The next Battlefront for East African Retail Industry is Online

Kenya’s retail industry has continued to record positive growth in 2015 and future prospects seems favorable underpinned by a growing middle-class, increasingly sophisticated consumers, the construction of new shopping malls and the continuing expansion of the four leading supermarket chains, namely Nakumatt, Tuskys, Uchumi and Naivas.

Despite setbacks, such as the destruction of Nakumatt’s flagship store during the terrorist attack on the Westgate Mall in Nairobi, the Kenyan capital, in September 2013, the retailing environment has remained positive.

This is due to the growing interest of foreign retailers. Companies such as Spanish clothing retailer Zara planned to start operations in early August 2014 via a distribution agreement with local retailer Deacons, while French retailer Carrefour and South African Game planned to open outlets at Garden City mall.

Despite the strong performance, local retail chains may need to brace themselves for intense completion among themselves and also their international counterparts due to the attractiveness of the sector which is sustained by a growing middle class among other reasons.

One strategy that many retail chains have adopted is rapid physical expansion through either buy out of smaller retail chains or building of new branches from scratch. In the same vein retail chains are competing by ensuring they place themselves in every new mall that comes up.

We at Viffa Consult contend that such a growth strategy is unsustainable especially with the ever changing consumer sophistication and taste, technological changes and globalization.

Viffa Consult think that the earlier the  local retail chain adopt an e-commerce strategy into their long term plans the better for them to have a head start in the looming global competition.

Take for instance Walmart which recently lost $20 billion in market cap in one day, in part because its leadership admitted it needs to invest more into its e-commerce operations. Walmart isn’t the only retailer struggling with selling on the web — most brick and mortar stores are, too. In 2013, Target even told the Securities and Exchange Commission that “digital sales represented an immaterial amount…of total sales.” With Amazon having such a big head start – claiming a customer base of 244 million in 2014, it’s hard to see how brick-and-mortar retailers can catch up.

All brick-and-mortar chains globally have struggled because they haven’t sufficiently adapted to the fact that retail on the web is a harsher environment compared to what they face on land. Success on the web is achievable, but it requires adopting strategies from other industries such as airlines and credit cards, which also operate in a more cut-throat, price-focused environment.

The top priority for local retail chains should be to capitalize on their biggest asset – customers who visit their stores and connect with their brand. The top goal should be to persuade in-store shoppers to also purchase from the retailer’s web site. This is supported by Kenya National Bureau of statistics (KNBS) which estimates daily internet access at 882,608.

When you think about it, internet retail today is similar to the airline market before frequent flyer programs were introduced. In those days, airline travel was a commodity – passengers selected flights primarily on convenience and price. Similarly, today there’s nothing overly compelling to sway where customers shop online, except for convenience, selection, and price. A website redesign, promises of better service, or even matching competition prices won’t be game-changers.

Frequent flyer programs transformed once-homogeneous airlines into differentiated entities – and similar loyalty programs can do the same for web retail. You will be amazed at how many regular travelers are to their preferred airlines. They take less convenient flights or pay more – all to gain reward points.

Frequent flyer programs have differentiated a commodity product in a manner that engenders loyalty. Analogously, an ambitious loyalty program can convince shoppers who regularly frequent retail chain, for instance, to shop on their website. A rewards program is the long overlooked incentive that can convince in-store shoppers to remain true on the web.

There’s room for creativity – similar to airlines, retailers should offer bronze, silver, and gold status (each level providing enhanced benefits) to provide additional incentives to concentrate purchases at one retailer. Borrowing from the credit card industry, all programs should also allow customers to redeem points on a variety of products, services, and experiences – this enhances the value of collecting points.

The beauty of loyalty programs is they are enhanced by a network of store locations. More locations provide more opportunities for customers to accumulate points. Making loyalty programs a key differentiator leverages a unique competitive advantage – physical stores – of brick-and-mortar chains.

The internet will revolutionize retail. And while it’s easy to be dazzled by its “newness,” e-commerce is in essence an old school commodity market. The same time-tested tactics that have worked in similar situations will work for internet retail.