(Published in the Financial Express, 10 May 2016)

In about 20 years, Café Coffee Day (CCD) has grown from one ‘cyber café’ in Bengaluru to the leading chain of cafés in the country by far.

In its early years, it was a conservative, almost sleepy, business. The launch of Barista in the late 1990s and its rapid growth was the wake-up call for CCD — and wake up it did!

CCD then expanded aggressively. It focussed on the young and more affluent customers. Affordability was a keystone in its strategy and it largely remains the most competitively priced among the national chains.

Its outlets ranged widely in size — and while this caused inconsistency in the brand’s image — it left competitors far behind in terms of market coverage. However, the market hasn’t stayed the same over the years and CCD now has tough competition.

CCD competes today with not only domestic cafés such as Barista or imports such as Costa and Starbucks, but also quick-service restaurants (QSRs) such as McDonald’s and Dunkin’ Donuts. In the last couple of years, in large cities, even the positioning of being a ‘hang-out place’ is threatened by a competitor as unlikely as the alcoholic beverage-focussed chain Beer Café.

CCD is certainly way ahead of other cafés in outlet numbers and visibility in over 200 cities. It has an advantage over QSRs with the focus on beverage and meetings, rather than meals. Food in CCD is mostly pre-prepared rather than in-store (unlike McD’s and Dunkin’) resulting in lower capex and training costs, as well as greater control since it’s not depending on store staff to prepare everything. However, rapid expansion stretches product and service delivery and high attrition of front-end staff is a major operational stress point. Upmarket initiatives Lounge and Square, which could improve its average billing, are still a small part of its business.

Delivery (begun in December 2015) and app-orders seem logical to capture busy consumers, and to sweat the assets invested in outlets. However, for now, I’m questioning the incremental value both for the consumer and the company’s ROI once all costs (including management time and effort) are accounted for. The delivery partner is another variable (and risk) in the customer’s experience of the brand. Increasing the density through kiosks and improving the quality of beverage dispensed could possibly do more for the brand across the board.

The biggest advantage for CCD is that India is a nascent market for cafés. The café culture has not even scratched the surface in the smaller markets and in travel-related locations. The challenge for CCD is to act as an aggressive leader in newer locations, while becoming more sophisticated in its positioning in large cities. It certainly needs to allocate capex on both fronts but larger cities need more frequent refreshment of the menu and retraining of staff.

An anonymous Turkish poet wrote: “Not the coffee, nor the coffeehouse is the longing of the soul. A friend is what the soul longs for, coffee is just the excuse.” There are still many millions of friends in India for whom the coffee-house remains unexplored territory, whom CCD could bring together.

Aggregator models and hyperlocal delivery, in theory, have some significant advantages over existing business models.

Unlike an inventory-based model, aggregation is asset-light, allowing rapid building of critical mass. A start-up can tap into existing infrastructure, as a bridge between existing retailers and the consumer. By tapping into fleeting consumption opportunities, the aggregator can actually drive new demand to the retailer in the short term.

A hyperlocal delivery business can concentrate on understanding the nuances of a customer group in a small geographic area and spend its management and financial resources to develop a viable presence more intensively.

However, both business models are typically constrained for margins, especially in categories such as food and grocery. As volume builds up, it’s feasible for the aggregator to transition at least part if not the entire business to an inventory-based model for improved fulfilment and better margins. By doing so the aggregator would, therefore, transition itself to being the retailer.

Customer acquisition has become very expensive over the last couple of years, with marketplaces and online retailers having driven up advertising costs – on top of that, customer stickiness is very low, which means that the platform has to spend similar amounts of money to re-acquire a large chunk of customers for each transaction.

The aggregator model also needs intensive recruitment of supply-side relationships. A key metric for an aggregator’s success is the number of local merchants it can mobilise quickly. After the initial intensive recruitment the merchants need to be equipped to use the platform optimally and also need to be able to handle the demand generated.

Most importantly, the acquisitions on both sides – merchants and customers – need to move in step as they are mutually-reinforcing. If done well, this can provide a higher stickiness with the consumer, which is a significant success outcome.

For all the attention paid to the entry and expansion of multinational retailers and nationwide ecommerce growth, retail remains predominantly a local activity. The differences among customers based on where they live or are located currently and the immediacy of their needs continue to drive diversity of shopping habits and the unpredictability of demand. Services and information based products may be delivered remotely, but with physical products local retailers do still have a better chance of servicing the consumer.

What has been missing on the part of local vendors is the ability to use web technologies to provide access to their customers at a time and in a way that is convenient for the customers. Also, importantly, their visibility and the ability to attract customer footfall has been negatively affected by ecommerce in the last 2 years. With penetration of mobile internet across a variety of income segments, conditions are today far more conducive for highly localised and aggregation-oriented services. So a hyperlocal platform that focusses on creating better visibility for small businesses, and connecting them with customers who have a need for their products and services, is an opportunity that is begging to be addressed.

It is likely that each locality will end up having two strong players: a market leader and a follower. For a hyperlocal to fit into either role, it is critical to rapidly create viability in each location it targets, and – in order to build overall scale and continued attractiveness for investors – quickly move on to replicate the model in another location, and then another. They can become potential acquisition targets for larger ecommerce companies, which could acquire to not only take out potential competition but also to imbibe the learnings and capabilities needed to deal with demand microcosms.

High stake bets are being placed on this table – and some being lost with business closures – but the game is far from being played out yet.

Retailers seem to be fighting a losing battle against the growth of ecommerce, and it is only the nature of the shopping activity, especially for fashion – interactive, social, and immersive as it is – that has kept many retailers relevant and in business.

However, the defensive stance is changing, and now they’re using technology to get the customers back into the store. Forward-thinking retailers are reimagining trial rooms, stores, business processes and entire business models. It’s not a physical versus virtual approach but an approach that integrates both sides. The idea is to create a more immersive experience than pure digital retail can be, using some of the same tools as ecommerce.

It is important to remember that the whole retail environment is a “suggestive” environment. Due to cost and other operational factors most retailers are ill-equipped to provide appropriate levels of excitement, suggestion and support during the browsing and buying process.

For many, the simplest move could be screens serving up their catalogue to customers within the store. For instance, US department store chain Kohl’s has initiated connected fitting rooms that identify products the customer is carrying, and bring up not only those items onscreen, but additional colours and sizes that are available. If the customer wants an alternative, a message goes to a sales associate who can fetch the requested option. Macy’s and Bloomingdales are using tablets in the trial rooms, while Nordstrom, Neiman Marcus and Rebecca Minkoff are attempting to boost their fashion sales using magic mirrors to provide similar enablement. These devices and the processes empower and involve the customer far more, while leaving store staff free for other activities.

A step up, Puma is using “virtual trials” for its apparel products by having a customer take images of herself in specific positions, and then mapping styles on their own images to visualise how they might look. While this needs more work and investment, this is still only a more developed product browser technique from the customer’s point-of-view.

The next level, augmented reality trials and virtual fit, are significantly more sophisticated at creating simulations of a selected garment image draping and falling on the customer’s body even as he or she moves normally. Imaging and texturing of the simulated garments is technically challenging and expensive, repeated for each new style and option. The imaging also needs to mimic the “wearer’s” movements. Nevertheless, retailers such as Polo Ralph Lauren are finding it worth their while to investigate these new technologies, as these reintroduce the much needed “theatre” that are integral to a successful retailer.

For the customer virtualisation expands the number of items “taken” into the trial room, and creates more convenient product discovery. More products can be seen in the same shopping time, and sharing of images and videos with friends and family, engages them in the shopping process as well.

For retailers, the benefits multiply. Inventory can be optimised, and there is reduced handling and shrinkage. Even without sales associates, it is feasible to prompt for alternatives and related products, improving conversion and transaction values, reducing space and costs of physical trial rooms, and increasing the number of customers serviced especially at peak traffic times.

A phenomenal advantage is the data captured that is relevant while the customer is in the store, but which can be linked to future promotions. Valuable intelligence, such as what is being tried and for how long, can help the retailer to quickly gauge demand patterns, and adjust pricing and promotions. Normally retailers only capture sales transactions (post-fact), and miss out the rich information on in-store behaviour that etailers do collect and analyse.

However, massive hurdles to virtualisation remain, including data input accuracy, product accuracy, and the technical capabilities of the tech solution adopted. A bigger concern is whether technology is intuitive and seamless, or whether it gets in the way of the shopping experience. Further, consumers do have privacy concerns about the images and other data collected.

Its important to remind ourselves that, on its own, technology is just a novelty – huge transformation of business processes, organisational capabilities and behaviours must happen as well.

That is perhaps the biggest mountain to climb.

The Patanjali Group has created an Indian FMCG giant in a very short span of time on the back of a three-pronged strategy:

1. The enormous brand awareness that can be attributed to the very high visibility of Baba Ramdev, across a variety of media and issues,
2. Wide and deep market penetration through a large network of outlets and distributors across the country, and
3. Pricing itself below the benchmark competitor in each product area in which it is competing.

Over time, the group has also invested in improving its manufacturing and packaging infrastructure to bring itself on par with well-established competitors.

The group has clearly focussed itself on the mass market, and Patanjali Group’s products become a “go-to” for customers who are more price-sensitive than brand-loyal. This definitely creates pressure on established brands in each of the product segments where the group is now present.

In the growing market for ready-to-cook packaged food, a new entrant would struggle to create visibility and initial demand. However, with the momentum of the Patanjali brand behind it, the group’s new product — instant noodles — has a fighting chance.

I must say, though, that the immediate opportunity would have been bigger had Maggi also not just relaunched in the market. The other aspect to keep in mind is that while a lot of food and nutraceutical products resonate easily with the Patanjali brand, instant noodles seem completely counter-intuitive under this brand’s umbrella. How much consumers will support this new launch remains to be seen.

This 2-4 minute noodles story is still cooking. Keep watching the pot!

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.