It is clear from our earlier discussion that digital retail platforms can be thought as two-side markets. So far, we have focused on one side, the customer. The other side are the vendors or sellers. In the same way that the traditional mall needs tons of visitors and great tenants to be successful, the rater Platform needs the online visitors and the sellers to offer their products. From the platform perspective, the vendors are asked key as fundamentals, as the buyers, vendors are customers for the platform. In my experience, this becomes evident very quickly when you have the opportunity to talk about retail transformation with managers at digital platforms, you won't find any confrontational tone between platforms, managers, and sellers. I don't think you can say the same of the relationship between traditional retailers and their suppliers. From inception, digital retail platforms knew that their success depending on happy customers and happy sellers. When platforms managers define or adjust commissions for the platform products, they are always keeping an eye on the impact that this will have on their relationship with the vendors. They need for the vendors to be happy and eager to offer all their assortment in the platforms with the best customer service and the lowest possible prices. This new perspective of vendors and the relationship that these generate has pushed traditional retailers to revisit their approach to managing relationships with their suppliers. In some cases, because the retailers are trying to become platforms themselves. In others, because the retailer can observe the positive result of this more collaborative approach. It is also true that this love story between sellers and platforms can also get unpleasant very quickly. Let me share with you the story of X Fire. X Fire is a retail chain with two stores that sells paintball-related products in the North-Eastern part of the United States. In 2012, X Fire began selling products online through Amazon marketplace, the retail platform run by Amazon. As you probably know, Amazon, in addition to its marketplace, also run a more traditional retail business. X Fire, benefit from being an early mover in the online space and selling products through Amazon marketplace was a unique opportunity. In only four years, by 2016, the company listed more than 500 products on Amazon, and the online sales represented 80 percent of X Fire revenues. Only a few years ago, the online sales were zero, and in 2016, 80 percent of X Fire revenue was coming not from a physical store, but from their own impresses in the retail platform. But around that time, the head of online sales at X Fire started noticing that their most popular products were struggling. He discovered that Amazon had begun sourcing those products from X Fire's suppliers and selling them directly. More than that, he suspected that Amazon was using the data from X Fire products listings to test the paintball market before entering as a seller, and placing order with their suppliers. X Fire was not alone. Other third-party sellers also complained that Amazon frequently did this. More than that, Amazon was not respecting the manufacturer's determined minimum price, making the competition between X Fire and Amazon almost impossible. X Fire quickly realized that the paintball retail market was highly fragmented and combating Amazon practices will be difficult if not impossible for them. Now, let's see what happened here in the original setting, when things were going well for both X Fire and Amazon, the manufacturer, the company that makes the paintball products, was selling those to X Fire. X Fire saw the opportunity and the possibility of increased business by becoming a seller in a digital platform. Amazon, the platform was happy that X Fire started to offer their products to them and help X Fire with a large number of visitors coming to the platform every day. Now, the next thing is what is interesting. Amazon noticed that there were certain products that X Fire was selling that were particularly attractive to customers. They decide to pick up the phone and reach out to the manufacturers to place orders for those high-selling products. By doing this, they bypassed X Fire. Amazon didn't place order for all 500 products that X Fire was selling. They only did that for the bestseller. It is not hard to pick winners if you have the data. Part of the value that X Fire and any seller brings to the platforms and to the customers is carrying a large assortment. That is what makes the platform attractive. However, not every single product is a winner and this is something that retailers have known for a while. This is where Amazon's decision becomes interesting. Amazon didn't decide to place order for all possible payable products or products that were available from the manufacturer. They just decide to place order for those winning items that they knew were going to sell well. Amazon knew that because they actually have the data. The data from X Fire sales of those products. Amazon is doing that for multiple reasons. One of the reasons is that by cutting the middleman, they can get a fraction of the margin that they were usually giving to X Fire. They could also offer better prices for the most attractive products and with that, increase the traffic and the relevance of the platform for the customers in the future. Regardless of the ultimate reason, it is important to notice that by doing that, Amazon is breaking the implicit contract between the seller and the platform. Amazon now effectively became a competitor to X Fire and is not a partner anymore. If anything, a poor partner. In this context, it is possible to argue that Amazon is doing something even more aggressive than what the retailers were doing in the past with manufacturers. However, in this case, the one that is being affected, at least for now, is not the manufacturer but the vendor. What can X Fire do about this move? Well, it is probably part of a longer conversation that we cannot have today. However, I would like to highlight the need to be aware of the potential risks of engaging with the platform. Sellers should try hard to set the ground rules before starting the relationship with the manufacturers and the platforms. X Fire definitely benefit from being on Amazon platform. In fact, in only four years, 80 percent of their sales were coming through that channel. I am not advocating here for not joining the platform. However, I want to call your attention to the potential risks. X Fire might want to think carefully about how to set the relationship for both manufacturers that provide the paintball guns and their relationship with the platform, Amazon in this case. While platforms have become increasingly important in retail today, concerns are growing in about the conflicts between platforms and sellers. In particular, while many platforms and sellers create value together, there is always a temptation for the platform to enter the seller space with very similar or actually the same offering. In this module, we put special emphasis on digital retail platforms. However, the platform approach is not the only way to navigate successfully the digital transformation. To excel in this digital environment, I want to be absolutely clear about the need to excel in their retail fundamentals more than ever. The fundamentals that drove retailer success in the past are still essential today. In the past, retailer success was driven by accurately forecasting the demand, making thoughtful assortment decisions, effective inventory management, and smart pricing. Finally, location is still essential and this is something that David Bell emphasized clearly in his book. The need to excel in these five factors. Forecasting, assortment, inventory, pricing, and location, are still true today. While we can get excited about the opportunities that the digital retail environment open to both traditional retailers and new comers, there is no way to successfully compete in this retail environment without a solid understanding and execution of these five factors. As we discussed in the previous module, forecasting is deeply connected to analytics capability. But this is also true for the assortment decisions. Assortment in the past was driven exclusively by experience and gut feeling of smart managers. That experience is still very relevant. However, experience plus analytics can help a retailer gain the advantage needed to beat the competitor and stay relevant. Assortment decisions today cannot rely only on managerial experience and needs to incorporate the tools available to make those calls. Deciding on what categories to carry and what product within those categories is tough. You need to constantly decide which products to include and which products should be discontinued. These decisions need to be made at the scale and frequency that many retailers haven't seen before. When it comes to inventory management, a very similar situation arises. Simple solid heuristics are not going to carry it anymore. The optimal inventory decisions are harder than ever. As we have seen, the supply chains today are a complex network of stores, online stores, pickup points, and distribution centers. All this makes the inventory management decision more complex in an environment where competition is intense. Being thoughtful and smart about when and where to carry the inventory can be the difference between success and failure. Pricing has always been key, and this is not exception today. Customers have the ability to compare prices across retailers like they never have been able to do before. The best pricing no longer means the lowest pricing for the item because it usually comes with a combination of delivery options and delivery timing that affects the price perception on the customer side. Again, experience in this pricing decision is very useful. However, if this experience is not supported with strong analytics, is going to fall short in the digital world. Finally, the relevance of the retail location is still true today. The change is in what location means. In the next module, we'll see what we mean by location in the digital space, but for now, I want to emphasize the fact that the fundamentals are as critical as ever before. It will be a big mistake to dive into a sophisticated digital transformation, ignoring the fact that the company will need to excel in these five components. Excelling in these fundamentals is an area where traditional retailers can actually have an advantage with respect to digital platforms. Traditional retailers have the scale and the possibility to coordinate decisions to optimize throughout the supply chain. This can drive a cohesive and coherent offering to their customers. Retail platforms by their own nature do not directly control what is being offered in the platform in terms of pricing, availability, and assortment. For the platforms, this is not only a complex problem, but they also cannot solve it without becoming a competitor to their vendors. In this sense, excelling the fundamentals seems a priori to be simpler for integrated retailers compared to digital platforms. Remember, a pure platform can only think of incentives to improve decisions of a large number of vendors. Definitely a very complex task. Today, many retail companies compete successfully in the digital space. Some of these companies with a traditional e-commerce approach, while others have entered the space with a platform approach. In China, for example, two of the main digital retailers today are JD and Alibaba. Alibaba, as we discussed before, started as a traditional retail platform. In its origin, JD approach to the market was based on a traditional e-commerce model. However, over time, these two companies, pushed by competition, started to transform and adapt their business model. Today, while keeping its e-commerce core, JD has incorporated aspects of a digital platform and it's offering to attract new customers and keep the old customers happy. JD has put a big emphasis on this digital platform approach in connection to the physical world. This migration in the business format is also true for Alibaba, which has moved away from a pure platform setup and has adapted to incorporate traditionally calmer components into their business. The reason for this transformation and adaptation, this new hybrid digital format, is driven by the fact that both companies, JD and Alibaba, recognized that they are competitive advantage in each format. The question for them is, how to stay competitive and make that competitive advantage sustainable over time. For that, in a digital context, transformation is key. Sometimes these transformation requires adaptation. The adaptation and changes for JD and Alibaba, don't stop in the digital space. Both companies have aggressively moved into the physical world. This transition to the physical world, and how the physical presence can complement and enhance the digital offering is going to be the focus of our next module. In this module, we discuss and analyze digital platforms. Not only that, we compare platforms to traditional online retailers and have seen where and how these different formats can show strength and weaknesses. More than that, we also saw that traditional manufacturers and brand have integrated forward and open a retail front, both in the physical world and in the digital world. This environment is incredibly dynamic. I also made emphasis on the fact that there is no way to succeed without a strong retail fundamentals. We're going to definitely see changes going forward. The transition is only starting.
