In recent years, the TCG sector has undergone a major transformation, perhaps unprecedented. This is happening rather quickly. So there is little practical experience and it is not always possible to know what new influences are driving the changes. However, the trends and the results of the last two years give some indication of what lies ahead for the industry. We spoke to Jens von Wedel, Partner at Oliver Wyman, about how the accelerated pace of change in the wake of the pandemic could shape the future of retail.
According to most researchers, analysts and market players, the epidemic has only accelerated the pace of progress. Do you agree? Has there been no change in consumer behaviour that could be considered a completely new approach?
We have indeed seen a substantial acceleration of existing trends; this includes a significant shift into online purchasing. Many customers have become acquainted with online shopping in the first place. Or have dared to buy products online they previously wouldn’t have. The accelerated shift to online has probably had the single biggest impact. But also new themes have emerged from the crisis: the role of the “home” has changed, and customers are more willing to invest into high quality and design – partially reversing a trend of declining prices and willingness to pay we have seen pre-Covid. Also hygiene features play a much bigger role now in product selection than they have pre-Covid.
Which interpretation do you think is more correct: online sales as a service to traditional retailing or in-store shopping as a service to which online sales are added? Is there a difference between the two approaches?
We don’t think in either or. For many journeys and purchase occasions, online fulfilment is more efficient and will hence take most of the market in the long run. Being a retailer or a brand, to stay competitive, you will have to build a competitive online proposition. But online also has its weaknesses, especially its ability to sell premium products and innovations – as well in serving the increasingly important aspect of service / repairability. Omni-channel retail can make a big difference here but needs to focus on the aspects where the model has advantages.
Marketplace platforms are playing an increasingly important role in commerce and are expected to become even more important in the future. What challenges might this pose for retailers and brands?
I agree. The situation is very dynamic and in some markets the entire growth in the online space is driven by platform models. And you can literally feel this dynamic as a consumer. Shopee entering Germany, Trendyol in Poland, Allegro enabling selling across Europe. The list of challenges from this development is long, for both ends of the market. For brands this includes new levels of retail concentration with e.g. Amazon already accounting for 20%+ of sales for some global, multi-billion dollar brands – often operated in a cross-country approach which is new to many brands. It also poses challenges with a much lower ability to control and shape the consumer journey. However, we see the far bigger challenges for retailers. For certain categories and products, the platform model is simply a superior business model.
By now many global platforms expand internationally, including international giants like Amazon, Alibaba and JD as well as regional champions like Wildberries, Allegro and Shopee. Incumbent retailers are challenged on scale and capabilities, and will need to evolve their value proposition to remain competitive and relevant for customers.
We are hearing more and more about Metaverse. What role do you think it can play in commerce and how relevant is it to address this issue now?
We have seen several evolutions in commerce over the last decade. From offline to online, from direct selling to platform models and now an increasing adoption of social commerce. E.g. with brand building and selling through social platforms like TikTok. There is a common theme in these waves in that the early movers are winning. Many US and Chinese retailers benefit from very digitally affine customers in their home markets. This enables players from these markets to export their know-how into other markets. Now turning to your question on the metaverse: we strongly believe in the substantial commercial opportunity of the metaverse, both for digital as well as for physical goods.
And the situation is much different than it has been with the first hypes around Second Life 15 years ago. The consumers are much more connected nowadays, 20%+ of the consumers are “gamers” and already spending a significant amount of time in virtual worlds and not least, the companies eyeing to develop the metaverse are much bigger and stronger than the early movers in the 2000s. Any long-term oriented CEO would certainly start thinking about the opportunity today.
Many manufacturers also sell directly online. So the supplier is also a competitor to the retailer, how does this affect their partnership? How might this develop in the future?
Understandably, retailers react very emotional to brands selling direct. Whilst this is understandable it is worth taking a closer look at why brands are pursuing such strategies. A big reason in going direct to consumer is to better understand the consumer and in taking stronger control of the retail environment a product is being sold in. More often than not, brands are thus compensating an inability to get to the desired outcome collaboratively with the retailer. In fact, looking at the big successful D2C leaders in Sporting Goods and Consumer Electronics, those retailers who have partnered with the brands and bought in to these strategies are now benefiting from a more closely managed retail distribution and healthier margins.
„Understandably, retailers react very emotional to brands selling direct. ”
Brands are also increasing their „dealer-independent“ presence in the physical world, with showrooms, monobrand stores or pop-up shops. What makes this attractive to consumers? What place could these solutions have in the future?
The invest into a physical presence follows a very similar logic from a brand perspective. However, consumer traffic is much more costly to build, requiring very high levels of staff quality and invest into consumer activation and engagement – e.g. show cooking. Also, for many brands the assortments are not capable of feeding a profitable offline D2C business. All in all we believe D2C offline POS to increase in relevance, but in mature retail markets it remain limited in relevance from an overall market perspective.
The pandemic has accelerated the process of retail transformation. Will inflation across Europe and continuing difficulties in supply chains slow down the transformation?
The scarcity of product dampens the effect of the inflation, as price competition is much less fierce than in previous years. And by establishing healthier margin levels – amongst others due to fewer promotions, it is a paradox situation that some retailers are even increasing their cash profits. But looking ahead, with assumed continued pressure on consumer purchasing power driven by the high inflation and an increasing appetite to re-engage in out-of-home activities like restaurant visits and international travel, we do expect the market conditions to worsen.
EU competition rules are changing this year. Do you think this will bring about a significant change in the current relationship between online and offline commerce?
The first draft of the new VBER regulation has indicated that there will be some fundamental changes ahead – more than anticipated by many market participants. However, we don’t expect the relationship between online and offline retail to change per se. The conditions will particularly be worsened for such retailers that invest little to no funds into a brand and act very opportunistically. These “pure arbitrage” based models will have a much harder time in the years to come.