Organized retail giants are gearing up for their second innings into e-commerce - and they are not leaving without a good fight
Organized retail giants are gearing up for their second innings into e-commerce - and they are not leaving without a good fight
In the last year or so, the stress on pure-play online retailers to showcase business profitability, has given these retail giants some respite, in order to take advantage of the visibility of opportunity, and to invest and innovate in the online space
These are interesting times for India's retail sector. The e-commerce space is innovating at breakneck speed. Amazon and Flipkart recently completed their much-awaited Great Indian Sale and the Big Billion Day sale. Not to mention the more than sizable losses. According to news agency Moneycontrol, Flipkart topped the tally for last year with USD 803.99 million in losses. Amazon came second with USD 549.46 million in losses. The mounting losses for e-commerce firms indicate heavy spend on marketing to up the gross merchandise value (GMV) last year.
In Amazon's case, the global ecommerce player has been on a losing spree for the last 23 years. In 1996, two years after its launch, Amazon grew its revenue from USD 511,000 to USD 15.75 million, and its losses grew from USD 303,000 to USD 5.78 million. Its Indian unit reported a 50.2% jump in sales to USD 26.14 million but suffered a loss of USD 3.78 million in a year after launch, Flipkart, on the other hand, clocked USD 100 million from its first Big Billion Day sale in 2014.
It also recorded a net loss of USD 298.3 million (approx) in the same year.
However, these losses don’t concern the spendthrift Indian consumer who gushes over every penny saved on an online purchase and in turn is spending more than ever. Heavy discounts and aggressive marketing over a range of products have the Indian consumer in the online player's pocket. According to PwC’s retail survey conducted in 2016, Indian consumers have adapted the pace towards the omni-channel way of life. Their survey data suggests that Indians buy online primarily because of convenience (65%), followed by price (31%). Unfortunately, the organized retail sector hasn’t impressed the Indian consumer yet. They have disappointed the Indian consumer - in terms of cost, customer experience, and choice.
Organized retail may be soon have its Amazon moment.
According to Pinakiranjan Mishra, Partner and National Leader, Retail and Consumer Products, Ernst &Young (E&Y), the organized retail sector is ready for some change. In the last year or so, the stress on pure-play online retailers to showcase business profitability, has given these retail giants some respite, in order to take advantage of the visibility of opportunity, and to invest and innovate in the online space.
Let’s consider Tata Group, the 150-year-old conglomerate who despite being a major offline retailer since 1998, entered online retail only a year ago in 2016, with an all-new e-commerce portal TataCLiQ. Tata UniStore is the company behind TataCLiQ.com that offers customers the phygital experience through a ‘Cliq and Piq’ payment option that allows you to shop online and collect your order from the store. “Within the first week of launch, it has received orders from every Indian state. In terms of traffic to the website, we are witnessing a 3X growth since the launch date with a 15% repeat rate amongst customers,” said Ashutosh Pandey, CEO, Tata CLiQ, in an interview published on tata.com.
In the past, the organized retail sector has disappointed the Indian consumer - both in terms of price and products. First it was Future Bazaar and then Big Bazaar Direct, Future Group’s much-hyped e-commerce venture, which shut down after almost 3 years of its launch in September 2013. The recent casualty has been USD 41 billion Aditya Birla Group’s flagship e-commerce site Abof.com, which will close down its operations by the end of 2017, after being unable to compete against the heavy discounting model of online rivals such as Flipkart and Amazon.
Abof.com is the only exception to this trend.
As against USD 3.1 billion Future Group, which is suffering a loss of around USD 38.46 million on their e-commerce ventures, such as FutureBazaar.com, Big Bazaar Direct, and Fab Furnish, you would expect the retail major to swear off e-commerce retail. However, the company is playing it safe by not talking about its investments in the online space. Tata CLiQ, on the other hand, has gone one step ahead by stating that the company has got into the e-commerce space to play the long game.
Shoppers Stop also, is looking at generating 10% revenue from online sales by 2020.
Mukesh Ambani-led Reliance Industries Ltd’s retail arm Reliance Retail is preparing to capture the top spot as India’s top online grocery retailer by 2020.
We anticipate that the retail giants are gearing up for a second coming into e-commerce and this time they won't go down without a fight. How?
Read on to find out.
In the year 2007, the Indian retail sector was estimated to be worth USD 350 billion. It was also around the time when 97% of the Indian retail market was dominated by traditional 'kirana' or 'mom and pop' stores. India's vast geographic, cultural, and economic diversity has encouraged traditional retail to prolifer for centuries because of a strong need and preference for personalized shopping requirements. The organized retail sector by that time, had developed a business model and was expanding very rapidly to get scale, but was badly hit by e-commerce. It was the year when Flipkart launched its business as an online bookseller in India. Since then, the world of retail has been the same again.
Today the Indian retail market is estimated to cross USD 1.3 trillion by 2020 from the current market size of USD 500 billion. According to Anurag Mathur, Partner-Consumer and Retail at PriceWaterhouseCoopers (PwC), organized retail will observe a 28% growth whereas e-commerce would be about 46%.“Both e-commerce and organized retail will grow fast although it is only in the last one and a half years that offline retail players got serious about online retail,” said Mathur.
The Big Trigger: Demonetization and the Rise of Digital Payments
One of the major reasons why this was possible is the Modi government’s November 8 demonetization drive in 2016, which has had a positive impact on organized retail unlike several other sectors. According to E&Y’s Mishra, several industries including food and groceries benefitted -- because citizens didn't have cash to pay at local kirana stores -- many of them saw the spike in the prices as an aftermath of demonetization. The fashion and apparel unit suffered because buying clothes wasn’t a priority for consumers at the time. Most major retailers had already understood the importance of bringing the convenience and interactivity of online commerce into the offline world thereby integrating digital wallet into their point-of-sale systems.
For instance, Shoppers Stop launched its digital wallet in September 2015, Reliance Retail launched ‘JioMoney’ in May 2016, and Future Group launched FuturePay in October 2016. The penetration of mobile Internet and smartphones aggregate, mobile wallets, with their ease of use and convenience, as expected, have grown in popularity ever since.
According to a report, digital transactions, trebled and quadrupled in volume and value across various modes from wallets to cards and interbank transfers from a year earlier. The mobile wallet industry is expected to maintain the pace of its current expansion with transaction volume expected to touch USD 32 billion by 2022 and the value of transactions is also expected to reach INR 32 trillion by 2021, growing at a rate of 126%.
GST – The Great Leveller
“GST will significantly impact the retail sector,” said Mishra. It will bring two major reforms in the retail sector. One is definitely the shift from unorganized to organized retail, and second is the improvement in margins. "The prevailing revenue neutral rate for apparel industry is 12-14%, and any rate set out by the new GST regime above it would have affected demand in the short-term as companies would pass on hikes to consumers, However, with the latest reports, rate for the branded apparels has been fixed at 12%, expected to have a neutral impact on the apparel industry. The GST would reduce competition from the unorganized sector and provide a level playing field to the organized branded players," said a Credit Analysis & Research Limited report.
GST will be able to set-off the service tax paid on the rent as input tax credit against the taxes to be paid on the final revenue. According to Mathur at PwC, a fully compliant value-chain will be more profitable than a part complaint one. As a retailer if you buy something from a vendor and you will be able to check the value chain, you can negotiate the credits that are available in the entire chain. As a result, the pricing and procurement will be better.
“That’s where the retailers will get a more level playing field,” added Mathur.
Know your customer and technology
Shoppers Stop, with an annual turnover of USD 300 million, owned by K Raheja Corp Group is one of the oldest players in the organized retail business. The department store chain, owned by the K Raheja Corp Group, has over 83 stores across 38 cities in India. In 1991, it launched its first store in Mumbai, and since then it has made consistent efforts to introduce innovative schemes such as the loyalty programs which has garnered over 4.6 million First Citizen members and one million Shoppers Stop Mobile app download. The retailer believes it can use anonymized aggregate data to provide mapping, directions and personalized in-store promotions to customers in the coming months. The retail major is aiming to accelerate the digitization of its stores in-line with its omni-channel strategy by 2020.
According to Anil Shankar, Customer Care Associate & Vice President - IT, Shoppers Stop, this is a result of a sustained effort that has gone in the last couple of years. We have put in unrelenting effort in a direction where things are moving. Shankar has closely observed the evolution of the Indian retail sector for over two decades. He said that there has been a consistent effort in terms of how customer segments are moving and how customer preferences have changed - we have to align their strategies internally and put tech into play.
In organized retail, this change is happening.“In the last 2-3 years, retailers are looking at deploying a cross-channel strategy. We acknowledge the fact that they will need to be available to the customer on channels in which the customer is available,” added Shankar. Multichannel retailing has been helping India’s consumption story and increasing the share of organized retail in the total retail pie. According to Mathur, in the present scenario, omni-channel agenda coupled with the pressures of delivering superior customer experience and in the face of aggressive competition will put the onus on developing an operating model which is strategically aligned to business goals.
As a retailer, you can't choose between e-commerce and brick and mortar today.
According to Veneeth Purushotaman, currently the CIO of Fortis Healthcare, in the past, has led technology leadership roles across several retail mammoths, such as Shoppers Stop, HyperCity and Bharti Retail. He said, “the decision to choose the channel lies with the consumer. However, the choice of being the channel is obviously in the hands of the retailer. If retailers want to do business in this age, and want to be profitable, they don't have a choice but to be present on every channel.”
“Retail is the most dynamic and fast growing industry. Consolidation is inevitable and we see that happening among online and offline players. A good offline retailer player could shake hands with an established online player rather than going all out and creating an online presence,” he added.
According to E&Y’s Mishra, the element of connecting with customers, creating engagement, and connecting with the brand is significant – that is an area where retailers have to do more. With the variety of technology, whether it is through big data, artificial intelligence IoT, a lot of this data that can be embedded into the physical world.
Today, retailers are using predictive analytics to data optimize customer experiences by identifying the most valuable big data streams and integrating cross-channel data requirements for targeting customers, This data is also being used for understanding retail, and staying ahead of new trends, buying preferences and product affinities, checking inventory status, and segmenting and targeting customers accurately. “The change has led through the tech side. Some retail players have put in a lot of tech investment especially in the online retail space,” added Shankar.
Essar Retail is a venture of USD 22 billion Essar Group. It has over 300 telecom retail outlets spread across 48 cities in India. Meheriar Patel, who is the Chief Information Officer, AGC Networks Ltd and Essar Retail, believe that a convergence of technologies is happening in digital technologies. While Robotics, AI, and big data are already getting implemented, the relative value in using these technologies and quantifying it is becoming extremely important. Patel, whose career in IT spans over three decades, has worked with organizations like Sun Pharmaceuticals, Globus Stores, Jet Air Pvt Ltd., and The Mobile Store. He believes that offline retailers are now looking at reinventing their offline strategies to serve their existing and new customers.”They are experimenting with ‘Buy Online and Pick from Shop’, ‘Shop Offline and Get Delivery’, and ‘Order Online and Pick’ customizations, and offering competitive pricing and parity for both offline and online. Most of the large and small retails have their backend integrated with online and offline interface. However, time has come when the retail players re-align technology, value, and margins in order to become profitable. It is the business model that will shape their existence,” he added.
Today retailers’ brick and mortar strategies also need to evolve. To continue to draw customers into their stores, and to compete with the online retailers opening their own physical outlets, innovative marketing strategies, as well as new technologies such as smart shelves, robots, self-checkout, and interactive and virtual reality, being deployed in-stores as retailers strive to compete on all fronts.
According to Purushotaman, the real intelligence that will drive business will come from predictive analytics. “Data will continue to become bigger. One of the problems that continue to persist is the triviality with which we handle KYC in retail stores. That activity has to be given more seriousness. If the customer is inside the store, what is the best way in which you can invoke personalization, recognition, and reward the customer - instantaneously instead of post facto,” he added.
“Video analytics also has a huge potential in retail stores and now retailers are using it to capture customer trends, track traffic, catch shoplifters, as well as reduce fraud.
According to Shankar, in many ways, businesses are trying to bring up their play in all channels - online and social - and prominently stay available there.
“The disruption has been there, but whether it will match up to the same level as their e-commerce counterparts, through their online strategies, will be a hope for the future,” he said. Organized retailers have long focused their business model innovations on aping the techniques applied by their ecommerce counterparts.
To succeed, these tactics may not help in the long run.
What Tata CLiQ has done in the last one year is commendable. As its CEO puts it: We are attractive for a brand-focused, quality-seeking audience so that we can deliver a targeted phygital marketplace.
Essentially, they are taking steps to carefully carve a unique brand image via online, mobile and social platforms, at the same time, making use of their 149-year old brand heritage. All other large Indian retailers have the same advantage. Small innovations and supply chain improvements cannot differentiate an offline retailer. It needs a structure for organizational change, a carefully crafted cross-channel strategy that reflects what customers want and where and when they want it.
Last but not least, the model requires a mechanism for getting the most out of the technology, tools and the vast ocean of big data that only is going to grow larger every day. As for consumers, the more retailers there are, the merrier they will be.