1、With limited growth in traditional buying and selling,retailers need new revenue and profit streams.By Melanie Sanders,Aaron Cheris,Shyam Unnikrishnan,and Connie KwokHow Engine 2 Expansion Can Power the Future of RetailCopyright 2023 Bain&Company,Inc.All rights reserved.1How Engine 2 Expansion Can P

2、ower the Future of RetailAt a Glance Growth is becoming more elusive in core retailing activities,to the extent that,by 2030,half of industry profits could come from nontraditional sources such as marketplaces,advertising,and financial services.Retailers can seize the opportunities that lie“beyond t

3、rade”by launching Engine 2 businesses that unlock the potential of strategic assets they already own(or capabilities they already have).As Engine 2 development accelerates,three imperatives are vital for successful expansion outside the core:Choose strategic battles carefully,craft a compelling inve

4、stment story,and anticipate operating model tensions.Retailers old and new have been increasingly branching out through the creation of“Engine 2”businesses.Omnichannel players with a long history of physical retailing are moving into areas such as advertising,data services,third-party fulfillment,an

5、d financial or health services.These Engine 2 ventures can create a step change in revenue growth and compensate for the diminishing opportunity available through their traditional growth levers(such as expansion of store footprint).For digital-native retailers focused mainly or exclusively on e-com

6、merce,Engine 2 expansion can be a tonic for profitability.Many such players dont yet have the earnings to match their impressive scale;attractive Engine 2 profit opportunities can offset their weak e-commerce margins.As a potent solution for both revenue and profit growth,Engine 2 business creation

7、is only likely to become a bigger strategic priority for retail.While forecasting amid todays volatility is tricky,Bain&Company estimates that,between 2021 and 2030,retailers in key markets will see only modest growth in sales and profit from core retailing(meaning activities centered on the sale of

8、 goods procured from suppliers).Contrast that with the rosy outlook for activity that reaches beyond trade,including marketplaces,data monetization,and advertising.Strong growth could mean“beyond trade”activity accounts for about 50%of retailer profit in 2030,up from 10%in 2021(see Figure 1).With gr

9、owth likely to become more elusive in core retailing,Engine 2 business creation could determine the sectors winners and losers.But while the stakes are high,retailers should be fired up about the opportunity.The sector need only look at Amazon to see how moving beyond the retail core can be transfor

10、mational.In 2022,its advertising business generated$37.7 billion in net sales after stellar growth(including a 19%year-over-year increase in the fourth quarter).Overall,more than half of Amazons 2022 net sales came from outside its online and physical-store reporting segments.Theres still time(and r

11、oom)for executive teams to use Engine 2 expansion to power their own businesses beyond tradeif they make the right moves today.2How Engine 2 Expansion Can Power the Future of RetailNotes:Trade includes traditional buying and selling,trade spend(e.g.,in grocery),rental of stores-within-stores,and who

12、lesaling(e.g.,by retail brands that also sellthrough third-party channels);beyond trade includes third-party marketplace activity(counted as gross merchandise value),data monetization,monetizing assets with business-to-business customers,and consumer financial services;based on analysis of leading r

13、etailers in Belgium,France,Germany,Netherlands,Portugal,Spain,Sweden,Switzerland,US,Canada,UK,South Africa,Australia,China,Japan,India,Indonesia,and Malaysia;proportions have been rounded Sources:S&P Capital IQ;Edge by Ascential;Euromonitor;GlobalData;Forrester;company annual reports;Bain analysisRe

14、venue by sourceProfit by source202190%10%2030E50%50%202190%2030E65%35%10%Retail industry profit margins20216.0%2030E7.8%Beyond tradeTradeFigure 1:Half of retailer profits could come from“beyond trade”diversification by 2030,according to our analysis in 18 key marketsUnlocking the potential of existi

15、ng strategic assetsMany scale retailers,both omnichannel leaders and e-commerce pure plays,are well placed to create Engine 2 businesses by unlocking the growth potential of strategic assets they already own(or capabilities they already have).These assets and capabilities include vast databases that

16、 offer valuable proprietary insights into consumer behavior;extensive logistics networks that third parties could piggyback upon;existing customer traffic to physical stores,websites,and apps that could be monetized in new ways;cloud and payments technology used for todays core retailing that could

17、be repurposed for other partners;deep supplier relationships that provide a ready-made audience for new advertising ventures;and a strong brand that can underpin expansion into financial services,health,and other areas where trust is essential.Consider JD.coms expansion into the supply of affordable

18、 virtual healthcare consultations with family doctors,via its JD Health International arm.The service is one of a growing number of healthcare Engine 2s developed by retailers around the world,including Kroger in the US,Canadas Loblaw,and Switzerlands Migros.Reaching people in areas of China that ar

19、e not well served by physical healthcare 3How Engine 2 Expansion Can Power the Future of RetailSource:Bain&CompanyHealthcareTelecomMarketplaceFinancial servicesand paymentsFood deliverySocialEntertainmentTravelWholesaleData monetization and analytics Media and adsCloud servicesFulfillment and logist

20、icsOther B2B servicesTech solutionsLoyaltyNewadjacentcategoriesNewgeographic marketsNew formatsEngine 1Engine 2New products and solutions that draw on existingcapabilities and assets,targeting new and existing customersIP ownershipInfrastructure networkSuppliers and partnersData and insightsCustomer

21、sTech capability and assetsBrand strengthUNDERLYING ASSETSCORE TRADEBEYOND TRADEBEYOND TRADEFigure 2:Profitable Engine 2 expansion is possible across many domains,supported by a range of underlying assetsfacilities,JD Health International draws on a range of existing JD.com strengths:its brand,its d

22、igital expertise,its large customer base(588 million active accounts),and the willingness of its customers to act as advocates for its business.Tight integration with its online pharmacy business creates another advantage,in the form of one-stop shopping,for instance.Beyond healthcare,there are mult

23、iple domains that offer retailers continued potential for profitable Engine 2 expansionwith options available in both the business-to-consumer(B2C)and business-to-business(B2B)spheres(see Figure 2).Collectively,they constitute an invigorating addition to Engine 1 growth moves focused on the expansio

24、n of core retailing in new formats,new geographic markets,or adjacent categories.Walmart is one of the scale retailers using existing assets in powerful retail media ventures.The approximately 230 million people globally who visit its stores and websites each week constitute a potent asset,albeit on

25、e that cant be put on the balance sheet.That traffic has underpinned its flourishing global retail advertising arm,which by early 2023 had grown into a$2.7 billion-a-year business.Likewise,Carrefours retail media operation has expanded by offering access to about 80 million customers around the worl

26、d and drawing on data for 8 billion transactions.Other retailers are capitalizing on similar assets in retail mediaor could yet do so.4How Engine 2 Expansion Can Power the Future of RetailBain research suggests that retails push into advertising builds on genuine competitive strengths:59%of advertis

27、ers say that retail media networks offer benefits that other channels cant replicate,while 60%believe tighter data privacy rules will make retail media more important(see the Bain infographic“How Retail Media Networks Can Win with Advertisers”).The attraction for advertisers includes targeted access

28、 to consumers close to the point of purchase.Advertisers also value the vast stores of first-party data that retailers can use to improve ad targeting.Digital wallets generate payments data that can explain consumer purchase patterns and personalize marketing promotions.Financial services continue t

29、o present opportunities well beyond the traditional banking that some retailers have offered for decades.Take digital wallets,for instance.By enabling cashless payment,they dont just simplify checkout;they can also increase access to e-commerce,particularly in regions where many lack bank accounts o

30、r credit cards.Digital wallets generate payments data that can explain consumer purchase patterns and personalize marketing promotions.Benefits such as these have enabled retailers to undercut credit card issuers on fees charged to merchants.Balances held in digital wallets have also allowed players

31、 such as Alibaba to add new financial services profit streams,via expansion into broader lending and wealth management.Not every Engine 2 will spark,howeverWhile they have huge potential,Engine 2 businesses are not easy to build at the best of times,let alone amid rising capital costs,talent shortag

32、es,and relentless pressure to invest more in supply chains,pricing,and other core business priorities.Recent history is littered with Engine 2s that didnt spark.Even Amazon,so successful at expanding beyond trade,has had the odd setback.For instance,its meal delivery service in the US was shut down

33、in 2019,after failing to compete with more established players such as Grubhub,which it ended up partnering with instead.The pace of Engine 2 development has accelerated,too,with retailers looking beyond trade much earlier.Amazon took 18 years from its founding in 1994 to branch out into retail netw

34、ork advertising;it took Noon,the Middle East e-commerce marketplace,3 years from its own inception in 2017 to make the same move.Similarly,JD.com had been in business for 19 years when it started offering fulfillment services;it took Indias Flipkart only 7 years,while Noon had that capability in 2 y

35、ears(see Figure 3).5How Engine 2 Expansion Can Power the Future of RetailRetailerYear foundedYears taken to start selling advertising space388810161718BAlibabaMercado LibreAmazonFlipkartNoonRakutenJD.com19991999199919942007201719971998Note:Years taken calculated from year of founding to year service

36、 launched,not from day-or month-level data,so may emerge as rounded up Source:Company reportsRetailerYear foundedYears taken to offer third-party fulfillment27121414151819BAmazonAlibabaJD.comFlipkartNoonMercado LibreRakuten19991994199919982007201719991997Figure 3:Digital natives are branching out fr

37、om core retailing at a much earlier stage of their development6How Engine 2 Expansion Can Power the Future of RetailAfter a period in which e-commerce pure plays made the greatest strides,long-established omni-channel retailers have also been moving quicker on the Engine 2 front in recent years,laun

38、ching a flurry of new ventures and committing themselves to bold growth goals for their noncore retail activities.Walmart,for instance,has made a succession of Engine 2 moves in the past five years,including expansion into health centers,third-party fulfillment services,and data analytics.These omni

39、channel scale players are also committing themselves to bold goals for their continuing push beyond their established activities.For instance,Carrefour is aiming to triple its e-commerce gross merchandise value to 10 billion between 2021 and 2026,including expansion in marketplaces and quick commerc

40、e.In the same period,it is also looking to add 200 million of recurring operating income from its digital strategy for financial services,among other diversification goals.Retailers should choose strategic battles carefully,craft a compelling investment story,and anticipate operating model tensions.

41、Three imperatives for Engine 2 successAgainst this backdrop of macroeconomic challenges and accelerating new business creation,a few imperatives stand out as particularly important for Engine 2 expansion.Retailers should choose strategic battles carefully,craft a compelling investment story,and anti

42、cipate operating model tensions.Choosing strategic battles carefully.The right Engine 2 strategy requires a clear understanding of the goal and how to measure success.Is the new business reinforcing an existing proposition?If so,measure success on incremental customer lifetime value.Or is it seeking

43、 new profit streams,perhaps from a different customer segment(such as B2B)?If so,measure success on contribution to overall profit.Such distinctions matter,as some Engine 2s are written off after mistakenly being judged on standalone profit contribution,not the customer lifetime value boost to the c

44、ore business(which some companies struggle to track anyway).Its worth noting a third Engine 2 aim:indirect access to a bigger profit pool.For instance,the scale provided by a marketplace can make advertising or third-party“fulfilled by”models viable,even if the marketplaces standalone economics dont

45、 stack up.Once clarified,the strategic goal must be rigorously tested for workability.Is the addressable market well defined and the profit pool large or growing?Will the new business meet an underserved need,7How Engine 2 Expansion Can Power the Future of Retailor better meet an existing need with

46、a new and disruptive solution?Realistically,how much time and investment will be needed to break even in various scenarios,and is that acceptable?Do you have the scale,assets,expertise,and partnerships to be credible as a new entrant?Remember that building a conglomerate of independent business unit

47、s is not the goal.Engine 2 expansion works best when it ties in closely with the corefor instance,by increasing the“stickiness”of a retail ecosystem through capturing more of the customers attention and spending.Crafting a compelling investment story.A new growth engine can boost a retailers stock p

48、rice in the expectation of future profits,especially in the early days,before it breaks even.Yet Engine 2 projects requiring heavy,multiyear investment can test the patience of investors,especially those used to strong cash flow and dividend payouts.Some might prefer to invest directly in start-ups

49、rather than fund a retailers disruptive growth ambitions.Sentiment has also turned against early-stage investments with an uncertain path to profit,amid a broad revaluation of tech stocks.While digital-native retailers were granted years to build up their initially loss-making ecosystems,even they a

50、re now under pressure to increase short-term profit.Forecasting is more fraught than usual today,and retailers need to understand profit outcomes and consequences in different scaling scenarios.All of these factors underline the need for executive teams to craft a compelling equity story for Engine

51、2 ventures.That narrative must be simple,tangible,authentic,measurable,and exciting.A robust,rather than rose-colored,view of cash flow is vital.Forecasting is more fraught than usual today,and retailers need to understand profit outcomes and consequences in different scaling scenarios.But current a

52、nd future investors still want to see a clear path to profitability.Lastly,retailers should invest in their Engine 2 projects like a venture capital outfit,releasing funds in phases as the business gains traction and confidence grows in its ability to scale.That can lower the risk of capital and ope

53、rating expenditure commitments,while building credibility with investors.Anticipating operating model tensions.Building a new growth engine is different from day-to-day operations.It requires a shift from tight control to delegated trustand a“pivot,persevere,or perish”mindset based on prototyping an

54、d short feedback loops.This likely means grounding the operating 8How Engine 2 Expansion Can Power the Future of Retailmodel in agile principles.In such a model,leaders set the new business growth mission,then empower the innovation team to execute on it.They adopt a venture capitalstyle flexibility

55、 in planning and prioritization,resource allocation,and performance review.They hire new talent and create new roles,to inject expertise and innovation experience.They also strengthen business processes and technology that might otherwise slow progress.Often,setting up a separate unit with the licen

56、se to operate differently is the quickest way to achieve agility.But that unit will still need access to core business assets,which can cause friction in areas such as objective setting,transfer pricing,and sales and profit recognition.For example,the team setting up a retail media business might cl

57、ash with the retailers buyers.The former might see suppliers solely as potential customers,but buyers have a more complex relationship with suppliers,including sometimes-tense pricing negotiations.The new business might also cannibalize the core.And,as it scales,theres also the question of whether(a

58、nd how)it should be reintegrated.In all of these contexts,retailers need to anticipate the necessary operating model changes.From the new ventures creation,they must be clear on structure,accountabilities,transfer pricing,and the recognition of sales and profit.Converging on a sustainable economic f

59、ormulaThe mounting importance of Engine 2 expansion is a powerful demonstration of the convergence that will be one of the defining characteristics of retail over the next decade(see the Bain Brief“The Future of Retail:The Age of Convergence”).Companies with a long history in physical retail need En

60、gine 2 growth.So do digital natives that have only been operating a decade or two,or even just a few years.In both cases,its about making the economics of retail sustainable for the long term,at a time when the deepening penetration of the online channel is putting sustained dilutive pressure on pro

61、fits.Moving outside the core and into the unfamiliar requires a careful approach,but retailers should not underestimate the Engine 2 potential of existing assets:They can be the platform for a truly profitable future.Bold ideas.Bold teams.Extraordinary results.Bain&Company is a global consultancy th

62、at helps the worlds most ambitious change makers define the future.Across 65 cities in 40 countries,we work alongside our clients as one team with a shared ambition to achieve extraordinary results,outperform the competition,and redefine industries.We complement our tailored,integrated expertise wit

63、h a vibrant ecosystem of digital innovators to deliver better,faster,and more enduring outcomes.Our 10-year commitment to invest more than$1 billion in pro bono services brings our talent,expertise,and insight to organizations tackling todays urgent challenges in education,racial equity,social justice,economic development,and the environment.Since our founding in 1973,we have measured our success by the success of our clients,and we proudly maintain the highest level of client advocacy in the industry.For more information,visit