South-east Asian retail: Is the platform burning yet?

Catching up with digital disruptors

Traditional retail channel players, such as mall operators, department stores and large franchisees of international brands, in South-east Asia have long enjoyed a relatively comfortable environment, where:

• Growth has been fuelled by economic development and tourism expansion;
• E-commerce competition was slower to catch on due to lower Internet and smartphone penetration than in western and northern Asian markets;
• Retail prices have remained higher than in western and northern Asian markets, not only because of persisting import duties, but also mainly because of the operating model — through franchise partners — chosen by most international brands; and
• Large multi-brand franchise players — typically two to three of them in each market — have been “dominating” their respective market thanks to their clout and relationships.

[caption id="attachment_5556" align="alignleft" width="249"] How can retailers prepare themselves for the rapid pace of change in our current retail environments? Retail Asia invites
Pascal Martin, who has lived and worked in Asia for more than 20 years, to share his views[/caption]

In sum, a “cosy” environment where a small number of local players in each market — often in the same holding groups — have been controlling malls, department stores and best brand franchises, as closely knit protected ecosystems.

But we are now starting to see similar trends as experienced in western and northern Asian markets — an oversupply of malls with occupancy rates starting to decline and some international brands slowing their store expansion (even sometimes closing a few outlets).

Meanwhile, Internet and smartphone penetration have reached critical mass and e-commerce activity is increasing, facilitated by the emergence of cashless payment platforms that are compensating for the relatively low levels of credit card usage. Local platforms such as
Lazada and Zalora are on the rise.

Alibaba’s recent acquisition of Lazada for US$1 billion, Unilever’s partnership with Lazada to grow their South-east Asian business and rumours around Amazon’s upcoming entry into Singapore may signal an acceleration in the pace of change.

Two factors are at play:

• More Internet and smartphone users are now browsing the Web, learning about brands, checking prices across markets and opting for better deals.
• Why should South-east Asian consumers continue to pay 1.5 to 1.8 times higher prices than in larger, more mature markets for the same international brands?
• Many international brands are looking for the next growth opportunity after they have saturated their home markets and achieved inroads in core markets such as Japan and China. Some of them who are already in South-east Asia through franchisees know that their brands are positioned at a premium level that does not allow them to achieve their full potential.

Until now, there were more advantages to grow through franchisees in South-east Asian markets than directly. Some of the reasons include access to distribution, clout with channel partners, low-capital growth model and handling of local red tape. But if a few international
brands were to decide to “go it alone” and reposition themselves at a consistent price point with their other markets, they could put pressure on other brands to do the same, one after
the other, opting to go direct themselves or to switch to tighter control collaboration
models whenever their franchise agreement renewals give them the opportunity
to do so.

Going direct is not just about resetting prices at internationally consistent levels, it also enables better control of merchandising and a better leverage of e-commerce opportunities without channel conflicts — both of which are often painful friction points in relationships
with distribution partners.

This scenario has happened before in larger markets such as the US, Japan and China, where major international brands have taken over their businesses, one after the other, making franchise operators largely irrelevant, thereby accelerating the pace of change in these
retail environments.

How can incumbent players prepare themselves for these changes?

Franchise operators will have to reinvent themselves along several dimensions:

1. Learn to operate profitably at internationally consistent price levels. This means that franchise operators will have to review their operating model in depth, with much more “smart” sharing of resources and systems across brand teams in their business portfolio
   while maintaining distinctive marketing approaches aligned with each brand they
   represent.
2. Build solid, up-to-date e-commerce and omni-channel capabilities, well integrated into their local digital ecosystems, keeping them as desirable long-term partners for international brands.
3. Be ready to engage in major transition discussions with their brand partners, either to evolve the partnership from a “soft” flexible franchise model to a much more closely integrated “hard” franchise scheme with tighter control and monitoring or towards a joint-venture approach.
4. Be prepared to tackle a termination scenario at the next renewal opportunity (if their partner chose to do so). Being well prepared can help franchise operators maximise value from selling a business that they have built over many years for their brand partners.
5. As they will inevitably lose some of the biggest brands in their portfolio, franchise operators will have to intensify their search of relevant international brands that are not yet present in their markets and negotiate terms with these new brands that will enable attractive future renewals or terminations, with a pre-negotiated formula-based sell-out price.
6. Leverage their experience with international brands to build their own brands or to acquire existing brands with South-east Asian growth potential. In some cases, forming alliances with players in other South-east Asian markets might help optimise their attractiveness as a potential buyer.

Department store operators will have to reconnect with their core values, aiming at “surprising customers” with the most appealing selection of brands in a compact, digitally enabled multicategory and multi-brand environment, that provides the best experience and
service to their customers.

Malls will have to deliver on their promise of traffic by enriching their mix with better entertainment and experiential formats, whether F&B, cinemas or educational, that e-commerce players will not be able to easily replicate.

For those who are chronically optimistic, there is always the hope that it will take years before the digital disruptors build the full set of supply chain capabilities in South-east Asia’s multiple fragmented geographies, often surrounded by sea, that will be required to disturb the cosy status quo.