Year: 2011

Retailers like Future Group, Lifestyle, Godrej, MegaMart, Fabindia offering 0% EMI to attract customers

admin

October 24, 2011

Writankar Mukherjee, Atmadip Ray & Pramugdha Mamgain

Kolkata/New Delhi, 24 October 2011

Retailers are countering the economic slowdown by offering interest-free equated monthly instalment (EMI) schemes, which they say are not only helping them pull customers into stores but also encouraging shoppers to buy higher value products.

Such EMI-based sales promotions have staged a big comeback at a time near double-digit inflation has put a heavy strain on household budgets, making people defer non-urgent and big-ticket purchases even on credit because of hardening interest rates.

But transactions carrying zero percent financing have grown more than 50% over the past year, say retailers and bankers.

From apparel sellers such as Arvind Brand’s MegaMart and Fabindia to multi-product retailers such as Future Group, Lifestyle and Godrej, firms reckon that zero-interest EMI options are the most effective discounts they can offer.

While retailers end up bearing the interest for the duration of the credit extended, they see it as an acceptable cost of keeping the sales register ticking during the downturn.

"EMI schemes are removing inhibitions and inducing consumers to splurge on big-ticket items," says Himanshu Chakrawarti, chief executive of Essar Group’s Mobile Store, the country’s largest mobile phone retailer. He says consumers going for six-month EMIs are buying handsets priced twice than they had initially planned and those going for nine-month to 12-month schemes are tripling their size of transaction.

Almost a third of the high-end mobile phones, such as the iPhone and the latest models of Blackberry and Android-based phones, sold at the Mobile Store are paid for through instalments. The company, which rolled out EMI schemes at its 1,200 stores across the country over the past couple of months, recently became India’s largest seller of BlackBerry smartphones.

Instant approval of loans and minimal documentation help speed up EMI-based transactions, says Parag Rao, senior executive VP, HDFC Bank. He says the bank has seen a more than 100% spurt in this loan category over the past year with an average transaction of 30,000. "Since the amounts are much smaller compared to home or car loan, the EMIs don’t pinch much," he says.

Consumer durables and jewellery sellers were the first to offer such sales schemes, but now retailers across product categories are betting on interest-free instalment schemes. For consumers, this spells the return of consumer financing schemes, which had dried up during the global meltdown in 2008 and 2009 when banks turned away from most unsecured lending schemes.

But the return of such schemes is becoming a major motivator at a time when studies are showing consumers are searching for the best deals and discounts like never before. A latest study by NM Incite, a Nielsen-McKinsey Company, shows that conversations about deals and discounts account for 50% of all conversations in social media forums this Diwali.

"Deals are becoming the primary motivators to consider purchases. This more than anything will decide which brands will win a greater share of wallet this season," says Adrian Terron, Head, NM Incite India.

From apparel and mobile phone sellers to furniture and computer stores, retailers across the board are reporting a jump of 10% in sales on average driven by deals like EMI schemes. They say the average bill size has also grown simultaneously by 10% to 15%.

EMI-based sales have doubled for consumer electronics during this festive season, retailers say. In the case of products such as LCD and LED televisions, nearly 15%-17% of all purchases are being made through such schemes, says Devang Mody, business head (sales finance) at Bajaj Finserv Lending.

The lender has tied up with manufacturers such as LG, Samsung, Sony and Panasonic and durable retailers including Croma, Vijay Sales and Reliance. It expects the festive season to generate EMI-based sales worth 750 crore.

For jewellery retailers, hit by the double whammy of inflation and appreciating gold prices, interest-free instalment schemes have become a veritable lifeline.

Furniture retailers, staring at halving of growth to 10%, are finding a much-needed growth driver in zero-interest EMI schemes. "With inflation kicking in and discretionary spending capability of households going down, EMI schemes will become more relevant as these facilitate consumer instant gratification while paying in easy instalments later," says Lifestyle International managing director Kabir Lumba.

Future Group’s Home Town is similarly offering products on interest-free EMIs, as is Style Spa, which joined the bandwagon a fortnight ago. Fabindia launched an EMI scheme this month on purchases of 50,000 and above, which covers apparel and other products. "We intend to tap the burgeoning professional class through this scheme," the company spokeswoman said.

Analysts say retailers stand to gain even as they absorb the interest component when they offer zero-percent EMI schemes. "While such schemes may impact their margins, the interest gets accounted as a cost they need to bear to generate sales," says Devangshu Dutta, CEO of retail consultancy Third Eyesight.

---

Gulliver’s Travails

admin

October 22, 2011

Srikanth Srinivas with Suneera Tandon

22 October 2011

Sanjeev Narula could say his fight with private equity (PE) investors Bain Capital and TPG is a Lilliput versus Gulliver saga. The managing director of Lilliput Kidswear, an apparel retailer that until recently was a success story, got into a fight with his principal investors over the veracity of the company’s audited accounts that were presented at a board meeting on 28 September.

Details are scant, but what appears to be a whistleblower call about fudged accounting, just as the company was readying to file a draft red herring prospectus (DRHP) ahead of a planned initial public offering (IPO), has driven a wedge between the two parties. Narula has 55 per cent of the stake, and the PE firms, 45.

A re-audit was suggested, but Narula did not agree to it. Instead, he appears to have taken umbrage at the suggestion, refused to agree to a re-audit and moved the courts.

The fight prompted many resignations from the company’s board: by the representatives of Bain Capital and TPG, four independent directors, and just days later, by the auditors S.R. Batliboi and Ernst & Young (Lilliput’s advisors).

In an appeal filed by Lilliput in the Delhi High Court on 3 October 2011 against Bain Capital India, the company has “restrained the respondents from selling, alienating, transferring or creating third party rights in any manner dealing with their shares of petitioner (Lilliput) and hence, the respondents are restrained, directly or indirectly, from acting contrary to the minutes of the Board Meeting dated 28.09.2011 and they are further restrained from giving adverse publicity to Lilliput. The petition also restrains the respondents, its associates, affiliates, servants, and employees directly or indirectly, from interfering with and obstructing the operations of the petitioner”.

After the company filed an injunction in the high court restraining its investors and related parties from exiting the company or taking matters further, no one — Narula, the PE firms, or the auditors — is willing to go public on anything. BW’s attempts to talk to them were unsuccessful; they claim the matter is sub judice.

The PE investors’ concerns stem from what is standard operating procedure. “In US firms, any suggestion of wrongdoing in an investee company is always reported by the managing partner to his fund,” says a PE expert. “That prompts a set on questions, checks and inquiries that ultimately are taken back to the investee company’s management.”

The opportunities for litigation against the PE firm’s general partnership make a firm very cautious. Occasionally, the general counsel gets involved. “All too often that ignores the realities on the ground in India, like very sensitive promoters,” the expert adds. “That could have driven Lilliput’s promoters over the edge.”

We talked to more than a dozen analysts, experts and retail consultants to try and piece together some answers. None of them, however, was willing to go on record.

The Beginnings Of A Clash
“Both Bain and TPG competed fiercely to get a piece of Lilliput in 2009,” says a leading investment banker. At that time, 35 per cent of the company was held by PE investor Indivision Fund (now Everstone Capital), with Narula holding about 65 per cent.

Other investment bankers say Narula was unwilling to give up control, so Everstone, which had invested in the company in late-2006, sold its stake, and Narula sold a small part of his. After the deal was completed, the company was valued at about Rs 775 crore.

S.R. Batliboi and E&Y have worked with the company for over three years, and helped conduct the due diligence necessary for the PE investors. That was followed up by another due diligence exercise by KPMG, another global consultancy, before Bain and TPG paid about $86 million to buy in, closing the deal in January 2010. Lilliput’s revenues, say market observers, was then more than Rs 300 crore.

The company then embarked on a rapid expansion spree. It added four manufacturing plants to its existing six. In 2010, the company had about 225,000 sq. ft retail space; by September 2011, that had gone up to 700,000 sq. ft, with another 200,000 being fitted out. It also took on a lot of debt. “All of this cannot be done without at least the strategic approval of Bain and TPG,” says another investment banker. “July to September have been hard on retail, and such rapid growth implies huge inventory. That may have scared Bain and TPG.” Perhaps, but where does the alleged fudging come in?

Invent(ory) Accounting
The Lilliput story highlights a critical issue that investors in organised retail have been facing for some time: inventory management and accounting. “Stores do not do any annual stocktaking,” says one analyst. “In most cases, there is no policy for markdowns, or writing off for losses.”

That, he says, leaves the door open for accounting gaps. Other analysts say that sometimes stock from existing stores is moved to new stores without accounting for them properly. But they add that a lot of it could be because of inadequate management information systems (MIS) — at the end of the year, these transactions and markdowns are ‘rounded off’. “This could have prompted the whistle-blowing,” says a retail consultant.

Rapid expansion could exacerbate the effects of slack inventory accounting. Analysts say there is usually a benchmark of unaccounted inventory-to-sales ratios. “It is something that auditors are aware of, or should be,” says an analyst with a brokerage firm.

“There is constant pressure on the company to show sustained growth, top-line progress and a sizeable foot-print,” adds Devangshu Dutta, CEO of Third Eyesight, a retail consultancy. Other instances have illustrated the consequences of very rapid growth before.

“With investor interest one can create turnover in ways you would not use otherwise,” says Dutta. “This is partly driven by stockmarket movements, by the exit window of PE investors who want sizeable returns, and by human aspiration.”

No End In Sight?
Reports say that Narula has agreed with his creditor commercial banks to allow a re-audit; he wants them to pick the auditors (something he had disagreed to earlier). This may suggest that he is confident that there is no substance to the allegations of fudged financials.

By taking the matter to court, however, Narula may have tied the hands of his PE investors. “Once things move into the legal arena, there usually is no going back to the negotiating table,” says an investment banker. So chances of a settlement or understanding between the two parties have weakened.

The clash has also dented reputations: Narula’s, the PE firms’, the auditors’, and the advisors’. When the smoke clears after the re-audit, which people estimate should be in about six months, it might well turn out that the spat was ill-advised. “If nothing else, the value that the promoter and investors would have realised (through an IPO) is unlikely now,” says an investment banker. As one put it, what a tragedy of errors.

(This story was published in the Businessworld Issue Dated 31-Oct-2011.)

---

Is Retail Design Tone Deaf?

Devangshu Dutta

October 21, 2011

I can’t think of any other reason why locations such as retail stores, malls, restaurants, large office receptions, and other public spaces are designed and built so badly from the point of view of handling sound.

Fundamentally Unsound

The retail soundscape, if I might call it that, is littered with noisy and uncomfortable spaces. Sound levels in busy restaurants and shopping malls can be as high as 70-110 decibels, which is the equivalent of a busy construction site. Sportswear stores play loud and fast-paced music throughout the day; are they trying to make you believe that you are in a nightclub at 11 a.m.? Internal equipment such as air-conditioning and fans add to noise levels. Restaurants and cafes are worse: noise sources include the kitchen, customers using the crockery and cutlery, chairs moving as people sit or leave, apart from the conversations going on.

For sustained exposure, 80 dB is judged to be the outside limit, and we are frequently exposed to sound levels that are higher than that, for long periods of time.

Unfortunately, it is also a vicious upward spiral of sound. Loudness feed loudness. We all raise our voices when we are competing with the surrounding sounds, and only end up adding to the noise further.

Developers spend millions on picking the right stone, fancy fixtures and creative layouts to make the place “look good”. I don’t remember ever coming across a retail space designer in India who says that the space should “sound good”. Even stores selling high-end audio equipment are badly designed and executed!

I remember sitting in a restaurant belonging to a popular Indian quick service chain after a “modern” redesign. No matter how much I tried, I could not understand a word of what my wife is saying (and that’s not just because we’ve been married for so long!). The reason my wife was inaudible was the high level of ambient noise, echoing from all the hard surfaces around us. What was worse was that I could very clearly hear a stranger who was sitting 5 tables away because the false ceiling had dome that perfectly captured his voice and bounced it across the room to me.

Toning it Down

The most basic thing to remember is this: noise has a negative impact. Not only are the customers uncomfortable, high noise levels actually interfere with the staff’s health and performance. Noise increases physical and mental stress.

What’s more, if conversations are not possible at a normal volume and tone, we have to put in more effort into hearing and understanding what the other person is saying. There comes a point when we just give up. Can you imagine what impact that has on a sale?

Studies have shown that noise can drive sales down by more than 80%. On the positive side, if sound is managed well, sales can rise by more than 1,000%! Isn’t that worth looking into?

A plea to architects and retail managers: do consider the fact that customers coming to the mall expect that space to be qualitatively different from an open market. Making a space noisy is not enough to recreate the feel of an open market – it only means that your space is noisy, and probably worse than an open market will be.

Materials selected for building and fitting out the retail outlet, the mall or the restaurant can have huge implications for how sound is handled in that space. A lot of “modern” design depends on hard, polished, reflective surfaces of stone, glass or metal. The floor, the ceiling and the walls, as well as the fixtures are all surfaces from which sound reflects back into the space, not just once but many times before it dies down. So not only do the sounds get amplified in such a space, the reflections also interfere with each other, adding to the problem.

Not Just the Sounds of Silence

Of course, just making every space a quiet “dead” space is not the answer. Sound and silence affect us positively as well as negatively.

The ancients believed that sound could transform the energy of human beings and their surroundings, and from various base sounds they created “simple” beej mantras to complex Vedic chants. Anyone who has chanted or sung hymns, or even an old peppy film soundtrack knows that sound has the power to affect our moods.

At one extreme, most people are uncomfortable in a heavy engineering factory, or for that matter, a modern shopping centre on a busy weekend, without realising why. At the other end, most people would also be uncomfortable in a recording studio, because it suppresses ambient sound as much as possible, leaving the space “empty”.

In some cases (e.g. a night club, or discount store), sounds need to be louder to ensure that the place “feels” lively, even when it is not full to capacity. In some places our enjoyment is enhanced by noise. Watching a cricket match in a stadium while wearing noise-cancelling headphones would hardly be as much fun. A school playground is “happy” when hundreds of children are running around screaming and shouting at the top of their voices, and “solemn” during a quiet morning assembly.

In some cultures and countries, normal social interaction is “louder” than would be acceptable in others. (For example, a British acquaintance mentioned to me how heavily she felt “the sounds of silence” when she moved back to England, after spending many years in Asia.)

So the key is to first define the ambience and the mood that you want to create in your space. What is the objective: who do you want to attract, who do you want to send away? (For example, operators of public transportation systems have successfully used classical music to drive away loiterers who were undesirable.)

Disney offers an inspiring example of how sound can be used. Over the years they have evolved systems combining sophisticated software and hardware in their amusement parks, such that you can walk through the whole park without the decibel-level changing too much. The music sets the appropriate mood for each specific zone. What’s more, the transitions are smooth as you move between zones.

Not everyone needs the sophistication of a Disney amusement park, but I believe it is worthwhile for most retailers to think about how sound is affecting people in their stores.

I would urge you, at the very least, to look at how it impacts conversations between customers, and between the customer and members of the serving staff, because that will definitely impact sales.

A leading cafe chain proclaims: “A lot can happen over coffee”. Yes, it can; but not if you make conversation impossible.

Try it. Tone it down. You’ll see an upswing in productivity, sales and customer satisfaction.

(Read “How Mr. Q Manufactured Emotion” in the Disney parks, on Dustin Curtis’ blog.)

---

Tommy Hilfiger goes in for solo play

admin

October 17, 2011

Raghavendra Kamath , Business Standard

17 October 2011, Mumbai

Global fashion brand Tommy Hilfiger says its newly refurbished 5,000 square feet store in Hyderabad is inspired by the brand’s first global flagship store on Fifth Avenue in New York City and the Champs-Elysées store in Paris, and reflects the décor and visual merchandising of those stores.

Tommy Hilfiger, owned by clothing conglomerate PVH Corp, says it is also working on such makeover plans for its other stores in the country. Currently, it has 80 stores.

Just two weeks before its flagship store in Hyderabad was reopened, Tommy Hilfiger announced that it is buying Murjani Group’s stake in its Indian sub-licensee — Arvind Murjani Brands (AMB) to “accelerate India expansion”. Mohan Murjani who partnered with Hilfiger to launch the brand and the company in 1985 and brought it to India in 2004, has exited the brand.

Though Tommy Hilfiger says such acquisitions were part of its global strategy— it took direct control of its operations in China and Turkey— it clearly knows India is too big a market for it to ignore given the slowdown in western markets.

“The market sentiment and talk about a second wave of slowdown have not affected the Indian consumer sentiment so far. As with all markets, we will monitor the situation closely but believe that emerging markets like India have many positive factors that should bypass a slowdown in consumer demand,” says Fred Gehring, chief executive officer of Tommy Hilfiger Group.

To put it in perspective, while the US and Europe, two of Tommy Hilfiger’s key markets, are expected to grow at two to three per cent and 0.6 per cent to 0.8 per cent respectively, India’s economic growth is pegged at 7.5 per cent, making it a lucrative market to invest in.

Another pull factor is that organised retail sales account for nearly 24 per cent of overall apparel sales in the country and are set to grow exponentially.

Gehring says Tommy Hilfiger has been posting a growth of 50 per cent in its Indian business in the last couple of years and its latest move to acquire stake in AMB is aimed at accelerating that.

According to sources, Tommy Hilfiger is doing business of Rs 200 crore in India.

With direct control over the brand, Tommy Hilfiger now plans to integrate India into its global sourcing and design programmes besides opening 30 stores in the next six months and launch new categories such as kidswear which the brand believes will grow 30-40 per cent over the next couple of years.

But the foray into kidswear hasn’t impressed everybody. Ramesh Tainwala, CEO of Planet Retail, which markets brands such as Guess, Nautica, Accessorise and runs Debenhams stores here, says Tommy Hilfiger has done well so far, but will face huge competition from here on. Kidswear is a relatively new segment and it has not been so successful globally. “I think they should play their core story first and then enter new segments. Kidswear is growing, but growing less than the adult segment”.

Tommy Hilfiger is not alone which has ended its previous partnerships.

Italy’s GAS recently ended the JV with textile and apparel major Raymond last year and entered India on its own through cash and carry route. GAS is aiming at three fold jump in its revenues by 2013-14 with the help of a dozen exclusive outlets in the country.

Three years ago, UK’s Marks & Spencer ended its franchise agreement with Planet Retail, promoted by Indonesia-based VP Sharma and others, and did a joint venture with Reliance Industries for faster roll-out of its stores.

“If there are differing perspectives between Indian and overseas partners about the pace of growth, investments and branding and so on, the international brands can choose to go on their own,” says Devangshu Dutta, CEO of retail consultancy Third Eyesight.

Dutta says while Levis, Adidas and Reebok have come in on their own, others such as Mothercare entered with a franchise agreement with Shoppers Stop but later also entered into a joint venture with DLF Brands.

---

The e-tailing sunrise, finally?

Devangshu Dutta

October 9, 2011

Amazon went public in 1997, when there were a total of 50 million internet users in the world. I remember making my first purchase on Amazon in 1998, and being delighted at the experience of finding something specific, quickly and conveniently. Over the next few months, a “revolutionary” fashion site in Europe – boo.com – raised and spent more than US$ 100 million of venture funding, and heralded a world under the domination of dotcoms.

A few short months later, chatting with a journalist in New Delhi, I found that India too had caught the dotcom bug. We weighed the pros and cons of retail on the internet in India. The previous year, ecommerce sites in India were estimated to have transacted all of Rs. 120-160 million (US$ 2.7-3.7 million) worth of business, but the figure looked set to explode.

I felt then that while the growth could be rapid, even exponential over the next few years, the outcome would still be a very small fraction of the total retail business in the country. We estimated that by 2005 e-commerce in India could be anywhere between Rs 5 billion and Rs. 15 billion on a best case scenario. Despite several apparent advantages in the online business model, the outcome depended on a variety of factors including internet penetration, the appearance of value-propositions that were meaningful to Indian consumers, investments in fulfilment infrastructure and the development of payment infrastructure.

In fact, by the middle of the decade the business had reached just under halfway on that scale, at about Rs 8-9 billion (US$ 180-200 million), despite 25 million Indians being online. Dotcoms became labelled dot-cons, with an estimated 1,000 companies closing down. The retail business discovered a new darling – shopping centres – which pulled funding away for another explosion, that of physical retail space.

The Second Coming

Today, though, dotcoms seem to be back with a vengeance.

The Indian e-commerce sector has received more than US$ 200 million investment in the last couple of years. Now India’s Amazon-wannabe Flipkart alone is looking to raise approximately that amount of money from private equity funds in the next few months, to push forward its aggressive growth plan.

Estimates for internet users in India vary between 80 million and 100 million, and the total business transacted online is projected to cross Rs 465 billion (US$ 10 billion). Online, the Indian consumer seems spoilt for choice, with offers ranging from cheap watches, expensive jewellery, speciality footwear, premium fashionwear, the latest books to feed the intellect, and organic foods to satisfy the body.

However, a closer analysis shows that product sales (or “e-tailing”) are still straggling, being forecast at about Rs. 27 billion (around US$ 550 million) in 2011, which would be merely 6 per cent of all e-commerce, and just about 0.1 per cent of the estimated total retail market. 80 per cent of the business remains travel related, with airline and railway bookings taking the lion’s share, and most of the rest is made up of services that can be delivered online.

The success of online travel bookings shows that the consumer is increasingly comfortable spending online. While a low credit card penetration remains a barrier in India, websites and payment gateways have created alternative methods that give the consumer a higher degree of confidence, including one-time cards through net-banking, direct debits from bank accounts, mobile payments, and, if all else fails, cash on delivery.

An e-tailing presence offers “timeless” access without physical boundaries. For a retail business, reducing and replacing the cost of running multiple stores, with their heavy overheads (rent and store salaries being the largest chunks) seems like a dream come true.

Similarly, merchandise planning and forecasting is typically fraught with error and multiple stores only compound the problem. An internet presence can minimise the number of inventory-holding points, thus reducing the error margins significantly. These factors should, in theory, make the online business more efficient and the value proposition more compelling for the consumer.

Then why isn’t e-tailing growing faster?

Barriers to Growth

The answer is that, while the online population is bigger and payment is no longer the hurdle that it once was, there are two other critical factors that have changed only marginally and incrementally over the years: the consistency of products and how effectively orders are fulfilled. With an airline or a train ticket, one has a reasonable idea of the product or service that will be delivered. Unfortunately this isn’t true of the online merchandise trade, which is plagued by poor products, poor service and, as a result, low consumer confidence.

Individual companies, of course, are spending a large amount of management effort as well as money, to ensure consistency. For instance, the team at Exclusively.in told us how they fretted over design, (including the thread and the number of stitches in the embroidered logo on the T-shirts) to ensure that the final product had a “rich” feel and to ensure that their product in quality to some of the most desirable brands in the market. Flipkart highlights its in-house logistics operations to ensure high service levels, in addition to using traditional courier and postal services.

Unfortunately, the fact remains that the consumer’s confidence can only be built over a period of time, by constantly providing consistent product quality and high levels of service. Businesses need to spend a few years before they achieve a “critical mass” in this area.

This issue of confidence is more of a problem in some products, due to their very nature. For instance, buying fashion and accessories online is very different from buying a book online.

Businesses such as Amazon have made it more convenient for the customer to search for books, compare them with others on the same subject, and read reviews before finally deciding to buy the book. But, even more importantly, they now also allow us to preview some of the pages or sections, so that we can do what we do in a bookshop – flip through the text, to get a sense of whether the book actually speaks to us. However, when we think of putting fashion products online, the problem that immediately comes to mind is that there is no effective way yet of the consumer getting a similar touch-feel experience. Avatars and virtual placement are a poor substitute to holding the product and physically placing it on oneself.

Accessories – such as jewellery and watches – are an easier sell than clothing and footwear, and if we could classify mobile phones and other electronic items also as “fashion accessories”, then we can declare the online accessory market a runaway hit. As long as the product quality and the accuracy of the picture depicting the product are high or consistent with the offer, it is the pricing and convenience that will drive business growth online, and the business can benefit from all the efficiencies inherent in the online model.

However, with clothing and footwear two major concerns remain: sizing and fit. For the answer to why this is so, we need to remember the fact that these are indeed two separate barriers. There are usually anywhere between three to six sizes options in any product, sometimes more (especially if you account for half-sizes in shoes). This translates into 3-6 times the complexity of managing inventory and, at the very least, doubles the possibility of returns (since customers may order multiple sizes to discover one that fits them). However, the other aspect is perhaps even more important and a bigger problem: fit also depends on styling, not just the size. We know from our own experiences in buying clothing and shoes that the same size in two different products does not mean that they will fit in a similar manner. This is less acute for clothing, especially products such as T-shirts, shirts and blouses which may have some allowance around the body, but is absolutely critical for shoes, which must fit close to the feet.

The American online shoe retailer Zappos – also owned by Amazon now – has found a way to overcome this barrier by offering free shipping both ways (i.e. for delivery to the customer and for any products that need to be returned), a 365 day return policy and a process whose final objective is customer-delight. As long as the product is in the same condition as it was when it was first delivered to the customer, Zappos accepts returns at no cost to the customer.

On the other hand, Indian sites Bestylish.com and Yebhi.com (also now owner of Bigshoebazaar.com) have different policies to deal with returns, but both are less flexible and less customer-friendly than the Zappos policy mentioned above.

I’m sure the Indian websites have sound commercial principles and clear strategic reasons for structuring their policies as they have, but it certainly presents a significant barrier to customers who may be debating whether to buy shoes online or buy offline after trying the shoes on. Unfortunately, the convenience factor is just not a big enough driver yet to overcome the fit barrier for most customers.

Among other products, the food and grocery category stands out as having the largest chunk of the consumer’s wallet. However, selling this electronically is a challenge, especially since the biggest driver of purchase frequency is fresh produce that is tough to handle even in conventional retail stores in India, let alone via non-store environments.

However, grocery retailers could ride on the back of standardised products, if they can overcome the challenge of delivering efficiently and quickly.

Another barrier is the desirability of shopping online versus offline. Management pundits may borrow Powerpoint slides from their western counterparts, describing “time-poor and cash-rich” customers for whom the internet is the most logical shopping source. This holds true for a small base of Indian consumers, but for most people product-shopping remains predominantly a high-touch activity and a social experience to be enjoyed with friends and family. In spite of the inconvenience related to driving and parking conditions, the pleasure of walking into a physical store has not diminished. If anything, during the last five years the “retail theatre” has become capable of attracting more customers with better stores and better shopping infrastructure. The convenience of shopping online is just not compelling enough for most of India’s consumers.

Emerging Opportunities

On the plus-side, consumers located in the smaller Indian cities, with less access to many of the traditional brand stores, are finding the online channel a useful alternative. However, fulfilling these orders in a timely and cost-effective manner remains a challenge for most companies.

One potential growth area is the “clicks and bricks” combination for existing retailers. Indeed, worldwide, leading retailers have moved on from multichannel strategies to being “omnichannel” – present in every location, format or occasion where their consumer can possibly be reached. Many of the chains in India have gained the trust and goodwill needed to tip the customer over to online shopping. However, for them the challenge would be to ensure that the internet presence is designed for an excellent user experience and serviced in a dedicated manner, just as any flagship store would, rather than as an online afterthought.

Retailers who have achieved a high degree of penetration and consumer confidence can also use a combination of “sell online, service offline” in locations where they have critical mass, as first demonstrated successfully by Tesco in the UK.

Delivery-oriented food services are a potential winner for consumers in urban centres in India who are pressed for time, again on the back of standardised service and product offerings, and their existing delivery mechanisms. For instance, quick-service major Domino’s, which hits 400 outlets this year, already has 10% of its annual sales coming from internet orders within just a year of launching the service, and that share is expected to double in the next year. What’s more, the online orders are reported to be of higher value than its other delivery orders. All in all, a phenomenal shift for the brand that promises delivery within “30 minutes or free”.

There is no doubt that e-tailing will grow in India. The confluence of increasing incomes, a growing online population, improving connectivity, and more businesses starting up on the net will lead to what would be “stupendous” year-on-year growth figures. We can expect the e-tailing revenues to be between Rs. 50 billion and Rs. 80 billion by 2015.

However, we need to remember that this will still be a very small share in the total pie, because the rest of the retail business is evolving and growing rapidly as well. Costs of acquiring and retaining customers will remain high and only increase, cost-effective fulfilment and high service levels will continue to worry most players. Per capita spends are also not going to be helped by discount-driven websites.

It is not a false dawn for e-tailing in India but, to my mind, the sun is as yet below the horizon despite the recent sky-high venture valuations.

Teams that are building for an exit must remember: most are likely to never achieve one. If you are losing money on every transaction, and will continue to do so in the foreseeable future, there is no future. Entrepreneurs and investors who are being over-enthusiastic and blithely ignoring the real costs of doing business may be in for their darkest hour.

However, those who are careful in tending to their flickering flames and have a longer term view of remaining in the business, may get to see their own e-tailing sunrise in the next few years.

(Updated in November 2011.)