Retail: Syncing The Retail Game
While retailing is all set to boom to more than a $1 trillion industry by 2020 backed by e-tail and omnichannel formats, there will be many winners and some losers
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To click, or not to click, that’s the question
For in that vastness of online choice
When we have shunned this brick-and-mortar hassle
For we enjoy the touchy-feely shopping.
Oh! That someone would put the two together
And blend them into a seamless experience
(With unqualified apologies to a chappie named Bill Shakespeare)
The question now really isn’t whether to click or not to. That has been settled — on both sides, that of the customer and that of the retailer. Both online and offline (brick-and-mortar) retailers have realised the worthwhileness of the other’s position, in other words, their competitors’ strengths.
And both, to the extent possible and resources available, are harvesting the benefits of either. In the case of online retailing, the experience of shopping, the touch and feel of things, the visual and tactile pleasure of a customer, and the satisfaction of having settled something oneself. In the case of brick-and-mortar retailing, it is the wider reach and better market positioning and branding.
Retailing is changing
E-tailing was once considered a threat to the glass-and-window shopping. But the lines between high street and cyber stores is getting fuzzier. Traditional retailers have expanded into online. And slowly but surely, online retailers are setting up brick-and-mortar offline stores. Native online only companies, which roiled traditional brick-and-mortar ones a few years ago, are finding that there are more opportunities in brick-and-mortar formats. And now, the online only entities want to offer a multi-channel experience.
The once offline-only retailers, on their part, are picking up the gauntlet and taking the competition one step further. For instance, in one of the biggest deals globally, Walmart, a brick-and-mortar retailer, acquired a 77 percent stake in Flipkart for $16 billion (Rs 108,880 lakh crore approx.), including $2 billion cash infused, making it the largest acquisition in the country. “This investment is of immense importance for India and will help fuel our ambition to deepen our connection with buyers and sellers and to create the next wave of retail in India,” said Binny Bansal, Flipkart’s co-founder and group CEO in May while announcing the Walmart-Flipkart deal. “While e-commerce is still a relatively small part of retail in India, we see great potential to grow.”
The deal marks the elevation of Walmart from a glass-and-steel retailing behemoth to the online market in an amalgamation of formats called the omnichannel. In India, Walmart is present in the B2B cash-and-carry business, with 21 Best-Price stores and two fulfilment centres that support its on-ground distributors. It has been strong in physical retailing and behind in online e-commerce with just 3 per cent online sales globally. This fusion of online and offline models will offer scale to Walmart’s strategy of providing to local entrepreneurs and small-scale companies access to market places to launch and sell their products, especially in a market as diverse as India.
“Retailing is on the cusp of a boom. We want to provide small businesses the platform and reach across India and it not only is providing ease of doing business to kirana stores, but also about using our platforms to drive the retail business, generate jobs, etc,” says Krish Iyer, President and CEO, Walmart India.Even as global giant’s like Walmart make inroads in India’s e-tailing story, local behemoth Mukesh Ambani’s Reliance Industries (RIL) is setting the stage to conquer the growth opportunity in the online space. In his address to the shareholders at the company’s 41st (AGM), RIL’s CMD Ambani emphasised on the company’s plans: “As Reliance transitions to become a technology platform company, we see our biggest growth opportunity in creating a hybrid, online-to-offline new commercial platform. We shall create this by integrating and synergising the power of Reliance Retail’s physical marketplace with the fabulous strengths of Jio’s digital infrastructure and services.”
Online goes offline
The story on the other side of the retailing divide is equally hyper active. Not to be missing out on the opportunities that steel-and-glass retailing presents, online companies are setting up offline retailing stores or kiosks and front-end stores. Amazon has also bid in a consortium to acquire Aditya Birla’s retail entity More, a food and grocery chain.
Amazon’s India story is a shining example of e-commerce success. Now Amazon, which completed five years in India, has gone all out to beat competition — both new and old — by launching a Hindi version of its mobile website and app (for Android users), further heating up the e-commerce war. “It’s incredible I think that India is very very rapidly moving in the direction of digitisation and we are excited to be in the crossroads of that, Amit Agarwal, India head of Amazon had said during an interview at the WEF held in Davos earlier this year.
Several players that started as native-only online players are turning their e-tailing business on its head. Players such as Pepperfry, Nykaa, Urban Ladder, Myntra and Jaypore and many more have opened brick-and-mortar retail stores in the past one year. Paytm is tying up with a brick-and-mortar store and setting up Paytm Malls for users to be able to see and touch physical products and complete transactions online.Pepperfry, the online furniture retail store, has 21 physical format stores, and more are on the anvil as it franchises out its presence to businessmen across India.
“People need to know how furniture will actually look in their house and, hence, we always thought of having physical stores,” says Ashish Shah, Co-founder, Pepperfry. “Also, it boosts our brand as people can see our branding as opposed to hoardings, which does not come cheap.”
The company has plans to double its store count — known as Studio Pepperfry — in the next few years. The extra stores add to the experience of an online retailer: customers get a first-hand feel of Pepperfry’s furniture. Besides, it is a huge saving on costs to the company. Brick-and-mortar stores not only have an edge in logistics and distribution, they also boost a company’s brand presence on the ground. Having a storefront saves the cost of setting up and renting hoardings, and, at the same time, provides first-hand user experience.
In fact, whether it is online or offline, the retailing space is seeing it all. Not only are foreign firms making a beeline for India, the investments are going to be big. Take for example, the Swedish retailer Ikea. The furnishing and home accessories, which set up its first store in Hyderabad last month, is set to invest Rs 20,000 crore to open a total of 25 stores in India. That’s not all. Even private equity funds have invested $800 million in the retail sector. Thanks to the booming economy, diverse shopping patterns, and growing dispensable income, India is the fifth largest destination for retail, accounting for over 10 per cent of the GDP, and around 8 per cent employment. A Walmart Best Buy store in India, for instance, generates 2,000 direct and indirect jobs.
The good thing is that the e-tailing threat to the brick-and-mortar business model is fading. On the flipside, brick-and-mortar companies are launching their own formats online. The Future Group, for instance, is launching its own Retail 3.0, providing technology and a wider user experience online. With the emergence of modern IT tools such as cloud technology, data analytics and a range of data on customer shopping habits, retail giants such as Future Group are still staunch believers of making it big in the offline segment. If there were benefits to being a pure play online retailer such as rapid scalability, better distribution logistics, increasing customer convenience and faster turnaround of inventories, physical retail formats, too, are not short of “pull” factors. The need to touch and feel products and have a shopping ‘high’ still drives throngs to physical retail stores. Clearly, the lines in retailing are being redrawn.
“India is on the cusp of retail transformation. With the recent tie-ups and acquisitions, consolidation may occur, depending on synergies. The lines between online and offline will blur and a common commerce looks likely to emerge,” says Dilip Piramal, CMD, VIP Industries, one of India’s oldest retailers. “Our retail industry will go the omnichannel way in future. This trend has already picked up. Revenue growth in retail is going to be high in coming years. Currently, everything is bought and sold online right from a house to staples. In offline retailing, which is still largely non-regulated FMCG, staples will be big; but in the formal sector, according to me, fashion, mobiles would be large categories in future,” says Piramal.
Threat or thurst
In India’s $700-billion retailing world, online retailing has hardly made a dent yet. It constitutes just about 2-3 per cent of retail revenue and is largely confined to electronics, mobiles, fashion, garments and other accessories. Future Group Founder and CEO Kishore Biyani, whose retail businesses include Pantaloons and Big Bazaar, dismisses online competition. “In India, retail is dominated by the physical stores format. Why are people making such a hue and cry about online versus offline?”
Biyani has a point. It is probably also one of the reasons online retailers are boosting their visibility through physical stores. Native online retailers have for some time now been on the lookout for brick-and-mortar shops. Nevertheless online retailing is picking up fast in India due to penetration of smartphones and Internet connectivity.
Still, the key question remains. Which format will dominate in the longer run — online or offline? “The question is quite radical, considering the flip of words offline and online. Time will tell which of the two will eventually be dominant from a retail industry standpoint,” says Neville Noronha, MD, DMart.
The shift towards an omnichannel is global, he says. “Online pure play operators understand the value of offline retail and, at the same time, Asian retailers won’t make the mistake of the Western world by ignoring online for too long. There is clear convergence. Most businesses have come to realise that a consumer wants both the experiences: online, convenience and wider choice; offline, visual and textural. Our strategy is the same as before — we will continue to focus on value retailing. Offline does throw up opportunities to be more aspirational and we constantly strive to get better. If online is frictionless, offline is an in-store experience,” adds Noronha. On their part, brick-and-mortar retailers are looking for more space, not only to broaden their visibility on the ground, but also to roll out better in-store experience. In fact, in the second half last year, malls added 3.4 million sq. ft and more than 15 entrants made a splash in India, according to research by CBRE.
Foreign single-brand outlets are looking at setting up shop in India, which, in turn, will further boost brick-and-mortar stores. Reports say that over 50 mid-rung global retailers are planning to enter India, including brands such as Migato, Evisu, Lush Addition, Yoghurt Lab, among others, and they are expected to open nearly 3,000 stores in the next few years.
While this certainly gives a fillip to brick and mortar, the more well-entrenched retailers on the contrary are looking at building a better online presence to drive sales penetration. Most buyers are trying to familiarise themselves with products online, while actual buying tends to happen offline usually.
“About 40 per cent of our business is digitally influenced. Today much discovery is online. But actual shopping happens at the brick and mortar,” says says Ronnie Talati, CEO, Eyewear Division, Titan. “While we have a standalone online play, a chunk of business still comes from offline. This will not be dramatically different for us than for any other retailer. Many purely online retailers have shifted offline and the equation for them has changed; offline has now become a major part of their business,” adds Talati.
Consumption on a rising curve
The play for both native online retailers and chrome-and-glass companies is the vast Indian retailing opportunity. A young, upwardly mobile, aspirational India is looking for more choices, and consumption is on the rise. By some measures, Indian retailing could see a hockey-stick-like rise because income per person is now at an inflection point. For instance, Ikea Hyderbad witnessed more than 40,000 footfalls and did business of over Rs 2.4 crore and Rs 11 lakh-plus in food sales as per reports.
In other parts of the world, when the GDP crosses $2,000 per person, there is a huge rise in consumption. India is likely to cross this mark this year. Countries such as China, Singapore and South Korea experienced a similar J-curve growth in consumption when their GDPs crossed $2,000 per person. A large and fast-growing market that has the spending power is a natural draw for nearly all retailers. It explains why several foreign brands are making a beeline for the Indian shores.
India is seeing a shift in the retailing market place from the non-regulated arenas to the regulated market. GST has been and continues as the key driver for formalisation of the retailing industry.
In fact, the market share of formal retail is expected to rise from single digits of around seven per cent to early teen double-digits of 13 per cent, driven by GST and the expansion of regulated retail. The formal sector is expected to transact business of about Rs 90 lakh crore by 2020. All this augurs well for retailing, both online and offline.
Besides, the overall retailing pie is expanding. Retailing in India is forecast to swell to a $1.1-trillion industry by 2020, from $680 billion in 2017.
The government is also trying to push the Indian retailing sector. It has allowed 100 per cent FDI (foreign direct investment) in single-brand retail stores, which makes it easier for single-brand companies to set up shop in India. The new FDI policy in retail has, of course, still capped FDI in multi-brand retail to 51 per cent, subject to approvals from the respective ministries and through the DIPP (Department of Industrial Policy & Promotion). Segments such as cash-and-carry business can come through the automatic route with the 100 per cent FDI limit.
India’s informal retailing sector is, of course, seeing a shift in business. Most of them are adapting to the new retailing environment and compliance. Besides, the advent of cash-and-carry retailers has helped kirana stores broaden their offerings.
Most of them have begun sourcing in a big way from the cash-and-carry stores. Walmart India, for instance, has 22 Best Buy stores. Other large companies such as Reliance, too, are expanding operations in retail cash-and-carry with more than 40 stores on the ground.
Unbundling of retail
Retailing is not an easy format. For every success story, there are scores of not-so-successful business models.
Subhiksha, a small grocery retailer, folded in 2009. LocalBanya, an online grocery store, could not crack the online grocery retailing format. Carrefour, which test-piloted a store, found the going tough in the cash-and-carry model. Reid and Taylor, an apparel store, raked up substantial cash burn, and had to fold up.
In fact, a war had broken out between online and offline retailers, which drove several, even well-funded ones, out of business. It also affected the businesses of some well-established players. Back in the days, many brick-and-mortar companies lost market share to online operators.
“Online retailers had taken away business, but that was three years ago. Now we are growing at more than 30 per cent in many stores, so it’s difficult for me to say the same now. We are setting up more stores now. And we are also building a strategy that now directs online customers to our offline stores. Online constitutes about 5 per cent of our revenues and will remain so for some time,” says Ritesh Ghosal, CMO, Croma.
Sanity, though, now seems to be returning in retailing. While there is a price war and discounting, that has always been the name of the game, say retailers. Online operators are playing it safe and discounting only categories where they are able to make profits.
“Canabilisation will be there in retail, but it will depend on how companies want to play the various categories. Overall, competition between online and glass-and-steel will shrink from the earlier levels, but won’t go away completely,” Anurag Mathur, Leader, Retail and Consumer Goods Practice, PwC.
Product retailers are also now increasingly beginning to keep the price parity going between online and offline purchases. “If we are giving discounts online, then we ensure that there is a similar discounting strategy in the offline channel as well so that customers have a similar experience across channels. We don’t want to differentiate between channels,” says J. Suresh, MD & CEO, Arvind Lifestyle Brands.Online retailing is also increasingly segmented as only certain categories seem to be doing well. For instance, in Bangalore accessories such as baby diapers are more easily sold online than FMCG.
Online tends to have an edge when consumers want routine products such as electronics, books, consumer durables, mobile phones, and so on. In apparel, customers like to size up the multiple assortments that the format has to offer, even though products are not standardised. A new design in Tamil Nadu can find buyers in New Delhi.
Rajiv Suri, MD, Shoppers Stop, notes that apparel and beauty are top categories online, but avers that companies like his want to offer a seamless experience. “We were one of the early adopters of the omni-channel format. We invested about Rs 60 crore to get our IT infrastructure off the ground. Currently, our online revenues are about two per cent, but what we want to be able to do is offer customers all options.”
Retailers have also been quick to adopt and change in pitching the business models to consumers. In one of the largest categories of retailing, that is, food and groceries and convenience stores, Nature’s Basket has adopted an approach that has shifted from world food gourmet to daily food delight, and is offering its products at specific locations — Mumbai, Pune and Bengaluru. “We believe in the omnichannel play. About 15 per cent of our revenues comes from online and home delivery. We are looking at sustainable and profitable growth,” says MD Avani Davda.
In fact, food and groceries is expected to be one of the largest categories in coming years, and multiple winners could arise in this category. Retailers from all segments are putting their best foot forward whether through specialised standalone stores or multi-brand outlets.
Across the world, retail is a tough industry, and this is not specific to India. Every large and medium retailer in the B2B or B2C segments in India is clearly focusing on segmenting and standing out and working out varied strategies online or offline. And not all the companies are getting drawn into the online slugfest.
“We are looking at online as an alternative channel, where we cannot have our own brick-and-mortar stores. We do not have the courage to burn cash beyond a point. That will be a limiting factor to grow in e-commerce for DMart,” says Noronha.
While online formats are convenient, for small businesses without deep pockets that can end up with a lot of cash burn. Buying keywords and paying affiliates is not getting any cheaper, besides setting up a logistics operation is quite expensive. If online companies want to make it big in certain categories, it calls for much investment. Little surprise then, that many online companies are haemorrhaging.
Nevertheless, there is enough elbow room for the right products and operators. “The good thing about brick-and-mortar retail is that the winner never takes it all. We can have hundreds of different store chains owned by hundreds of Indian entrepreneurs across the country. India throws up that opportunity. Brick-and-mortar retail in India can retain that colour, that diversity,” points out Noronha.
The good news is whether retailing swings online or offline, the customer will always be pampered.