Across emerging markets, growth in e-commerce accelerates as the pandemic reshapes consumers' shopping patterns.
A young couple in suburban São Paulo wants a smart TV. During the COVID-19 pandemic, they have become used to buying nearly everything they want or need online. But they are reluctant to buy a television without actually seeing it. So they strap on their masks and head to a large store downtown, where they can compare makes and models, sizes and picture quality, and talk to a salesperson. Then they go home, discuss their options, make their selection, and order it online for delivery. Here's what makes it easy: the store they visited and the online marketplace they bought from are operated by the same company.
In Shanghai, the reverse scenario is taking place. A mother knows exactly what she needs from the grocery. She opens an app on her smartphone that lets her into China's largest e-commerce platform. She orders everything on her list (and then some) and pays for it electronically, using the online platform's payment system, which links directly to her bank debit card. Then she drives to the grocery market—one of China's urban “hypermarkets”—where her entire order is packaged and waiting for her to pick up.
These two scenarios on different continents are the flip sides of a major emerging market trend: the convergence of e-commerce and physical retail into a fast-growing “super-sector” referred to as omnichannel. And while the sector has been developing over the past several years, its growth has accelerated dramatically in the wake of COVID-19, as the number of emerging market consumers shopping online has surged.
While the omnichannel model is similar across emerging markets, it has evolved very differently in other parts of the world compared to China. Historically, countries such as Brazil or Mexico already had a number of large, established brick-and-mortar retailers and a shopping mall culture when e-commerce began its ascent in the 21st century. These retailers had to invest aggressively in recent years to build an online presence to complement their physical stores and create a competitive “moat” against the threat from young and agile pure-play e-commerce sites.
In contrast, China had very little in the way of consumer retail stores as it grew out of the Mao era and began liberalizing its markets. Today's massive online retail platforms in China effectively leapfrogged the physical stage of development, abetted by the rapid proliferation of the smartphone. Unburdened by legacy physical operations, they introduced innovative mobile shopping apps that were far more advanced than those of their Western counterparts. Their move into physical spaces is a comparatively recent development, as they realized that a majority of Chinese consumers still want the choice of an in-person shopping experience.
These different evolutionary patterns—online to offline in China, offline to online in Latin American markets—are reflected in the differing economics of omnichannel from market to market. Brazil's largest omnichannel player, for example, reportedly derives revenue in roughly or nearly equal amounts from its online and offline channels. Among China's e-commerce giants, no one is approaching such a 50-50 split. Online sales still account for the vast majority of revenues. Meanwhile, China's prestige shopping districts are dominated by global brand names. Rather than building their own brick-and-mortar stores to compete, China's leading e-commerce providers partner with these popular brands and feature them prominently on their sites—creating a virtual “high street” of flagship stores within the context of a larger online platform.
Chinese e-commerce sites have also taken partnership stakes in large grocery chains, making possible the online order, in-store pick-up scenario cited earlier. These supermarket and hypermarket networks give the online players a presence in virtually every Chinese municipality, with access to an estimated 65% of the country's population that lives in or near an urban area. In return, the physical stores can leverage the online providers' proprietary payment systems to offer added convenience and capture a loyal consumer base.
The Pillars of Omnichannel Success
To win in e-commerce, players must master the three “pillars” that characterize a well-run business. The first is product. Sites must have the right merchandise that consumers want, and have the supply chain to ensure availability. The second is logistics. Companies must have an effective fulfillment and delivery network to get the merchandise to the customer at a reasonable cost and in an acceptable time frame (which increasingly means “free” and “next day”). And the third is payments. The platform must provide a seamless transaction capability.
COVID-19 has put these capabilities to the test. In China, for example, some players own their own distribution networks, which gives them more control over delivery vehicles and schedules. But others rely on third-party carriers with a mix of last-mile delivery modes, from trucks and vans to taxis and scooters. In the early days of the pandemic, when drivers were not allowed to leave their homes or travel across provincial boundaries, delivery times suffered. The merchandise mix shifted as well. Where consumers previously shopped online primarily for discretionary items, such as electronics or apparel, they were now looking for household essentials and hard goods, such as appliances.
The omnichannel model is likely to see growth in emerging markets that have the infrastructure to support the three pillars of success. In countries that lack efficient road networks between major population centers, for example, e-commerce platforms will be hard pressed to meet the delivery expectations that consumers in other countries have become accustomed to. Companies that have invested heavily in getting the logistics, warehousing and last-mile routes right have gained a significant advantage during the pandemic as others have not kept pace.
A reliable and trustworthy payment system is also essential. Brazil's top omnichannel platform offers a branded affinity credit card in conjunction with a leading global payment processor with features that encourage usage on the site. In China, where credit card penetration is low and consumers are generally averse to personal debt, the e-commerce players themselves have filled the void by building their own electronic payments networks to facilitate seamless transactions. Digital payment systems, which have expanded rapidly in China, are starting to take hold in other emerging markets, enabling merchants of all stripes and sizes to take advantage of the trend toward online ordering and on-site pick-up.
Consumers Vote with Their Digital Wallets
Ultimately, of course, it is the customer who decides the fate of an omnichannel venture. Companies that can deliver a satisfying customer experience, whether online, in-store or in combination, stand to benefit the most from the growing demand for omnichannel buying solutions. In emerging markets, where discretionary incomes are rising and consumer buying behavior has permanently changed, the omnichannel sector—encompassing not only retailers but also logistics and payments providers—represents some of the most compelling long-term investment opportunities.
Senior Research Analyst