"Future events cast their shadow much earlier."
When Cicero said this, more than 2,000 years ago, he wasn't shopping on Mercado Libre or subscribing to Amazon Prime. He didn't follow Magalu's Lu on Tik Tok or take an Uber Pool during rush hour. But the famous Roman orator's phrase is more alive than ever when applied to the accelerated formation of new business ecosystems.
In recent weeks we have seen several mergers and acquisitions in Brazilian retail. Traditional players teaming up with startups, disputes over brands and assets, digital acceleration and business arenas becoming less and less defined.
Those who have been surprised by the speed of this transformation have not paid attention to the shadows that have been cast around the world in recent decades.
It's natural to attribute a large part of this transformation to technology. After all, cloud computing has democratized access to technology, enabled high-speed data processing and availability, and enabled a leap forward in artificial intelligence. And 5G will power another turbine in this rocket. But technology is only the means.
I would highlight two other business elements that have been strengthened by the technological leap and, combined, have set the strategic tone for the latest market movements: customer centricity and the network effect.
The customer wasn't always right
Until the mid-twentieth century, companies faced little competition. What counted was dominance of the value chain. The greatest operational efficiency won.
Strategy as a science applied to business began in earnest at the end of the 1960s, when competition became fiercer - and was definitively established in 1979, in Michael Porter's seminal article in the Harvard Business Review. If you studied business strategy between the 80s and 90s, your main source was probably Porter.
What is most striking about his work today is how much more important the competitors are than the customer. The consumer is there, but he's only one of the 5 forces, and the graphic representation itself leaves him on the sidelines.
This approach dominated business theory for decades, influencing a whole generation of entrepreneurs and businesspeople, and this only began to change in the mid-2000s.
An example that captures this new spirit is the Blue Ocean Strategy, by W. Chan Kim and Renée Mauborgne, from 2005. The central idea of the theory, which explained the success of Cirque du Soleil and Starbucks, is that the best way to beat the competition is to stop trying to beat them by creating untapped markets.
In the following decade, cloud computing became popular, drastically reducing infrastructure costs, which enabled the explosion of startups, which were born with the consumer at the center of the value proposition, innovating at speed.
The theory captures and propagates the movement. The lean startup by Eric Ries and Business model generation by Alexander Osterwalder are from 2011. Zero to one, by Peter Thiel, is from 2014.
Personalization at scale begins in earnest. And growth becomes a mental model. Hacking Growth, by Sean Ellis, is only from 2018.
We are so anesthetized by the overwhelming wave of new companies, brands and consumer-centric innovations that we don't realize how new this movement is.
Today it's possible to test and learn in real time. And digital products have a natural liquidity - they can be modified without large capital investments. This brings a new perspective that totally expands the boundaries of companies' original vocation.
So it doesn't matter that my company was born as a food delivery company. If my consumer is asking for drug delivery, or household appliances, financial services and online courses, and is willing to pay for it, I can expand my value proposition.
If I've already had the cost of acquiring that customer, my mission now is to maximize their value throughout their life with me. The nature of my business, my specialization or my competitors are no longer references - but the needs of each of my customers.
And if I do it right, I'll get the greatest benefit of all: the network effect.
Bezos, Ma and the virtuous cycles of growth
In 2001, Jeff Bezos drew the famous "virtuous cycle" on the back of a napkin, sitting in a café in Seattle. In a nutshell: the more products available, the more experience for the consumer, generating more traffic, which generates more growth and reduces costs... and the system feeds back on itself.
At almost the same time, Jack Ma had just launched Alibaba in his apartment in Hangzhou. The Chinese company was born as a B2B marketplace to "facilitate business anywhere".
Twenty years later, Amazon operates or will operate in practically every major business vertical in existence: cloud computing, logistics, advertising, books, music, movies, health food, medicines, healthcare... and counting.
In 2003, Saars caused a lockdown in China, which boosted e-commerce. Jack Ma took advantage of his technological base and launched Taobao, a B2C marketplace. And from there, new services linked to the business, which would make life easier for sellers and buyers on their platforms: payments (Alipay); cloud computing (Alisoft; Alibaba Cloud); digital marketing (Juhuasuan); logistics (Cainiao).
A complete infrastructure chain for any business the group wants to launch. This attracts more and more sellers. So much assortment brings more consumers. With so much scale, other activities not linked to the core business are launched: Alitrip, Hema, Alibaba Health, among others. Pure network effect.
This business structure has become the standard to follow. According to NFX, 70% of the value created by technology companies comes from the network effect.
So, over the last 10 years, we've had a new credo in business: start with a well-defined core business, which offers a more efficient solution to a real pain for a relevant user base. As the consumer base grows, we start to offer new solutions, first related to the core business, then exploring scale. With each new business, new skills are combined with old ones. The expansion of the consumer's relationship with the company generates more data about their consumption patterns - and their likely next best offers.
Scale helps to refine algorithms more quickly. The more users, the better the digital products and the greater the diversification, which attracts more people.
That's why some scholars say that algorithms are a commodity - the difference is scale.
Back to the future of Brazilian retail.
Not everyone realizes it, but ecosystems are already a reality in Brazil.
We've already had important cycles of mergers and acquisitions, but if before this was based on moments of high purchasing power or stability in macroeconomic factors, which attracted investors and enabled IPOs and strong liquidity, now the motivation is different: the search for a recurring consumer base and network effect.
The pandemic has accelerated the movement. E-commerce sales increased by 74% last year alone, according to the Metrics Committee of the Brazilian Chamber of Digital Economy. With more consumers at home and fewer in stores, even the most traditional physical retailers have accelerated their online operations.
Digital natives, on the other hand, or those who were a few steps ahead in digitization, have sophisticated their operations.
Perhaps the biggest example is Magazine Luiza, which became just Magalu, and has acquired 17 companies since 2020. With a portfolio that includes Netshoes, Época Cosméticos, Jovem Nerd, TonoLucro, GrandChef, InLoco, Canaltech, Steal The Look, among others, the company is now active in several arenas. It's difficult to name Magalu's current and future competitors. That's because that's not the focus. It's all about consumer lifetime value and the network effect.
Similar moves are being made by Via, B2W, Arezzo, Grupo Soma, Dasa, Fleury, Raia Drogasil, among many others. The race for the consumer's entire life pulverizes labels and categories, and leads everyone to compete - and cooperate - with everyone else.
Perhaps, like me, you have a natural preoccupation with trying to explain and anticipate the next steps. The best way, in this case, is to follow Cicero. And observe the movement of the shadows of future events.
We are in the midst of a cycle of publication of results from publicly traded companies. It's worth following the presentations of results and strategic plans. Many of them no longer set limits on their operations. On the contrary, they are openly talking about creating ecosystems. The territory and nature of the next mergers and acquisitions are already being announced. The shadows are moving.
The time is right for this. Consumers are more digital, technology is more accessible, retail is changing, with new business models. There is liquidity in the market and good companies and startups for sale.
All this should fuel a major evolution and maturation of the Brazilian market, towards the creation of large business ecosystems, like Amazon and Alibaba. And whether you're a professional, executive, investor, developer, startup founder or even a customer, this is a unique time of great opportunities. You just have to be prepared to take advantage of them.
