Treasury Today Country Profiles in association with Citi

A global appetite for eCommerce

Small shopping trolley with cardboard boxes in them whilst ontop of a laptop keyboard

eCommerce presents a tremendous opportunity for businesses to tap into new revenue streams around the world. Treasury departments must help their company meet the challenge, with agile eCommerce players ready to eat the lunch of anyone who doesn’t keep up.

Did we witness a watershed moment in the development of electronic commerce this summer? Amazon’s announcement in June that it was paying US$13.7bn to acquire upmarket US grocery chain Whole Foods seems likely to mark an opening shot from the world’s biggest online retailer as it moves into America’s US$700bn grocery business.

It’s the latest chapter in the expansion of eCommerce, whose growth is reflected in the market capitalisation of its biggest players. In 2013 Google was first to hit the figure of US$300bn, while Amazon and Facebook climbed above the same level in late 2015. Further growth potential is reflected in the fact that while US online buying reached US$395bn last year, the figure represented only 11.7% of total US retail sales.

In May this year the elite US$300bn+ group was joined by China’s tech giants Alibaba and Tencent, whose Asia Pacific home markets offer the potential for huge further growth. Potential new members include Chinese internet conglomerate and video game company NetEase and search engine Baidu, dubbed “the Google of China”. Each has conditioned consumers to expect not only overnight delivery of goods but also same-day fulfilment.

Such is the power of these online behemoths that when they lobby leaders of the world’s major economies to eliminate barriers to digital trade, politicians respond. At the most recent G-20 summit in July, members put eCommerce and the internet’s steadily growing impact on the global economy top of the agenda. A central part of their efforts will be tougher international and domestic legal frameworks for security, privacy and data protection to engender greater trust in doing business online.

“We’re now seeing acceleration in the growth of eCommerce – even in the relatively developed channels of North America and Europe where it is extending into new areas,” says Yory Wurmser, Senior Analyst at market researcher eMarketer. “Consumers are more willing to go online to buy big-ticket items such as furniture as well as groceries; hence the Whole Foods acquisition. US consumers are now taking up the concept of doing their weekly grocery shop online.”

eMarketer estimates that while total retail sales globally will rise from US$22trn last year to over US$27trn by 2020, double-digit growth will push the figure for eCommerce sales over the period from US$1.915trn to US$4trn+. Asia Pacific, as the world’s largest retail eCommerce market, will dominate, with the region’s total rising from just over US$1trn last year to around US$2.725trn by 2020.

An evolving term

So what is generally understood by ‘eCommerce’? Tom Durkin, Managing Director for Digital Channels at Bank of America Merrill Lynch believes that in many respects the term has become outmoded. “Basically it refers to all the transactional activity that has moved to become an online experience although it doesn’t convey the fact that it’s a 24/7 online activity.”

“The concept has steadily shifted to one of mobility, with a growing number of consumers using their mobile phone to make purchases,” adds Durkin. “eCommerce via mobiles helps to establish more of a personal relationship between the buyer and the supplier, with the latter able to develop a better understanding of customers.”

Initially, the PC drove eCommerce’s strong organic growth in Europe and North America back in the 1990s, as businesses and individuals grew increasingly comfortable with transacting online. The emergence of new platforms and social media, such as Facebook, opened up previously untapped opportunities.

“Growth has more recently got impetus from tech-savvy smartphone and tablet users, particularly in countries with logistical challenges, where shopping in traditional bricks-and-mortar locations can be inconvenient in many areas or even unsafe,” says Thomas Lin, Director, Innovation, Mobile, E-commerce, Transaction Banking at Standard Chartered. “Even in the US many of the shopping malls are in decline or closing, while Amazon is championing robotic bodies.

“So eCommerce is certainly here to stay, but the distinction between mobile and online payments and the traditional bricks-and-mortar shops will blur – as will that between online and offline transactions.”

For corporate treasurers, eCommerce offers new markets to be reached as there are no longer geographical limits, but Wurmser adds that it also constitutes a threat if they fail to grasp the opportunity. “Agile eCommerce players are ready to eat your lunch if you don’t keep up, so you need a clear strategy,” he says.

“Your customers are already online, so treasurers need to take a more sophisticated view of sales,” adds Wurmser. “The success of eCommerce depends on the strength of your analytics – which role does each channel play and how much of the company’s overall sales does it generate?”

The underlying element of better analytical data allows a supplier to determine, through their customer’s behaviour, where he or she wants to go next, says Durkin. “Amazon was the original pioneer, as evidenced by the buying suggestions it regularly sends to customers based on their purchasing history – an innovation has steadily been adopted by financial services providers and other sectors.

“eCommerce is no longer simply just transaction-oriented but is increasingly focused on the supplier keeping one step ahead – and we’re still at a fairly early stage of the journey.”

Durkin believes many treasury departments are still working out how to navigate their way in this rapidly changing world and digitise their workflows. They can take advantage of processes that eliminate inefficiencies, so digitisation is – among other benefits – helping to make their cash forecasting more accurate.

“It’s also helping with the establishment of completely new businesses, such as Airbnb,” he adds. “Starbucks has been particularly adept at taking full advantage of the rise of mobile apps, using it to gain data on its customers and provide them with special offers, specific services and other promotional activity that keeps them interested.”

APAC’s new consumers

While growth in European and North American markets was fairly sedate in the early years, Asian consumers and businesses took to eCommerce more readily, says Nick Howden, eCommerce Market Management Lead, Treasury and Trade Solutions at Citi. Indeed the size of China’s eCommerce market overtook that of the US in 2014 and by last year reached an estimated US$749bn. What’s more, while around 88.5% of US citizens have internet access, the figure is only around 50% for China’s population of 1.3bn, leaving plenty of yet-unfulfilled potential.

“As middle-class populations become more affluent and are able to afford the ever-lowering cost of smartphones, more people are able to come online and mobile access to the internet is the major driver for eCommerce in Asia,” says Howden. “Once they do so, they are able to become a consumer – in the sense that they can actually start to transact in an online environment.”

“The younger generation has particularly taken to it – many are really leapfrogging technology, so they’re moving beyond traditional devices into a mobile environment very quickly,” adds Howden. “When you think of a country the size of India, the region’s highest growth eCommerce market, reports suggest that 64% of its population and 72% of internet users are aged under 35 whilst over 300m individuals are online.”

While Asia’s demographics are particularly favourable for eCommerce, growth for online sales channels requires a greater proportion of its populations accessing basic banking products and services. “Government-backed digital programmes are bringing more people online and availing banking services to populations for the first time,” adds Howden. “So while we’re making great headway – with India leading the charge – in other countries, such as the Philippines, Vietnam or Indonesia, you’re looking at 40% or 50% of the population still without bank accounts. These countries are availing solutions which digitise cash and enable online purchases, or consumers may prefer cash-centric solutions such as cash on delivery or ATM transfers which are after checkout with more friction. There is a gap between card users, bank account holders and smart phone pre-paid subscribers which is a target market for eCommerce growth.”

Howden says India’s progress is thanks to a forward-looking administration. Prime Minister Narendra Modi, in office since 2014, recently spoke of a ‘New India’ within the next five years, with digitisation of the economy a key contributor. “The government is trying to digitise many of the paper-based services that were previously very cumbersome and difficult to access – such as pension schemes and state assistance for unemployment benefit,” he says.

BMW revs up for its second century

German car giant BMW, which in 2016 celebrated its 100th year in business, has noted customer behaviour changing in recent years in favour of digital channels.

“Today’s global reality is that customers research and shop online 24/7 when buying high-end commodity products, which includes premium cars and brands such as BMW and the Mini,” says Christina Hepe, corporate and governmental affairs and spokesperson for group business and finance communications.

“Customers expect an omnichannel experience, so the collaboration of traditional retail formats and the ever-evolving eCommerce formats are an essential backbone for the future of car sales. So we aim to offer an integrated, premium customer experience across different customer touchpoints, including shopping on their smartphone, talking to our BMW Genius (an app providing videos and other features on the product range) or collecting their vehicle at a dealership.”

BMW sees the pace of the eCommerce market continuing to accelerate. “The success of our efforts will be determined by the successful combination of online and offline sales,” says Hepe. “The desire of customers for a more flexible sales process is a key factor in our online strategy. It’s vital to link these contact points so that customers can move seamlessly between them; this allows the group to interact with customers in a customised manner, at the appropriate time through their preferred channel.

“Every vehicle sold in the UK market for example can now be bought online – from vehicle selection and configuration to financing and payment. Customers can receive individual support from a Product Genius via chat or telephone or by contacting the dealer directly.” BMW is currently reviewing the extent to which the initiative can be rolled out in other markets and to other of the group’s brands. “It’s important to note that what works well in one market cannot necessarily be transferred or replicated in another,” notes Hemp.

With BMW i Ventures, set up in 2011, the group has its own venture capital unit for investing in fast-growing technology start-ups. The unit invests in the group’s innovation spectrum under Strategy Number ONE > NEXT, an initiative defining BMW’s future goals, which include electric cars and automated driving. Its remit, says Hemp extends “beyond the traditional automotive value chain, from mobility services through vehicle technology to fintech.” A recent example is its investment in Caroobi, which offers a certified garage service, booked online for a fixed price.

What threats and opportunities does eCommerce present for treasurers? Hemp says that BMW’s group treasury believes that new digital formats present great opportunities for improved operational efficiency. “eCommerce is a growing channel and the fastest change is coming from the Asian region, especially China,” she notes.

“One example is the investor communication and interaction for asset-backed security (ABS) transactions in China that, besides using email, also happens via WeChat – among the country’s most important social media mobile apps.”

“If we communicate our bond or ABS transactions for example via new eCommerce channels it is more transparent, often quicker than conventional communication channels and easier for potential investors to access the information.”

“Among its initiatives has been signing up some 250m Indians for bank accounts, as well as creating new digital platforms for cross-border settlements which are common in eCommerce businesses.” These initiatives, in turn, encourage banks and third-party providers such as payment aggregators and telcos to devise services such as digital wallets – aka the e-wallet – enabling consumers to make electronic transactions via their tablet or smartphone.

So how can smaller businesses claim a slice of the steadily-increasing pie? Howden reports that Citi has seen the more agile players dominate a local market by identifying a domestic need which needs disruption or creates value, responding with a product or service nuanced to reflect that market and backing it up with great service. He cites Indonesia’s motorbike taxi booking service Go-Jek as a textbook example.

“Go-Jek took a service that has been around for years – roadside hailing a motorbike for transport – and brought it into a mobile phone app-based solution. That works very well in Indonesia, where traffic volumes are intense and traditional car-based transportation services are more challenging. By taking an existing solution and formalising it, they’ve been able to expand beyond their core ride-hailing service into about 15 different business lines, including payment services to their large and growing user space. The data they collect from the various businesses is very valuable.”

Another steadily-growing business is Travelzoo, an online service offering deals on hotels and flights, whose online community globally totals 28 million members with around 3.6 million in the Asia Pacific region. Its service includes a weekly top 20 email newsletter highlighting the best last-minute deals.

Honnus Cheung, Travelzoo’s CFO for Asia Pacific says that setting up an ecosystem in a new territory is less of a challenge than setting up an e-payments mechanism. “That’s why we negotiate with the local acquiring bank and payment processor to accept the local currency. We also use the same agreement to pay our local merchants. The challenge for us is that we have to manage quite a lot of foreign currency right now and many of them – particularly the yen or the Australian dollar – have been volatile against the US dollar.

“We try to centralise our major currencies by having one regional bank, into which we can put the majority of our cash balance.”

A further challenge for Travelzoo is identifying the sweet spot between efficiency and security in the customer payment journey. “Nowadays, most of the customers expect an efficient and convenient online or mobile payment process, especially for small value purchases,” says Cheung. “At the same time they also demand that the payment transaction is secure.

“That’s why if the price is a little high – more than US$500 for example – as the provider you may need to create a more secure mechanism in which to conclude the transaction. As a customer and a credit card holder, I want to be provided with better cyber-security and to achieve it I may have more patience than to demand that it’s completed in just one or two clicks.”

Financial strategy is key

So how should treasurers go about optimising their role in this brave new world? “It’s crucial that treasurers educate themselves. Don’t sit back and watch an eCommerce transformation happen through a purely financial perspective,” suggests Ken Yontz, Global VP, Transformation Management, for product information network 1WorldSync.

“Be strategically involved in the larger business decisions, as establishing an eCommerce presence requires devoted financial investment. Treasurers should understand the eCommerce tools and technologies in place to make smart financial decisions.”

Yontz believes that eCommerce presents obvious valuation opportunities for treasurers, as the more that successful companies open new channels of revenue, the more they will be worth. eCommerce implementation also provides opportunities to explore merger and acquisition strategies, digital strategy and value positioning in the finance space.

“However, setting the wrong digital strategy has serious financial implications and timing on investments – or lack thereof – will severely impact company finances,” he warns. “Growing eCommerce capabilities requires a strong financial strategy that supports digital commerce transformation.”

How might the market change over the years ahead? “As millennial consumers grow older, they’ll continue to take over the market in terms of wallet share,” says Yontz. “This generation grew up with technology in their hands, which is quite a shift from the catalogue-browsing, in-store shopping generation before them.

“As a result, you can expect the commerce experience to become more and more connected in the future, putting technology at the core of every customer interaction. eCommerce certainly won’t become the only channel to shop – there will still always be a need for human interaction in commerce – but the experience will become more convenient and informed through digital.”

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