Devangshu Dutta
November 25, 2011
(This piece appeared in the Financial Express on November 26, 2011.)
The debate on allowing more foreign investment in retail reminds me of an incandescent bulb: producing more heat than light. With a variety of agendas at play, the heat has been generated by both sides, for and against foreign investment in retail. Conflicting views have emerged not just outside but from within the government and the civil services as well.
Much time has been spent, multiple studies and consultations carried out, even as behind-the-scenes negotiations have gone on.
We can now all let out our collective breaths. The Indian Cabinet has, with some caveats, approved foreign investment up to 100% in single-brand retail operations and up to 51% in multi-brand businesses.
However, the Cabinet “yes” to 51% foreign investment in multibrand retail and 100% in single brand retail doesn’t quite mean an all-clear to accelerated development of modern retail in the country. The debate is not really over—how can it be when it remains still alive and kicking in some of the most consolidated markets in the West? The states retain the power to allow or disallow foreign-owned retail businesses from operating within their boundaries, and local and regional political parties would certainly have an impact on retailers’ expansion strategies. It also remains to be seen whether this will only affect new stores, or affect investment into existing businesses, too.
Opposition to the expansion of Big Retail is not unique to India. There are enough places within the US where the American giant Walmart has faced opposition, not just in small towns but including large cities such as Boston. Similarly, Tesco has been opposed in several locations within the UK. In fact, there was a huge uproar in the UK in the late-1990s when Walmart entered the country with its acquisition of Asda. The details of such opposition vary from location to location, but the canvas of fears is similar: predatory pricing by large retailers, depressed wages, net loss of jobs in the medium to long term with closure of local businesses, as well as low sensitivity to local social issues when operational and financial decisions are driven from distant headquarters.
Though India is labelled a slow-coach when compared to China, it is worth remembering that China took over 12 years to liberalise its FDI regime, and in stages with reversals as well. It first allowed foreign direct investment in retail in 1992 at 26%, took another 10 years to raise the limit to 49%, and allowed full foreign ownership in 2004, but only in certain cities. It even revoked some previously granted approvals, to reduce the foreign retailers’ footprint.
Anyway, the “policy flywheel” in India has finally moved and is now rolling. Certainly there will be winners and losers in its path.
The losers will include simple intermediaries and low-value wholesalers who have a diminishing role in a better-connected economy. Large suppliers, including multinationals, will gradually find power slipping from their hands. However, the fact is that most of them would anyway be losing in absolute or relative terms to the large Indian retailers over the course of the next few years; it would be naive, even dishonest, to suggest otherwise. And I suspect also that landlords who may be rejoicing the FDI decision could be tearing their hair out when they sit down to negotiate rents with the big boys.
In the other corner, the beneficiaries obviously include the foreign retailers themselves. With a direct relationship to the consumer, retail operations are the most economically valuable link in a supply chain. Foreign retailers can now have access to this with a controlling stake in one of the fastest growing markets.
The second set of winners is the large Indian retailers. In a capital-hungry business, large Indian retailers can use foreign equity and cheaper foreign debt to reduce high-interest domestic debt, and infuse more funds into growing the store footprint. For some, this also allows a potential exit from the business, whether immediate (for instance from the current 51:49 single-brand ventures) or in the future.
There would be winners among suppliers as well, including packaged and processed foods for which modern retail is a great platform to reach the “income-rich, time-poor” urban consumers, technology companies and service providers including the larger logistics companies, as well as foreign suppliers who would benefit from the trust that they enjoy with the international retailers in other markets.
The government can certainly benefit in terms of indirect and direct tax collection, from these more structured, “on-the-books” businesses.
And the consumer would be at the receiving end of a much better product choice and better shopping environments.
Where India as a whole can potentially derive the biggest benefit from foreign retailers is in developing agricultural practices and supply chains that comply with global requirements. If channelled well, this can create tremendous export possibilities (‘agricultural produce outsourcing’), and help to propel rural incomes upwards, creating a wider economic impact.
However, I think the critical things that have been debated most hotly will also be the slowest to be impacted: foreign retailers contributing to bringing prices down, and on the other hand, potentially damaging local competitors.
If the efficiency is simply a matter of scale, and if building up scale is simply a function of having deeper pockets from which to invest, it is obvious that the largest global retailers will squeeze their smaller Indian counterparts out of business, one way or the other. However, retail is not a global business or even a ‘national’ business: it is an intensely local business. Sheer financial muscle can be used to bulldoze competitors, but the consumer chooses to shop at a particular retailer for several reasons, many of which are not influenced by the size of the retailer’s balance sheet. So, local retailers have more than a fighting chance. Walmart, Carrefour and Tesco are the only three foreign retailers in China’s top-10, although two of them have been there for more than 15 years.
The growth of modern retail is an outcome of the development of the economy and a better supply chain, and a working population that is seeking food in more convenient and safe forms; it doesn’t necessarily drive supply chain improvements itself. Indeed, in India, during the last decade, modern retailers have deployed money and management more on opening stores in a drive to capture market share, than actually in supply chain improvements and operational efficiencies.
However, without investments in the supply chain, neither can the quality of products be significantly improved nor their cost significantly reduced. The new FDI policy partly addresses this issue, as it requires a minimum investment of $50 million in the ‘back-end, which cannot include land, rentals or front-end storage. While the final notification should be clearer on the exact implications, for now one can assume that this investment is envisioned in the storage, processing and transportation infrastructure. However, the impact this can have on a $450 billion retail market will be too small to be immediately meaningful.
Clearly, FDI in retail is not a panacea for growth and efficiency. There is much the government itself still needs to do.
The modernisation of retail doesn’t just lead to consolidation of sales turnover, but also enormous concentration of economic power. Therefore, a tilt towards modern retail must be accompanied by the government taking on the active role of a competition oversight body that can maintain an environment of fair competition. So far, the government has played this role mainly in consolidated industries; retail will require it to play this role in a fragmented market as well, and between buyers and suppliers also rather than only between direct competitors.
We also cannot run 21st century supply chains on dirt roads, with unpowered storage and a poorly educated workforce. The benefits of FDI in retail will remain largely unrealised for the nation overall if there is no simultaneous investment by the government in three key areas: transport infrastructure, electricity and education. The Indian government must be a ‘co-investor’ and active partner in developing and maintaining these aspects much more aggressively.
Lastly, several other regulatory changes are needed to unfetter domestic businesses, too. These include, among others, land and real estate reforms so that we are not constantly living with a mindset of scarcity and ridiculous real estate prices, rationalisation of tax structures, and simplifying the certifications and approvals needed to run business on a day-to-day basis.
Unless these aspects of governance are managed actively and consciously, Indian businesses — small or large — will not be completely free to grow and to complete effectively, and FDI could well turn out to be a Faustian bargain for India.
Tarang Gautam Saxena
October 30, 2011
The operating environment for the fashion retailers in India is only moving towards a more challenging and competitive direction even though the market is yet to mature. The market has grown over the last two decades on account of brand proliferation and developing retail network and more recently due to new product category creations. High consumer awareness and exposure to international trends has cut the product life cycles short. Topping this up, the last 12-18 months has witnessed the growth of the online platform offering an alternate, convenient and cost effective shopping option for consumers.
It is necessary that fashion retailers manage their operations efficiently both in terms of managing a complex and responsive supply chain at the back end and delighting the customers at the store with great product offers and customer service. Adopting lean practices can help fashion retailers to achieve significant improvements in store profitability and customer satisfaction, making their retail business sustainable through a positive impact on bottom-line.
The concept of lean philosophy, pioneered by Toyota, is built on the premise that inventory hides problems. The basic tenet of this philosophy is that keeping the inventory low will highlight the problems that can be dealt with and fixed immediately instead of maintaining inventory in anticipation of any bottlenecks.
“Lean retailing” is an emerging concept and has already been adopted by retail organisations in the Western countries using technology such as barcodes, RFID (across the product value chain from raw material sourcing through production through final delivery at the retail store) and item-level inventory management and network architectures.
In an ideal scenario a retail organization would be lean at both the store and the distribution center. The organization would leverage technology such as RFID to uniquely identify the movement of its inventory accurately and use fulfillment logic as per the store’s merchandizing principle to have replenishments in tune with customer demand.
Some international retailers that have adopted lean retailing techniques include Wal-Mart, Macy’s, Bloomingdale’s, The Gap and J. C. Penny. Applying lean philosophy to fashion retail in India may sound like an avante garde concept as of now. However, there are some leading large retailers in India such as the Future Group who are early adopters and have already adopted lean practices in their retail supply chain.
An understanding of what lean retailing is and some of its principles can help in appreciating how this concept can make the apparel retail business more sustainable. Lean retailing aims to continuously eliminate “waste” from the retail value chain, waste being defined as any activity/process that is not of “value” to the customer. A fundamental principle of lean retail is to identify customers and define the “value” as those elements of products or service that the customer believes he should be paying for, not necessarily those that add value to the product. Further the value should be delivered to the customer “first-time right every time” so that waste is minimized.
Lean retailing requires simplifying the workflow design in delivering products to customer. Given that the connotation of value is customer-centric, simplifying the workflow design requires streamlining the core and associated processes so that any kind of waste is eliminated. Further pull-system drives replenishment at the stores (and the shelf) based on what customers want “just-in-time” (neither before nor after the time customer demands). This results in a value flow as pulled by the customer.
Those practising lean retail have invested in information technology that allows the stores to share sales data in real time with their suppliers. New orders for a given product maybe automatically placed with the supplier as soon as an item is scanned at the check-out counter (subject to minimum order size criteria). Smaller stores may use visual systems wherein the sales staff can gauge through the empty shelf space the products that have been sold and that need to be re-ordered.
Removing bottlenecks throughout the supply chain is another principle driving lean retail. It entails redesigning processes to eliminate activities that prevent the free flow of products to the customer. Further, lean retail requires following a culture of continuous improvement. Continuous improvement (or “Kaizen”) focuses on small improvements across the value chain that rolls up into significant improvements at an overall level. Kaizens not only can lead to elimination of wasted effort, time, materials, and motion but also focus on bringing in innovations that lead to things being done faster, better, cheaper and easier. Involvement of staff at the lowest levels is very important in Kaizen activities and that means that companies must invest in training, up-skilling their talent pool in Lean Principles.
In the context of apparel retail business, lean retail can help in improving organisational responsiveness to customer needs, the speed with which the products are delivered to them and meet their expectations as per the latest trends. Systematic application of lean principles translates in increased throughput (Sales), with lower Work in Process (Investments) and as per customer requirements of Quality, Design, Trends and Time. Improved information visibility across the chain leads to reduced instances of out of stock and excess inventory at the same time, minimising inventory control costs and reducing shrinkage. At the front-end lean retail may lead to redesigned in-store processes and systems for consistency in frontline behaviors to provide standard customer experience.
With the focus on training and involvement of the workforce, Lean principles have resulted in improving employee satisfaction without increasing labour costs that in turn positively impacts revenues and profitability. Some retailers in the West have reported reducing their store labour costs by 10-20 percent, inventory costs by 10-30 percent, and costs associated with stock outs by 20-75 percent on account of lean retail.
In addition to top-line and bottom-line impact, lean retailing by enhancing the enthusiasm and motivation of the frontline staff creates distinctive shopping experiences for customers.
Inditex, the world’s largest clothing retailer with Zara as its flagship brand, has successfully achieved supply chain excellence following lean principles. It targets fashion conscious young women and is able to spot trends as they emerge and deliver new products to stores quickly thereby establishing its position as the leading fast fashion retailer. The product development processes is based on customer pull-system. Its design team reviews the sales and inventory reports on a daily basis to identify what is selling and what is not. Additionally, regular visits to the field provide insights into the customers’ perceptions that can never be captured in the sales and inventory reports. Critical information about customer feedback is widely shared by store managers, buyers, merchandisers, designers and the production team in an open plan office at the company’s headquarters. Frequent, real time discussions and interactions within the team help them to understand the market situation and identify trends and opportunities.
Further, Zara manufactures the products in small lots and many styles are typically not repeated. Style cues for replenishments are derived from real time customer demand. At the back end, Zara holds inventory of raw materials and unfinished goods with its supply partners which may be local or offshore manufacturers. Typically, the fashion merchandise is produced at the local manufacturing base and quickly delivered while the staple low-variation range is produced offshore at cheaper costs.
Following lean retail practices implies a higher stock turn and frequent replenishments by the suppliers based on real-time sales. Building and maintaining reliable and responsive suppliers through win-win partnerships, is imperative to realize the success of lean retail implementation as high stock turns and frequent replenishments involves the commitment and involvement of the entire supplier base.
Like in any transformational effort, change management plays a critical role in reaping the benefits of lean retail. The whole philosophy requires paradigm shift in attitudes, behaviors and mind sets of those involved upstream and downstream across the value chain. Training, communicating and inspiring the front end staff is thus an important aspect in the overall success and companies need to device a compelling vision that is shared by employees across functions and hierarchy across the entire chain.
Devangshu Dutta
October 21, 2011
At the outset, let me say that this is the personal complaint of a consumer. However, I’m airing it here because I believe it is also important to the future profitability of our readers’ businesses.
Over the last few years I have felt increasingly uncomfortable with the noise in public and commercial spaces.
It may be that my sensitivity to this has increased with age, but it is a fact that noise levels have also increased dramatically in every urban public space around us. In fact, it has reached a point where I now feel that people involved in the architecture and design are either addicted to noise or, at the very least, completely immune to it.
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.)
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.)
Devangshu Dutta
August 26, 2011
A few months ago, when asked to speak about value-addition at a food industry seminar, I decided, in a deviation from the usual discussion, to dissect the meaning of “value”.
Most people in industry focus on only one dimension of value-addition – the economic value added by processing and transforming food raw materials – virtually ignoring two other dimensions which are required for most of the (undernourished) population: calorific value and nutritional value (see “Perishable Value Opportunities”).
At the end of that seminar session, an agriculturist from the audience put forth a very pointed question: “What is the cost of the potatoes in a bag of branded chips that sells for Rs. 10? Or to put it another way, how much of the retail price actually goes back to the potato farmer?”
The question, of course, was completely loaded with angst on the economic imbalance between farm and factory, supplier and buyer, small and big, rural and urban. But it also underlined missed opportunities to capture economic value, which in turn accentuate the imbalances in growth.
Economic value can be added to food through improvement, providing protection, changing the basic product and through marketing. Improvement typically focuses on seeds, growing techniques and post-harvest areas for improved quality of harvests, disease resistance, better colours, size and flavour, possibly nutrition. Protection initiatives work across cultivation, harvest and post-harvest, storage, during processing, through packaging, while change is essentially focused on processing techniques (cooking, combining, breaking down and reconstitution).
There is a lot of work going on in the food supply chain to enhance the value captured closer to the farmgate. And, certainly, the “value-added” earlier is vital to maintaining and building value later in the supply chain.
However, what is striking is the fact that as we move downstream towards final consumption, the economic value captured as a price premium also increases dramatically.
So, as depressing as the multiplier may be to the farmer, on a kilo-for-kilo comparison, the bag of factory-fresh potato chips is priced many times higher than his farm-fresh potatoes. And, the maximum economic value is created, or at least captured, by the act of branding and marketing.
The Love is in the Brand
A short quiz break: can you recall the “most valuable company” in the world in August 2011, as measured by valuation on the stock market?
The answer is Apple. It is a company that physically manufactures nothing, but tightly controls the design, development, sourcing, distribution and, yes, branding of a group of products and services, whose fans seem to grow by the minute.
Of course, one can argue that Apple “produces” by the very act of designing completely new, highly desirable, products that are not available from anyone else, and that this is what provides the premium. But similar premium – which is due to branding and marketing, rather than proprietary products – is also visible in thousands of companies, across product sectors, including food. That sustained price premium is the sign that the consumer trusts and wants a particular brand’s product more than another one. There is a hook, a strong connect, due to which that consumer is willing to lighten her wallet just that much more.
In India, surprisingly, “value-addition” discussions in the food industry focus almost entirely on cultivation, storage and transformation through processing, virtually ignoring branding and marketing. In fact, branding is usually only discussed in the context of multinationals or some of the largest Indian companies. What’s more, most of the brands discussed are focussed largely in the area of processed food products that originated in the west.
Run these tests yourself. When you think of food and beverage branded companies who do you think of? And, when you think of food brands, what kind of products come to mind first?
The answer is that the brand landscape is dominated by products such as biscuits and cookies, jams, fruit and non-fruit beverages, potato chips, 2-minute noodles, confectionary products and food supplements, mostly from the portfolio of some of the largest companies operating in the market.
Of course, there are some alternative examples.
Aashirvaad and Kitchens of India present quintessentially Indian products (albeit from the gigantic stables of ITC which also has a multinational parent).
And, yes, there are cooperatives such as Lijjat, as well as home-grown mid-sized companies such as the Indian snack maker Haldiram’s, spice brands such as MTR and MDH, pickle brands such as “Mother’s Recipe”, rice brands such as Kohinoor and Daawat.
But, given the size of the Indian food market and the width and depth of Indian cuisine, shouldn’t there be more brands that are Indian and focussed on essentially Indian food products?
This is a tremendous opportunity – a gap – not just in the Indian market (among the largest and fastest growing in the world), but also globally.
The Hurdles to Branding
So, why aren’t there more Indian brands?
Let’s face it, for most companies, marketing fulfils one need: to communicate their name to potential customers. Most of them generally hope that if they do it enough, they would actually be able to sell more volume.
Of course, no one has been able to draw a straight line graph that correlates more marketing expense with higher sales.
Those are two self-destructive notions. Obviously, if marketing is an expense, then it must be minimised! And secondly, if it cannot be proven to be effective, why would you spend money doing it? For most people, branding is even fuzzier in that regard, in terms of what it is and what it achieves.
However, the picture changes when you look at marketing as an investment rather than an expense. As we evaluate any investment, there should be an expected return that should be quantifiable. Examples of Apple and other brands make it amply clear that branding and marketing, when done well, can certainly create quantifiable financial returns on the investment.
The second hurdle to branding and marketing is that they require consistency, which is not a strong point for most wannabe brands. They end up with too many messages to the consumer, or the messages keep changing and shifting. The company, the name, end up representing many things, sometimes everything, and eventually nothing.
The third, enormous, hurdle is the time needed to develop a brand with a decent sized marketing footprint and a deep relationship with the consumer. Most small and mid-sized companies, constrained as they are for resources, focus on areas that seem to offer more immediate returns, such as distribution margins or discounts, or even expansion of production capacity. Especially in the early years of the business, the benefits of branding and marketing seem to be too far in the future to be a priority for investment.
Due to these one of these reasons or a combination, many companies are unable to see their brands through to success. In fact, sadly, most companies do not last long enough to become owners of successful brands.
Even those who do achieve success and even market leadership, sometimes choose to cash-out on their success by selling their brands to larger competitors, rather than competing with the financial might of the giants (such as Thums Up being sold to Coca Cola; Kissan, Kwality and Milkfood being sold to Hindustan Unilever).
In the past, one of the other barriers in India was the hugely fragmented retail and distribution system, which essentially sapped energy, resources and focus for any company that wished to grow a brand across regions. In fact, one of the key lessons from the western markets is that the growth of brands has been closely linked to the expansion of retail chains. So, certainly, we should view the growth of modern retail in India as a platform for the emergence of regional, national and global Indian food brands.
However, there is a flip side to this retail growth. In the west, most retailers were focussed on running shops, and were content to leave product development and brand development to their suppliers, the national brands. These retailers began looking at private labels only as an additional source of margin well after they had gained scale, and even then they ventured rather carefully into the space. In India, on the other hand, private label is very high on the priority list of our nascent modern retailers, precisely because the effectiveness of that business model has been proven elsewhere and because there are such few national brands that have a strong, irrevocable connect with the consumer.
Should You Invest in Branding?
The short answer is to that question is: yes.
It doesn’t matter if you run a small company or start-up, or a more mature company. It doesn’t matter whether you are selling a consumer product directly, which is the most effective and most necessary playing field for building a brand, or an intermediate product or service where you can still achieve a premium within the trade.
If you are committed to selling only commodities, where your selling prices are determined only by the tug-of-war between supply and demand, government policies and Acts of God, then you wouldn’t be reading this article.
Since you are reading this, you should brand.
In the short to medium term, if you do the job well, your customers will pay you a premium. And in the mid to long term, financial investors looking to ride India’s economic growth are more willing to put their money in a company that has a recognisable hook and a trading premium over its generic competition.
The brand can be built on any platform for which there could be a discernible premium. This can be trust (quality, quantity), simplicity and convenience (prepared snacks and meals, pre-ground spices, flour instead of grain), or even novelty (fizzy coloured sweetened water, reconstituted potato “chips” so uniform in shape and size such that they fit into a cylinder). Organic, vegan, fair-trade – you take your pick of the platform on which to build the brand.
Possibly the strongest driver of premium and brand value is a properly maintained heritage. Some brands have a past, some of them even have a history, but very few have a heritage. If your business has a history, there is a heritage waiting to be discovered, and it is worth a lot.
Of course, this doesn’t mean that a brand should become anchored at a certain historical time point and expect to only milk its age. Heritage is always viewed in a cultural context and culture evolves over time, so the most effective brands maintain a link between the attributes of their past to their ever-evolving present.
As with most other things, it is good idea to start early. Take on board the lessons of branding early in the company’s life so that the foundation is strong, and the brand can grow organically. As a side benefit, strongly branded companies also have strong and cohesive organisation cultures, a fantastic defence during times of high employee attrition.
The Global Branding Opportunity for Indian Food Companies
One of the most important ingredients of a good brand is clarity of identity and origin.
Often we confuse identity with the name, the logo, fonts or colours associated with a brand. Yes, a brand’s identity is certainly indicated by these – as much as our name and our physical appearance indicate our identity. However, the identity itself is much larger; in fact, it is helpful to think of the brand’s identity as a personality. The personality gets expressed in many different ways, but is tied together in a definable manner and has some strong traits that define its actions.
There are clear statements that can be associated with effective brands, whether or not they have been expressed by the company or brand in any of its formal communications. For instance, some globally relevant Indian brands include Tata Nano (“frugal engineering”), the Taj Mahal (“timeless beauty”), Goa (“party”), Rajasthan (“royal exotica”), and Kerala (“bliss”).
(I am deliberately picking “global relevance” as a theme to keep in mind that there is, literally, a world of opportunity that we could be looking at.)
We find a high number of tourism-related brands in this list, because these are destinations that pull the customer in – as long as they are true to themselves and relevant to the context of the consumer, they will be successful.
More conventional consumer product brands, on the other hand, must work harder to fit into the consumer own context, especially as they move away from their geographical origin, their home market.
This is particularly true of food, which is widely divergent across geographies. Some products can be adopted into multiple cuisines, offering more easily accessible opportunities and potentially greater scale. Rice and generic spices fit the bill here. However, for most other food items, the context of the home country cuisine is vital. Therefore, the growth of food brands, not surprisingly, is linked to the expansion of cuisines across borders. It is partly driven by the movement of people, and partly by the movement of culture (television and movies being the most important in current times), mostly both together.
For Indian companies, there is certainly an opportunity to ride on the back of the Indian diaspora across the world. And now there is an additional opportunity: expatriates who spend a few years living and working in India can also help to carry the cuisine and its associated brands out.
Finished product brands such as Tasty Bite, Haldiram’s and Amul are good examples of diaspora-led expansion, where the original driver was to bring people of Indian-origin a taste of home. In fact, Amul has recently announced that it wants to set up a manufacturing plant for cheese and other dairy products in the US, to service the Indian-origin population more effectively. Should it be restricted only to that? Certainly not; availability, if supported well by branding, can help it to cross into other segments as well.
As the consumption of Indian food grows across ethnic lines, it is likely to drive the growth of Indian ingredients as well – a perfect vehicle for branded ingredient suppliers. What’s more, Indian recipe books could even specify Amul Cheddar Cheese, MDH Chaat Masala or MTR’s Dosa Mix as ingredients – they wouldn’t achieve a 100% hit rate, but it would certainly be significantly higher than zero!
There is an opportunity to capture economic value that branding offers, which is very often greater than any other process in the food supply chain. Remember two phrases made famous by Hollywood: “show me the money” and “show me some love”. In the business of brands, these are one and the same.
It’s worth asking: do we have the patience to live through the lifecycle of a brand, and can we commit resources to nurturing it? If the answer is “yes” to both, we are most likely to benefit from branding.
Here’s to more Indian food brands that grow within India and across the world.
(If you need support with growing brands, do connect with us.)
