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Retailing in the new normal

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Isha Rathod
Isha Rathod
Isha Rathod is a chartered accountant with more than 14 years of experience in consulting retail and consumer product organisations. She has stints with major consulting firms where she has interacted with multiple retail and consumer sector clients.

The retail and consumer industry is going through an exciting phase with risks on one side and opportunities on the other 

The Indian Consumer market is expected to become the third largest consumer market after the US and China; as per a recent World Economic Forum Report. The retail and consumer industry is going through an exciting phase with an ever-increasing consumer base along with beneficial demographics on one side, and impacts caused by fierce competition and technological disruptions on the other. For those in the business, it, therefore, becomes increasingly crucial to weigh the risks and turn them into opportunities to grow the share in the minds and pockets of consumers.

Macro factors

Some of the most crucial factors impacting the industry are increasing commodity costs and inflation. A similar impact is witnessed in the price of labour, energy, and transportation costs, owing to the pandemic and geo-political crisis. All of these have led to the shooting up of prices, some of which may or may not be passed on to the consumer.

There has been a significantly higher impact on the pockets of the consumer, causing them to become price-sensitive. This has a potential impact on spending on discretionary items and services.

During the pandemic supply chains remained completely disrupted due to a capacity block and high spot prices for transportation and also due to overreliance on limited third-party contractors/vendors. This has resulted in an inflated cost of serving consumers, not to mention the significant delays and inaccuracies. Supply chain disruptions have led to increased inventory-to-sales ratios and lower revenues caused by subsequent inflationary pressures.

The container Freight Index rose by a staggering 724%, standing at roughly $10,400 in Sept 2021 versus $1262 two years ago.

Market conditions

New entrants in the market due to the recent start-up boom and high FDI inflows in India are intensifying competition like never before. As per a recent release by the Ministry of Commerce and Industry, FDI in India nearly doubled to $83.6 billion in 2021-22 from $ 45.15 billion in 2014-2015.

As of September 2022, India is home to 107 unicorns already.

This phenomenon has shaken existing organisations which had remained sustainable so far, though some are too big to have suffered a significant impact. However, there is bound to be some loss of market share as multiple smaller (especially D2C-first brands) make a collective impact.

Regulations

In addition to the external risks mentioned above, there exist internal risks capable of shaking customer confidence and impacting brand reputation. There is a dire need of improving corporate governance, controls and transparency of the internal functioning of the organisations. The regulations becoming increasingly stringent with an increased focus on improving governance, processes and controls.

Prominent risks make way for abundant opportunities as well. We are seeing a lot of initiatives to optimise costs, lure consumers and enhance brand reputation while curbing governance lapses.

Emerging opportunities

Following are some of the evolving opportunities and actions that organisations are taking to grow through the current environment.

Embracing sustainability: Consumers’ affinity towards sustainable products/services and companies that are purpose-driven is increasing. Nearly 90% of Gen X consumers today are willing to spend an extra 10% or more for sustainable products, according to a report by First Insight and the Baker Retailing Center at the Wharton School of the University of Pennsylvania.

Sustainability is expected to have an enormous impact on brand reputation and will negatively impact companies that have not taken even the first step towards environmental, social, and governance (ESG). Some organisations are prominent carbon emitters due to their core operations and business models. They will have to contribute to society materially to compensate for their negative impact. ESG will impact the cost of funds as well. Compliances and disclosures are set to get harsher with each passing day in this domain.

Organisations will have to introspect deeply regarding where they stand. The next step will be to define specific goals driven by a thorough assessment to determine where they want to reach. Disclosure of achievements will help improve brand reputation and ESG ratings.

Entire operations and business value chains will have to be re-assessed. Businesses will need to evaluate sustainable options, be it in the form of sustainable raw materials, packaging, services to consumers in areas of waste/scrap management, re-use and recycling of products and repairs services. Combined deliveries and bulk purchases, transparency with all tiers of suppliers, traceability of products and adoption of technology to reduce carbon footprints will need to be considered.

Cost optimisation: Consumer product companies have already reduced their packaging size to maintain value growth. Internal cost optimisation exercises must be conducted to evaluate excessive costs and re-look at newer options to optimise spending. This would include zero-based budgeting and questioning each cost element, re-negotiation with vendors and even reducing support costs through technology and process re-engineering.

Businesses will also need to re-evaluate vendors based on geo-political situations, regulations, duties/taxes, transport costs and ease of doing business.

Companies are opting for nearshoring. The Wall Street Journal’s Sharon Terlep reports that close to 20% of supply-chain executives surveyed by McKinsey & Co. said they had brought some production back to a nearby country in the past year; double the number from a year earlier, and more are sourcing parts closer to home.

The “Make in India” concept under which Production Linked Incentive (PLI) scheme across 14 key manufacturing sectors launched in 2020-21 should provide impetus.

It will do well for businesses to consider strategies such as vertical integration and production in smaller batches. They should look at using technology to provide higher visibility on logistics, replenishment and effective coordination with supply chain partners with a 3P network optimisation program.

Enhancing consumer experience and lifecycle: Today’s consumer is used to being serviced 24/7 at all possible locations and in multiple ways. As of now, the price for such convenience is not being paid but gradually all such add-on services will be charged for. India sees one of the lowest data charges, free deliveries of products, free returns, minimal charges for customisation/personalisation of products, free use of basic hygiene services such as water, use of washrooms etc. and minimal membership or subscription fees.

The Indian consumer is extremely price sensitive, and we might see a sharp fall in take-off appearing in such situations. There will be some strata of society who shall remain smitten by add-on services and shall continue to opt-in. However, for now, organisations need to ride this wave and lure consumers.

Mobile phone internet user penetration in India is at 66.16% in 2022 and is expected to grow to 96.11 % in 2040, as per statista.com.

Riding on this, retail businesses should consider adopting value-added services such as:

  • Offering multiple payment options to consumers.
  • Subscription models to offer value to consumers in the longer term.
  • Loyalty benefits for value in the longer term.
  • Reversal of membership fees at a certain value of purchases to increase consumer stickiness.
  • Premiumisation of products and services which are not highly impacted by inflation or price pressures.
  • Revamping omnichannel strategy. During and post covid, most of the organisations were forced to sell online and speed to market was crucial then. It is now important for organisations to enhance and revamp the strategic, tactical and operational parameters.

The new normal

The pandemic has compelled people to alter their business models and innovate. Some of the models we are seeing in the market include the sale of samples, the sale and purchase of pre-owned goods, products on rent and getting into repairs.

Acquisitions and collaborations with players offering unique propositions complementing core business models or for diversification are also on the rise.

Businesses are also digitising and adopting innovative processes to bring efficiency and optimise costs: Some of the concepts being tested and brought to life are big data analytics, using artificial intelligence and machine learning for understanding consumer behaviour patterns and demand forecasting; robotics for operations, processes, manufacturing and design; using radio frequency identification(RFID) and global positioning system(GPS) in logistics, Internet of things (IoT), 3D printing, chatbots, virtual reality, metaverse and endless aisle.

Disclaimer: The opinions/views expressed in this article are those of the authors. They do not purport to reflect the opinions or views of IndiaRetailing, Images Group or any of its sister concerns or employees.

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