Why Is Abercrombie & Fitch Partnering With Zalora?

Abercrombie & Fitch (NYSE:ANF), on April 10, announced a partnership with online fashion retailer Zalora, that has a presence in 11 countries, including Singapore, Thailand, Indonesia, Hong Kong, and the Philippines. The US retailer will start with selling Hollister products through the online platform from next week, and ANF merchandise will follow later on in the month. Such an agreement would give Abercrombie access to Zalora’s 600 million online customers, located mainly in Southeast Asia, where the company does not have much of a retail presence. The website, founded in 2012, promises deliveries as fast as three hours in some locations, as well as up to 100-day free returns.

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Immense E-Commerce Potential In The Region

Southeast Asia’s current internet user base of 260 million users is expected to grow to an estimated 480 million users by 2020, making it the world’s fastest growing internet market, according to a report by Singaporean sovereign wealth fund Temasek and Google. Moreover, a young population, 70% of which is under 40 years of age, a lack of big box retailers, and a growing middle class are expected to make the region’s internet economy surge to a massive $200 billion annually by 2025. This would make the e-commerce in the region grow at an annual rate of 32% per year, reaching $88 billion in the next decade, with all six countries in the region expected to have an e-commerce market of at least $5 billion.

Despite this massive potential, the online marketplace remains quite small when compared to China and the US. The 3% online market penetration in the region results in approximately $6 billion in sales, while in China and the US, a 14% penetration in both regions have led to $293 billion and $270 billion in online sales. However, this seems to be poised for a change. This is because, while 100 million digital consumers have made an online purchase, a larger group, representing 150 million consumers, have “taken the first big step of researching products or engaging with sellers online.” Moreover, 24% of all clothing and footwear has been estimated to be purchased online. This will be beneficial to Abercrombie, and since every sale through this website will be additional revenue, without any fixed costs associated, it may have a positive impact on the margins. The company is also not that heavily present in the continent, and hence, a presence on the website will not result in cannibalization. In the past as well, wholesale arrangements with online retailers such as Next plc and Asos Plc in the United Kingdom have resulted in increased revenue, with $10 million additional sales in the year 2015.

A Number Of Hurdles Remain

Lack of a solid regional payment system and an adequate logistics infrastructure leads the list of challenges that need to be overcome. Furthermore, a survey conducted by Bain and Google found that consumers in the region don’t fully trust e-commerce platforms. Hence, success in the region would mean a better understanding of the consumer mindset. To overcome the logistics problems, Zalora in the Philippines has a delivery system that comprises of 400 motorcycle riders, to provide speedier options to traditional truck deliveries, apart from warehouses and delivery hubs. This system handles 75% of all the company’s orders. This also aims to solve the dearth of credit cards or bank accounts in the region, with cash on delivery ruling the roost.

Another unique aspect of the region’s online shopping market is the large number of sites, which has resulted in market fragmentation to such an extent that no platform has a market share exceeding 20%. In addition, the reason for choosing a particular retailer may not be one that provides the cheapest deal, as is usually the case; the consumers in this part of the world give greater importance to their experience. As per the survey, 60% of consumers cited experience and 61% mentioned choice as primary influencers for their decision, while only 45% went for the price.

E-commerce in the region is still in its nascent stage, and it hasn’t reached the level where it will disrupt the brick-and-mortar business. Furthermore, the mall culture in the region is different from the US, in the sense that it is not frequented just for shopping, but that consumers like going to malls in general. Keeping this in mind, many retailers are aiming to maximize the potential of both these channels. For example, Zalora often opens pop-up shops, which exist only for a few months, in malls in Singapore, the Philippines, Hong Kong, and Malaysia. Such stores are meant to make consumers aware of the merchandise available on their online platform. Hence, while a massive potential exists in the region, only companies who are able to adopt unique and local strategies will likely achieve success.

Have more questions about Abercrombie & Fitch? See the links below:

• Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores
• Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Abercrombie Revamps Brand To Attract Customers
• Abercrombie & Fitch’s Direct Business Is Its Only Beacon Of Hope

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