How e-Commerce is Adapting to the New Normal and Scaling Up

Image: Zara

How e-Commerce is Adapting to the New Normal and Scaling Up

The COVID-19 pandemic has had a significant impact on both global and local economies. As most industries grapple with the after-effects of the economic standstill, e-commerce and digital payment systems look towards new economies of scale in the pandemic-hit economy, as well ...

October 23, 2020 - By Rohit Dhingra

How e-Commerce is Adapting to the New Normal and Scaling Up

Image : Zara

Case Documentation

How e-Commerce is Adapting to the New Normal and Scaling Up

The COVID-19 pandemic has had a significant impact on both global and local economies. As most industries grapple with the after-effects of the economic standstill, e-commerce and digital payment systems look towards new economies of scale in the pandemic-hit economy, as well as in the post-pandemic economy. As one of the few sectors that has continued to operate throughout lockdowns in a largely uninterrupted capacity, e-commerce and digital payments are segments that have expanded and are in the process of efficiently scaling their operations into various new business segments, product categories, portfolios and regions.

Going into the pandemic, no shortage of consumers preferred brick-and-mortar stores, where they may see the actual product before making a purchase (and in many cases, may still feel that way, at least in theory). COVID-induced lockdowns and social-distancing measures, however, have necessitated an increase in consumers’ acceptance and broad adoption of e-commerce. As such, the present crisis has created an opportunity for e-commerce companies to tap into a wider customer base than ever before. Drastic changes in consumer behavior and product preferences, as well as the impact of the pandemic on internal and external factors affecting the e-commerce industry, present an array of opportunities for companies to scale operations and diversify, using advanced technology and delivery models. A few are laid out as follows … 

Diversification & Validation

The most promising opportunity for growth lies in the diversification of product lines. Traditional product categories need to be realigned based on the striking shift in preferences and consumer spending habits. For example, work-from-home and a reduction in social visits have had an adverse impact in the demand for most apparel, especially formal fashion items. Given the decline in household income for many individuals, the emphasis has shifted from preference-based to value-based products, and purchases of essentials, utilities and household convenience products have risen, while fashion – and luxury goods – purchases have fallen. 

A recent survey conducted by FTI Consulting for the apparel sector found that 42 percent of the 1,000 U.S. consumer respondents surveyed stated that they plan on only buying clothing they absolutely need and  approximately 31 percent said that price, more than brand names, will influence their purchases, prompting many brands to revisit and reimagine the products they are offerings and how they are offering them in order to best serve consumers. The threat of drastic falls in sales forced companies, particularly those whose operations depend on discretionary spending, brick-and-mortar sales or activities that have been brought to a halt by social distancing mandates, back to the drawing board to adapt and adapt quickly.

As companies attempt to diversify their products and merchant portfolio, they face an increased risk of fraud, including: fictitious, blacklisted or unauthorised merchants; collusion between employees and merchants to exploit cashbacks and promotional schemes; self-ordering by merchants to receive cash backs; employees providing higher visibility, product listing and discounts to their preferred merchants for kickbacks; and reverse logistics (customer returns, overstock, expired items or redistribution) manipulation for personal gain of employees and delivery partners.

Hyperlocal delivery & regional expansions

Many e-commerce companies are trying to build the “hyperlocal” model of delivery. The pandemic has reignited the focus of e-commerce and logistics companies on strategies to fulfil consumer demand through local stores rather than relying on inter-city deliveries. Another strategy would be to capture the underserved online ordering markets, such as tier-3 Indian cities, where consumers still prefer to assess products in brick and mortar stores, placing a high level of trust in local family-owned shops, rather than online platforms.

Companies need to address some of the following key challenges to make the “hyperlocal” model successful: building technological capability; educating local merchants to list products as well as training to efficiently use the portal; addressing consumer data privacy concerns; and identifying fake merchants or suspicious transaction patterns.

Omni-channel & offline to online (“O2O”)

In light of the widespread disruptions to their supply and distributions chains as a result of the global health pandemic and given expectations that there will be future disruptions, many e-commerce companies are attempting to transition to an offline-to-online (“O2O”) and omni-channel retail model to ensure business continuity. Several large retail outlets have either launched their own online platforms or have existing tie-ups with major e-commerce platforms in order to achieve this at scale. 

The O2O and omni-channel models present the ideal mix for brands, where the consumer trusts the retailer, and has the choice of picking up/ordering the product from the store and the convenience of returning/exchanging the product in case there are issues. For instance, one international cell phone manufacturer is bringing 20,000 of its Indian offline stores and brand ambassadors online through a click-to-mortar initiative that will allow the company to ensure business continuity and provide customers the convenience of ordering from their preferred stores from the comfort of their homes.

However, to achieve larger market penetration and success, companies should focus on providing effective warranty, replacement and return policies; proper integration of systems, data and policies between retailers and e-commerce platforms; strengthening logistics; and firming up data privacy controls. 

Digital transactions providing impetus

According to a recent study from Forrester Research, retailers reported in August that contactless transactions had grown by 69 percent increase from the beginning of the year. That same report revealed that the rise of contactless payments in U.S. retail has come came on slowly, particularly when compared to countries like India, where the government and the Reserve Bank have been the driving force behind the increase in digital payments in the recent years, but has, nonetheless, gained steam in the year or so before the pandemic and risen further since.  

The future of contactless payment growth depends on a number of factors, including enduring adoption by consumers and on “retailers’ ability to deploy appropriate payment infrastructure and encourage use,” per Retail Leader. Not only do retailers need to provide consumers with the ability to use contactless payments, they need to cognizant that the increase in digital payments has its own share of risks. Companies are increasingly facing largescale phishing attacks, denial-of-service, defacement, data streaming (bulk theft of data or groups hacking into specific system), data takeovers, malware, ransomware and many other types of cyber-attacks.

It is essential to mitigate against cyber risks as falling victim to cyber-attacks causes severe reputational damage, financial losses and depletion of customer base for affected organizations.

Managing supply chain disruptions

Finally, extended lockdowns have tested the fulfilment centers and warehouse capacities of most of the e-commerce companies and merchants, which have had to quickly adapt to new ways of deliveries that have also challenged their back-end technological systems and capabilities. The balance between order fulfilment and inventory management with changing seasonal demand, particularly in light of the pandemic, is extremely difficult and most businesses are still trying to understand the ideal supply-chain diversification.

Further, the pandemic has severely impacted order inventory management and fulfilment with many merchants either running out of inventory (thereby, leading to delayed deliveries and cancellations and, subsequently, unavoidable refunds), or being stuck with excess unsold inventory that must be offloaded, often as a loss to the retailers. 

Further, the pandemic has severely impacted order fulfilment with many merchants running out of inventory, leading to delayed deliveries and cancellations and, subsequently, unavoidable refunds. Fraud schemes that have surfaced in this area include: delayed deliveries or lost consignments; unauthorised and fraudulent refunds processed by call centres or requested by customers; and round-tripping by merchants.

Although, most of the companies have reduced and, in many cases, eliminated cashbacks and discounts to minimise losses, demand for essential goods has increased, leading to a shift towards the need for maintaining demand-based inventory levels and reducing excess stock buffers.

What can e-commerce companies do?

New opportunities inevitably pose new risks. However, there are several ways through which companies can navigate these risks and drive more efficiency in their operations, while adding value to their various stakeholders. A few of such measures that companies can take include enhancing the effectiveness of merchant and seller onboarding due diligence processes; enhancing usage of artificial intelligence and machine learning tools to monitor customer and merchant behavior and botnet activities; strengthening velocity checks with increased monitoring of transaction risks; and building checks to authenticate digital/synthetic identities.

Moreover, companies can benefit from implementing warehouse management systems and supply chain automation tools with inbuilt fraud detection analytics; efficiently managing fulfilment centers and expanding their merchant databases; integrating merchants’ inventory management system and e-commerce platforms to ensure order allocation and reduced cancellations; and building smart logistics and delivery platforms with technology driven fulfilment centers.

With the advent of the “new normal,” there has been – and will continue to be – significant shifts in consumer behavior. Amidst the gloom, there are a few silver linings that will enable the e-commerce industry to emerge stronger from the crisis. The key to success lies in how well companies prepare themselves to respond to the situation with processes and advancement in technology.

Rohit Dhingra is a Managing Director in the Risk Advisory and Investigation practice in the Risk Advisory and Investigations segment at FTI Consulting. Aleya Ray is an associate in the Risk Advisory and Investigation practice at FTI Consulting. (Minor edits courtesy of TFL)

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