Click and dial: A new path for Indian retail
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 le