Losers@Retail

Meghna Maiti, Financial Chronicle

Mumbai, January 17, 2014

Both are full of bombast. Both are bleeding. So what’s the difference between the virtual retail market and the real retail market? Not much really as far as making money is concerned.

Oh yes, for you and me the difference is obvious: when you buy from an e-shop, you pay much less for an item that lands at your doorstep by post or courier and you suddenly decide you don’t like it after all. Try returning that – it’s a learning process you don’t want.

Much better is the real world: you see, hold and buy what you want, but the price you pay for it covers the rent of the place, the salary of the staff, the electricity and air-conditioning cost, the huge margin, the works. In short, you pay through the nose. But the return policy works fine.

If you are vicarious, you will be pleased to know that both your e-retailer and the flesh and blood retailer are losing loads of money every time he sells you anything.

But e-retailers do come up with clever spot ads on TV. In contrast, r-retailers (real retailer) mostly use print media for full-page ads that are dull, prosaic, but factual. Unfortunately, neither cleverness nor dullness brings in profits.

By way of bombast, there’s Flipkart: the e-retailer founded by Sachin Bansal and Binny Bansal claims it will sell goods worth Rs 6,200 crore by 2015. Ask how much they sell now, mum’s the word. What we do know is that in none of the seven years it has been around has it made a profit. Also chronicled is their takeover of a string of mom-and-pop-shop equivalents in the e-world. Mime360­.com and Chakpak.com, for example.

For the rest, one has to do a little snooping in the office of the registrar of companies (RoC) where filed data show up a firm called Flipkart Internet. This company’s last available financials are for October-March in 2012-13. And it had filed only the balance sheet, not the profit and loss account.

But its director’s report gave a pointer: in the six months its income was Rs 15.46 crore and expenditure Rs 71.29 crore. Loss before depreciation and tax was Rs 55.76 crore and after depreciation the net loss was Rs 62.68 crore.

But Flipkart Internet paid Rs 94.15 crore to Flipkart India for purchasing the e-commerce business and another Rs 19.70 crore as cost reimbursements. Flipkart India is a subsidiary of Flipkart Internet. The pyramid raises two more levels: Flipkart Marketplace of Singapore is the Indian firm’s holding company whose holding firm is Flipkart, also based in Singapore.

This story is, of course, not about the holding structure but its e-business in India. Given that it was pitiful in the last RoC filing, isn’t the year 2015 plan but a pipe dream?

eBayIndia.com story is not much different either. eBay India data with RoC indicates a net loss of Rs 72.15 crore in 2012-13. In 2011-12 its net loss was Rs 15.29 crore.

Neither the Flipkart spokesperson nor eBay officials want to comment on the results. But eBay officials were most willing to share the hype associated with e-shops. Sample: the company sells 15 items every minute and has customers in 4,600 Indian cities. Or so claims Deepa Thomas of eBay India.

Claims in the e-retailing business are always tall. A specialised e-retailer, Lens­kart.com, for example, says it has doubled in one year. “We are selling 1,000 (pairs of) spectacles a day,” Peyush Bansal, founder and chief executive officer. His online business is growing but he has gone offline as well, clearly not willing to put all the eggs in one basket.

Similarly, Jabong.com (in the business of fashion and lifestyle) too has sealed its lips on financials, but Arun Chandra Mohan, co-founder and MD, says online retail has a large potential and that they are trying hard.

Myntra.com, according to RoC data filings, is legally called Vector E-Commerce. It too has filed only the balance sheet and not the profit and loss account. The file has two pieces of hazy data under the head ‘Profit Loss For Period’. One is Rs -3.50 crore and another is Rs -2.60 crore. They, quite certainly, are losses, but for which year is not clear.

Like the others, Myntra.com is not forthcoming with any information. Mukesh Bansal, founder and CEO, had earlier told Financial Chronicle that they expected “a gross merchandise value” of Rs 800 crore in 2013-14. How much of it has been achieved is not known.

Analysts think they know where the failure comes from. Most e-retailers lack the credentials, strong business models or experience, and their costs are very high.

For now, at least publicly, e-retailers still take pride in their “phenomenal growth story” and point gleefully to the sad plight of r-retailers. True, footfalls at r-retailers have dropped and sales are not encouraging at all. Reliance Retail has discontinued its TimeOut range of specialty stores. Future Group has shut eZone and positioned it as a convergence platform for physical and online shoppers. Music World stores are disappearing. Other books, music and movies chains like Crossword, Planet M and Landmark have trimmed themselves.

While offline retailers have slipped, it is true that e-retailers managed to have double-digit growth. But in the process their costs have soared and margins shrunk.

In the r-retail business, ‘same store sales’ (SSS) is a good indicator of growth. Over the past year this growth has slipped to single digit in the case of Kishore Biyani’s Future Value Retail, which operates Big Bazaar (8 per cent), and Home Town and eZone (7.4 per cent), according to Q3 data.

K Raheja’s HyperCity has seen 8.9 per cent growth at the end of September. Govind Shrikhande, managing director of Shoppers Stop, had claimed to FC “7 to 9 per cent” growth in December. Discount apparel chain ‘The Loot’ has actually seen a 10 per cent drop in SSS growth last month from the level a year ago, according to Jay Gupta, MD.

If not profits, online shops have certainly seen volume growth, but, according to Gupta, this comes on a low base. Gupta attributes the growing online business to big price discounts customers get. “They save 15-20 per cent in their annual budget when they shop online. They realise there is great value in online retail.”

This is perhaps reflected in the fact that 10 per cent of urban consumers in India now use the internet as the primary medium to make purchase decisions. “This will rise to 30 per cent in three years,” says Shweta of the Boston Consulting Group.

According to a recent Technopak study, the Indian retail market is worth $490 billion now and will grow a 6 per cent annually to $865 billion by 2023. Within this market, e-retail, now just $1 billion, will grow 0.2 per cent annual to $56 billion by 2023, which will be still be only 6.5 per cent of the total market. By then, the share of organised r-retailers will grow from 7 per cent now to 17 per cent.

In other words, mom-and-pop stores and the kirana shops will still rule the retail roost. Organised r-retailers see the vast cluster of e-retailers as a menace, though a few of them are trying their hand at online business too. The need for a different strategy to face the online challenge is felt.

“We have to become more convenient to the consumer. We need to have a more cooperative kind of model to survive,” says Shrikhande of Shoppers Stop, which runs two online shops: Shoppersstop.com and Crossword.in.

Rahul Mehta, MD of Creative Casuals and head of the clothing manufacturers associations of India, does not agree that online is a threat to offline. “Online retailers have only 8 or 9 per cent of the retail space. It is not a big threat, but offline players need to re-work their strategies to stay relevant.”

Profit or no profit, online retailers are gung ho — in the manner that all small businessmen trying to go big are. They see holding the edge with clear access, convenience and low prices. “And, do not underestimate the great power of choice,” says Mohan of Jabong.

Bansal of Lenskart points to other advantages to the customer: “It (buying) happens from home or office. You have everything under the sun, and the freedom to buy any time and get it delivered to any address.”

True, says Preeti Vyas, chairperson of Vyas Gyanneti Creative, a design consultancy. “Even for categories like shoes, people in all age groups are placing orders online.”

According to Amitabh Mall of the Boston Consulting Group, online retailers are able to influence the customer better. The influence is highest for categories such as travel, electronics and financial products like insurance.

Still, there is resistance because of uncertainty of quality, safety of transaction and inability to navigate easily. “These will likely get solved as better portals with innovative service features emerge and allay these apprehensions,” adds Mall.

Some others say just the opposite: that a large number of consumers transacting online are young and the internet is an integral part of their life. They browse, compare, review and use multiple online sources of information simultaneously to take decisions. “But product and service unpredictability remains a barrier even for them,” says Devangshu Dutta, CEO of the consultancy Third Eyesight.

So, for now, online is mostly about information, attention, influence and social interaction related to a purchase, according to Dutta. He also believes that over time, physical retailers will improve their online presence to tap customers’ cross-channel behaviour.

What this implies is that offline and online retail may have to be combined to create a new business model. Actually, it is already happening: some offline retailers are also offering their best rates on their own websites. “In the future, offline retail will seek more and more integration with online players to stay profitable,” thinks Mark Ashman, CEO of HyperCity India.

This is why Kishore Biyani entered e-commerce in 2010 after a full decade of being around as a physical retailer. At the time he had hoped to derive 10 per cent of Future group’s sales from online portals.

Last September the company was oozing confidence, and its website said: “The digital world is where the future lies… There is vast potential for the Future group to become front-runners of retailing in digital space.” It had then boasted that “our reach and relationship with customers provide us with the benefit of low customer acquisition cost for the digital space….”

Although the Future group refused to comment on it now, clearly it has not quite worked as it had hoped.

Croma of the Tata group has also copy-pasted the e-shop model of other physical retailers. It entered e-commerce in 2012. Ajit Joshi, MD and CEO of Croma, Infinity Retail, exudes confidence: “We hope to provide a one-stop destination for our patrons…, enabling them to personalise their online shopping experience.”

Words heard before.

Aditya Birla Retail, too, went online last year to sell Madura label apparel from trendin.com. Media reports suggest Reliance Retail also plans to get into it within six months. The company is already on record that it plans to adopt multi-retail channels. Reliance did not respond to an email query from FC.

The lesson learnt? If you can’t beat them, join them. Holds true for both e-retail and r-retail. The best of both worlds for the customer.

(Wih inputs from Rajesh Gajra)

(Sourced from Financial Chronicle .)