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Influencer Marketing Redefining the Fashion and Beauty Industry

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Social media users are increasingly reliant on and influenced by what they see online, particularly, when it comes to marketing done by fashion and beauty brands. Social media provides immense marketing opportunities to the fashion and beauty industry by allowing them to closely interact with customers and influence their buying decisions like never before. To tap such opportunities, about 78% of global fashion brands incorporated social influencers in their marketing strategy in 2017, according to a survey conducted by Launchmetrics. Influencers are slowly becoming an integral part of marketing campaigns for fashion and beauty brands – for high-end brands such as Becca Cosmetics and Yves Saint Laurent, as well as affordable brands such as Maybelline, for whom influencers have been pivotal in driving sales.

Why beauty and fashion brands are adopting influencer marketing?

In the past, to launch new collections or promote products, fashion/beauty brands invested heavily in celebrities and television models gracing magazine covers, billboard and television advertisements, among others. These efforts were effective but as technology progresses, fresh marketing tactics are born. While most of the traditional forms of advertising are still being used, brands have started to realize how laborious it is to employ traditional methods in promoting products, hence, majority of brands are going digital and starting to work with influencers.

How influential is influencer marketing?

Undoubtedly, influencer marketing is one of the fastest growing digital marketing tools, providing unparalleled access to real-time word-of-mouth targeting. For marketers, today’s social media influencers are yesterday’s celebrities and socialites, only with a more persuasive voice and greater power to reach audiences.

Beauty and fashion industry has understood the power of influencer marketing quite well. Cosmetics brands such as Smashbox have completely abandoned the use of traditional print media for advertising while luxury cosmetics companies such as Estee Lauder have significantly reduced spending on traditional media to focus on digital.

Fashion and cosmetics brands are using various types of influencer campaigns to promote products, foster brand awareness, and boost sales. For example, Maybelline (an American cosmetics company) in China used the influence of beauty bloggers and 50 celebrity influencers to do a 20-minute livestream video for a newly launched lipstick in 2016, which led to sales of 10,000 lipsticks in two hours.

On the other hand, Olay (an American skincare company) introduced a skincare campaign, Olay 28-day Challenge, which urged influencers to document their four-week experience of using company’s products while updating their followers simultaneously across various social media platforms. Influencers also gave away free samples and offered discounts to followers to encourage them to buy the products to join the skincare challenge. In 2018, the campaign was able to increase engagement rate by 20% and there was a significant increase in Google searches for the brand name.

There is no end to innovative social media campaigns that brands are launching. For example, in 2018, H&M (A Swedish clothing retail company) engaged in conversation with consumers on Instagram to come up with new designs for its brand Nyden, which is targeted at millennials. H&M worked with nine influencers, who used Instagram stories’ polling feature to understand followers’ preferences for certain designs, such as using zippers versus buttons, among others. Over a period of two weeks, the polls attracted more than 425,000 viewers and generated 35,000 votes.

For brands such as Fashion Nova (an American fast fashion retail company), with 14 million Instagram followers and ranked as the most Googled fashion brand of 2018, marketing through Instagram has been pivotal in its rapid ascent in the fashion industry. Fashion Nova is known for betting big on Instagram and use of celebrity influencers – as of December 2018, the company had worked with 3,000 influencers on Instagram. Using celebrity influencers, it claims to have generated sales up to US$ 50,000 per post and selling out a whole collection of clothing line within 82 minutes. With about 20 to 30 posts per day on Instagram, Fashion Nova knows how to keep its audience engaged and generate brand awareness.

What challenges are obstructing growth?

Influencer fatigue

Influencer marketing is not as impeccable as it sounds to be. With more and more businesses adopting influencer marketing, threat of influencer fatigue increases, which could result in disengaged audiences and reduced impact. According to a study conducted by Bazaarvoice in 2018, about 47% respondents claimed to be fatigued with repetitive influencer posts on Instagram.

Promotional content is already beginning to clutter consumer’s news feeds. With beauty and fashion influencers recommending every other product that enters the market, audiences will eventually lose trust in them, feel disengaged and overwhelmed. Consumers, after some time, are bound to get tired of having their buying behavior manipulated. Just like people started using ad-blockers when websites became loaded with advertisements, there’s a probability that they may also turn away from beauty/fashion influencers.

Absence of standard metrics/parameters to determine success of campaigns

There is uncertainty regarding what constitutes a successful influencer marketing campaign and how to calculate ROI on marketing spend. Beauty and fashion companies are unable to accurately calculate profitability of influencer campaigns. According to a study published by Celebrity Intelligence in 2018, 46% of respondents (from the beauty industry) faced challenge in evaluating ROI of an influencer collaboration.

Driving purchases is not always the key objective of influencer marketing, rather it focuses on softer goals like growing brand awareness or boosting engagement, which makes ROI far more complex to determine.

Influencer marketing does not guarantee results in terms of sales, brand reach, or number of clicks. No standard metrics have been set for the industry to measure success, instead brands end up speculating whether the campaign was successful or not. Some beauty and fashion companies monitor the comments or number of likes on the posts, while others determine views on videos or track campaign hashtags, all of which are not very effective methodologies.

Fraudulent practices

Much like other industries, beauty and fashion market has also fallen prey to influencer frauds. According a report published Points North Group in 2018, cosmetics/skincare companies suffered losses due to fraudulent engagement – 46% of Raw Sugar Living’s influencer marketing budget was squandered on fake followers, Clarins lost 45% of its budget on influencer frauds, while L’occitane blew 24% of its budget, among various others. Such deceitful practices have taken a toll on marketers, who invest in influencers to drive brand awareness and sales, but their campaigns fail to reach the actual target audience.

Another inauthentic social media activity plaguing the beauty and fashion industry is staging fake promotional posts by aspiring influencers. Companies want to see promotional abilities and references of past campaigns of influencers before hiring them to do paid sponsored posts. Hence, aspiring influencers, particularly from the beauty and fashion industry, have started to publish posts with brand hashtags and captioning it in a manner such that it seems to be a promotional or sponsored content. While this leads to free publicity for brands but most of them complain that this also results in inferior quality sponsored content posted without approval, which could harm brand’s reputation.

Influencer Marketing Redefining the Fashion and Beauty Industry by EOS Intelligence

EOS Perspective

If there is any market that qualifies to be an early adopter of influencer marketing, it is the beauty and fashion industry. It is an extremely dynamic industry and to stand out from competitors, brands need to constantly evolve, be creative, and promote products extensively – all of which is easily achieved through influencer marketing.

Equipped with social media savviness, influencers have the power to eloquently persuade consumers to make purchases. There is no limit to the creativity that they bring to the table – fashion/beauty influencers design compelling marketing campaigns for the brands by reviewing products, conducting polls and contests, offering huge giveaways, sharing their experiences of using products through videos or photographs, attending events organized by brands and promoting such events, among various other tactics.

Is influencer marketing here to stay?

There is no doubt that influencer marketing is becoming the mainstay of beauty and fashion industry, far from a passing fad. The personal nature of influencer campaigns is one of the reasons why it is proving to be effective for the beauty and fashion industry. According to a survey conducted by Celebrity Intelligence in 2018, 98% of beauty companies believed that influencer marketing is effective for the industry while 68% thought beauty segment has a natural affinity with influencers. Even though difficult to calculate, surveys have determined that influencer campaigns could also provide high ROIs – for every US$1 spent on influencer marketing, brands received average ROI of US$10.7 in 2017. Fashion and beauty brands have gauged the power of social media and know that with the right influencer endorsing to the right community/audience, it can translate into clicks, conversions, and actual sales.


Find out more about drivers and challenges in influencer marketing adoption here


For fashion and beauty brands, influencer marketing has become a multi-million-dollar investment, with considerable portions of their budgets dedicated to influencers. For example, Estee Lauder (a US-based cosmetics company), in 2019, revealed that 75% of its marketing budget will be spent on digital marketing, particularly on influencers, while Shiseido (Japanese multinational personal care company) increased its influencer marketing budget by 50% in 2019. On the other hand, in February 2019, Benefit Cosmetics (a US-based cosmetics company) formed an in-house dedicated influencer agency in the UK to streamline influencer marketing operations and manage influencer relationships. In the future, it plans to expand the in-house influencer agency to other locations as well.

Undoubtedly, influencer marketing has dramatically changed the fashion and beauty industry, by allowing real people to narrate a brand story, demonstrate product, and provide honest and credible product reviews. In order to make it a sustainable marketing strategy, measures are being taken to overcome some of the existing challenges. In pursuit to engage with authentic influencers, beauty brands are adopting more sophisticated, data-led approach to selection process. According to Celebrity Intelligence survey, in 2018, about 67% of beauty brands identified social media analytics (including audience insights and engagement metrics) useful to choose authentic and suitable content creators.

Another ongoing challenge is to accurately determine success of campaigns, which some companies (including lifestyle and cosmetics brands such as Daniel Wellington, L’Oréal, and Olay) are tackling by providing influencers with a unique URL or a discount code, which followers can use and brands can easily track conversions. If the campaign does not entail discounts, various metrics can be used to evaluate ROI such as traffic driven, social reach, social media impressions, engagement rate, cost per impression, and cost per engagement, among others.

Nonetheless, opportunities that influencer marketing provides for the beauty and fashion industry outweigh all downsides. While brands have achieved success with sponsored posts and brand hashtags on social media, there is still a lot more for them to explore and innovate through influencer marketing.

by EOS Intelligence EOS Intelligence No Comments

Influencer Marketing: A Powerful Marketing Tool on the Rise

Influencer marketing, until fairly recently a new marketing tool, is now on the frontier of becoming a mainstream marketing channel. The real, relatable, and reaction-stimulating content created by influencers, distinguishes this form of marketing from traditional marketing channels. Influencer marketing offers effective means for brands to communicate and engage with customers on social media, a fact that is driving its popularity. Laden with potential to drive sales and grow brand awareness, the influencer marketing market is likely to reach US$22.3 billion by 2024. However, certain challenges do exist in the market, and if not addressed, they can potentially hinder market growth.

Influencer marketing started shaping up around 2005 with mere video blogs on YouTube, but quickly grew in prominence as marketers took notice of its potential. Growing at a CAGR of 28% between 2019 and 2024, the industry is becoming a marketing mainstay for brands across various markets. This is driven by the fact that influencers generate a sense of proximity with their audiences, which helps in molding their shopping behavior under discrete suggestions and recommendations.

What is driving adoption of influencer marketing?

Consumers, especially millennials, are embracing a different approach to making purchasing decisions. Consumers are relying on Instagram models, Twitter personalities, and YouTube influencers to seek recommendations or to understand which brand or product is trending in the market. This has resulted in brands endorsing products through various social media channels using influencers.

Moreover, it is a proven fact that word-of-mouth marketing leads to twice as high sales as paid advertising, and influencer marketing is nothing but a form of word-of-mouth marketing. Studies also suggest that shoppers purchasing product through word-of-mouth have a 37% higher retention rate, another reason why brands want to reach their consumers through influencer marketing.

Additionally, the way that we consume media has changed. Social media boom is slowly driving consumers away from traditional forms of advertising and marketing. More than ever, social channels are becoming means to start a conversation with consumers and build direct relationships with them. With traditional advertising being sidelined by consumers (about 65% of people skip ads posted during or before online videos), influencer marketing has become an integral channel to connect with them.

How have influencers assisted companies to increase sales and grow brand awareness?

Engaging with influencers is proving to be an effective way of getting a sale, hence, brands are investing considerable budgets in influencer marketing. Brands are partnering with influencers to launch various types of innovative campaigns, with primary focus on increasing brand awareness (84%), reaching new audience (71%), and generating sales (64%), according to a survey conducted by Mediakix in 2019.

For example, YouFoodz, an Australian food chain, used Instagram to promote the launch of its 2017 winter menu. It collaborated with 81 influencers, who posted 162 Instagram stories and 176 pieces of content, which reached 1.5 million Instagram users. The campaign was a huge success, generating 70,000 direct engagements and over 500,000 impressions (number of times particular content is displayed, regardless of if it was clicked or not).

Relying on influencer marketing, Bigelow Tea (an America tea manufacturer) was able to showcase healthy aspects of drinking tea and promote its product to a large audience. Influencers incorporated Bigelow tea into their content in various ways. Culinary influencers developed different recipes to use tea in innovative ways, while craft bloggers turned packaging into DIY arts, for example, creating flower pots from the tea packaging. The campaign led to more than 44 million impressions and increased sales by 18.5%.

Further, M&M (a product of US-based confectionary and food company, Mar Incorporated) launched an innovative campaign in 2016 to let audience decide its new peanut flavor (a choice between Honey Nut, Chili Nut, and Coffee Nut) by running a mini-election. It partnered with a television personality and a team of influencers to encourage people to try the flavors and cast their votes. Finally, coffee nut flavor was selected, and the campaign generated 269 million impressions, 216 influencer posts, 14.4 million social engagements, and more than 1 million votes.

Is influencer marketing cost effective?

Influencer marketing has proven to be quite budget friendly, allowing large brands and small start-ups to launch compelling marketing campaigns. Traditional forms of advertising campaigns, through television commercials, magazines and newspaper ads, etc., require substantial investment.

On the other hand, influencer marketing is cost effective and simpler to execute. Companies with limited budget can engage with micro (comprising 1,000-5,000 followers) or nano (comprising less than 1,000 followers) influencers and still achieve remarkable results without spending a fortune.

In fact, according to a study conducted by Takumi, micro and nano influencers can generate high engagement rates – influencer with up to 1,000 followers could generate about 9.7% engagement rate, while influencers with 1,000-4,000 followers could provide 4.5% engagement rate. Micro and nano influencers tend to build strong trust and authenticity, and are relatable to their audience, which enhances their ability to engage an audience. According to a study conducted by Experticity, 82% of consumers have higher probability of listening to suggestions provided by micro influencers than those provided by influencers with large number of followers.

Moreover, surveys have determined that influencer marketing could yield a decent average ROI of US$ 5.20 for every dollar spent, which makes it an appealing option for marketers.

What challenges are hindering growth?

Lack of stringent regulations leading to poor compliance with guidelines

Current regulations and guidelines pertaining to influencer endorsements are not stringent or comprehensive, leading to malpractices. In the USA, the FTC (Federal Trade Commission) requires influencers to provide disclosure in case of sponsored content, however, no fines are applied for violations. As a result, most influencers do not adhere to the endorsement regulations, either due to lack of knowledge or in fear of losing followers. In 2018, out of 800 Instagram accounts from UK, USA, and Canada, only 25% fully complied with local regulations pertaining to sponsored content, according to a study released by Inkifi.

Such misleading conduct on influencer’s part could raise questions on their authenticity and lead to mistrust among their followers, who demand transparency. Moreover, large corporations such as Unilever (a consumer goods company) have strictly refused to work with influencers who indulge in fraudulent activities. Influencers are at risk of losing trust of their followers as well as of companies if they continue to indulge in misleading activities.

Fraudulent engagement

Typically, brands use the number of followers on an influencer’s account to estimate campaign results in terms of ROI, engagement rate, brand awareness, earned media value, among others. To seem more appropriate or popular, some influencers purchase their followers using bots – software designed to automatically like, comment, and share posts, increase views on videos, and inflate number of followers on accounts. Influencers have also started to fake their engagements by joining a community of real users to trade likes and comments. Despite these followers being real people, they are not likely to be interested in influencer’s content. Consequently, brands fail to meet the desired campaign result or reach the target audience.

In 2019, fraudulent activities were estimated to cost brands US$1.3 billion, about 23% of allocated budget for influencer marketing. Fraudulent practices are inhibiting market growth, as brands are increasingly becoming cautious of investing in influencer marketing – as of January 2019, about 53% of brands stated that fraudulent impressions were obstacles to increasing digital advertisement budgets.

Influencer Marketing A Powerful Marketing Tool on the Rise by EOS Intelligence

EOS Perspective

Influencers are no longer an extra asset to marketing campaigns instead they have become a critical element of storytelling and building direct relationship between brands and customers. Influencers have positioned themselves as authentic gurus rather than simple advertisers, with 92% of consumers making purchasing decision based on influencers’ posts in 2018. Their relentless savviness to promote brands is what keeps audiences engaged and brands coming back for more.

Nonetheless, challenges do persist but the industry is continuously evolving and coming up with solutions. Measures are being taken against inauthentic engagements. Platforms such as Instagram have started to strictly regulate fraudulent activity and began to threaten offenders with fraud penalties, account suspension, and brand reputation damage. Companies have also become mindful and vigilant while engaging with influencers and started to thoroughly vet them to check for fake followers or use of bot to increase followers. On the legal side, a New York Attorney General has stated that selling fake followers on social media will be considered as an illegal activity in the state.

Further, in November 2019, FTC launched guidelines for sponsored content under ‘Disclosures 101 for Social Media Influencers’ that encompasses when and how influencers should disclose their engagement with brands, regardless of whether or not it includes payment. FTC has not made any major changes in the guidelines but the new guide is more user-friendly with abridged language, and photos and videos illustrating the correct way to endorse products on social media.


Find out how influencer marketing is reshaping fashion and beauty industry here


According to the guidelines, when partnering with brands, disclosure is mandatory when there’s a financial, employment, personal, or family relationship with a brand. Disclosure language should be simple and clear, and the disclosure should be hard to miss (for example, disclosures on Instagram are required to be placed at the beginning of the post’s description and before the ‘more’ button). FTC’s aim is to foster transparency in sponsored content by placing more liability on brands and influencers to explicitly reveal their relationship while recommending products.

Influencer marketing has well-established itself in the advertising industry and is moving towards becoming a mainstream marketing channel, and such measures taken by regulatory authorities, social media platforms such as Instagram, as well as the brands will further strengthen its position as a marketing channel. In future, not only will influencer marketing continue to grow in popularity, but is also likely to become a more purposeful and effective way to communicate and engage with audiences. Allured by endless opportunities, brands will continue to collaborate with influencers and the industry is poised to grow.

by EOS Intelligence EOS Intelligence No Comments

Social Commerce Reshaping How Brands Sell and Customers Buy

Today, social media is at the core of many brands’ marketing strategies. The growing value that customers (especially the younger demographic) place on social media content and the increasing use of social media to gain information about a product or brand have made social media an essential part of a customer’s purchase decision and experience. However, till recently, the use of social media was limited to being an advertising tool or referral channel for retailers, who used these channels to drive traffic to their e-commerce sites. This is expected to change in the future. With social media giants, such as Facebook, Instagram, and Pinterest offering direct sales options, it is quite likely that these apps will move from being mere marketing tools to becoming the final destination for sales, creating a new retail category – social commerce.

It is no secret that visual content social media apps, such as Instagram and Pinterest, offer a more engaging shopping experience for customers, who now look at these apps as an integral part of their purchase experience. Visual content on social media is known to significantly improve discoverability for brands, deepen brand trust and value, and increase sales conversion.

Retailers, both large and small, have been using social media extensively as a part of their marketing campaigns and are investing huge dollars in the platforms. Retailers are increasingly offering quick access to their e-commerce websites via social media apps, through which they aim to drive traffic to their sites and in turn convert it into sales.

Visual content on social media is known to significantly improve discoverability for brands, deepen brand trust and value, and increase sales conversion. Retailers, both large and small, have been using social media extensively as a part of their marketing campaigns and are investing huge dollars in the platforms.

This has paid off well for retailers, with reports stating that in 2017, the top 500 retailers globally earned about US$6.5 billion through sales that were a direct result of social media presence/marketing. This has increased by about 24% when compared with sales resulting from social media for the same set of retailers in 2016. This clearly demonstrates social media’s increasing influence in a shopper’s purchasing decision.

While it has become critical for retailers to have presence on social media, it is expected that social media will play an even bigger role in the consumer shopping experience in the future. Several social media platforms have been experimenting with direct selling options, wherein users do not have to leave the social media platform to make a purchase. While platforms such as Facebook and Pinterest have been offering direct selling options for a few years now, Instagram has recently joined the bandwagon.

As per a study by Bazaarvoice in 2019, the number of users who wish to discover and purchase directly through social media platforms has risen by 38% in 2018 over the previous year. Due to this, several social media platforms are forging their way into the e-commerce space, creating a new category, known as social commerce.

Facebook

Facebook was one of the first social media pages to move to direct selling, having introduced in December 2015. Facebook has a huge active user base (about 1.6 billion daily users) who visit the platform to engage with friends as well as brands.

The main premise behind introducing direct selling by Facebook was to streamline the purchase journey by reducing the number of clicks/page redirects a user needs to do to purchase a product. It helps facilitate impulse buys, which sometimes are abandoned in cases where multiple page redirects are required. Moreover, it provides an overall integrated shopping experience for users, who can rate, review, and comment on the products that they have purchased. This in turn increases overall engagement for the retailer, which in response may facilitate better visibility and credibility for them.

The main premise behind introducing direct selling by Facebook was to streamline the purchase journey by reducing the number of clicks/page redirects a user needs to do to purchase a product. It helps facilitate impulse buys, which sometimes are abandoned in cases where multiple page redirects are required.

Facebook store (its direct selling feature) is free to set up for retailers, however, most retailers setup their Facebook store with e-commerce website builders such as Shopify, Ecwid, and BigCommerce for ease of checkout and payment options.

While Facebook has been undertaking direct selling for a couple of years now, the response has been slightly underwhelming. This is due to several shortcomings. Firstly, the ticket size of products sold on Facebook is on the lower end, primarily due to encompassing mostly impulse or low consideration products. The average order value of referrals by Facebook is US$55, suggesting that the value of products ordered directly through Facebook would not be much higher than that. Moreover, the interface for a Facebook store is standard for all retailers, with no room for customization at their end. This also limits their opportunity to upsell/cross-sell other products. Lastly, the rights for ads shown on a retailer’s Facebook store remains with Facebook. Thus it is very likely that a competitor is advertising its products on the retailer’s page.

Thus, while Facebook store may be ideal for small and medium businesses with limited presence and scale, it may not be used by large retailers who sell high-value products and wish to provide an engaging and enriching shopping experience to their customers.

To further strengthen its hold on the social commerce aspect, Facebook launched Facebook Marketplace in 2018, which provides a destination for users to discover, buy, and sell items. However, the Marketplace differs from the Facebook Store and is more similar to eBay and Craigslist, wherein users can list products and conduct transactions through the platform. While it started as a peer to peer shopping marketplace, it has expanded to include merchant selling. As of October 2018, about 800 million people globally used Marketplace monthly to browse, buy, and sell items. This presents a unique opportunity to retailers who can drive sales of products at a platform where customers are already shopping.

While Facebook may not be the one-point solution for retail sales, it is definitely not to be ignored, especially for small to medium businesses. As per Ecwid, one of the largest e-commerce platforms, merchants who sell through this platform drive 15% of their sales from Facebook (as of 2017). Moreover, with people becoming more open to shopping through social media apps (as per a 2016 survey by BigCommerce, one of the largest e-commerce platforms in the USA, about 30% consumers are willing to make purchases directly from social media pages) and an increase in mobile shoppers, direct selling through Facebook presents a great number of benefits to retailers.

However, in 2018, Facebook announced a big change to its News Feed algorithm, which will now prioritize content shared by one’s friends and family instead of content shared by businesses and media outlets. This may further impact direct sales on Facebook, since going forward, business-related posts will feature less on the News Feed.

Social Commerce Reshaping How Brands Sell and Customers Buy

Pinterest

In June 2015, Pinterest also entered the social commerce space by introducing ‘Buyable Pins’, which are Pins that allow customers to buy products without leaving Pinterest. Since Pinterest is widely used by close to 250 million users, who visit the platform to discover new products, designs, and ideas, an option to buy pinned products seems like a natural extension for the social media player.

Buyable Pins help retailers streamline the e-commerce experience and improve conversion rates. As per a research by Shopify (another leading e-commerce platform) in 2014, Pins with prices get 36% more engagement compared with those without. Moreover, according to a 2016 survey by BigCommerce along with research firm, Kelton Global, 26% of the GenXers and Millennials surveyed claimed that they are more likely to purchase a product directly from Pinterest if given an option.

While Pinterest does not take any commission from retailers for sales through their platform, it makes money through advertisements as retailers promote their ‘Buyable Pins’ to users. Moreover, Pinterest lets the retailers handle the order processing, which includes processing payments, shipping, and customer service. This further helps retailers obtain and retain the customer’s information, which can be used in the future for sending follow-up mails, sharing promotions, and making future sales to the customer (unlike on Amazon and eBay).

‘Buyable Pins’ are currently only available in the USA and to few selected merchants. They are also available to merchants who use a listed range of e-commerce platforms, which include (but are not limited to) Shopify, BigCommerce, and Salesforce Commerce Cloud. However, the platform has been expanding, and over time will include a greater number of merchants.

Post the introduction of ‘Buyable Pins’, Pinterest also introduced a shopping cart option which is integrated across the mobile and desktop platforms, and which helps users to purchase multiple ‘Buyable Pins’ at a time.

Several retailers, especially small and medium size enterprises, have achieved significant success with ‘Buyable Pins’. FlyAway BlueJay, an online retailer selling artisanal products such as beauty products and small jewelry, attained tremendous success by using ‘Buyable Pins’ during the holiday season in 2015. All of their ‘Buyable Pins’ sales came from new customers, with ‘Buyable Pins’ driving 20% of their overall sales in the last quarter of 2015. In the beginning of 2016, Pinterest drove about 28% of their overall website traffic. Thus, it helped the company reach new customers and reduce their customer acquisition rate. Another small-scale retailer, Modern Citizen (a San-Francisco based women’s fashion and home goods retailer), introduced Buyable Pins shortly after they were launched by Pinterest and witnessed a 73% increase in their sales from Pinterest by using ‘Buyable Pins’.

Direct selling on Pinterest appears to be a must consideration for small to medium businesses that are selling unique and new products. With women making up 85% of Pinterest’s user base, brands selling to female audiences are expected to achieve higher success rate when compared with male-centric products sellers.

Instagram

Owing to its visual and interactive content, Instagram is one of the most widely used social media apps for discovering new products and inspiring purchase decisions. As per statistics shared by Instagram in June 2018, it had 500 million daily users. Moreover, as per an Instagram user survey (November 2015), 60% of its users claim that they leverage Instagram as a product discovery platform and 75% of these users have taken an action based on the products they discovered via Instagram (such as visit the website, purchase the products, or tell a friend). This puts the platform in a strong position to leverage its role (in the purchase process) and further extend brands’ offerings to include direct shopping from Instagram’s app.

While Instagram had not entered the direct selling market up till very recently, in 2017, it launched ‘shoppable posts’ (in a testing phase), wherein brands tagged their products on their organic posts. When a user clicked on a tagged product, they could see the pricing and a streamlined path to purchase it.

‘Shoppable posts’ received significant success on Instagram and the company launched them across the platform in 2018. In addition, it also launched ‘shoppable stories’ (stories offering the same tagging features as shoppable posts) and ‘shoppable collection’ (which allowed users to bookmark ‘shoppable posts’ to in turn create a shopping folder for the user).

Several companies that were part of the testing phase of ‘shoppable posts’ achieved significant increase in sales and Instagram-driven traffic to their websites. During the beta testing phase, participating brand, Natori (a US-based upscale woman’s fashion brand) posted 61 ‘shoppable posts’ and achieved a 1,416% week-over-week increase in traffic from Instagram and a 100% week-over-week increase in revenue from Instagram. After the testing phase, BigCommerce merchants using shopping features on Instagram witnessed a 50% increase in their Instagram referral traffic to their website.

In March 2019, Instagram launched a testing phase for a checkout option on the platform to tap on the potential of direct selling. Under this feature, Instagram allows users to buy directly (without leaving the app). Instagram aims to monetize this by charging a small fee from the retailers who look to offer this service to their Instagram followers/customers. Instagram will process the payment and store payment information for future purchases, enabling a more streamlined and frictionless purchasing experience for the user.

Instagram will share a small fee from the retailers looking to sell directly on Instagram and in turn offer an option to the user to purchase and checkout through Instagram without leaving the app. Instagram will process the payment for the user and store payment information for all future purchases, enabling a more streamlined and frictionless purchasing experience for the user.

This is likely to facilitate impulse buys and convert abandoned shopping carts into actual sales, since customers will not need to fill in their details again and again (as is case of shopping directly at different retailers with shoppable posts and signing in/logging in separately for each retailer/purchase).

This is expected to provide the perfect blend of social media experience and frictionless e-commerce experience (such as Amazon). However, unlike Pinterest, where social media platform is only the facilitator and the transaction in terms of payment and service is completed by the retailer, Instagram will be handling the payments itself and only sharing the basic details necessary to fulfill the order with the retailer (i.e., contact information and shipping address). This is expected to be a slight downside of selling on Instagram vis-à-vis on one’s own website as the retailer will receive less data and may not be able to build a relation with the customer.

Instagram is currently running a testing phase of this feature with a few brands across the USA, including Adidas, Anastasia Beverly Hills, Balmain, Burberry, ColourPop, Dior, Huda Beauty, H&M, KKW Beauty, Kylie Cosmetics, MAC Cosmetics, Michael Kors, NARS, Nike, NYX Cosmetics, Oscar de la Renta, Outdoor Voices, Ouai Hair, Prada, Revolve, Uniqlo, Warby Parker, and Zara. Payments will be processed through PayPal and customers can pay through PayPal, Visa, MasterCard, American Express, and Discover. The retail merchants can also integrate their e-commerce tools and partners, such as Shopify and BigCommerce, with the checkout feature.

While it is currently in its testing phase, the company is bullish on the success of this new feature. Although checkout option is currently only available for organic posts, Instagram will look to roll it out for ad-based posts as well in the future. It is expected that Instagram is likely to make US$10 billion in shopping revenues by 2021.

Instagram has been one of the most successful social media platforms with regards to consumer purchase decisions and unlike other social media apps that are apt for small to medium businesses, it also has a huge market for high-end and upscale products.

Challenges ahead

While social commerce seems to have a major role to play in the retail landscape in the future, it still has a long way to go. Social media pages have already showcased their worth as product discovery platforms, but exhibiting their potential of converting discovery into sales is a different ball game altogether and may also require a different strategy. Users will need to be organically cajoled to complete sales on these platforms and social media platforms must constantly work towards improving their buy-button experience, otherwise success is not guaranteed for them.

Twitter introduced a direct selling option in 2014 but retracted it by 2017 due to poor reception. Facebook’s initiative has also been met with moderate success with regards to direct selling, which lead the platform to change the direct selling features and strategies over the years to engage both retailers and customers.

Moreover, retailers who focus on selling on Instagram and other social media apps run the risk of alienating followers/users with constant promotions of their retail and shoppable posts, instead of their current subtle engagement posts that are working and preferred by users.

EOS Perspective

Social commerce is often being pegged as the future of online sales. While this may be true, there is a long road ahead for this to happen. Currently, the social media giants are applying different strategies to enter the space of direct selling, however, for most of them the focus is not on revenues from commerce but from ads. Therefore, till the time direct sales do not become a key revenue stream for social media apps, their focus on the apps will also remain limited.

That being said, the emergence of social commerce cannot be ignored by retailers, both large and small. Customers have taken to social media apps and use them extensively to learn about new products. Retailers are in a unique position to leverage this space and work towards reaching a new customer base, converting impulse sales that are otherwise being missed.

However, the social commerce experience needs a lot of shaping. Today, customers greatly rely on user-created content on social media (which includes content by influencers as well as other users’ reviews and product ratings) for their purchase decisions. Social media features must include direct selling not just from a retail’s social media page but also from influencers’ and bloggers’ pages. Till the time direct selling on social media apps is not a fully integrated solution, it will not reap results for users, retailers, nor for the social media platforms.

In the end, it is safe to say that social commerce is currently in a very nascent stage of development but nonetheless, it is here to stay. With the consumer’s attention span constantly reducing and people spending great amount of time on social media, social commerce undoubtedly offers great potential.

by EOS Intelligence EOS Intelligence No Comments

Luxury Brands Become Collateral Damage of Hong Kong-China Conflict

Talk to any top executive at Gucci, Prada, Tiffany (or any luxury brand for that matter) and they will tell you the importance of Hong Kong as a market in their business. For years, Hong Kong has ranked among the top five luxury hubs and accounted for about 5-10% of the estimated US$285 billion luxury goods market. However, the recent pro-democratic protests in Hong Kong against China have left luxury brands grappling, with many undergoing store closures. With the situation seeming to worsen by the minute, luxury brands must act fast and with prudence to limit their losses, formulate strategies, and identify other regions that may help them offset loss of revenues from Hong Kong.

Hong Kong has been one of the top destinations for luxury brands with several leading brands operating multiple stores in this small area encompassing 427 square miles and housing a population of 7.5 million. Hong Kong achieved this cult status due to a large number of visitors from mainland China (as well as other Asian countries) who travel to Hong Kong to shop. This is due to Hong Kong’s tax-free policy and an assurance that the products purchased are genuine (unlike in China where stores are distrusted).

Most of the leading luxury retailers derive a significant portion of their sales from Hong Kong. Richemont Group (which owns brands such as Cartier, Chloe, Dunhill, Jaeger-LeCoultre, Montblanc, Panerai, Piaget, and Roger Dubuis, among many other) derives about 11% of its global sales from Hong Kong, while Burberry derives about 8-9% of its global sales from the territory. Brands such as LVMH and Prada attain about 6% of their global sales from Hong Kong. Despite having one of the highest real estate costs, brands have always been bullish about Hong Kong, opening multiple stores and stocking their best and most recent collections.

Recent protests impact luxury retail sales

However, since mid-2019, Hong Kong’s retail market has taken a big hit. What started as a protest over an extradition law has translated into a full-fledged pro-democracy movement challenging China’s grip over Hong Kong and has brought the latter to a standstill.

Along with a large fall in visitors from China, several other countries have issued travel warnings against Hong Kong. Visitor numbers declined by 39% in August 2019 (compared with August 2018), with visitors from China falling more than 42% during the same period. In addition to fewer tourists, the local population is also avoiding malls and other public places owing to the ongoing protects. In fact, about 30 shopping malls shut down across Hong Kong in October due to violent protests. These closures have come around the peak festive time (the Golden Week holiday) and have continued to remain closed during the otherwise well-performing Thanksgiving week.

This has converted one of retail’s best performing markets into one of the poorest. Brands such as Burberry, Hermes, Prada, and Tiffany have been forced to shut down few of their stores in Hong Kong. The sales of premium goods, such as jewelry, watches, and other high-value items plunged by nearly 50% in August 2019, when compared year-on-year.

This has converted one of retail’s best performing markets into one of the poorest. Brands such as Burberry, Hermes, Prada, and Tiffany have been forced to shut down few of their stores in Hong Kong. The sales of premium goods, such as jewelry, watches, and other high-value items plunged by nearly 50% in August 2019, when compared year-on-year.

Brands are estimated to suffer a 30-60% quarterly drop in sales in Q3 2019 and considering how the protests are widening and worsening, the sales are expected to drop further in Q4. For instance, as per UK-based financial services firm, Jefferies, Burberry’s sales from Hong Kong are expected to fall by about GBP100 million (US$131.6 million) in 2019. While the brand is expected to offset half of the loss from growing sales in other regions, the remaining loss will be incurred by the luxury retailer.

Given the steep fall in sales and high real estate cost, brands are now revaluating their presence in Hong Kong. In October 2019, Prada announced its plan to shut down one of its flagship stores in Causeway Bay. The company used to pay HK$9 million (US$1.2 million) monthly rent for the 15,000 square feet store and could not justify the high costs anymore. While a few brands are shutting down stores, few others, such as Burberry, are talking to their landlords about rent reduction to cope with the gloomy sales in the short run.

The impact on luxury sales may not be just short term in Hong Kong. Several brands are re-strategizing their approach towards Hong Kong, especially with regards to the Chinese customer. Chinese customers are increasingly going for shopping trips to Japan and South Korea instead of Hong Kong.

Moreover, the Chinese government is also encouraging customers to shop in mainland China by reducing taxes and thereby narrowing the price gap between China and overseas. In 2018, the Chinese government reduced import taxes on luxury goods and followed it with a cut in value-added tax in April 2019. Post this, several brands such as Gucci and Hermes reduced their prices by about 3% in China. This might show that several brands are trying to offset their losses in Hong Kong by targeting the Chinese consumer in their home country.

Brands are also shifting their marketing investments from Hong Kong towards the mainland. Hermes and LV have been extremely bullish about the Chinese market and have opened new stores in the region. Hermes opened its 26th store in China in 2019 and has been expanding its e-commerce presence in China since launching it in 2018.

Luxury Brands Become Collateral Damage of Hong Kong-China Conflict by EOS Intelligence

Brands are extra careful about their design and communication

In addition to focusing on reaching the Chinese customers (in their home market as well as new travel destinations), brands are also being extra cautious about not supporting Hong Kong in the conflict. China has been prompt at bringing brands to task if and when they identified Hong Kong as an independent country in any of their designs or brand communication.

Brands such as Givenchy, LVMH, Versace, and Coach have publically apologized to the Chinese nationals for their clothing designs that labeled Hong Kong as a separate country (from China). Moreover, they removed all such designs from their collections, globally, to ensure they remain in good books of the Chinese customers.

The Chinese have also been very sensitive about any support or sympathy shown to Hong Kong with regards to the conflict. For instance, Tiffany received significant backlash for one of its print ads, which showed a female model covering her right eye with her hand. The Chinese saw this as a sympathetic shout out to the Hong Kong protester who was shot in the eye in August 2019. While Tiffany clarified that the campaign was not a political statement and was conceptualized and shot much before the incident, they eventually removed the image from all digital and social media platforms.

Although not directly related to luxury brands, in October 2019, the Chinese government sanctioned the NBA for a pro-Hong Kong tweet by Daryl Morey, who is the GM of Houston Rockets team. The NBA and Tiffany cases show China’s lack of tolerance towards any pro-Hong Kong message by any brand or organization and thereby brands must ensure that they distance themselves from any pro-Hong Kong sentiment (real or perceived).

Thus it is quite possible that Hong Kong market may lose its luster for luxury goods for good, especially if the Chinese customers stray elsewhere for their shopping. In that case Hong Kong market will only remain relevant for its own residents, which may not justify more than 2-3 stores for a brand in the city.

Thus it is quite possible that Hong Kong market may lose its luster for luxury goods for good, especially if the Chinese customers stray elsewhere for their shopping. In that case Hong Kong market will only remain relevant for its own residents, which may not justify more than 2-3 stores for a brand in the city.

Most brands are currently following a wait and watch strategy, where they are not sending large amounts of their inventory to Hong Kong as has always been the case. They have temporarily shut down shops and given unpaid leaves to their employees. They will wait and gauge if the Chinese consumers do return to Hong Kong when the situation settles and decide the future course accordingly. In case the Chinese customer takes a fancy to other shopping destinations (such as Japan) or start shopping domestically, Hong Kong may lose its position as the luxury hub of Asia.

Opportunities that may arise

In case the Hong Kong conflict has any permanent impact on luxury sales in the region, brands will have to go back to the drawing board to ensure a strong position in Asia. In addition to identifying and developing new shopping hubs for the Chinese customers, brands will also have to alter their strategy and approach to retain Hong Kong’s resident customers. Hong Kong’s resident customers are also avid shoppers but they are more price sensitive in comparison with their Chinese counterparts.

Targeting solely the local residents may also widen the scope of e-commerce in luxury retail sales. Unlike most other markets, e-commerce has not been a major driver of sales in Hong Kong. This is due to the fact that a large number of shoppers are travelers and therefore prefer to make their purchases from retail stores. Moreover, the presence of multiple stores within a small area further reduced the need for e-commerce.

However, if brands plan to reduce their footprint in Hong Kong (only to cater to local residents), they may look at shutting down few stores and promoting e-commerce sales. Hong Kong residents are also more likely to purchase from online multi-brand aggregators (such as Farfetch and Net-a-Porter) that offer deals and discounts. Thus working with such aggregators to promote their brands may also be a good avenue for luxury retailers.

A growing focus and investment towards developing the e-commerce part of the business may also result in growing demand and thereby investments in the mobile payment technologies (which are used for easy payments for purchases) in Hong Kong. While this technology never really took off in Hong Kong as it did in China, this may help in providing the push that it needed.

EOS Perspective

While it is yet to be determined if the ongoing conflict will have a permanent effect on Hong Kong’s position as a prime shopping destination, it is safe to say that the situation will remain unfavorable for the next few months. While some brands such as Prada are already shutting down stores permanently and limiting their exposure in Hong Kong, others such as Burberry are a little more optimistic and want to wait before taking any such decision. This is due to the fact that Hong Kong previously faced a similar situation in 2014, when the umbrella revolution disrupted sales. However, sales bounced back shortly after and Hong Kong continued to be one of the most important luxury markets.

That being said, current protests have become much more intense than anything Hong Kong has endured before and do hold the ability to permanently contract Hong Kong’s role as a leading travel and shopping destination. This may force brands to rethink their strategy for the region with increased focus on e-commerce. This in turn could create opportunities for Hong Kong’s e-commerce and its ancillary markets.

by EOS Intelligence EOS Intelligence No Comments

The Rapid Rise of India’s Food Tech: Yet Another Tech Bubble?

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In the past few years, food tech (online food delivery) industry in India has seen substantial growth in terms of daily order volumes (DOVs), revenue, and funding. While the business is growing for all players, they are still posting losses. A closer look into their financials and business models reveals that the current operating margins are very thin, and much of the recent rapid growth has been on the back of heavy discounting offered by players to attract customers. At present, the growth strategy is loud and clear: to acquire new customers, enter new markets, and expand current market share at any cost. This has raised a question whether such a model is sustainable in the long run or is it another tech bubble just waiting to burst?

Less than five years ago, the way Indians consumed food was completely different. Eating out was predominantly occasion-driven, while ordering food was limited to calling local restaurants or ordering a pizza from Dominos or Pizza Hut through their own websites. Online food ordering through apps was not at all a part of consumers’ culinary vocabulary.

However, this has been transforming over the past few years. There is a growing trend among Indians to order their food online via food aggregation apps. Today, Indian consumers, especially in metro and larger cities, are ordering food online more often than before. As a result of this, food tech has become one of the fastest growing internet sectors in India with an astonishing triple-digit growth rate in gross merchandize value (GMV) and DOVs in 2017 and 2018.

Huge potential waiting to materialize

After an initial hype among entrepreneurs and investors in 2015, the food tech industry saw a slump and market consolidation in 2016 and 2017. Yet in 2018, India’s food tech industry rekindled investors’ appetite for the sector with huge spending spree. Driven primarily by rising disposable income, rapidly growing internet and smart-phone penetration, urbanization, and a young and working-class consumer base, India’s food tech industry stood at around US$700 million in 2017 and is expected to reach US$4 billion by 2020. In 2018, DOVs went up to 1.7 million orders from 0.2 million in 2016. The current market consists of four key players. Leaders Swiggy and Zomato currently hold a combined market share of ~70%.

The Rapid Rise of India's Food Tech

The market still in its infancy

While order volumes have gone up significantly in the last 12-18 months, the industry is still in its infancy considering its outreach and adoption rates across the nation. At present, online food ordering is available in just over 200 cities across India and contributes to merely around 5% of the total food delivery business.

Further, India’s US$1.7 billion food tech market is pretty small compared to US$10.5 billion in the USA and US$36 billion in neighboring China. Out of the 90 meals consumed each month, Indians eat out or get their food delivered less than five times a month as compared to around 40-50 meals in countries such as Singapore, China, and the USA. In a nutshell, food aggregators have just begun to scratch the surface in India and there is a long road ahead for the industry to develop and grow further.

Growth driven by deep discounts

While the recent growth numbers draw a compelling picture of the industry, it should be noted that much of the current growth is driven primarily by deep discounts that are offered by the players to attract customers onto their platforms. With the recent funding boom, all players are deep-pocketed. In a fierce battle for market share, companies are spending heavily on advertising, low-cost and complimentary deliveries, and discounts as their primary growth strategy. Given the huge potential of the internet economy, even investors are willing to throw in money and keep the incentives going. However, recent history in India as well as similar experiences from other internet companies globally reveal that while this can be a good strategy to attract customers and penetrate markets, it is unlikely to be sustainable.

The recent growth is not entirely organic. A significant part of it is inorganic, pushed by discounts and offers, as players focus more towards acquiring new customers, increasing their order frequency, and entering new geographies.
Satish Meena, Senior Analyst, Forrester

Again, customer loyalty is very hard to come by in the food tech industry. With India being a price-sensitive market, consumers will often flock to the platform that offers the best deal. Just like in India’s cab aggregation industry, it will be interesting to see how the food aggregators find their revenue and DOVs impacted once these offers will start to disappear.

Penetration beyond tier-II cities

Till 2018, orders were highly concentrated among top ten cities of India. These markets accounted for around three-fourths of the total business for all players. In order to move away from these gradually saturating markets, and to scale up their outreach across India, food tech players are pushing to capture the untapped potential in tier-III cities and smaller towns with first-mover advantage. While they consider these markets to be lucrative with improving demand appetite, rising spending power, and profitability, these cities are very different from metros in terms of size and customer preferences. E-commerce adoption rates as well as user base in these cities are relatively small, and therefore it will be challenging for food aggregators to create demand here, as consumers are not acquainted to online food ordering.

On the demand side, it will be difficult for aggregators to generate order volumes from smaller cities in India. Considering that Indians are very price sensitive, once these offers are gone, the drop-out rates will be much higher in these markets as compared to metros. –
Satish Meena, Senior Analyst, Forrester

Back in 2016, Zomato tested the potential in smaller cities and had to shut down its business in four cities including Lucknow, Coimbatore, and Indore due to poor demand. Similarly, Grofers, an online grocery delivery platform expanded into several tier-II and tier-III cities. But they also had to suspend operations in nine cities, citing the same reason. While the advent of Jio (an Indian mobile network operator) and its cheap internet data packages are proving to be a boon for e-commerce players, the question still remains how food aggregators will be able to create a sustainable demand in cities where population prefers to cook its food every day.

In addition, unorganized players dominate food delivery in these markets. It will be tough for aggregators to compete with them, especially in terms of pricing, since the local players operate with very low overhead costs without the need to worry too much about hygiene, safety, and other quality standards.

Weaker financials and unit economics

With the ongoing discounts and offers, the cost of customer acquisition is very high at present. A closer look at the financials of Zomato and Swiggy reveals that their monthly cash burn has increased five times within 2018, as they resort to aggressive discounting to grow further across the country. At present, all players are posting losses. This is very common even in the global food tech industry where most players are still operating with losses. For example, China’s Meituan-Dianping and ele.me are still far from reaching the break-even point, even after 10 years in the business. The story is the same even in developed markets such as USA and the UK. The aggressive cash burn model requires food aggregators to keep raising funds at regular intervals in order to further scale up and grow. This is a major concern raised by many industry experts.

Look at China! The top two players have still not managed to turn profitable even with far superior market penetration and order volume rates as compared to India. – Former Executive, Swiggy

Another major challenge faced by all the players are the inefficiencies in their operations, a fact that has a direct impact on their unit economics and thereby profitability. Although food delivery logistics is slowly getting better, it still constitutes a major chunk of the overall cost. Players are in a dire need to leverage innovative technologies and processes to streamline their logistics operations and make the most out of their logistics infrastructure and assets.

In order to improve their unit economics and operational margins, everyone is trying to streamline their logistics operations and to make the most out of their current infrastructure and assets. –
Vaibhav Arora, Former Associate General Manager,
RedSeer Consulting

Playing by the same playbook?

For the Indian market, food tech industry’s current growth story may seem to be a flashback from the ride-hailing industry, which really took off in the early days. On the back of heavy discounts and attractive offers, it looked like a win-win situation for all. In recent years, when cab aggregators slowly started to move away from discounts, at the same time increased fares for customers on one hand, while reducing incentives for drivers on the other, they started to witness challenges on both demand and supply sides of their business.

Strategies such as surge pricing, hike in fares, cutting-down driver salaries and incentives, etc., have impacted their businesses and resulted in unhappy customers and driver partners, unreliability in services, and a tussle with local associations. Cab aggregators in India have still not found the right balance to continue to grow without leaking money.

Many industry experts believe that food aggregators will also face the same set of challenges in the coming years, as players will start moving away from discounts along with hike in delivery charges and restaurant commission in order to improve their operating margins. This is already becoming evident as delivery partners from Swiggy in Chennai went on a strike for wage-related demands in December 2018, while UberEats faced a similar situation in April 2019 in Ahmedabad.

You can connect the dots with cab aggregation business and foresee similar challenges coming up for the food tech sector. In the long run, they will start charging higher delivery fees from customers and higher commissions from partner restaurants. –
Vaibhav Arora, Former Associate General Manager,
RedSeer Consulting

EOS Perspective

In recent years, food aggregators in India have definitely created a market for themselves by inculcating consumers with online food ordering concept. There is no doubt that the Indian food tech market is still developing and has a huge potential. But it is also a difficult one to crack. As seen in the past few years, many start-ups folded up early on. Similarly to India’s cab aggregators and e-tailers, food tech companies have started to believe that discounts are the way to a customer’s heart and eventually increasing their market shares.

None of the major players within the Indian internet sector is profitable yet. Even for Indian food tech players, profitability looks elusive, at least in the short to medium term. They will require massive funding injected regularly to finance their aggressive growth strategies. Uber in its recent initial public offering (IPO) prospectus made a bold statement admitting that if may never be profitable. This is one of the deepest concerns across the industry, and many industry experts are not sure whether sustainable growth can be achieved with the present business models.

In India, it looks like a certainty that both Swiggy and Zomato will be still posting losses for at least the next two to three years. –
Former Executive, Swiggy

There are many areas which are not streamlined enough, and therefore a significant amount of money is lost there. In order to grow, players will have to address the fundamental issues around unit economics and operational efficiencies. Companies will have to find multiple ways to improve their operational efficiencies such as looking at alternative revenue streams, monetizing their fleets, building other businesses, etc. Therefore, Swiggy has ventured into hyperlocal business by starting deliveries of groceries and medicines to further optimize its current delivery fleet. Similarly, Zomato has started Hyperpure, a service wherein they deliver food products to restaurant partners in order to grow further.

On the one hand, the above mentioned strategies seem to be logical for food aggregators and the way forward to scale up their businesses. On the other hand, this approach also raises concerns whether they are trying to juggle too many balls with just one pair of hands. Are players diversifying too early and rapidly, considering that they have not yet mastered the trade of online food delivery? Will these diversifications shift their focus away from the core business? Do they have the bandwidth as well as the expertise to manage these new businesses?

Furthermore, it will be also difficult for players to continue their current growth momentum beyond 2019, since they have penetrated all metros as well as tier-I and tier-II cities in India. Growing in smaller cities with low e-commerce penetration will be a daunting task, especially without the discounts. All these challenges are likely to cause the industry growth to slow down. To continue the growth momentum, food aggregators will also have to customize their strategies for smaller towns in India. Since availability of cuisines and quality of food is the biggest pain-point in these markets, players will have to compete by offering more choices with higher quality standards. Variety and quality of food will be one of the key differentiators for them to succeed in these markets.

In order to succeed in the long run, players will have to leverage the vast consumption pattern data at their disposal, and convert them into insights. By harnessing technologies, they can smartly identify the demand-supply gaps in each market, and address them by launching relevant products and services. For example, aggregators can assess and identify particular cuisines, dishes, order time-slots, etc. that are trending in each market, based on which they can either collaborate with restaurants and push them to expand their offerings and outreach to meet the increasing demand, or themselves start to move up the value chain by setting up own cloud kitchens (delivery-only kitchens) to fill such gaps, and thus further improve their profitability.

Additionally, players will have to further innovate their offerings. For instance, since migrant workers and students are the prime target, introducing subscription based meals in this segment could allow players to gain customer loyalty as well as earn steady stream of revenue. Similarly in the B2B (business-to-business) space, they can forge partnerships with small and medium enterprises (e.g. Indian Railways) to supply meals to their employees and customers. This is another market segment with huge latent demand where variety and quality of food is the need of the hour.

While these are early days to comment on the long-term growth potential of the industry, we can expect the market and current players evolve over the next few years. Considering that no one in the Indian aggregation space is profitable yet, and the fact that the path followed by food aggregators closely resembles to the one followed by cab aggregators in India, who have found it to be bumpy, unless players can build a solid business model with a clear path to profitability, for now, the rapid rise of food tech sector looks like another tech buzz that will eventually slowly down over the years to come.

by EOS Intelligence EOS Intelligence No Comments

Argentina’s E-commerce Growing at an Explosive Rate, but Not without Challenges

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Argentina is the fastest growing e-commerce market in Latin America with a booming m-commerce segment. Blessed with high internet smartphone penetration rates, the country sets stage for plentiful e-commerce opportunities. However, Argentina is still battling high inflation and low economic growth rates, a fact that bleaks growth prospects of e-commerce market. Much like its regional neighbors, Argentina is also plagued with logistics and payment issues, and resolving these challenges is the need of the hour.


This article is part of a series focusing on e-commerce in LATAM, which also includes a look into e-commerce market in Mexico and Brazil


What is pushing the meteoric growth?

Home to MercadoLibre (Latin America’s most popular e-commerce site), Argentina, is one of the most prominent e-commerce markets in Latin America, known for its outstanding growth rate – between 2018 and 2022, e-commerce market is expected to increase by 83% to reach US$ 19 billion.

Strong connectivity is one of the key supporting factors powering the e-commerce market. Argentina benefits from incredibly high internet penetration rate of more than 80% and one of highest numbers of mobile Internet users in Latin America. Further, the country’s growing young, Internet-savvy consumer base, with sufficient disposable income, is also driving e-commerce sales.

What is holding back Argentina’s e-commerce market?

Logistics

The most significant barrier restraining Argentina from becoming Latin America’s e-commerce leader is logistics. To begin with, quality of roads in certain neighborhoods of various cities, even in the capital city of Buenos Aires, is not suitable for swift deliveries. An average delivery time for packages to reach shoppers is about seven days, which is not a convenient wait time and could dissuade shoppers from ordering online.

An average delivery time for packages to reach shoppers is about seven days, which is not a convenient wait time and could dissuade shoppers from ordering online.

Most logistics companies are unable to deliver as quickly and reliably as e-retail demands. Adding to the list of logistics and infrastructure insufficiencies is the unfinished GPS mapping, owing to confusing address systems and missing postal codes, thus, making deliveries an even more cumbersome task. With the current state of logistics, Argentina secured 61st rank (out of 160) in the Logistics Performance Index in 2018, lagging behind its fellow competitors (in the e-commerce space), Brazil and Mexico.

Payment methods

Online payments can be challenging in Argentina, particularly, for making purchases on international retailers’ websites. More than 50% of Visa and MasterCard cards provided by local banks, cannot be used on international websites. This is a major operational hurdle for international e-commerce retailers, who have to set up other payment methods.

More than 50% of Visa and MasterCard cards provided by local banks, cannot be used on international websites.

Moreover, with exorbitant credit card interest rates (according to the Central Bank of Argentina, credit card interest rates lie between 36% and 111%), customers have become vary of shopping online.

Additionally, debit cards comprise a negligible share of Argentinian e-commerce spend, as they can only be used on limited e-commerce websites, thus, limiting use of this crucial payment gateway.

Distrust

Another key challenge is distrust among several Argentinians toward e-commerce websites, especially when it comes to billing and payment transactions. Some customers are also hesitant to provide card details for online transactions with protection of information being their primary concern.

With no proper legislation in place, trust in the e-commerce marketplace is hard to build. Argentina does not have a comprehensive regulatory scheme governing e-commerce, rather it has just a few regulations that are applicable to e-commerce.

The country also does not adhere to any standard international e-commerce model such as UNCITRAL model law on electronic commerce by the USA or Directive 2000/31/EC (Directive on electronic commerce) of the European Parliament. Without any robust regulation in place, consumers would neither feel protected nor be certain regarding action being taken in case of unlawful activities.

Economy

Argentina’s economy is shackled with sky-high inflation rate (second highest in Latin America in 2018) and depreciating currency against dollar, thus, dampening economic growth prospects of the country. Poor economic conditions have taken a toll on all economic sectors, including e-commerce. High inflation rate has decreased purchasing power of consumers, who have become cautious shoppers.

Opportunities still exist

Nonetheless, outlook for Argentina’s e-commerce market is quite positive, with key e-commerce players craving for attention from Argentina’s proliferating online customer base.

Argentina’s e-commerce market is endowed with opportunities arising from growing m-commerce and social-commerce segments.

Argentina’s e-commerce market is endowed with opportunities arising from growing m-commerce and social-commerce segments.

Smartphones are increasingly becoming the key mode to reach consumers in Argentina, with consumers preferring to use mobile devices for accessing internet over stationary computers or laptops. The use of mobile phones for searching products before purchase is a common habit in Argentina. To tap this opportunity, businesses are increasingly focusing on building mobile-friendly websites – as of May 2018, 74.3% of businesses adapted sites to mobile phones (compared with only 10.4% in 2017).

Another trend emerging in the market is that of social shopping (shopping influenced by social media), fueled by growing social media engagement among Argentinians – as of January 2018, about 76% of the total population were active social media users. E-retailers are now using social networks to interact with shoppers, particularly the young demographic, and also to promote products. As of May 2018, 73.5% of businesses used social media to engage with shoppers and the most preferred sites were Facebook and YouTube.

Argentina’s E-Commerce Growing at an Explosive Rate, but Not without Challenges

EOS Perspective

Argentina’s e-commerce industry has reached a stage where consumers, particularly the young demographic, are slowly beginning to embrace online shopping as part of their daily lives, however, there is still scope for a lot of development for wider adoption. While Argentina’s e-commerce market is dynamic and growing, it could benefit from certain improvements, particularly in terms of payment methods, logistics, and building consumer’s trust in online shopping.

Payment methods need to be kept up to date with requirements of businesses and consumers, and steps are being taken for its betterment. Better logistics is a requisite for online retailing to function properly. In the era of one-day deliveries, a week’s wait time in Argentina is too long, and retailers are looking to resolve this issue.

MercadoLibre, the largest e-retailer in Argentina, has taken giant leaps for betterment of both payment mechanism and logistics. The company introduced a digital wallet, Mercado Pago, through which both debit and credit card payments can be processed. The digital wallet can be used in physical stores as well. Customers can scan QR code on items using MercadoLibre or Mercado Pago apps and choose preferred mode of payment.

Further, MercadoLibre has been adopting various measures to improve logistics. Through Mercado Envios, the company takes care of package shipment and delivery, as the seller only has to take the package to nearest dispatch center of MercadoLibre, and from there onwards MercadoLibre ensures seamless package delivery. Mercado Envios ascertains that the package reaches customer in the shortest time possible and allows tracking of shipment by both seller and buyer. MercadoLibre’s another program, Mercado Envios Flex, guarantees deliver of packages within 24 hours, but it is limited to Buenos Aires for now.

Undoubtedly, customer service and shopping experience need to be revamped, which could help in building customer’s trust as well.

Undoubtedly, customer service and shopping experience need to be revamped, which could help in building customer’s trust as well. The e-commerce platforms could use foreign digital expertise to develop websites that are safe for billing and money transactions. Moreover, online merchants need to understand that a transaction is not complete when a customer purchases product online, but when the package is received by the customer. To be able to gain customer’s confidence, merchants should take end-to-end responsibility, be transparent in communication by clearly stating the delivery timelines or any additional charges that are applicable, among others, before the payment is made.

Nonetheless, Argentina is slowly making progress and is on track to uphold its position as one of the e-commerce giants in Latin America. Despite being the fastest growing e-commerce market in Latin America, Argentina is still behind the two e-commerce powerhouses, Mexico and Brazil, at least as of now. However, the country definitely has the potential to give them both a tough competition with its e-commerce and m-commerce markets growing at exponential rates.

by EOS Intelligence EOS Intelligence No Comments

Brazil – Lucrative but Challenging E-commerce Industry

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Brazil is likely to account for approximately half of US$64.4 billion retail e-commerce sales across Latin America in 2019. Being the region’s largest country with a whopping 200 million population, a tech-savvy and consumption-driven middle class, and one of the largest internet-connected populations of the world, Brazil is one of the most preferred Latin American countries where international retailers are looking to expand. However, e-commerce success in Brazil also comes with numerous challenges. Overcoming those challenges still remains a quagmire for e-commerce merchants.


This article is part of a series focusing on e-commerce in LATAM, which also includes a look into e-commerce market in Mexico


The good and the difficult

Despite the economic slowdown and political turbulence in the country, retail e-commerce market has continued to grow, recording 10% y-o-y growth in 2018. Brazilians are connected now more than ever, access to the internet and technologies is becoming affordable by the day, while consumers are particularly enthusiastic to purchase international products using online shopping websites, all of which is making Brazil Latin America’s e-commerce powerhouse. Another key reason for online retail growth is the fact that consumers have become cash-strapped amidst frail economic conditions, which has squeezed money out of the market, bringing a prominent change in buying behavior, where consumers are more price conscious and driven by promotions. In such a scenario, e-commerce has emerged as a clear winner by offering lower prices and good deals, as compared with offline channels.

Operating an e-commerce business in Brazil is a double-edged sword. On the one hand, the 140 million internet users represent an enormous e-commerce opportunity, while on the other hand, Brazil is plagued with operational challenges and struggles.

However, operating an e-commerce business in Brazil is a double-edged sword. On the one hand, the 140 million internet users represent an enormous e-commerce opportunity, while on the other hand, Brazil is plagued with operational challenges and struggles with complex logistics, high tax rates, and payment issues, among others.

An array of challenges

One of the key challenges for any international retailer operating in Brazil is the high tax rate of 6.4% applicable on all international payments, which is enough to disincentivize shoppers to make purchases from international retailers such as Amazon or Alibaba. Further, customers are required to pay 60% flat tax on all imported product purchases valued between US$50-500 (the range may vary across different states). The taxes almost double the price of products, which could deter digital sales. In addition to the taxes, Brazil’s customs procedures are slow and complex, and shipments take a long time to arrive, making the online shopping experience arduous for customers.

For international retailers to operate in Brazil, it is crucial that they familiarize themselves with various local payment methods such as Boleto Bancário (bank slips), payment options offered by regional players (MercadoLivre offers MercadoPago, which is equivalent to PayPal), among others. This is because only 20% of Brazilians have access to international credit cards and instead prefer paying through local payment channels. This could be an obstacle for e-commerce players, as most transactions on shopping websites rely on online card payments. Furthermore, credit cards provided by domestic banks can only issue payments that are made in Brazilian Real, hence, international retailers need to find a way to convert currency if they want to operate in Brazil.

Brazil – Lucrative but Challenging E-commerce Industry

There are also several operational, logistics, and infrastructural challenges that are impairing e-commerce growth in the country. Strikes in Brazil are very common and happen quite often, consequently halting operations of federal customs or postal services. It usually takes some time to resume operations after the strike and the packages/deliveries could take even longer to reach the final destination. The recent truckers strike in spring of 2018 caused more than 3 million online deliveries to arrive with significant delays.

The country also lacks proper infrastructure to support e-commerce business – the distribution centers rarely function 24-hours a day due to security concerns and costly overtimes, which prevents shippers from collecting packages at night when the traffic is lower. Further, traffic situation in major Brazilian cities such Rio de Janeiro and Sao Paulo is so overwhelming that same day or next day shipping requirements are very difficult to fulfill. In addition, rampant cargo robberies are further disrupting e-commerce business in Brazil and are an acute problem in Rio. All major e-commerce players and logistics companies are investing heavily to protect goods, which increases security costs and is subsequently squeezing profit margins. Sao Paulo’s cargo transportation and logistics companies spend about 10-14% of revenue on ensuring cargo safety, while in Rio this ratio lies between 15% and 20% of revenue.

Sao Paulo’s cargo transportation and logistics companies spend about 10-14% of revenue on ensuring cargo safety, while in Rio this ratio lies between 15% and 20% of revenue.

Strong fundamentals promise opportunities

Nonetheless, challenges have not yet dissuaded customers from shopping online or prevented international and local players to expand operations in Brazil. Players are continuously making efforts to improve services to lure customers. One of the key trends that are reshaping customer support services is the increasing focus to provide chatbots on e-commerce websites for 24-hour shopping assistance. Brazilian e-commerce players are betting on chatbots to improve customer engagement and management, and to generate brand awareness.

With rising number of smartphone users in Brazil, mobile commerce is also growing and players are increasingly focusing on tapping this opportunity. In 2017, m-commerce users grew 42% y-o-y and mobile devices contributed to 31% of e-commerce sales in H1 2017. Furthermore, Brazil is a country with highly active social media users, a fact which serves as a key platform to expand business – as of March 2016, 60% of e-commerce sites used social media for sales and marketing. Numerous Brazilian companies use social media for marketing and it has become an integral part of e-commerce business, where social media is used as a tool for promotion and to reach out to customers.

EOS Perspective

While Brazil’s e-commerce market could be a cash cow for retailers, it also comes with various quirks and challenges. Localizing business in Brazil requires enormous amount of planning, calculation, and understanding the market before entering it. The high cost of doing business could be intimidating for several players along with online payment challenges, hefty taxes, and inferior infrastructure. However, forging local partnerships could solve some of the issues. For instance, cross-border e-commerce merchants could partner with Brazilian payment processing companies and invest in developing local payment methods to overcome the online payment challenge.

Alternative delivery channels are becoming popular, and these could help solve the logistics and shipping issues to a certain extent. InPost, a Polish company that operates a network of parcel lockers, introduced click and collect services in Brazil, which allows customers to place an order online and collect package from InPost’s lockers that are situated at most frequently visited places such as gas stations. Customers receive a QR code by email, which is used to operate the lockers. The lockers offer convenience for customers and reduce wait times, and greatly reduce logistics cost for retailers. While this is only one of potential novelties that could ease logistics problems, the arrival of established international retailers such as Amazon and Alibaba might be expected to bring in other innovations to reduce delivery, infrastructure, and payment barriers.

Despite the existing macro-economic and operational challenges, the country’s potential as a digital commerce market will continue to attract investments and is expected to keep growing.

Despite the existing macro-economic and operational challenges, the country’s potential as a digital commerce market will continue to attract investments and is expected to keep growing. With a large internet savvy consumer market eager to purchase international products and with westernization deeply influencing the young population, Brazil will continue to draw the attention of international retailers across the world. Amidst the country’s turbulent politics and economy, purchasing power grew 3% y-o-y in 2017, making Brazil even more attractive for online retailers. With new trends reshaping the industry and players forging ways to improve operations, the country is expected to remain the largest e-commerce market of Latin America ahead of Mexico and Argentina in the foreseeable future.

by EOS Intelligence EOS Intelligence No Comments

Mexico’s E-commerce Sector to Rise Amidst Challenges

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E-commerce in Mexico is witnessing a steady growth and is slowly becoming one of the most dynamic sectors of the country’s economy. In the last five years, e-commerce market in Mexico has grown significantly, as retailers strengthened their digital strategies to grow sales. The online channel is becoming an indispensable part of retail and despite all operational challenges that exist in the market, opportunities are too attractive to be missed.


The article is part of series focusing on e-commerce in LATAM, which also includes a look into e-commerce market in Brazil


In recent years, Mexico has attracted interest from global brands to expand in the country, where online retailing is expected to grow substantially – revenue generated by e-commerce is expected to reach US$ 17.6 billion by 2020, growing at a rate of 16.6% annually. Mexico’s distinctive geographic and demographic characteristics make it one of the most promising e-commerce markets in Latin America, where global companies are looking to expand. Its proximity to the USA is advantageous, making it an attractive target for USA-based retailers looking to grow internationally (Amazon, Walmart, Best Buy, among others). Additionally, the growing population of young, working-age, tech-savvy Mexicans with sufficient disposable income is the key target for global retail chains, particularly for companies eyeing growth through e-commerce channel.

Mexico’s distinctive geographic and demographic characteristics make it one of the most promising e-commerce markets in Latin America, where global companies are looking to expand.

Lack of consumer trust 

In the last five years, e-commerce has witnessed double-digit growth and the trend is likely to continue in the long term. However, the market faces few challenges, which are impeding growth. To begin with, low consumer confidence in online transactions is a major barrier. Mexican users are skeptical when it comes to internet-based transactions due to distrust in payment methods and fear that the banking information provided will be misused, amidst high level of banking-related frauds prevalent in the country. According to a study conducted by Aite Group1, in Q2 2016, 83% of the interviewed respondents witnessed identify theft, while 70% were victims to online banking frauds. Consumer willingness to make online purchases is further shattered by the unsatisfactory online shopping experience delivered by some retailers due their relatively poor website designs and product display. According to a joint study by The Cocktail.com and ISDI, Challenges of E-commerce Mexico in 2017, consumers typically lost confidence in the online purchase process when trying to look for information on the products sold, making payments, understanding shipment and delivery policies, and dealing with returns.

Dependence on cash

Mexico is a cash-based economy, with 90% Mexicans preferring to make payments in physical currency. High dependence on cash is largely caused by limited access to modern financial infrastructure – as of 2016, there were only 37.7 ATMs and 10.3 bank branches per 100,000 people. Moreover, large proportion of the population remains unbanked along with low credit card penetration in the country. The dominance of physical currency in Mexico limits e-commerce growth, which is dependent on online payments. To overcome this challenge, players are adapting to align with customer preferences, as the significance of cash is impossible to overlook in Mexico. E-commerce players are introducing hybrid payment systems. For example, Linio and MercadoLibre allow customers to pay in cash, through banks, pharmacies, and convenience stores (OXXO and 7-Eleven), for items bought online. Walmart has introduced more than 2,000 kiosks in its physical stores, where customers can pay in cash for products bought online.

EOS Perspective

Although several large players, such as Amazon, Walmart, and MercadoLibre operate in the market, e-commerce sector still faces several obstacles and has yet not developed to the levels of other e-commerce markets that exist globally. For the Mexican e-commerce market to grow, it is imperative for the retailers to boost consumer confidence by ensuring that the buyer is safe; one way to achieve that is to make sure that the purchase process does not end with payment confirmation. Instead, the complete purchase process should be made transparent by enabling consumers to track all orders, receive notifications on shipping process, as well as making the return policy/process agile and convenient for shoppers.

For the Mexican e-commerce market to grow, it is imperative for the retailers to boost consumer confidence by ensuring that
the buyer is safe.

In spite of all quirks and challenges of the market, undoubtedly, Mexico offers a promising future for e-commerce with its sizable upsides – high internet and mobile penetration, growing purchasing power among consumers, declining smartphone prices, presence of e-commerce giants, such as MercadoLibre and Amazon looking to expand operations, among others. According to the Mexican Association of Online Sales (AMVO), five years ago in Mexico, online sales of large retailers including Walmart, Sanborns, Sears, Liverpool, and Palacio de Hierro comprised merely 1% of their total sales. This share rose to nearly 20% by 2017.

The e-commerce market is developing, demonstrated through sustainable and constant improvements – for instance, the country is making efforts to steadily develop infrastructure, customers are offered wider payment options through offline channels, and Amazon’s entry in the market has acted as a catalyst to e-commerce development, boosting customers’ trust in online shopping websites. With the launch of Amazon Prime in 2017, Amazon reduced shipment time to 1-2 days and expanded free shipping option across Mexico – a significant step that would revolutionize online retailing with other players trying to follow Amazon’s lead.

Mexico is ripe for e-commerce to boom. Even though the market is at nascent stage of development and faces challenges, it is also laden with myriad of opportunities. Online shopping accounts for a small share of the total annual retail sales in Mexico – e-commerce comprised 1.6% of total retail sales in 2016 and is likely to grow to 2.6% by 2019 – which represents a huge opportunity for players, as Mexicans have just begun adopting shopping through e-commerce. Players operating in the market understand the tremendous future growth prospects that the market offers, hence, are focusing to expand operations. With the right growth strategy, understanding of the market, and knowledge of consumer buying behavior, it is possible to survive and grow in the market, even though it is packed with challenges.
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Notes:

  1. 2016 Global Consumer Card Fraud study conducted by Aite Group; n (number of respondents interviewed in Mexico) = 303
  2. American e-commerce companies: Amazon and Best Buy
  3. American retail companies: Walmart and Sears
  4. Latin America-based e-commerce companies: Linio and MercadoLibre
  5. Mexico-based department store chains: El Palacio de Hierro, Sanborns, and Liverpool
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