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| Click and dial: A new path for Indian retail |
| Deepak Sharma & Vlad Flamind / Nov 09, 2011, 00:16 IST |
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This report by Kanvic Consulting outlines the current and future prospects of ‘click and dial’ distribution channels.
The internet and the phone are revolutionising the way retailers connect with their customers worldwide. In India, these distance channels can become a major breakthrough for retailers striving to expand the reach of their business, and offer a new shopping experience to the emerging consumer class.
To reach more customers, Indian retailers have so far relied overwhelmingly on the development of brick and mortar channels. As a result of their expansion strategies, close to 63,000 outlets have been constructed in urban areas between 2001 and 2010. Additional stores have increased the retailers’ reach but they have also been the source of tremendous inefficiencies.
Firstly, retailers have grown their distribution network faster than demand. A comparison of growth in total organised retail space against the growth of retail sales is a revealing indicator of this trend. While the retail space in sq. ft. rose by a CAGR of 42.9 per cent between 2001 and 2011, aggregate sales increased by only 35.8 per cent during the same period. In parallel to this, costs have also been put under pressure by high and unstable rental prices. Retailers thus operate more shops, but each one generates higher costs, and less revenue per square foot.
To pursue their expansion strategy more efficiently, retailers should exploit the potential offered by distance channels. By dismissing the need to have products and transaction means close to the consumer, these alternative channels enable retailers to remotely address a vast consumer base which has been growing rapidly.
On one side, the internet is expected to see its user base expand significantly as the market matures. If the 23 per cent annual growth rate witnessed between 2006 and 2011 continues, the number of online customers will exceed 100 million by 2020. Growth will first be driven by the growing popularity of the web, accessed by Indian consumers both through personal computers and smartphones. The second driver will be found on the supply side. Evidence shows that more consumers will go online as the richness and diversity of the offer increases. In other words, it will be e-retailers’ responsibility to stimulate demand in the newly created market space.
On the other side, the phone can also become a substantial revenue stream for those organised retailers prepared to invest in the channel. Today, most of the Rs 11,339 crore in this channel is generated from the unorganised sector where the offer is more commonly available.
So many Indian urbanites are both phone owners and advertising consumer, that a vast market lies, almost entirely untapped by organised retailers.
As well as expanding their reach, retailers have also focused their efforts on providing a new shopping experience to urban Indians. Air conditioning, tidy shopping shelves and frequent bargains have so far attracted consumers toward new organised retail formats. In the future however, convenience and time efficiency will be the next battlefields for retailers. Societal changes will impact families dramatically, increasing the pace of life and thus the value that busy urbanites place on their time. Distance channels are already perceived as more convenient than traditional brick and mortar stores by a majority of users. It is more than likely that they constitute the answer to the consumers’ call for convenience.
To succeed in increasing reach and improving their customers’ shopping experience, retailers should adopt the right strategies.
Four consumer segments should be considered in the internet channel, each with a specific capacity to buy online and a specific interest for online shopping. Each of these segments should be targeted using a different approach.
The two non-buyer segments, window shoppers and casual surfers, are the biggest and represent an opportunity for retailers to increase the size of their buyer base. Window shoppers are the 33 million internet users that have not yet purchased despite a high interest in online shopping. They should be reached by firms through a focus on price, since their level of income tends to be lower relative to the buyer segment. To succeed profitably in this segment, e-retailers must adopt new models based on tailored pricing instead of the current heavy discount and group buying models that do not provide a path to economic viability. The 41.2 million casual surfers are neither interested nor capable of purchasing in volume online. They can, however, be turned into window shoppers by companies focusing their efforts on increasing their interest for online shopping through the most effective means yet proven: Social media.
The two buyer segments, travel buyers and product buyers, are currently small but their volume and average sales per customer can be dramatically increased. Travel buyers currently number 8.5 million, and they only purchase intangible goods related to travelling, mostly transportation tickets. To overcome their concerns about product delivery and turn them into product buyers, retailers should enhance their logistics capability. Finally, another 8.5 million product buyers purchase a variety of tangible and intangible goods online. They are the current base of online consumers and should be made loyal by firms through improved customer communication and relationship management.
In the phone channel, organised players will succeed by shifting their business model from a decentralised to a centralised one.
To out-compete unorganised shops in this segment, they are bound to focus on reliability and availability. These features however require very effective logistic capabilities and customer contact point. At present, effectiveness is achieved only through inefficiency because retailers operate at low utilisation rates to meet consumers’ needs and maintain their advantage over unorganised shops. Centralisation should become the new model for the phone channel. Firms that achieve the right scale could indeed improve their efficiency both by reducing their infrastructure costs and by increasing their capacity utilisation rates.
Reach and consumer experience
During the last six years, India has witnessed an impressive boom in retail, registering an annual growth in value of 9.3 per cent. Estimated at Rs 18,72,000 crore in 2010, this market has been attracting substantial investments from organised companies wishing to grab their share of the pie, as shown in Exhibit 1.
To increase their market penetration, retailers have been focusing their strategy on two critical success factors: Reach and consumer experience.
Reach refers to the number of consumers having a convenient access to the retailers’ selling points. To increase it, retailers are getting closer to the consumers by expanding their distribution network. In the last four years, Indian cities have indeed witnessed the emergence of 38,800 new organised retail outlets (Exhibit 2). This fast progression has increased the proximity of big retailers to their customers. In 2006 urban India counted one store for an approximate 12,130 inhabitants while four years later the figure dropped to 5,565.
As well as proximity, retailers are providing consumers with a new shopping experience, by introducing modern retail formats to rival the traditional corner shops known as kiranas. These stores have offered the possibility for consumers to wander between air-conditioned shelves, looking for bargains among dozens of different products. Enthusiastic about atmosphere, choice and frequent promotions, middle class consumers have been adopting these formats rapidly as the fast penetration of organised retailers indicate (Exhibit 1).
To improve reach and consumer experience, retailers should consider developing alternative distribution channels, referred to as distance channels throughout this report. As against the traditional brick-and-mortar shops, distance channels enable consumers to order remotely, either through a phone call or through a website, and receive their goods at the designated place without moving from their location.
Increasing reach through distance channels
- Increasing reach is necessary for retailers to leverage fixed costs
Retailers are setting up an increasing number of outlets to develop their reach. This distribution strategy compels managers to maximise sales because it generates substantial fixed costs from the renting of real estate. Each square foot rented in a shop must be used to optimise revenues, be it through the display of a product, of an advert or through the installation of a cashier.
Looking at the situation in urban India reveals that retailers are not leveraging their space efficiently. The weight of rental costs in sales is actually above the international average.
There are two reasons for this low efficiency. On the one hand, retailers have been confronted with high rental prices. Rents have increased significantly during the period 2005-08. Although the trend is downward since then, rents still represent a major risk for the retailers’ efficiency with regard to their weight in the cost structure and to their capacity to show significant increases.
On the other hand, retailers are scaling up faster than demand is growing. To get a foothold in the best areas, firms have been erecting malls and outlets at a tremendous rate. The total organised retail space has been expanded by 78.5 million sq. feet between 2001 and 2010. This represents a CAGR of 42.9 per cent over the initial area. Organised retail sales however have grown at a slower 35.8 per cent during the same period. To reach out to a wider consumer base, retailers are thus neglecting cost efficiency, generating fewer sales per square foot of commercial space.
- Distance channels can widen reach more efficiently
Brick-and-mortar shops have a limited reach because they require the consumer to come to them. When making their purchasing decision typical buyers consider this as a constraint. As a result they might decide to go to the nearest shop if the offers are undifferentiated, or simply abandon the idea of shopping if the inconvenience of moving seems greater than the benefit of acquiring the goods.
Distance channels give retailers the possibility to increase their reach though the setting up of distant sales point and delivery capabilities. Retailers developing these channels can tap into a nascent but fast growing consumer base.
- Internet connectivity is increasing
Between 2006 and 2011, the number of Indian consumers buying online has grown from 6.1 to 17 million, which represents a 179 per cent increase. These figures are promising, but a much larger potential could actually be unlocked if retailers expanded their virtual presence.
Urbanites are increasingly connected to the World Wide Web through both computers and smartphones. Between 2006 and 2011 the proportion of urban Indians going online has increased tremendously from 9.6 per cent to 24.2 per cent. The main factors explaining the increase in the number of internet surfers accessing through computers have been the evolution of both computer literacy and internet familiarity as shown in Exhibit 3.
- E-retailers can trigger substantial growth
The number of online Indians has been growing at close to 24 per cent per year since 2006, driven by a fast 94 per cent CAGR for smartphones and a 23 per cent CAGR for computer users. The number of actual buyers however, has not caught up, with a slightly slower increase of 23 per cent per annum (Exhibit 4).
This differential in growth rates reveals that the development of the internet has not been fully exploited by retailers. While almost 60 million Indians became potential e-buyers between 2006 and 2011, only 11 million of them actually made a purchase. In other terms, e-retailers are gaining reach but have not capitalised on this opportunity.
In India, like in the rest of the world, one important driver for consumers to shop online instead of going through brick-and-mortar stores is their desire to find a relatively wider range of products and bargains. Half of the Indian buyers state choice as a motivation to buy online and almost 20 per cent of non-buyers say they would switch to virtual channels if they found more variety.
Consumer confidence is another factor preventing the growth of the internet channel. Almost 1/3 of surfers state their lack of trust in product quality and payment systems, as a reason not to purchase through the internet.
If more retailers had online presence, it is likely that consumer confidence would also rise. The brand image and loyalty acquired in traditional retail channels will be the drivers supporting the increase in consumer confidence. As additional famous retail names get associated with online retail, cautious consumers are very likely to change their perception about e-retail and consider it as a secure alternative.
Phone
At present the market for ordering through phone in urban India is estimated at Rs 11, 339 crore. A far larger part of the urban population is ready to adopt this alternative channel but at present only a few organised retailers have made a move into this area. Firms willing to develop phone ordering services are therefore likely to increase their buyer base significantly by filling this market gap.
- Organised retailers can expand in this channel
Despite the tremendous potential of phone ordering, few organised retailers have ventured outside their brick-and-mortar stores.
Most phone channel sales currently happen in the unorganised sector (Exhibit 5) where phone ordering is proposed to customers in an informal and non-systematic way. About a third of Kirana owners surveyed by ICRIER in 2007 claim to offer delivery services to their customers.
For almost half of them this measure has been taken as a way of resisting the pull of organised retailers over their customers.
Taking advantage of their small scale, and proximity to a limited consumer base, kiranas have a natural advantage to develop home delivery without building any specific capacity. The system is generally reliant upon kiranawallahs simply delivering orders by foot or bike, to loyal customers residing in the close vicinity.
On the organised side, the only mature segment for phone ordering is food services and more specifically fast food. Players like Pizza Hut or Dominos have built sufficient capacities to generate demand and on average they realise 50 per cent of their sales through the phone-ordering channel.
FMCG, durables and grocery retailers, however, have been late to invest in phone ordering. As a result the market is still not mature and no company has yet emerged as a leader. Outside the food service segment, e-retailers like eBay and Flipkart also generate sales through the phone channel. They utilise phone ordering to attract customers with limited experience in online shopping, presenting it as an alternative to ordering online. With the internet as their main consumer interface, these firms are missing out on the majority of urban consumers that do not surf at all or that do surf but don’t shop online.
To tap into wider consumer base, firms like Express Retail Service have recently started to enter the market, providing phone ordering without any web interface. Not wanting to miss the opportunity, leading retailers like Reliance and Walmart are also considering an entry in the phone delivery market.
Companies should adopt the right strategies to succeed in these channels
Internet and phone channels can help retailers improve their reach and customer shopping experience. Demand for these alternative distribution channels is still nascent but substantial growth can be triggered. The way forward is for managers to adopt inclusive strategies, reaching consumers beyond current market boundaries. To seize this latent demand through the internet, retailers should consider new consumer segmentation. Each segment should be targeted individually with the objective to increase consumer awareness, interest and trust. Leaders will place their focus on building marketing and logistics expertise.
In the phone segment retailers must out-compete the unorganised sector to widen their reach. Developing this service sustainably will be a delicate matter, and to succeed leaders will have to shift from less profitable decentralised business model to a leveraged centralised one. Internet retail comprises four consumer segments with different readiness to buy online.
In the internet channel, 91.2 million surfers can be segregated in two categories: the online buyers (18.6 per cent) on one side, and the non-buyers (81.4 per cent) on the other side.
The buyer category can then be broken down into two segments. One segment is referred to as travel buyers because it comprises the 8.5 million consumers that purchase goods exclusively related to travel; such as tours, transportation tickets, or hotel rooms. These travel goods are considered separately because they do not involve any physical delivery from supplier to consumer, dismissing a critical part of the purchasing process.
The other segment is named product buyers and is composed of another 8.5 million consumers that purchase any type of good online. These consumers are not exclusive in their choices, buying travel goods, durables, FMCG products or books regardless.
The non-buyer category comprises all internet users that do not purchase anything online. On the one hand, the window shoppers segment regroups the 33 million surfers that visit shopping websites for informative purposes, that is to say without ever placing an order. On the other hand, the 41.2 million casual surfers represent the segment of the market that does not even visit e-retail platforms.
- Developing direct sales contact points will enhance the customer relationship
In traditional channel, consumers value their relationship with vendors. By nature, virtual channels reduce the interactions between the buyer and seller and thus raise barriers against loyalty-building contacts. Successful companies will be the ones that place focus on using telecommunications to restore the lost relationship. The first level of interaction remains virtual and takes place through chats and blogs where customers are given the opportunity to express themselves. This practice is currently expanding in the Indian e-retail market place following trends in Europe and America.
Indian consumers however will demand a deeper level of interaction because of their specific cultural traits. Call centres with operators standing ready to answer a customer’s queries in person will most certainly differentiate e-players competing for customer relationship. At present market leaders are the only companies to have set up such call centres. Smaller contestants achieving the sufficient scale to set up these centres should promptly take advantage of their position before new entrant attempt to capture market share.
- Developing CRM tools will enable effective marketing in an increasingly complex market
Understanding the customer’s preferences to tailor the offer will be the second competitive battlefront for e-retail companies in India. As the population of internet buyers grows, marketers will need to reach deeper levels of customer segmentation. Since sub-segments will increase the complexity of marketing strategies in terms of product, pricing and promotion, successful companies will have to lead through their capacity to adjust price and product offerings to the purchasing pattern of individual customers. CRM is therefore bound to become a central component of marketing.
- Tangible improvements can be achieved through logistics
Logistics play a vital role in e-retail because customer satisfaction is strongly dependent on the supplier’s ability to deliver goods on time, at the right quality and at the cheapest price.
The combination of these three elements is probably the most basic expectation of customers. Each transaction made online is based on the buyer’s assumption that goods will reach their destination as promised. On the retailer’s side however, meeting this requirement is a great challenge. Complex IT systems must bridge the gap between remote physical stocks and the virtual stores where customers place their orders. Integration with third party logistics providers must be seamless, from the packing of the parcel in the warehouse to the final client delivery. Transit time must be stuck to shipments tracked individually and complaints and returns handled professionally.
Achieving a 100 per cent on-time-in-full rate is a crucial requirement for e-retailers wishing to reach higher levels of consumer satisfaction through tangible improvements. As competition intensifies in the online market, delivery will become a major competitive battlefield, and leaders will depend on their logistics to maintain and grow their market position. Significant effort should be made to reduce the currently large proportion of unsatisfied consumers. Close to 70 per cent of buyers have experienced delays in delivery and 25 per cent have received damaged goods at least once.
- Converting window shoppers into buyers through tailored pricing
Since window shoppers have a high interest in online channels but a lower purchasing power than actual buyers, companies should touch base with them through pricing. The objective is to increase the buyer base in volume through attractive pricing and nudge them towards higher priced products gradually. With their lower purchasing power these clients will first account for a marginal part of the revenue stream but if companies succeed in making them loyal their value will increase over time. To be attractive in an already low-priced e-commerce market companies will however need to adopt a new perspective on pricing.
- The current pricing models are not sustainable
In the area of pricing e-retailers have been actively focused on granting substantial discounts (ranging from 5 per cent to 95 per cent), betting on high negative price elasticity to grow sales volume. For some players this method has proven to be effective in attracting customers. Snapdeal, for example, has managed to sell 1,000 units of watches in a single day by offering an 85 per cent discount.
However, as new players enter the market to capture share, the viability of this approach will be threatened. To maintain high sales volumes under this business model companies will have to drive prices down further. If improved cost effectiveness is not achieved, margins will be lost and many players are likely to exit the market due to consumer and competitive pressure.
To overcome this, some companies have decided to import the business model of group buying from the more mature European and American markets. This model appears promising because it provides security to e-players competing heavily on price. Group-sellers purchase their goods only when the required number of customers has placed an order on their site. Customers are offered low prices on the condition that they collectively generate enough sales to cover the seller’s costs and margin. Although group-buying has potential, only few companies will succeed in this increasingly crowded market place. At present, 20 companies are operating in the segment and major internet players like Google are also considering a move.
Groupon and Amazon’s Living Social are the key players in the global group buying market. India has its own set of popular group buying sites like Snapdeal, Mydala, Dealsandyou, Taggle, Koovs etc. Times internet, a subsidiary of Times Group, launched its new deals site called TimesDeal on May 2, 2011. The site is currently being launched in six Indian cities (Delhi-NCR, Mumbai, Bangalore, Pune, Kolkata and Chennai) to compete with the existing players in the Indian market.
- Pricing should be tailored to maximise profits
In future, the most successful companies will obtain leadership by adopting a new perspective on pricing. Discounts and group-buying are effective in generating sales volume, but they fail to maximise profits. Because these discounts are offered to all customers, including customers that were willing to pay more, they represent a high opportunity cost. For example, if a customer willing to pay Rs 100 for a product benefits from a 50 per cent discount offered to everyone, the retailer loses the opportunity to generate an additional Rs 50 of revenues.
Instead firms should tailor prices to the consumer segment they are targeting. On the one side, existing buyers, as mentioned earlier, should be provided with tailored offers according to their past buying patterns. Companies can track these buying patterns through widely available CRM software. On the other side, companies looking for faster growth should make a priority of converting window shopper into buyers because in the currently restricted e-retail market they represent a significant base of potential customers.
To achieve this, e-retailers should decrease their margins exclusively to attract these customers. One example is to provide incentives to new customers setting up an account. Once window shoppers make their first purchase, their behaviour should be tracked and pricing should be adapted to progressively capture more revenues.
Growth in e-retail is constrained because casual surfers are not converted into buyers at a fast enough pace. To drive more sales, e-retailers can expand the window shopper segment by increasing the consumer’s awareness and interest through expanded use of social media.
Social media is not sufficiently exploited
At present traditional communication in the form of web banners, search-engine referencing, and e-mailing are widely used to create awareness. However social media remains under exploited compared to other countries like the USA (Exhibit 6).
Two marketers out of five are still unsure about increasing their spending in this advertising format and are waiting for clearer signs of effectiveness to make a move. This cautious attitude is one of the factors currently slowing down the expansion of the online buyer base, and restraining the market from reaching its full potential.
- Social media is an optimal way to attract casual surfers
To stimulate growth in the e-consumer segments managers should consider shifting more of their advertising expenditures to social media. These platforms can generate tremendous awareness about e-retail because their reach is very wide. Indeed, the traffic on social media is increasing at an annual rate of nearly 30 per cent and today 84 per cent of online Indians are connected through these sites.
In addition to the number of users they cater to, social media sites have the advantage of being particularly effective in building consumer interest and trust. An American survey states that two-thirds of consumers use information found on social media to make purchasing decisions, and those 67 per cent are likely to pass the information on to others. Additionally, by using consumers as influencers, firms advertising on social media can also increase trust. Interestingly, 60 per cent of consumers said they trust information found on social media more than traditional adverts.
Retailers should scale up to penetrate the phone channel profitably
Organised retailers have a limited presence in thephone channel relative to their unorganised counterparts. Apart from food service majors that captured share by focusing their business model on these channels, most retailers are currently providing limited delivery services because their logistics capacities are not yet geared for this channel. To capture market share these firms should invest heavily in building logistics network and customer contact points that offer consumers the convenience they desire. However, only the firms that scale their operations will sustain profitability by leveraging their expenditure on fixed costs.
Big retailers can improve their competitiveness against the unorganised sector by developing their infrastructure.
- Organised players are competing with unorganised players
Small shops from the unorganised retail market exploit the natural advantage of their small scale to deliver to local customers for free. Their customer base is small and lives within a limited perimeter, allowing them to provide the service without building specific logistics capability. Organised retailers aiming to compete in this Rs 11,339 crore market will need to offer a better alternative to the consumers at an affordable price.
Unorganised retailers are strong competitors because they provide delivery services often for free and without imposing minimum order sizes. However, their weakness lies in their lack of capacity to sustain the availability and reliability of their service. Due to their small scale, these shops can deliver to only a limited part of their customer base. Typically, the service is made available to loyal clients with whom the owners maintain a close relationship. In addition, most of these shops are unable to guarantee delivery times due to a lack of dedicated staff or vehicle.
Players in the organised sector can fill these gaps by providing systematic services. With dedicated call centres and fleets of vehicle they have the potential to deliver any customer in time. However, this level of service draws in substantial marginal costs. These are covered by some players through the charging of a fee or through the limitation of the service to a certain size of orders.
- Centralisation will be the key to profitability in the phone channel
The key to success in cost efficiency will lie in the adoption of a new business model. Today, phone ordering is done at the level of individual outlets. By 2020, centralised structures taking orders from large-scale call centres and performing home delivery trough centralised warehouses are likely to dominate the market due to their increased cost efficiency. Improvements in urban road infrastructure will facilitate faster delivery of larger shipments made through vans or small trucks. Retailers will therefore be able to shift their call centres and warehouses to city outskirts and benefit from lower real estate costs and better utilisation of their logistics capacity.
This report has outlined the prospect for distance channels to prosper in urban India, and clarified the challenges ahead for retailers wishing to venture into this developing market space. The evidence gathered in this work suggests that distance channels are bound to expand and become part of the buying habits of Indian urbanites. As more consumers embrace these channels, retailers will be forced to change their business model. Throughout this report we have explained how retailers wishing to grab their share of the pie will need to thoroughly rethink their marketing and logistics strategies. However, the expansion of distance channels will not have implications exclusively for these retailers. Even if they lack interest in distance channels, pure brick-and-mortar players will be impacted by the changes occurring in consumer habits.
The significant change for these retailers will probably be felt through a decrease in footfall and revenues. Because convenience and choice are becoming the key criteria in consumer satisfaction, pure brick-and-mortar shops will surely suffer a loss of competitiveness relative to distance channels.
Another important change will come more specifically from the rise of internet buying. With the development of the internet as a retail format, consumers are taking shopping to a whole new level. To find the best offer, people get informed, share their satisfaction level through consumer reviews, scout for bargains, and evaluate and compare products with the help of powerful search engines. This new tendency to prepare a purchase on the internet can impact brick-and-mortar shops.
In more advanced e-retail markets like France for example, more than 80 per cent of internet users use the internet to inform themselves before making any purchase either in a virtual or in a physical store. As a consequence, the relationship between buyers and sellers is changing. Extra-informed consumers are often more knowledgeable about the product specifications and rival brands than sales people on the shop floor, and for this reason they become difficult to persuade on criteria other than price. Overall, the rise of demanding and savvy consumers is likely to change the rules of competition in the Indian retail market. This will compel leaders to rethink their business, begging a crucial question: How can I be part of tomorrow’s Indian retail story?
ABOUT THE AUTHORS Deepak Sharma is a partner and co-founder at Kanvic, where he leads strategy practice. Vlad Flamind is an associate consultant at Kanvic. Excerpted from the report, CLICK and DIAL: A NEW PATH FOR INDIAN RETAIL, by Kanvic Consulting. Reprinted with permission. The complete report is available at www.kanvic.com
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