Indian retail is characterised by fragmentation. A single retailer would never have a major share of the market as consumers have many options to choose from, with multiple retailers in each category and multiple channels to source from. (India rank highest in terms of per capita availability of stores.)
This is attributed to the dominance of small format retail in India which is 93 percent of the total retail market. The rest 7 percent is divided between large format stores like departmental stores, supermarkets, specialty stores, malls, and online. The price-based competition has proved that retail to be not a simple and sustainable business unless managed well. Deep pockets do not mean high market share and sustainability. The sector needs to find new business models and performance matrices different from GMV (Gross Merchandise Volume) and scale. The ever-changing customer expectations and reducing differentiation in terms of products and range would require retailers to compete on customer service which is beyond just on-time delivery.
Indian Retail Landscape
In 2017, the Indian retail industry was US$ 932.96 billion and estimated to be US$ 1.6 trillion by 2021, growing at CAGR 14.3 percent. The projected growth of organised retail suggests the potential for modern retail in India. The factors that govern Indian retail market are changing consumer shopping trends with increasing purchasing power, time strapped consumers getting digital and polarization of the industry.
Rising Purchasing Power with Growing Economy
The Indian consumer sector has grown at 5.7 percent annually between FY 2005 to FY 2015. It is estimated to be the third largest consumer market by 2025, growing at 12 percent annually. The rising GDP (6.7 percent in 2017 and forecasted growth of 7.5 percent in FY 2019-20) has created the middle-class segment which is about 50 percent of the country’s population. These mid-income consumers have higher purchasing power and affluence. About 75 percent of Indian youth (16 to 21 years old) spend more than Rs 6,000 on cosmetics, apparels and mobiles (ASSOCHAM report). These are informed shoppers and investors with discerning and explorative shopping behavior. These consumers want it all. They are interested in quality and experience at affordable price with minimum hassle. Retailers would have to find new avenues to meet the expanding and changing demands of these consumers.
The Time Strapped Indian Consumers Getting Digital
Increasing number of working women, growing single households (9.04 million constituting 11.6 percent of the total households as per 2011 census report) coupled with hectic work culture (Indians work for around 2,195 hours a year on average as per the Arcad is report) result in consumers opting for convenience over lower price. More than 65 percent of consumers say convenience is the driving factor of their shopping behavior as per a PwC study.
Online retailing provides consumers convenience with accessibility and affordability. E-commerce in India has grown at an annual rate of 51 percent, the highest in the world, and is expected to be $120 billion in 2020 from US$ 30 billion in 2016 (ASSOCHAM-Forrester study). The increasing internet users (second largest, 445.96 million in 2017 and expected to be 829 million by 2021) and increasing smartphone penetration (telecom and broadband services is US$ 38.95 billion in 2017 with second largest smartphone market) indicates growing number of consumers on various digital platform.
According to Euromonitor’s Global Consumer Trends 2016 survey, more than 65 percent of online consumers visited or updated their social networking sites daily. The online medium is expected to influence 30 percent of the entire retail sales which would amount to US$ 70 billion of retail sales in 2019. The demonetisation in November 2016, further created opportunities for digital transitions and growth in India.
According to government sources, between November 8 and December 7, 2016, e-wallets providers such as Oxigen, Paytm and MobiKwik observed a spring of 271 percent in number of daily transactions and 503 percent in terms of value of transactions. Most of the leading categories are growing online.
These shifts are indicative of growth potential of Indian retail, making all product types accessible and affordable at various digital platforms. However, online format with heavy discounts and only 1 percent conversion rate may find it difficult to remain viable. About 8 percent of initiated online transactions are abandoned during the process due to poor customer service (Datamonitor report, 2011). Hence, to reach these consumers, retailers would need to think beyond accessibility and affordability of product and to cater to the rising expectations of the consumers need to harvest on services quality or introduce innovative services.
Polarisation of Indian Retail Industry
The increasing consumption and high competition pushes the industry towards consolidation. The consumers buy mostly from two or three stores/sites in a category.
Big retailers acquire the mid-size retailers to scale their business and smaller ones find their niche to sustain. Among the top retail houses, Future Group and Bharti Retail have combined their retail in 2016 to become India’s biggest retail conglomerate with 7 key retail brands, 738 stores in 221 cities across India. Even the online e-commerce is consolidating through mergers and acquisitions. Hence, few big retail houses concentrate in each category. The online consumer base is also skewed towards both in terms of demographic and geographic. Organised retail in India is 7-10 percent and online is 1.2 percent. About 52 percent of regular shoppers are in 26-35 age groups and almost 65 percent of online shoppers are male. Only 24 percent of the online consumers use the medium for buying. In terms of geography large part of the consumers come from top metro cities. Mumbai leads in online shopping followed by Delhi and Kolkata.
Fewer large retail houses and skewed consumer base trends push towards polarization of the industry, creating two types of retail formats. One acts as ‘one stop shop for all’, where consumers can get everything under one roof like Bigbazar and Amazon. Other format is specialised service providers concentrating on focused offerings like Pharmeasy. in and thesouledstore.com or Polyvore, which was a designing website centered on providing a platform for creative minds to design, create and communicate.
Eataly, which is an Italian food mall where everything related to food is provided, from food stalls, beverage counters, restaurants, bakery, grocery items, to a cooking school, giving consumers a complete food experience. Croma, Vijay Sales and Foodhall are other such examples. Both the formats provide a complete experience with certain added services to cater to the changing expectations of the consumers like premium membership facilities by Amazon and personalised styling assistance by thesouledstore.com.
Growing purchasing power, increasing digitalized consumers and polarization of the industry require a paradigm change in the way Indian retail marketplace functions. Delivering best product on-time is the necessity but is not sufficient to gain consumer satisfaction. Online and large format price stores are just a dispenser system where consumers can pick and move. Its fast and convenient but not enough to reach the consumers’ love bracket. The consumer preferences are changing towards having an experience over owning a product, instant gratification over long-term benefit and variety than loyalty. Hence, retailers that are transforming from just a product delivery system to customer service provider,helping consumers make better choice, are here to sustain.
The concept of maximizing the Basket size and value has changed with new formats. Price discounts, reduced or no shipping cost, low or no switching cost makes it highly price competitive. Consumers have access to range of products through various platforms heightens the consumers’ expectations from retailers. More than 73 percent customers, within the age group of 25-34, use more than one channel for making purchases.10 Against the predictions, not all the online businesses proved profitable stating that brick-n-mortar formats will stay relevant. Consumers no longer think of offline and online as separate medium. They are looking for a seamless experience across all channels and retailers need to build systems to serve their customers anytime, anywhere.
Omnichannel presence by a retailer is the key to consistent and unparalleled service across all touch points. However, the challenges are reverse logistics management and third-party logistics interactions. Integration of online search with in-store buying can work only if the inventory is in correlation on both the platforms. In case customers do not find a product of their choice at the outlet they can order it online through the tablet at the outlet and have it delivered to their home. Nordstrom stores are 3,000-square foot store opened with only service model. They display merchandise only to try on, but not for sale. Shoppers are provided services like stylist and onsite tailoring. However, the shoppers can only order merchandise online which then can be delivered to the store on the same day.
Consumers look for not just shopping but a personalized shopping experience. The retailers to reach these consumers need focused and customized strategy.
Digitalization through internet and technology can be used as an aid to the specialization. For example, Bloomingdale’s Manhattan flagship store uses interactive windows as their showcase to display their apparel to the passers by. The consumers can select the different clothing and colors through the display. They can even order by texting ‘POLO’ for a link to a checkout page.
This makes the passerby convert to consumers without them even entering the store. Virtual dressing rooms are another example where retailers are trying to create customized shopping experience.
The definition of success has changed. Businesses have moved from creating value to creating valuation. Businesses both online and offline that shift from pricing model to non-price model would sustain. The retailers would have to create non-price propositions by delivering unique product or experience to the consumers through a focused strategy and best in class services.
Digitalisation of Distribution
Every category has its own primary format: kirana stores dominates grocery sector, online is the preferred platform for electronics and mobile. Further the heterogeneity of the Indian consumer makes it difficult to follow same strategy across the nation. Retailer would need to understand the strengths and weaknesses of a format with respect to the different target market before penetrating.
Retailers need to shift focus to localised service or consumer segment. Thinking local through local business partners could be an approach to sustain and succeed in the polarised market. The big retailers would have to work hand in hand with the traditional retailers. There are six million traditional stores constituting of 42 percent of the physical stores 12 providing a mix of merchandise, credit, home delivery and personalised services but has limited reach. On the other hand, online stores provide access, variety, price and convenience but they have high operating cost and acquisition costs with 1.2 average basket size. It is proposed that e-commerce companies to scale up their business can capitalise on the situation by partnering with traditional local stores to provide common values like localization, personalisation and convenience. The reach of a combined traditional online model could also be extended to rural geographies to serve the 850 million consumers, about 70 percent of Indian population and contributing around half of the country’s Gross Domestic Product (GDP).
This would enhance the role of the wholesalers. They would need to become more value added service providers, ensuring that retailers focus on understanding and customised services and products for their set of customer. A free exchange of data from retailers to wholesalers and vice versa would be key. Instead of just being a bulk breaking agency, they would have to become agglomerates as well as distributors of demand to smaller stores. Digitalizing the distribution channel through small retailers and modernizing the retail formats make the system more competitive and efficient.
The road ahead is transforming ‘Retail as a service’, focusing on market of “one”. Each customer would need to be serviced differently. The performance matric would move from channel/format profitability to customer profitability.
Similarly, instead of store profitability, the chain would have to measure profitability of the trading areas as the same retailer would use multiple formats to service the same customer leading to the reduction of the share of each format. This would require a different set of skills even for brands that participate on these platforms. Shopper marketing strategies would come to forefront than hardcore consumer marketing. Flipkart partnered with Microsoft Azure as its exclusive public cloud computing platform to help its customers in shopping online. Amazonis the biggest example, accounting for 26 percent of all online retail sales, with the help of its huge data bank is now converting itself into a personalised services provider.
Retailers would need to change the game from product-centric to a service-centric approach. Products are no more the differentiators. Consumers can locate products from anywhere and at varied price points with similar quality. Retailers need to adopt Omni-presence not only in the form of retailing but servicing as well, providing the customers a complete shopping experience. With the help of data integration and technological support consumers can be served across channels, where each consumer can have a personalised shopping experience. For eg. – a customer sees a sale at the store, sees few items they like on the e-commerce page, and receives a coupon from the store via email. When they go to the store, they can use the coupon, and know exactly what item they’re getting. That’s the kind of shopping experience consumers are looking for. Retail as a service is not easy to playas it provides sustainable competitive advantage to retailers irrespective of the size of the company.