The regions world-leading digitalization is forcing executive teams to confront new strategic questions. By Melanie Sanders, Jonathan Cheng, Shyam Unnikrishnan, Derek Keswakaroon and Kanaiya Parekh The Future of Retail in Asia-Pacific: How to Thrive at High SpeedMelanie Sanders leads Bain strong evolution expected Developing digitalizers Low digital disruption and medium market maturity Market maturity Evolution trend, length of arrow signifies level of expected change Indonesia Vietnam India China Malaysia Brazil Mexico South Korea UK US Japan Australia Germany Singapore France Russia Philippines Thailand Digital disruption High High Low Low Mature followers High digital disruption and high market maturity; slight evolution expected Note: NonAsia-Pacific countries are included for context Sources: Euromonitor; Forrester; Planet Retail; Global Data; EIU; Demographia; OMDIA (Ovum3 The Future of Retail in Asia-Pacific: How to Thrive at High Speed South Korea, Singapore, Japan and Australia are Asia-Pacifics mature followers. In these countries both disruption and maturity are high, and future evolution is likely to be more measured in many cases. South Korea stands out as the leader within this category. Its digital prowess, exemplified by omnichannel leaders such as Lotte and Shinesegae, points the way to what is possible for other mature followers in Asia-Pacific and beyond, including the US, the UK and France. The final cluster of countries consists of developing digitalizers: Malaysia, the Philippines and Thai- land, whose low digital disruption and medium maturity is reminiscent of Russia, Mexico and Brazil. They are heading for mature follower status. Six imperatives to thrive in Asia-Pacifics retail future In all four Asia-Pacific market clusters, there are outstanding retailers whose executive teams have proved themselves adept at anticipating and adapting to rapid change. Covid-19 has only accelerated many of the trends that were already on the radar screens of these companies. The pandemic has most obviously hastened the migration of sales from brick-and-mortar stores to online channels. The pandemic has most obviously hastened the migration of sales from brick-and-mortar stores to online channels. It has also increased demand for fast and reliable deliverymost vividly seen in the surging adoption of online grocery (see the Bain Brief “How to Ramp Up Online Grocerywithout Breaking the Bank”). Covid-19 has given fresh impetus to other shifts, widening the economic gap between haves and have- nots and further fragmenting the path to purchase by impelling consumers to shop (and live) through mobile phones. Thats on top of the operational repercussions of the virus, such as the paramount need to safeguard employees and customers, and other, non-Covid-related trends. The most effective responses to these myriad challenges are going to look very different than the strategies that worked in the past. In particular, we think executive teams can succeed by focusing on six imperatives. 1. Reinvent your value proposition Even after the transformative growth of the last few decades, Asia-Pacific consumers are still becoming more middle class and urbanand more digitally driven, too, aided by the fact that those born after the 1990s are heavily represented in regional demographics. With the exception of China and India, dual-income households are on the rise as women continue to join the workforce. Yet the gap between richest and poorest has also widened in many parts of the region, and Covid-19 is ratcheting up pres- sure on the most deprived by increasing unemployment.4 The Future of Retail in Asia-Pacific: How to Thrive at High Speed Retailers must ensure their value proposition meets the needs of this fast-evolving customer base. That might involve putting ultra-convenience at the heart of their offering in response to denser urban- ization and the rise of time-poor dual-income households; ready meals are already growing in popu- larity, for instancetheir penetration rate more than doubled in South Korea and Thailand between 2010 and 2019. As more consumers struggle financially in Covid-19s economically destructive wake, some retailers might benefit from pushing deeper into value/discount formats and offers. As more consumers struggle financially in Covid-19s economically destructive wake, some retailers might benefit from pushing deeper into value/discount formats and offers. (Aldi and Don Quijote have done just that in Australia and Japan respectively, expanding their discount store network by almost 10% a year.) Others might tilt toward rising interest in health, wellness and sustainabilityor use advanced analytics to meet swelling demand for personalization. 2. Win digital engagement Whatever a retailers evolving value proposition, improved digital engagement with shoppers is likely to be vitalparticularly through mobile phones. Asia-Pacific consumers already tend to do most of their online shopping through their phones, and this trend is set to deepen, with Forrester forecasting that 70% to 85% of e-commerce will be conducted by phone in 2023 in key regional markets (vs. a forecast of 43% in the US). Amid this mobile migration, the path to purchase is still fragmenting. People are buying more through super-apps such as WeChat, Paytm, KakaoTalk and Grab. E-commerce through social media has also been gaining ground in recent years, as shown by Chinese influencer Li Jiaqis success at selling lip- stick on Taobao livestreams or the video app Douyin. Consumers have increasingly turned to social commerce like this during the pandemic. When Bain rising costs make that declining sales density unsustainable. Conversely, convenience stores have already been gaining traction. In China and South Korea, they were the fastest-growing format between 2014 and 2019, posting double-digit growth. That growth reflects how shopping has become more local across the region, a trend that has now been given extra momentum by Covid-19. Stores will need to change role as well as format, contributing to a more seamless omnichannel whole as the sales mix tilts further to e-commerce. More stores will operate as showrooms or hubs for order Figure 2:Post-pandemic,allstagesofthepathtopurchasearesettodigitalizefurther Becoming aware of a brand or product Building interest in a purchase Purchase Post-purchase engagement Livestreaming/ short video Social community Key opinion leader/influencer platform Brand website Mini-app WeChat official account E-commerce platform Notes: Livestreaming, short video and social community can be redirected to e-commerce platforms for purchase; some livestreaming/short video has embedded purchase feature/platform Source: Bain China Consumer Survey (n=4,771) 26% 23% 35% 25% 14% 15% 22% 23% 6% 10% 10% 19% 10% 4% 5% 6% 16% 19% 14% 4% 5% 3% 5% 7% 3% 5% 26% 30% 11% 13% 23% 26% 20% 20% XX% 12% 17% 15% 13% 15% 30% 38% 31% 27% 18% 18% 21% 24% 30% 77% 73% 85% 73% We asked Chinese consumers which digital channels they used in 2019 during four separate shopping stages and which they were likely to use in the coming year. Expected growth in use in the next 12 months vs. 2019 Percentage of consumers used in 20196 The Future of Retail in Asia-Pacific: How to Thrive at High Speed picking or click-and-collect services, with increasing level of automation (as is already the case at cutting- edge stores operated by Emart in South Korea and Hema in China.) Given rising labor costs (up by half in China since 2014) and expensive real estate in many Asia-Pacific cities, it is more important than ever that retailers scour their cost base for savings. Moving to zero- base costs can help, while investing in technology to improve operations can create a virtuous circle of savings and improved customer experience. Examples include scan-and-go payment technologies, smart shelves, radio-frequency identification and predictive ordering and replenishment. 4. Master the last mile and supply chain resilience Consumers want faster and cheaper home delivery. Hema set a new standard when it offered home delivery 30 minutes from ordering (within a 3-kilometer radius). Thats a challenge to e-commerce economics around the world but particularly so in Asia-Pacific, given its geographic diversity. There isnt a single fulfillment model that can span the regional differences in e-commerce demand, urban density, real estate market dynamics, labor costs and logistical maturity. Retailers will instead need to tailor their last-mile approach to local conditions (see Figure 4). For in- stance, highly centralized and automated fulfillment centers work well in Sydney, with its expensive real estate and workers; its logistical maturity is also ideal for home delivery by truck. Shanghai suits a mix of centralized and hyperlocal fulfillment, trucks and nimbler two-wheelers, manual and auto- Figure 3:WhyexpandphysicalretailspaceinAsia-Pacificwhene-commerceismovingsofast? Online shopping has exploded in markets with less mature store networks . and physical expansion wont catch up 0123 Philippines 0.3 Indonesia 0.4 Vietnam 0.4 Singapore 0.5 India 0.6 China 0.7 Thailand 0.8 Malaysia 0.9 South Korea 1.0 UK 1.2 Japan 1.3 Australia 2.0 US 2.3 1% 1% 2% 2% 4% 1% 1% 0% 0% 1% 2% 1% 4% CAGR 1924 Selling space per capita (square meters, 2019) 0 1 2 3 01 53 0 45% 4,000,000 Total stores (number of outlets, 2019) Change of e-commerce penetration (percentage of sales online, 201419 CAGRs) Selling space per capita (square meters, 2019) India Southeast Asia China US Japan South Korea France Germany UK Australia Source: Euromonitor7 The Future of Retail in Asia-Pacific: How to Thrive at High Speed mated picking. In Mumbai and Jakarta, with their patchier roads and lower-cost labor, the pendulum swings much further toward hyperlocal fulfillment, motorbikes, scooters and picking-by-hand. Executive teams also need to anticipate how macrotrends will shape last-mile economics and under- stand the developments that make investments in automation more feasible, be that rising labor costs or hitting scale thresholds (such as the number of customers and the density of delivery routes in a given area). At the same time, retailers need to be attuned to the way that Covid-19 is likely to lead to shorter, more local and more automated supply chains as companies seek greater resilience. 5. Define your ecosystem destination Ecosystem pioneers Alibaba and Tencent have company. Technology groups, retail incumbents and others are nurturing their own ecosystems, including Koreas Kakao, Naver and Shinsegae, Singapores Grab, Walmart and Reliance Industries in India and Woolworths in Australia. Ecosystem players are increasingly disrupting retail value chains, using their scale and capabilities to provide B2B wholesale services to retailers (as Udaan is doing in India), logistics solutions (such as those offered by Chinas JD Daojia and Cainiao), payment propositions (see Indias Paytm) or data and analytics services (ecosystem players in this field include Alibaba and Naver). The pandemic has strengthened ecosystems strategically. Under pressure to accelerate their digital retooling, traditional retailers have sought out ecosystem partnerships. Such alliances can offer retailers Figure 4:ThediversityofAsia-Pacificcitiesresistsone-size-fits-allfulfillment 5 2 22 7 1 24 8 2 34 2 39 1 24 2 6 2 1 6 5 7 27 2 11 10 7 5 6 9 10 11 36 36 14 13 5 3 2 2 4 3 28 27 18 15 32 11% 11% 28% 28% 28% 4% 4% 4% 4% 4% 9% 9% 28% 28% 5% 9 6 10 8 2 3 0 0 2 1 9 8 9 8 10 4.0 6.6 0.6 0.8 0.9 0.2 0.3 0.6 0.3 0.6 2.4 3.8 1.5 1.6 3.0 3.7 3.7 3.6 3.6 3.6 3.1 3.1 3.1 3.1 3.1 4.1 4.1 3.6 3.6 4.1 33% 20% 31% 28% 19% 65% 56% 56% 53% 53% 42% 26% 9% 9% 32% 28 24 8 7 7 1 1 1 2 1 19 17 20 20 21 Notes: (1) Calculated as percentage of online spending of total retail spending; assume to be consistent within each country; (2) indexed 110; (3) refers to competence and quality of logistics services (e.g., transport operators, customs brokers); (4) refers to percentage of extra time a driver will spend in traffic during rush hour vs. uncongested conditions; (5) average wage per worker, including overtime payments, premiums, bonuses and allowances Sources: Demographia (population/ density); Global Data (income); Euromonitor/eMarketer (online penetration); Numbeo (real estate cost index); Bain World Bank (logistics maturity); TomTom (congestion); Euromonitor (labor); Bain for example, Amazon India uses Future Groups retail stores for deliveries. “Define ecosystem destination” is still a crucial task on the to-do list of many executive teams in the region. Completing it will involve answering a series of questions. Should we build our own ecosystem, acquire new capabilities or partner with others? 6. Retool for digital Asia-Pacific retailers have been at the forefront of new technology adoption. Consequently, digital in- surgents are now sitting on vast stores of datarich with insights that can solidify and extend their competitive advantage. For instance, WeChats payment services handle more than 300,000 transac- tions per second, Alibabas Taobao and Tmall sites host more than 10 million retailers and its DingTalk collaboration platform has more than 200 million usersthe data just keeps flooding in. Tmall uses customer-centric data to understand assortment productivity and identify new trends and products for specific customer segments. Its also helping its retail partners optimize assortment at a local level using location-based data. Many retailers will need to acquire new skills in advanced analytics to exploit the full potential of their data. Executive teams should also hone capabilities in other key areas of technology: artificial intelli- gence, the Internet of Things, virtual reality and augmented reality, autonomous robotics and cyber- security. Tomorrows winners will ruthlessly prioritize the new use cases that can deliver the biggest benefits to customers (and their bottom line). This will require a reallocation of capital toward digital solutionsas Woolworths has done in Australia, with the announcement of significant investments in distribution center automation. At the same time, theyll reset their operating model: embracing agile ways of working and leading, cultivating links with external experts (such as incubators and venture capitalists) and incentivizing risk-taking and innovation. Creating retails future Even before Covid-19, it wasnt an easy time to be a retailer. Leaders had to balance a range of competing priorities, running the business at the same time as changing its very essence. All of a sudden, the time frames for change have shortened dramatically. However, Asia-Pacific retailers remain unusually well placed to cope with the disruption. Profit pools remain healthy, and the region boasts many companies that are already attuned to the industrys new digital futureand in some cases are creating that future themselvesBold ideas