Devina Joshi, Financial Express

Mumbai, 8 September 2015

Recently, there was news of restaurant reservation site EazyDiner expanding operations to Mumbai from the National Capital Region, having secured Series A funding worth $3 million led by existing investor DSG Consumer Partners, and Saamna Capital.

As per a PwC analyst, investors have pumped more than $150 million into companies like Grofers, TinyOwl, Swiggy, LocalOye, Spoonjoy, Zimmber and HolaChef, among others. Judging by the patronage showered upon them by customers and investors alike, it would appear that hyperlocal start-ups are all set to create the next big boom in the Indian retail sector. But is it really all that rosy? Probably not, as can be amply witnessed by acquisitions taking place in the nascent yet already overcrowded market.

Between November 2014 and February 2015, the Rocket Internet-backed Foodpanda acquired rivals TastyKhana and JustEat.in, and is rumoured to be in acquisition mode with TinyOwl. Restaurant search app Zomato, which recently got into the food ordering space, is also reportedly looking to acquire minority stakes in food-ordering firms.

While investors are attracted to hyperlocal start-ups, controlling logistics well is key to sustained growth for these businesses — all of these will definitely go through a constraint in the supply of delivery boys, for example. In India, organising fragmented labour is a challenge and, hence, a services-based hyperlocal needs to figure out the mechanics of human capital even more than a traditional, product-based e-commerce firm.

For services, another challenge is customer stickiness. If a user uses an app to obtain the services of a plumber, for example, he may not go through the app to contact the plumber next time if his services are found satisfactory. Discounting can induce trials, but just like in any other business, prove fatal in the long run. Like what led to the end of HomeJoy in the US — excessive discounts to dissuade direct contact between servicemen and customers.

Even for product-based start-ups, maintaining data quality is a big hurdle as stock and prices may not be updated by retailers in real time, making it difficult to track offline sales.

Since the game is hyperlocal, you need to be physically present in the city to bring retailers aboard. For that, you need a city team. Other challenges include retailer verification and assessment, given that hyperlocals deal with small city retailers.

Stickiness is needed on both sides, and each locality will certainly evolve into having a market leader and a follower, with other players falling far behind. “So the critical success factor for a hyperlocal is being able to rapidly create a viable model in each location it targets, and then—to build overall scale and continued attractiveness for investors—quickly move on to replicate the model in another location, and then another,” says retail consultant Devangshu Dutta of Third Eyesight. As they do that, they will become potential acquisition targets for larger ecommerce companies, which could use acquisition to not only take out potential competition but also to imbibe the learning and capabilities needed to deal with microcosms of consumer demand.

(Published in Financial Express.)

Much has been written recently, with more than a touch of surprise, about ecommerce companies opening physical retail stores. Whether it is Amazon, Birchbox and Bonobos in the US, Spartoo in France, Astley Clarke in the UK or FirstCry and Flipkart in India, young tech-based ecommerce businesses are adopting the ways of the dinosaur retailers that they were apparently going to drive into extinction.

Perhaps, the seeds of the surprise lie in the perception that the ecommerce companies themselves built for their investors, the media and the public, that it was only a matter of time that the traditional retail model would be dead.

Or perhaps we should pin it on their investors for keeping the companies on the “pure-play” path so far – venture funds that have invested in ecommerce have largely taken the view that the more “asset-light” the business, the better it is; so they’re far happier spending on technology development, marketing, salaries, and even rent, than on stores and inventory.

After a bloody discounting and marketing battle, in a few short years, there are now a handful of ecommerce businesses left standing in a field littered with dead ecommerce bodies, surrounded by many seriously wounded physical retailers who are trying to pick up unfamiliar technology weapons. And their worlds are merging.

Which is a Stronger Building Material – Bricks or Clicks?

Online business models offer some clear strengths. Etailers have a reach that is unlimited by time and geography – the web store is always up and available wherever the etailer chooses to deliver its products.

An ecommerce brand’s inventory is potentially more optimised, because it is held in one location or a few locations, rather than being spread out in retail stores all across the market including in those stores where it may not be needed.

However, we forget that consumers don’t really care to have their choices and shopping behaviour dictated by the business plans of ecommerce companies or their investors. The fact is that physical retail environments do have distinct advantages, as etailers are now discovering.

Firstly, shopping is as much an experiential occasion as it is a transaction comprising of products and money. In fact, the word “theatre” has been used often in the retail business. For products that have a touch-feel element, the physical retail environment continues to be preferred by the customer. Of course, there are products that could be picked off a website with little consideration to the retail environment. For standard products such as diapers or a pair of basic headphones, online convenience may win over the need for a physical experience. However, non-standard products such as apparel or jewellery lend themselves to experiential buying, where a physical retail store definitely has an edge.

Shopping in a physical retail environment is also a social and participative activity. We take our friends or family along, we ask for their opinion and get it real-time. The physical retail environment lends itself to the consumer being immersed in multiple sensory experiences at the same time. These aspects are not replicable even remotely to the same degree by online social sharing of browsed products, wish-lists and purchases, nor by virtual smell and touch (at least not yet!).

In a market that is dominated by advertising noise, a physical store also helps to create a more direct and stronger connect for the consumer with the brand than any website or app can. An offline presence creates credibility for a brand, especially in an environment where online sales are dominated by discounts and deals, and many brands have risen and fallen online in the customer’s eyes during the last 3-4 years.

As a matter of fact, every store acts as a powerful walk-in billboard for the brand. If used well, the store conveys brand messages more powerfully than pure advertisements in any form. This reality has been embraced by retailers for decades, as they have created concept stores and flagship stores in locations with rents and operating costs that are otherwise unviable, except when you see it as a marketing investment.

Showrooming vs. Webrooming

As ecommerce has grown and brands have become available across channels, offline and online, the retail sector has been faced with a new challenge: customers browsing through products in the store, but placing orders with ecommerce sites that offered them the best deal. This obviously meant that retailers were, in a sense, running expensive showrooms (without compensation) on behalf of the ecommerce companies! The industry adopted the term “showrooming” to describe the phenomenon.

However, ecommerce businesses are now getting a taste of their own medicine as retailers are benefitting from a reverse traffic.

Consumers have now started using websites to conveniently do comparative shopping without leaving the comfort of their homes, and collect information on product features and prices but, once the product choice has been narrowed down, the final decision and the actual purchase takes place in a physical store.

This is described with a slightly unwieldy term, “webrooming”. This is one among the reasons that lead to consumers abandoning browsing sessions and carts when they’re online.

Bricks AND Clicks

The wide split between offline and online channels is mainly because traditional offline retailers have been slow to adopt online and mobile shopping environments.

Most physical retailers around the world have approached ecommerce as an after-thought, with a “we also do this” kind of an approach. Ecommerce has typically been a small part of their business, and not typically a focus area for top management. So, in most cases the consumer’s attitude has also reflected these retailers’ own indifference to their ecommerce presence. However, due to the accelerating penetration of mobiles, tablets and other digital devices, a serious online transactional presence is now vital for any retailer that wants to remain top of the consumer’s list.

On the other hand, ecommerce companies, as mentioned earlier, have so far mainly stuck to “pure-play” online presence due to their own reasons. However, with passage of time there is bound to be a convergence and eventually a fusion between channels.

The Journey to Omnichannel

Omnichannel today, in my opinion, is still more a buzzword today than a reality. Being truly omnichannel requires the brand or retailer to offer a seamless experience to the customer where the customer never feels disconnected from the brand, regardless of the channel being used during the information seeking, purchase and delivery process. For instance, a customer might seek initial comparative information online, step into a department store to try a product, pay for it online, have the product delivered at home, and be provided after-sales support by a service franchisee of the brand.

Very few companies can claim to offer a true omnichannel experience, due to internal informational and management barriers. However, having an effective multi-channel presence is the first step to creating this, since operating across different channels needs a completely different management mind-set from the original single-channel business. Having a presence across different channel means that a retailer will need to juggle the diverse needs. Capabilities, processes and systems that are fine-tuned for one channel, may not be fully optimal for another channel. This requires the retailer to restructure its organisation, systems and processes to handle the different service requirements of the various channels.

For instance, brick-and-mortar retailers moving online need to rethink in terms of the service (“always open”), speed (“right now”), and scale (“everywhere”). A traditional retail organisation is seldom agile enough to work well with the new technology-enabled channels as well.

An etailer opening physical stores, on the other hand, needs to embrace product ranging and merchandising skills to allocate appropriate inventory to various locations, as well as the ability to create and maintain a credible, distinctive store environment – in essence, inculcating old-world skills and overheads that they thought they would never need.

The retail business is not divided black-or-white between old-world physical retailers and the upstart online kids – at least the consumer doesn’t think so.

Retailers need to and will see themselves logically serving customers across multiple channels that are appropriate for their product mix. They need to mould their business models until they achieve balance, proficiency and excellence across channels, and eventually become truly omnichannel businesses. It doesn’t matter from which side of the digital divide they began.

Panel Discussion moderated by Mr. Devangshu Dutta, Chief Executive, Third Eyesight at the Indian Retail Congress 2015 (17-18 April 2015). The panel included Mr. Manish Mandhana (Managing Director of Mandhana Industries with the brand Being Human), Mr. Sanjay Warke (Country Head of Toshiba India), Mr. Tanmay Kumar (Chief Financial Officer of Burger King India), Mr. Kinjal Shah (Chief Executive Officer of Crossword Bookstores) and Mr. Ranjan Sharma (Chief Information Officer of Bestseller India, with the brands Vero Moda, Only, Jack & Jones).

(The Hindu Businessline – cat.a.lyst got marketing experts from diverse industries to analyse consumer behaviour during the last one month and pick out valuable nuggets on how this could impact marketing and brands in the years to come. This piece was a contribution to this Deepavali special supplement.)

Two trends that stand out in my mind, having examined over two-and-a-half decades in the Indian consumer market, are the stretching or flattening out of the demand curve, or the emergence of multiple demand peaks during the year, and discount-led buying.

Secular demand

Once, sales of some products in 3-6 weeks of the year could exceed the demand for the rest of the year. However, as the number of higher income consumers has grown since the 1990s, consumers have started buying more round the year. While wardrobes may have been refreshed once a year around a significant festival earlier, now the consumer buys new clothing any time he or she feels the specific need for an upcoming social or professional occasion. Eating out or ordering in has a far greater share of meals than ever before. Gadgets are being launched and lapped up throughout the year. Alongside, expanding retail businesses are creating demand at off-peak times, whether it is by inventing new shopping occasions such as Republic Day and Independence Day sales, or by creating promotions linked to entertainment events such as movie launches.

While demand is being created more “secularly” through the year, over the last few years intensified competition has also led to discounting emerging as a primary competitive strategy. The Indian consumer is understood by marketers to be a “value seeker”, and the lazy ones translate this into a strategy to deliver the “lowest price”. This has been stretched to the extent that, for some brands, merchandise sold under discount one way or the other can account for as much as 70-80 per cent of their annual sales.

Hyper-opportunity

This Diwali has brought the fusion of these two trends. Traditional retailers on one side, venture-steroid funded e-tailers on the other, brands looking at maximising the sales opportunity in an otherwise slow market, and in the centre stands created the new consumer who is driven by hyper-opportunism rather than by need or by festive spirit. A consumer who is learning that there is always a better deal available, whether you need to negotiate or simply wait awhile.

This Diwali, this hyper-opportunistic customer did not just walk into the neighbourhood durables store to haggle and buy the flat-screen TV, but compared costs with the online marketplaces that were splashing zillions worth of advertising everywhere. And then bought the TV from the “lowest bidder”. Or didn’t – and is still waiting for a better offer. The hyper-opportunistic customer was not shy in negotiating discounts with the retailer when buying fashion – so what if the store had “fixed” prices displayed!

This Diwali’s hyper-opportunism may well have scarred the Indian consumer market now for the near future. A discount-driven race to the bottom in which there is no winner, eventually not even the consumer. It is driven only by one factor – who has the most money to sacrifice on discounts. It is destroys choice – true choice – that should be based on product and service attributes that offer a variety of customers an even larger variety of benefits. It remains to be seen whether there will be marketers who can take the less trodden, less opportunistic path. I hope there will be marketers who will dare to look beyond discounts, and help to create a truly vibrant marketplace that is not defined by opportunistic deals alone.

2013 has been a mixed year for retail in the Indian market with multiple factors working in favour of and against the business prospects.

Economic growth had slowed to 5% for 2012-13 (as per advance estimates by The Central Statistics Office, Government of India), down from 9.3% in 2011. The ray of hope is that the growth rate is expected to rebound to 6.8% in 2013-14. Spiralling inflation, with prices of some basic vegetables shooting up almost eight to ten times, distracted the consumers from discretionary spending. The year hardly saw irrational expansions by retail businesses as they primarily focused on bottom line performance.

While the Government of India liberalised Foreign Direct Investment (FDI) policy in retail in September 2012, international investors have been slow to respond and sizeable foreign investments have been announced only recently at the end of 2013.

The political environment also took unexpected turn with the success of Aam Aadmi Party (AAP) at the Delhi Assembly Elections held towards the end of the year. This may augur in a new era of politics driven by performance and results but in the short term it could restrict market access for international multi-brand retailers, as the AAP has declared their opposition to investment from foreign multi-brand retailers.

So is India still a strategic market for international fashion brands to look at?

FDI Policy – Clarifications and Impact

India’s Foreign Direct Investment (FDI) policy has come a long way with foreign investments now being allowed in multiple sectors including retail, telecom, aviation, defence and so on. The Indian government is now exploring the possibility of allowing FDI in sectors such as railways and construction.

The year 2006 was a significant year for international brands in fashion and lifestyle space as the Government of India allowed up to 51 per cent foreign direct investment in the newly-defined category of “Single Brand retail”. In September 2012 the Indian Government liberalised the retail FDI policy to allow foreign investment up to 100 per cent in single brand operations and up to 51 per cent in multi-brand retail albeit with certain conditions related to the ownership of the brand, mandatory domestic sourcing norms for both single-brand and multi-brand retailers and additionally certain investment parameters for the backend operations of the multi-brand retail business. The idea was to attract foreign investment in retail trading a part of which could flow into improving the supply chain while providing Indian businesses access to global designs, technologies and management practices.

Large Investments in the Pipeline

The investments flowed in slowly initially. Some of these have looked at converting existing operations, such as Decathlon Sports which was present in India through a 100% owned subsidiary in cash and carry business. The brand is converting its cash and carry business in India to fully-owned single brand retailing business.

But there have been some significant moves as well. A record breaking FDI proposal in single brand retail is the Swedish furniture brand IKEA’s, that had to apply three times since December 2012 before its’ proposed investment of €1.5 billion (Rs. 101 billion) received the nod from the Government. However, the proposal is reportedly still in the works, as Ikea looks to structure the business to comply with the laws of the land. And as the year came to a close the Government cleared Swedish clothing brand Hennes and Mauritz’s (H&M) US$ 115 million (Rs.7.2 billion) investment proposal. According to news reports the brand had already begun blocking real estate with the goal of launching its stores in India at the soonest.

While the initial response to the relaxation of FDI policy spelt positive inflow for single brand retail, there was no new investment forthcoming in multi-brand retail. The existing foreign multi-brand retailers present in India through the cash and carry format showed a marked lack of interest in switching to a retail business model. On the other hand Walmart, the only foreign multi-brand retailer having access to a network of retail stores through its wholesale joint venture Indian partner, Bharti Enterprises Ltd., ended its five year long relationship and has restricted itself to the wholesale business. Though the company cited that it was disheartened by complicated regulations, it was also caught up in its own corruption investigation as well as allegations that it had violated foreign investment norms. The sole bright spot was the world’s fourth largest global retailer Tesco proposing and getting approval for a US$ 115 million investment into the multi-brand retail business of its partner, the Tata Group. At the time of writing the precise scope of this investment remains unclear.

If you want the full paper please send us an email with your full name, company name and designation to services[at]thirdeyesight[dot]in.