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5 August 20216 minute read

RetailTech: How digitization in the retail industry is shaping the way we shop in Australia

Online sales channels and digital strategies are increasingly prevalent. COVID-19 has accelerated this shift towards online as the dominant sales channel, especially during periods of lockdown. This trend is likely to continue, and retailers will be forced to continue examining their business model and their customer interactions in light of it.

Digital marketplaces are growing significantly, taking up a larger share of e-commerce worldwide. In Australia, we expect to see continuing diversification of channel partner strategies, as well as continuing diversification of payment methods – buy now pay later (BNPL) being a notable recent trend. Over time, the point of sale (POS) experience has changed dramatically, now including such aspects as embedded payments platforms within the customer journey, and POS finance/BNPL options.

Collaboration and innovation have been present in financial services in Australia for some time, with strategic alliances and partnerships, joint ventures, and M&A used to the benefit of various players in this sector, as they enhance their product and platform offerings, acquire new customers, increase market share, and maintain a healthy culture of innovation. We have started to see similar trends playing out in the Australian retail sector, and expect to see this continue.

In particular, this will include greater participation of fintechs and optimization of the customer journey – including to more closely integrate payments and delivery services within the existing online platform of many retailers. There will need to be greater collaboration between retailers and banks and other financial services players, as well as increased participation by fintechs in the customer journey (eg use of white-labelled payments platforms, embedded payments tools/products and related services).

Consistent with the above themes, it is likely there will be a prevalence of M&A (particularly minority investments by retailers in emerging growth companies and startups) and use of corporate venture capital, as retailers expand their digital offering, and provide a more fulsome offering as part of the customer journey. In addition to enhancing the customer experience, one of the main benefits of this strategy is that it potentially avoids the need for retailers to develop their own technology in-house. It also allows retailers to benefit from a strategic relationship with technology providers, as well as ensuring access to product and platform innovation.

We expect many retailers will begin (or continue) to use the above avenues in an effort to drive customer loyalty and maximize customer stickiness – developing (or enhancing) a customer-centric ecosystem.

While all the innovation and opportunities described above are exciting, they do raise a number of issues that retailers will need to pay close attention to:

Regulatory and compliance requirements: Particularly where retail and financial services solutions become embedded in one place, this has the potential to significantly change the existing regulatory and compliance requirements. In many cases, smaller fintechs will look to larger organisations to assist with compliance; however this will potentially be less relevant in the case of partnerships and similar arrangements with retailers. Within this regulated context, depending on whose channel is being used, this may affect the respective parties’ approach to ring-fencing of risk, and how best to structure the necessary compliance function. In addition, security and fraud considerations will also be paramount, especially where dealing with personal information and financial services.

Input of regulators: Many regulators have been vocal on this, one example being competition regulator (the Australian Competition and Consumer Commission) which recently issued announcements about increased scrutiny in the acquisition of fintechs. Many of these announcements were more focussed on corporate activity by large Australian financial institutions, meaning it is possible less emphasis will be given in the context of actions by retailers.

Investment approach: There are numerous ways retailers will pursue partnerships and similar arrangements in this area, including M&A (whether by way of 100 percent acquisitions, majority stake transactions, minority stake transactions and/or call options), strategic alliances and partnerships, joint ventures, and corporate venture capital. Convertible notes might also be an avenue worth considering, especially where there are valuation difficulties. Each transaction structure will require a bespoke approach to due diligence, governance and control rights, and transaction documentation.

Innovation and intellectual property: Until recently, intellectual property has been an asset that has been neglected or seen as an afterthought. The rise of e-commerce and the digital economy has transformed this thinking, and IP in e-commerce is increasingly being viewed as a solution to help leverage against the new wave of disruptions as well as a high value-bearing asset. In order to capitalize on this, retailers must ensure they have flexible and adaptive IP strategies to accommodate the relatively complex and shifting landscape. The strategy required will be business dependent. For example, small, fast-paced data or software driven businesses are more likely to consider protection mechanisms for trade secrets through nondisclosure agreements for employees and consultants, robust terms of service and privacy protections, technology licences and source code or object code escrows. For businesses where IP is the currency of R&D, global value chains, venture capital and digital platforms, protection for inventions will receive a more central focus – this means ensuring there is early exploration of the potential need for patent, trade mark, copyright or design applications, and taking early steps to protect such IP through registration in core markets. Mutual recognition of IP in overseas markets is also imperative. Perhaps the most important point is, taking stock of IP assets now will both create and maintain value in your business.

International best practice: Retailers have the opportunity to explore international successes, especially regarding look and feel of the product/ platform, how best to work within the confines of the existing IT environment, and how to most appropriately structure the applicable governance and compliance framework. Drawing on international best practice in the US, UK and Europe will be a key opportunity area for Australian retailers seeking to distinguish themselves from their competitors.

Scrutiny and assessment of partner risk: Retailers need to gain a deep understanding of who they are contracting with, including what the partner’s internal governance structure and compliance function looks like, and whether there are risks of reputational damage and to brand protection. As part of this, the parties will need to discuss how best to allocate responsibility for regulatory compliance and governance functions, what rights of scrutiny should apply, whether (and if so, when) either party can terminate the arrangements, and how each party can best protect its brand.

Changes to the retail sector presents exciting opportunities for many retailers, as well as providers of ancillary services to the retail industry. Technological advances will continue to move rapidly, and it is likely that regulation will move slower. This will create an interesting dynamic as players in the sector attempt to maintain pace with technological advances, while operating within a regulatory environment that will need to react to those advances. Those retailers that are able to effectively navigate this dynamic will be best placed to take advantage of the opportunities presented by the changing landscape.

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