patient confidence. Walgreens, leveraging Inovalon’s Converged Patient Assessment decision support platform that provides insights into possible diagnoses using predictive analytics, is another case in point.

EOS Perspective

With all the growth and progress, RHCs are penetrating the underserved population and strengthening the current primary care delivery model. A report released by the National Association of Community Health Centers in February 2023 indicated that about a third of the US population does not have access to primary care. RHCs are well-positioned to fill this gap. Moreover, according to the data published by the Association of American Medical Colleges in 2021, the USA could struggle with a shortage of up to 124,000 physicians (across all specialties) by 2034. In the face of physician shortage, RHCs providing non-emergency care can help to alleviate the burden on the primary care providers.

To what extent the RHCs would be able to carve out a space for themselves in the primary care segment is still an ongoing debate. However, the owners of RHCs are determined to compete head-on with the traditional providers for the primary care market share and are rapidly foraying into alternative primary care models.

In May 2023, CVS completed the acquisition of Oak Street Health providing primary care to Medicare patients through its network of 169 medical centers across 21 states.

Walgreens holds a majority stake in VillageMD, offering value-based primary care to patients at 680 practice locations (including independent practices, Summit Health, CityMD, and Village Medical clinics at Walgreens, as well as at-home and virtual visits) across 26 states. In October 2021, Walgreens acquired a 55% stake in CareCentrix, an at-home care provider serving post-acute patients. The company has plans to acquire the remaining stake by the end of this year.

Amazon is another prominent retailer that made inroads in the primary care space this year with its acquisition of One Medical, a primary care provider with a network of 200+ medical offices in 27 markets across the USA.

It is foreseeable that at some point in time, the retailers will try to bring in the synergies between the RHC business and other alternative primary care service offerings with the aim to become a one-stop shop for all healthcare needs. As retailers take on a larger role in primary care delivery, the retailization of healthcare is certainly on the way.

by EOS Intelligence EOS Intelligence No Comments

Connecting Africa – Global Tech Players Gaining Foothold in the Market

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While in the past, most global tech companies have focused their attention on emerging Asian markets, such as India, Indonesia, Vietnam, etc., they have now understood the potential also offered by African markets. Africa currently stands at the brink of technical renaissance, with tech giants from the USA and China competing to establish here a strong foothold. That being said, Africa’s technological landscape is extremely complex owing to major connectivity and logistical issues, along with a limited Internet user base. Companies that wish to enter the African markets by replicating their entry and operating models from other regions cannot be assured of success. In addition to global tech firms building their ground in Africa, a host of African start-ups are increasingly finding funding from local as well as global VC and tech players.

Great potential challenged by insufficient connectivity

Boasting of a population exceeding 1.2 billion (spread across 50 countries) and being home to six of the world’s ten fastest-growing economies, Africa is increasingly seen as the final frontier by large global technology firms.

However, the African landscape presents its own set of challenges, which makes increasing tech penetration extremely complex in the market. To begin with, only about 35% of the continent’s population has access to the Internet, as compared with the global rate of 54%. Thus, Africa’s future in the technology space greatly depends on its ability to improve digital connectivity. This also stands in the way of large tech-based players that wish to gain foothold in the market.

Large players try to lay the necessary foundations

Due to this fundamental challenge, companies such as Google, Facebook, and IBM have initiated long-pronged strategies focusing on connectivity and building infrastructure across Africa. Facebook’s Free Basics program (which provides access to a few websites, including Facebook and Whatsapp, without the need to pay for mobile data) has been greatly focused on Africa, and is available in 27 African countries. With Facebook’s partnership with Airtel Africa, the company has started to strengthen its position in the continent.

Similarly, Google has launched Project Link, under which it rolled out a metro fiber network in Kampala, Uganda, with Ghana being in the pipeline. Through such efforts and investments, Google is aimed at bringing about faster and more reliable internet to the Africans.

Microsoft, which has been one of the first players to enter the African turf, is also undertaking projects to improve connectivity in Africa. The company has invested in white spaces technology, which uses unused radio spectrum to provide Wi-Fi connectivity at comparatively lower costs.

However, managing to get people online is only the first step in the long journey to develop a growing market. Companies need to understand the specific dynamics of the local markets and develop new business models that will fit well in the African market.

For instance, globally, the revenue model for several leading tech companies, such as Google and Facebook, largely depend on online advertising. However, the same model may not thrive in most African markets due to a limited digital footprint of the consumers as well as the fact that the business community in the continent continues to draw most transactions offline, using cash.

Connecting Africa – Global Technology Firms Gaining a Foothold in the Market

Players employ a range of strategies to penetrate the market

These tech giants must work closely with local businesses and achieve an in-depth understanding of the unique challenges and opportunities that the African continent presents. Therefore, these companies are increasingly focusing on looking for collaborations that will help in the development of successful and sustainable businesses in the continent.

Leading players, such as Google and Microsoft have been investing heavily in training local enterprises in digital skills to encourage businesses to go online, so that they will become potential customers for them in the future.

While this strategy has been used somewhat extensively by US-based and European companies, a few Chinese players have recently joined the bandwagon. For instance, Alibaba’s founder, Jack Ma announced a US$10 million African Young Entrepreneurs Fund on his first visit to Africa in July 2017. The scheme will help 200 budding entrepreneurs learn and develop their tech business with support from Alibaba.

The company has also been focusing on partnerships and collaborations to strengthen its position in the African market. Understanding the logistical challenges in the African continent, Alibaba has signed a wide-ranging agreement with French conglomerate, Bollore Group, which covers cloud services, digital transformation, clean energy, mobility, and logistics. The logistics part of the agreement will help Alibaba leverage on Bollore’s strong logistics network in Africa’s French-speaking nations.

Considering the importance of mobile wallets and m-payments in Africa, Alibaba has expanded its payment system, Alipay, to South Africa (through a partnership with Zapper, a South Africa-based mobile payment system) as well as Kenya (through a partnership with Equitel, a Kenya-based mobile virtual network operator). In many ways, it is applying its lessons learnt in the Chinese market with regards to payments and logistics, to better serve the African continent.

While Chinese players (such as Alibaba and Baidu) have been comparatively late in entering the African turf, they are expected to pose a tough competition to their Western counterparts as they have the advantage of coming from an emerging market themselves, with a somewhat better understanding of the challenges and complexities of a digitally backward market.

For instance, messaging app WeChat brought in by Tencent, China-based telecom player, has provided stiff competition to Whatsapp, which is owned by Facebook and is a leading player in this space. WeChat has used its experience in the Chinese market (where mobile banking is also popular just as it is across Africa) and has collaborated with Standard Chartered Bank to launch WeChat wallet. In addition, WeChat has collaborated with South Africa’s largest media company, Naspers, which has provided several value added services to its consumers (such as voting services to viewers of reality shows, which are very popular in Africa). Thus, by aligning the app to the needs and preferences of the African consumers, it has made the app into something more than just a messaging service.

While collaboration has been the go-to strategy for a majority of tech companies, a few players have preferred to enter the market by themselves. Uber, a leading peer-to-peer ridesharing company entered Africa without collaborations and is currently present in 16 countries.

While entering without forging partnerships with local entities helps a company maintain full control over its operations in the market, in some cases it may result in slower adoption of its services by the local population (as they may not be completely aligned with their preferences and needs). This can be seen in the case of Netflix, a leading player in the video streaming service, which extended its services to all 54 countries in Africa in January 2016 (the company has, however, largely focused on South Africa). Despite being a global leader, Netflix has witnessed conservative growth in the continent and expects only 500,000 subscribers across the continent by 2020.

On the other hand, Africa’s local players ShowMax and iROKO TV have gained more traction, due to better pricing, being more mobile friendly (downloading option) and having more relatable and local content, which made their offer more attractive to local populations.

Netflix, slowly understanding the complexities of the market, has now started developing local content for the South African market and working on offering Netflix in local currency. The company has also decided to collaborate with a few local and Middle-Eastern players to find a stronger foothold in the market. In November 2018, the company signed a partnership with Telkom, a South African telecommunication company, wherein Netflix will be available on Telkom’s LIT TV Box. Similarly, it partnered with Dubai-based pay-TV player, OSN, wherein OSN subscribers in North Africa and Middle East will gain access to Netflix’s content available across the region. However, while Netflix may manage to develop a broader subscriber base in South Africa and a few other more developed countries, there is a long road ahead for the company to capture the African continent as a whole, especially since its focus has been on TV-based partnerships rather than mobile (which is a more popular medium for the Internet in Africa).

On the other hand, Chinese pay-TV player, StarTimes has had a decade-long run in Africa and has more than 20 million subscribers across 30 African countries. While operating by itself, the company has strongly focused on local content and sports. It also deploys a significant marketing budget in the African market. For instance, it signed a 10-year broadcast and sponsorship deal with Uganda’s Football Association for US$7 million. To further its reach, the company also announced a project to provide 10,000 African villages with access to television.

US-based e-commerce leader, Amazon, is following a different strategy to penetrate the African markets. Following an inorganic approach, in 2017, Amazon acquired a Dubai-based e-retailer, Souq.com, which has presence in North Africa. However, the e-commerce giant is moving very slowly on the African front and is expected to invest heavily in building subsidiaries for providing logistics and warehousing as it has done in other markets, such as India. This approach to enter and operate in the African market is not widely popular, as it will require huge investment and a long gestation period.

Local tech start-ups are on the rise

While leading tech giants across the globe are spearheading the technology boom in Africa, developments are also fueled by local start-ups. As per the Disrupt Africa Tech Startups Funding Report 2017, 159 African tech start-ups received investments of about US$195 million in 2017, marking a more than 50% increase when compared to the investments received in 2016.

While South Africa, Nigeria, and Kenya remained the top three investment destinations, there is an increasing investor interest in less developed markets, such as Ghana, Egypt, and Uganda. Start-ups in the fintech space received maximum interest and investments. Moreover, international VC such as Amadeus and EchoVC as well as local African funds appear keen to invest in African start-ups. The African governments are also supporting start-up players in the tech space – a prime example being the Egyptian government launching its own fund dedicated to this objective.

African fintech start-ups, Branch and Cellulant, have been two of the most successful players in the field, raising US$70 million and US$47.5 million, respectively, in 2018. While Branch is an online micro-lending start-up, Cellulant is a digital payments solution provider. Both companies have significant presence across Africa.

EOS Perspective

Although US-based players were largely the first to enter and develop Africa’s technology market, Chinese players have also increasingly taken a deeper interest in the continent and have the advantage of coming from an emerging market themselves, therefore putting themselves in a better position to understand the challenges faced by tech players in the continent.

Most leading tech players are looking to build their presence in the African markets. Their success depends on how well they can mold their business models to tackle the local market complexities in addition to aligning their product/service offerings with the diverse needs of the local population. While partnering with a local player may enable companies to gain a better understanding of the market potential and limitations, it is equally imperative to identify and partner with the right player, who is in line with the company’s vision and has the required expertise in the field – a task challenging at times in the African markets.

While global tech companies are stirring up the African markets with the technologies and solutions they bring along, a lot is also happening in the local African tech-based start-ups scene, which is receiving an increasing amount of investment from VCs across the world. In the future, these start-ups may become potential acquisition targets for large global players or pose stiff competition to them, either across the continent or in smaller, regional markets.

It is clear that the technological wave has hit Africa, changing the continent’s face. Most African countries, being emerging economies in their formative period, offer a great potential of embracing the new technologies without the struggle of resisting to adopt the new solutions or the problem of fit with legacy systems. It is too early to announce Africa the upcoming leader in emerging technologies, considering the groundwork and investments the continent requires for that to happen, however, Africa has emerged as the next frontier for tech companies, which are causing a digital revolution in the continent as we speak.

by EOS Intelligence EOS Intelligence No Comments

Brazil – Lucrative but Challenging E-commerce Industry

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Brazil is likely to account for approximately half of US$64.4 billion retail e-commerce sales across Latin America in 2019. Being the region’s largest country with a whopping 200 million population, a tech-savvy and consumption-driven middle class, and one of the largest internet-connected populations of the world, Brazil is one of the most preferred Latin American countries where international retailers are looking to expand. However, e-commerce success in Brazil also comes with numerous challenges. Overcoming those challenges still remains a quagmire for e-commerce merchants.

This article is part of a series focusing on e-commerce in LATAM, which also includes a look into e-commerce market in Mexico

The good and the difficult

Despite the economic slowdown and political turbulence in the country, retail e-commerce market has continued to grow, recording 10% y-o-y growth in 2018. Brazilians are connected now more than ever, access to the internet and technologies is becoming affordable by the day, while consumers are particularly enthusiastic to purchase international products using online shopping websites, all of which is making Brazil Latin America’s e-commerce powerhouse. Another key reason for online retail growth is the fact that consumers have become cash-strapped amidst frail economic conditions, which has squeezed money out of the market, bringing a prominent change in buying behavior, where consumers are more price conscious and driven by promotions. In such a scenario, e-commerce has emerged as a clear winner by offering lower prices and good deals, as compared with offline channels.

Operating an e-commerce business in Brazil is a double-edged sword. On the one hand, the 140 million internet users represent an enormous e-commerce opportunity, while on the other hand, Brazil is plagued with operational challenges and struggles.

However, operating an e-commerce business in Brazil is a double-edged sword. On the one hand, the 140 million internet users represent an enormous e-commerce opportunity, while on the other hand, Brazil is plagued with operational challenges and struggles with complex logistics, high tax rates, and payment issues, among others.

An array of challenges

One of the key challenges for any international retailer operating in Brazil is the high tax rate of 6.4% applicable on all international payments, which is enough to disincentivize shoppers to make purchases from international retailers such as Amazon or Alibaba. Further, customers are required to pay 60% flat tax on all imported product purchases valued between US$50-500 (the range may vary across different states). The taxes almost double the price of products, which could deter digital sales. In addition to the taxes, Brazil’s customs procedures are slow and complex, and shipments take a long time to arrive, making the online shopping experience arduous for customers.

For international retailers to operate in Brazil, it is crucial that they familiarize themselves with various local payment methods such as Boleto Bancário (bank slips), payment options offered by regional players (MercadoLivre offers MercadoPago, which is equivalent to PayPal), among others. This is because only 20% of Brazilians have access to international credit cards and instead prefer paying through local payment channels. This could be an obstacle for e-commerce players, as most transactions on shopping websites rely on online card payments. Furthermore, credit cards provided by domestic banks can only issue payments that are made in Brazilian Real, hence, international retailers need to find a way to convert currency if they want to operate in Brazil.

Brazil – Lucrative but Challenging E-commerce Industry

There are also several operational, logistics, and infrastructural challenges that are impairing e-commerce growth in the country. Strikes in Brazil are very common and happen quite often, consequently halting operations of federal customs or postal services. It usually takes some time to resume operations after the strike and the packages/deliveries could take even longer to reach the final destination. The recent truckers strike in spring of 2018 caused more than 3 million online deliveries to arrive with significant delays.

The country also lacks proper infrastructure to support e-commerce business – the distribution centers rarely function 24-hours a day due to security concerns and costly overtimes, which prevents shippers from collecting packages at night when the traffic is lower. Further, traffic situation in major Brazilian cities such Rio de Janeiro and Sao Paulo is so overwhelming that same day or next day shipping requirements are very difficult to fulfill. In addition, rampant cargo robberies are further disrupting e-commerce business in Brazil and are an acute problem in Rio. All major e-commerce players and logistics companies are investing heavily to protect goods, which increases security costs and is subsequently squeezing profit margins. Sao Paulo’s cargo transportation and logistics companies spend about 10-14% of revenue on ensuring cargo safety, while in Rio this ratio lies between 15% and 20% of revenue.

Sao Paulo’s cargo transportation and logistics companies spend about 10-14% of revenue on ensuring cargo safety, while in Rio this ratio lies between 15% and 20% of revenue.

Strong fundamentals promise opportunities

Nonetheless, challenges have not yet dissuaded customers from shopping online or prevented international and local players to expand operations in Brazil. Players are continuously making efforts to improve services to lure customers. One of the key trends that are reshaping customer support services is the increasing focus to provide chatbots on e-commerce websites for 24-hour shopping assistance. Brazilian e-commerce players are betting on chatbots to improve customer engagement and management, and to generate brand awareness.

With rising number of smartphone users in Brazil, mobile commerce is also growing and players are increasingly focusing on tapping this opportunity. In 2017, m-commerce users grew 42% y-o-y and mobile devices contributed to 31% of e-commerce sales in H1 2017. Furthermore, Brazil is a country with highly active social media users, a fact which serves as a key platform to expand business – as of March 2016, 60% of e-commerce sites used social media for sales and marketing. Numerous Brazilian companies use social media for marketing and it has become an integral part of e-commerce business, where social media is used as a tool for promotion and to reach out to customers.

EOS Perspective

While Brazil’s e-commerce market could be a cash cow for retailers, it also comes with various quirks and challenges. Localizing business in Brazil requires enormous amount of planning, calculation, and understanding the market before entering it. The high cost of doing business could be intimidating for several players along with online payment challenges, hefty taxes, and inferior infrastructure. However, forging local partnerships could solve some of the issues. For instance, cross-border e-commerce merchants could partner with Brazilian payment processing companies and invest in developing local payment methods to overcome the online payment challenge.

Alternative delivery channels are becoming popular, and these could help solve the logistics and shipping issues to a certain extent. InPost, a Polish company that operates a network of parcel lockers, introduced click and collect services in Brazil, which allows customers to place an order online and collect package from InPost’s lockers that are situated at most frequently visited places such as gas stations. Customers receive a QR code by email, which is used to operate the lockers. The lockers offer convenience for customers and reduce wait times, and greatly reduce logistics cost for retailers. While this is only one of potential novelties that could ease logistics problems, the arrival of established international retailers such as Amazon and Alibaba might be expected to bring in other innovations to reduce delivery, infrastructure, and payment barriers.

Despite the existing macro-economic and operational challenges, the country’s potential as a digital commerce market will continue to attract investments and is expected to keep growing.

Despite the existing macro-economic and operational challenges, the country’s potential as a digital commerce market will continue to attract investments and is expected to keep growing. With a large internet savvy consumer market eager to purchase international products and with westernization deeply influencing the young population, Brazil will continue to draw the attention of international retailers across the world. Amidst the country’s turbulent politics and economy, purchasing power grew 3% y-o-y in 2017, making Brazil even more attractive for online retailers. With new trends reshaping the industry and players forging ways to improve operations, the country is expected to remain the largest e-commerce market of Latin America ahead of Mexico and Argentina in the foreseeable future.

by EOS Intelligence EOS Intelligence No Comments

Mexico’s E-commerce Sector to Rise Amidst Challenges

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E-commerce in Mexico is witnessing a steady growth and is slowly becoming one of the most dynamic sectors of the country’s economy. In the last five years, e-commerce market in Mexico has grown significantly, as retailers strengthened their digital strategies to grow sales. The online channel is becoming an indispensable part of retail and despite all operational challenges that exist in the market, opportunities are too attractive to be missed.

The article is part of series focusing on e-commerce in LATAM, which also includes a look into e-commerce market in Brazil

In recent years, Mexico has attracted interest from global brands to expand in the country, where online retailing is expected to grow substantially – revenue generated by e-commerce is expected to reach US$ 17.6 billion by 2020, growing at a rate of 16.6% annually. Mexico’s distinctive geographic and demographic characteristics make it one of the most promising e-commerce markets in Latin America, where global companies are looking to expand. Its proximity to the USA is advantageous, making it an attractive target for USA-based retailers looking to grow internationally (Amazon, Walmart, Best Buy, among others). Additionally, the growing population of young, working-age, tech-savvy Mexicans with sufficient disposable income is the key target for global retail chains, particularly for companies eyeing growth through e-commerce channel.

Mexico’s distinctive geographic and demographic characteristics make it one of the most promising e-commerce markets in Latin America, where global companies are looking to expand.

Lack of consumer trust 

In the last five years, e-commerce has witnessed double-digit growth and the trend is likely to continue in the long term. However, the market faces few challenges, which are impeding growth. To begin with, low consumer confidence in online transactions is a major barrier. Mexican users are skeptical when it comes to internet-based transactions due to distrust in payment methods and fear that the banking information provided will be misused, amidst high level of banking-related frauds prevalent in the country. According to a study conducted by Aite Group1, in Q2 2016, 83% of the interviewed respondents witnessed identify theft, while 70% were victims to online banking frauds. Consumer willingness to make online purchases is further shattered by the unsatisfactory online shopping experience delivered by some retailers due their relatively poor website designs and product display. According to a joint study by The Cocktail.com and ISDI, Challenges of E-commerce Mexico in 2017, consumers typically lost confidence in the online purchase process when trying to look for information on the products sold, making payments, understanding shipment and delivery policies, and dealing with returns.

Dependence on cash

Mexico is a cash-based economy, with 90% Mexicans preferring to make payments in physical currency. High dependence on cash is largely caused by limited access to modern financial infrastructure – as of 2016, there were only 37.7 ATMs and 10.3 bank branches per 100,000 people. Moreover, large proportion of the population remains unbanked along with low credit card penetration in the country. The dominance of physical currency in Mexico limits e-commerce growth, which is dependent on online payments. To overcome this challenge, players are adapting to align with customer preferences, as the significance of cash is impossible to overlook in Mexico. E-commerce players are introducing hybrid payment systems. For example, Linio and MercadoLibre allow customers to pay in cash, through banks, pharmacies, and convenience stores (OXXO and 7-Eleven), for items bought online. Walmart has introduced more than 2,000 kiosks in its physical stores, where customers can pay in cash for products bought online.

EOS Perspective

Although several large players, such as Amazon, Walmart, and MercadoLibre operate in the market, e-commerce sector still faces several obstacles and has yet not developed to the levels of other e-commerce markets that exist globally. For the Mexican e-commerce market to grow, it is imperative for the retailers to boost consumer confidence by ensuring that the buyer is safe; one way to achieve that is to make sure that the purchase process does not end with payment confirmation. Instead, the complete purchase process should be made transparent by enabling consumers to track all orders, receive notifications on shipping process, as well as making the return policy/process agile and convenient for shoppers.

For the Mexican e-commerce market to grow, it is imperative for the retailers to boost consumer confidence by ensuring that
the buyer is safe.

In spite of all quirks and challenges of the market, undoubtedly, Mexico offers a promising future for e-commerce with its sizable upsides – high internet and mobile penetration, growing purchasing power among consumers, declining smartphone prices, presence of e-commerce giants, such as MercadoLibre and Amazon looking to expand operations, among others. According to the Mexican Association of Online Sales (AMVO), five years ago in Mexico, online sales of large retailers including Walmart, Sanborns, Sears, Liverpool, and Palacio de Hierro comprised merely 1% of their total sales. This share rose to nearly 20% by 2017.

The e-commerce market is developing, demonstrated through sustainable and constant improvements – for instance, the country is making efforts to steadily develop infrastructure, customers are offered wider payment options through offline channels, and Amazon’s entry in the market has acted as a catalyst to e-commerce development, boosting customers’ trust in online shopping websites. With the launch of Amazon Prime in 2017, Amazon reduced shipment time to 1-2 days and expanded free shipping option across Mexico – a significant step that would revolutionize online retailing with other players trying to follow Amazon’s lead.

Mexico is ripe for e-commerce to boom. Even though the market is at nascent stage of development and faces challenges, it is also laden with myriad of opportunities. Online shopping accounts for a small share of the total annual retail sales in Mexico – e-commerce comprised 1.6% of total retail sales in 2016 and is likely to grow to 2.6% by 2019 – which represents a huge opportunity for players, as Mexicans have just begun adopting shopping through e-commerce. Players operating in the market understand the tremendous future growth prospects that the market offers, hence, are focusing to expand operations. With the right growth strategy, understanding of the market, and knowledge of consumer buying behavior, it is possible to survive and grow in the market, even though it is packed with challenges.
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Notes:

  1. 2016 Global Consumer Card Fraud study conducted by Aite Group; n (number of respondents interviewed in Mexico) = 303
  2. American e-commerce companies: Amazon and Best Buy
  3. American retail companies: Walmart and Sears
  4. Latin America-based e-commerce companies: Linio and MercadoLibre
  5. Mexico-based department store chains: El Palacio de Hierro, Sanborns, and Liverpool
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Five Technology Trends to Reshape Retail in 2017

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Today, retail and technology have become inseparable, driven by the need to digitalize services to offer convenience to shoppers and elevate their shopping experience. Retailers are slowly shifting focus towards being phygital, and to digitalization of in-store experience, supported by disruptive technologies (social, mobile, cloud, and analytics) continuously transforming the face of retail sector.

Besides enticing customers and creating a unique shopping experience, digital retail integration is increasingly simplifying supply chain management, payment systems, and tracking of inventory and sales data, among others. Some retailers are using technology to get insights into hard-to-capture customer behavior data, which is then used to take effective measures to improve sales.

Clearly, technology has become an indispensable means to empower the retail sector and will continue to do it in 2017 with innovations such as Internet of Things (IoT), smart mirrors, big data analytics, chatbots, robotics, etc., sweeping every possible domain of retail.

By the end of 2017, insights captured using big data analytics will be increasingly used by retailers to devise business strategies, which is likely to help them to stay abreast of retail trends. Big data analytics are expected to play a key role in predicting sales and trends, conducting consumer sentiment/behavior analysis, forecasting demand, achieving price optimization, and devising customized promotions.

Interactive mirror, a smart mirror that helps to virtually try-on clothes, is an interesting digital retail innovation, which is likely to gain more popularity in 2017. Interactive mirrors’ application can be customized according to the needs of individual retailers. For example, companies such as Ralph Lauren (a US-based retailer) are using these mirrors to show consumers how a particular outfit will look during different times of the day by changing the lighting of the fitting room along with providing suggestions on accessories, which are displayed on the mirror, to encourage more purchase. Companies such as Lululemon (a Canadian athletic apparel retailer) are using interactive mirrors to suggest places to exercise and provide information on healthy living. These mirrors are not only a means to attract shoppers by offering unrivaled shopping experience, but can also be used to gather consumer behavior data. With the help of interactive mirrors, Rebecca Minkoff (a US-based luxury retailer of handbags, accessories, footwear, and apparel) store was able learn that a leather jacket was tried on 70 times in a week but never purchased. Most shoppers asked for different sizes using the interactive mirror, indicating that there was a fit issue.

Chatbots, another invention to continue gaining traction throughout 2017, act like a virtual concierge service, guiding customers through the shopping process, providing detailed information on product and stock level, and allowing shoppers to place an order and track it in real time. Chatbots are also a great tool for retailers to get insights on shoppers’ tastes and preferences – for instance, all first-time shoppers on Sephora’s (a French cosmetics manufacturer) chatbot are required to take a short quiz that helps the bot know about personal preferences of a user – this information is used to recommend products. The bot also provides reviews on certain products.

In 2017, IoT is likely to become an integral technology for the retail sector to build smart stores. IoT’s significance is expected to grow in retail with about 70% of retailers in the USA ready to adopt the technology in 2017, according to a survey conducted by Zebra Technologies. IoT will be the key to interconnect in-store smart devices and sensors with Internet, which will enable better data-driven business decisions and ease of operation.

For the past couple of years, big box retailers such as Staples, Walgreens, Amazon, and Gap have been using robots for warehousing and logistics operations, but 2017 is expected to witness an increasing implementation of robotics for customer facing in-store operations as well. While use of robotics for distribution center operations will still hold importance, the launch of Amazon Go stores, Amazon’s robot-powered supermarkets, Lowe’s customer-assistance robots, etc., will increase foothold of robotics in front-end tasks such as customer assistance (we wrote about Amazon’s latest efforts to digitalize the grocery market it in our publication Amazon: Prepared to Digitalize Grocery Business in the USA? in April 2017). In the coming 5-10 years, robots can be expected to become an integral part of the complete retail value chain including both front-end and back-end operations.

Five Technology Trends

EOS Perspective

In the medium term, in-store shopping is not going to fade away due to competition from online retail, but instead it is likely to witness an upgrade with retailers enthusiastically integrating technology into physical stores. The key focus of all retailers in 2017 will be to enhance personalized customer interaction, offer innovative in-store experience that rivals the convenience of online shopping, and use the gathered insights on customer shopping patterns to conduct effective predictive analysis. To achieve these objectives, retailers are likely to use technologies such as big data, IoT, and robotics, and employ interesting innovations such as chatbots and smart mirrors to offer seamless services to attract customers as well as use these innovations to capture valuable insights on consumer behavior.

Over the years, technology has tremendously contributed to the success of retail sector – starting from browsing, point-of-sale, shipping, checkout, supply chain, to payments, and so much more. This will not change in 2017, as technology will continue to digitalize retail, with top retailers prioritizing technology to improve sales.

*key sector of operation for each retailer included in the infographic

  • General merchandise: Amazon, Tesco, Macy’s, Kohl’s, and Kroger
  • Footwear: Nike
  • Fashion (apparel, fragrance, cosmetics, sunglasses, handbags, shoes, etc.): Burberry, Rebecca Minkoff, Nordstrom, Sephora, Van Heusen, H&M, and Ralph Lauren
  • Electronics: Anker
  • Online retailer: eBay, Ocado
  • Food: Godiva
  • Home Improvement/appliance: Lowe’s
Amazon: Prepared to Digitalize Grocery Business
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Amazon: Prepared to Digitalize Grocery Business in the USA?

For the past several years, Amazon has been battling to break into the grocery retail market. After several experiments, Amazon has now embraced technology to differentiate its offerings and improve customer experience – a bold tech-fueled strategy to establish itself in the grocery market in the USA. Its latest innovations have shaken the traditional retail store concept and brought in revolutionary ideas of checkout-aisle free convenience stores, robot-controlled outlets, and voice-enabled online shopping.

Amazon is set to soon open its technology-powered brick and mortar stores in the USA, an idea that it once shunned, due to the strong belief that it could win over customers only through online channel. These stores have the potential to offer seamless store experience.

Amazon Go – Grocery store of the future

The company unveiled check-out free, Amazon Go store that ensures hassle-free and smooth shopping experience by eliminating the need to wait in queues to bill items – which was one of the key grievances of time-pressed customers. Launched in December 2016 in Seattle, the store is still in private beta mode and accessed only by Amazon employees. The public launch date is scheduled for early 2017.

The store operates on ‘just walk out technology’ that allows shoppers with Amazon Prime accounts to tap their phones on a turnstile while entering the store, and from then onwards, the technology tracks the selected items and adds them to a virtual cart, which is billed and sent to customer’s Amazon account.

The ‘just walk out technology’ has been developed using recent innovations such as computer vision, sensor fusion, deep learning, and artificial intelligence, among others. Products have embedded tracking devices – functioning through high-tech object recognition and inventory management systems – which pair with customers’ phones to charge their Amazon accounts. The weight sensitive shelves alert Amazon regarding restocking requirements.

Amazon has not yet commented on the number of stores it intends to open.

Robot-powered supermarket – Soon to be reality

A robot-operated supermarket is no longer just a figment of imagination with Amazon working towards opening such outlets soon. The supermarket is likely to be an extended colossal version of Amazon Go stores – the idea is to build two story, about 10,000-40,000 square foot store, stocked with over 4,000 items.

Shopping experience will be facilitated with robots that will pick up items from shelves and bag them in the first floor to deliver it customers waiting downstairs. Items will be charged automatically to customer’s account, replicating the Amazon Go’s check-out and billing concept.

Customers will have option of in-store shopping or to order online and pick-up items from the store later – offering both facilities is Amazon’s strategy to attract more customers.

The stores will be able to function with as few as six staff members to a maximum of 10 workers per location during any shift, against the industry average of 90 employees required to run a supermarket. The stores will only require a manager to sign up people for the Amazon Fresh service, a worker to restock shelves, two employees stationed at drive-through windows for customers collecting their groceries, and another two employees to help robots bag groceries, which would be sent down through conveyors.

Eventually, Amazon aims to introduce robot-run stores globally.

Alexa – Powering the age of hands-free shopping

In March 2017, Amazon successfully launched yet another innovative solution, Alexa, which is an artificial intelligence-powered voice assistant that facilitates shopping on Prime Now for its members (currently, limited to the USA). It ensures seamless, hands-free, and convenient shopping experience, as the user only has to give a voice command as ‘Alexa, order from Prime Now’ and the job is done.

Alexa is extremely versatile and a multi-tasker, it can search for items, re-order or track orders, add items to cart, and give product recommendations. Besides being a powerful shopping tool, it can also read kindle books, control selected smart home products, play music from Amazon’s own services, etc.

Voice-enabled shopping service is available through Amazon devices such Echo, Fire tablet, and Fire TV, and it has been integrated with Amazon’s Shopping app for iOS platform.

EOS Perspective

Will Amazon’s innovations threaten other players in the market?

Other retailers feel the pressure to upgrade services to keep up with Amazon’s enhanced shopping experience. Kroger launched ClickList (an online grocery ordering service, where the customer needs to visit the store to pick up the items) across 500 stores and is using technology to analyze shopping habits of customers to generate relevant coupons for them.

In January 2017, Walmart launched Scan and Go app for Android users (already available for iPhone customers), to compete with Amazon. The app scans barcodes of items, customers can pay through the app, and show receipt at the gate before exiting the store. The prototype is still in testing phase and is likely to roll out by the end of 2017.

Amazon’s technology will not be easy to replicate nor will a lot of retailers have the capacity to implement technological innovation of such a massive scale, hence, Amazon is certainly likely to have an edge over its competitors when its stores open for public. Amazon’s competitors in the grocery business definitely feel threatened and have started to revamp strategies and use technology to reach more customers, however, the scale of their innovations still remains miniscule in comparison with Amazon.

Why is Amazon pushing for innovation?

After a decade of Amazon’s food retail experiments, with limited success through online channel, the company decided to launch physical stores. But cracking through the US$ 800 billion grocery market in the USA, already dominated with players such as Target, Walmart, Kroger, etc., is not so simple. Consequently, Amazon strategized to carve a niche for itself by differentiating its offerings, using technology to provide flawless, quick, and smooth shopping experience for customers. The move is expected to accelerate its penetration into the grocery business.

Amazon’s core business model is based on behavior modification, which revolves around attracting consumers to e-commerce website, and now also to physical stores, converting the customers into Prime members, and eventually driving them to spend more across categories.

All of Amazon’s new inventions, including Alexa, Amazon Go, and robot-powered outlets, will push consumers to eventually become Prime members, as holding a Prime membership is the basic requirement to be able to access these services. Prime members, besides paying an annual subscription fee, are likely to shop and spend four times more than the non-Prime members, which makes Amazon’s retail business profitable – in 2016, revenue from Amazon Prime and other subscription services such as e-books and videos stood at US$ 6.4 billion, growing by about 40% annually.

The other benefit of automation for Amazon includes minimizing labor cost, which accounts for lion’s share in a supermarket’s operating cost. Further, the robot-controlled supermarket’s design is likely to slash real-estate costs by reducing the need for aisles that typically occupy large areas of traditional supermarkets. Using robots on the first floor will also allow Amazon to stock more products in space smaller than in conventional stores. The store prototype is expected to yield profit margins above 20% against the industry average of 1.7%.

Further, Amazon envisions to open 2,000 stores in the USA over the next 10 years against the current 2,800 stores of Kroger, USA’s largest traditional supermarket chain. This indicates that, if these store openings are successful and if the profit margins are achieved as expected, Amazon could potentially be a real threat to conventional retailers over time.

Will these innovations be truly disruptive or have limited impact on grocery retail segment?

The path to building futuristic concepts and prototypes will definitely not be a cake walk for Amazon. It might face adversities such as increased chances of theft due to the store formats of Amazon Go and robot-driven supermarkets. Selling random weight items (fresh fruit and vegetables, sliced meats, etc.) can be difficult to incorporate in Amazon Go’s automatic checkout system.

Lastly, success of these stores will depend on their location and sales volume generated – opening stores in downtown areas might be difficult at the beginning because high rentals may not be covered by the sales achieved.

Certainly, the technology-driven stores are not a mass market option for Amazon today nor is the success of these prototypes guaranteed. Also, as grocery retail operates on wafer thin margins, lasting innovation is rare in this segment.

Amazon’s bold technological innovations might not be big enough to disrupt the industry yet. However, considering Amazon’s steady financials and relentless efforts towards automation, it is likely that the company could forge ways to make grocery retail more profitable and efficient in the future.

by EOS Intelligence EOS Intelligence No Comments

Online Grocery Retailing In India: Will Clicks Replace Bricks?

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India is the sixth largest grocery market worldwide buzzing with plethora of opportunities for the development of online grocery retailing. Gone are the days when Indian consumers were reluctant to shop online – studies have revealed that Indian consumers are overcoming biases against purchasing products without the touch and feel factor and are widely accepting online shopping. However, shopping for grocery online is at a very nascent stage and is still overcoming operational and economical hurdles. Over the years, multiple online grocery sites have shutdown, though there are a few survivors and presently the market is bustling with new entrants including e-commerce giants such as Amazon, Snapdeal, Flipkart, etc. Players are constantly implementing innovative marketing strategies, expanding operations, and experimenting with business models to find the best fit for e-grocery market.

Online grocery retailing is a tough segment to crack largely due to the perishable nature of products it offers, coupled with several operational impediments such as logistics, supply chain management, and low margins. Also, players face major challenges in training and retaining employees as well as attracting investment to grow operations.

1-Challenges

Despite the challenges, online grocery retail is witnessing rapid growth driven by increasing internet connectivity, use of smartphones, and changing lifestyles with increasing number of working women demanding convenience. Consumers pressed for time are continuously looking for less cumbersome options in their fast-paced lives and online grocery shopping is increasingly the best solution for them.

Out of the 40 online sites that initially ventured into the grocery retailing market, only a few have survived and BigBasket has emerged as the most successful e-retailer. Other survivors include ZopNow and Localbanya, while there are several new entrants such as Grofers, Jugnoo, etc. Traditional brick and mortar retailers have also realized potential of the market and have slowly started selling groceries digitally – for example, Reliance launched ‘fresh direct’ while Tata sells through ‘My247market’.

2-BigBasket

Successful e-grocers such as BigBasket, ZopNow, Nature’s Basket, and Reliance Fresh Direct, among others started formulating strategies to succeed in the e-grocery market. For instance, BigBasket started selling private label brands to improve margins while ZopNow offers cashbacks, discount coupons, and grocery deals to attract customers. Other strategies include implementing quality assurance programs and offering niche products, among others.

3-Success4-Success

EOS Perspective

E-grocers face various obstacles, hence a robust strategy is the need of the hour to survive and succeed in the market. It is imperative for any player to first understand the local nuances of the market – this includes establishing local relationships, developing local logistics, and building business according to unique scenarios in different cities. India is an extremely diverse country and a complex market to survive, hence effectiveness and efficiency of players to adapt to the market defines how any company will succeed in the industry. Factors such as target segment, operating costs, competitive landscape, and consumer preferences vary greatly across India, therefore, aligning business with domestic market and following ‘localization’ of operations is the key to success.

For long-term sustainability in the market, it is essential for players to differentiate through innovation and to improve business scalability. Innovation can be achieved in the form of targeting specific customer segment, selling niche products, or offering tailored services. Attracting investment can help players to expand and scale up their businesses.

Further, it is crucial for e-retailers to prioritize customer experience — across technology, delivery, and service platforms — as convenience is the primary factor that influences people to buy digitally.

Nevertheless, the question still remains if clicks can replace bricks. Online grocery market has potential and is expected to grow but it is unlikely that it will dominate or replace the brick and mortar stores in the near future. Online retailing definitely have the potential to grab a substantial portion of grocery sales in a long-term horizon, however, physical stores will long continue to have an edge, particularly in case of FMCG goods.

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E-commerce in Russia – Strong Impact of Consumer Culture

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Part II of our E-commerce Challenges in the BRIC series brings us to Russia, a market with significant growth opportunities which are impacted by customer’s traditional retail perceptions and infrastructure woes.

With a share of only 1.9% held by online sales in total retail sales, it would appear that Russian e-commerce market is almost irrelevant. However, the strong growth dynamics promising an average annual growth rate of 35% and a market size of US$36 billion by 2015, give a good context of the scale of opportunities. International online retailers are increasingly eyeing the Russian market with a view of capturing the growing e-commerce consumer base; however, some of the global giants, such as eBay or Amazon, still lag behind strong local competitors, such as Ozon.ru.

Opportunities are many, considering that already in 2011, Russia overtook Germany to become the market with the highest number of internet users, as well as the fact that it is Russia that prides the highest per capita income amongst all BRIC countries (with per capita income at PPP of US$17,700, compared with Brazil’s US$12,200, India’s US$3,900, and China’s US$9,100). However, as many e-commerce entities operating in this market have already discovered, Russian market is challenged by its own set of issues that hold back the market to expand even faster.

Russia e-commerce

The Challenges

  • Inadequate infrastructure – similar to many other developing countries with vast territories, Russia has by far insufficient and inadequate infrastructure, a fact that negatively affects delivery times, safety of cargo, and generally prevents the e-commerce market from developing to its full potential. Russia’s major transportation method is railway and road. With insufficient and outdated rail infrastructure, as well as bad or non-existent road network, paired with long distances required to cover in this large country, deliveries outside metropolises such as Moscow or Saint Petersburg often take a week to reach the online shopper. Also, on the online retailer side, delivering orders to customers across this huge country, particularly without a reliable national post system, generates significant costs and considerable time issues. Several larger players that have sufficient financial resources at hand need to invest in building own delivery networks and infrastructure wherever possible, as such services are not commonly available due to lack of specialized, reliable third party providers. This is, however, often impossible for smaller players or newcomers to the market, as it requires substantial investment.

  • Try-it shopping attitude – Russian shoppers often like to treat online shopping as ‘try-at-home’ service. They order many products, try them out at home, with the assumption that they might keep just few or even none of them. This requires online retailers to be rather flexible with product return options, and create process that allow for quick and efficient dealing with rejected products and cash refunds. This shopping attitude also results in retailers having relatively high inventory level, as well as devoting considerable time and resources to deal with orders that will eventually not generate revenue for them, as it is estimated that one in four deliveries of online purchases in Russia is refused and returned by the customer. Further, the infrastructure problems and lack of reliable public postal system clash with the try-it shopping attitude, as it makes it difficult for online customers to return purchased products, making them hesitant to shop online.

  • Cash payment shopping culture – credit and debit cards are not widely used by Russian shoppers, on the back of distrust towards safety of advance online payments and honesty of online retailers, as well as requirement for special card authorization before a purchase (online payment cannot be completed within a few clicks). This has led to high dominance of cash-on-delivery payment, which currently accounts for about 80% of online sales of products such as clothes, shoes, and electronics. Online retailers must cater to this demand, which requires them to finance product delivery while receiving payment later, leading to problems with cash flow and returns/rejects. Further, online retailers often incur additional costs of employing own team of cash couriers. While the use of debit and credit cards will increase, the process will be rather slow and long, as apart from developing reliable and safe online payment systems, a considerable cultural change to cash-oriented mindset in customers must occur.

  • Strong local competition – this is a challenge for newcomers to the Russian e-commerce market, especially foreign players. While it is still in early stages of development, there are several strong and successful local players (e.g. Ozon.ru, KupiVIP, Lamoda, Utkonos, Svyaznoy, X5, Wildberries.ru), who know how to navigate through nuances of online retail in the country, and enjoy strong, often loyal customer base. Ozon.ro is the unquestionable market leader, with grounded position, large customer base, own logistics arm, and wide offering, resulting in its extremely good performance (revenue hike of 91% in H1 2012 to US$232 million, expected to reach US$1 billion in 2014). Local competitive landscape is also infused with a number of smaller retailers that focus on narrower product categories, providing broad offering with a given category, e.g. consumer electronics provider Citilink or car spare parts store Exist.ru.

  • Consumer nationalist inclinations demanding localization – while many Russians appreciate foreign trends, there is a strong sense of nationalism that makes Russian shoppers less accepting and more likely to reject foreign influences and brands, if they do not localize their offering and do not provide fully Russian-language experience. This might pose a challenge for foreign e-commerce entities, expecting to transplant their business and operating models directly to the Russian market.

 

Russia’s e-commerce market is heavily influenced by customer mindsets and attitudes, which are still based on traditional shopping experiences, thus acting as hindrance to the pace of online retail growth. Inadequate and inefficient infrastructure has also played its part in creating challenges that result in cost and operational losses to existing players, and scares new entrants from investing in this space.

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E-commerce in Brazil – Marred By Political and Social Influences – read the first part of our E-commerce Challenges in the BRIC series.

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