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This report informs companies about the current and future prospects of these nascent ʻClick and Dialʼ distribution channels. Furthermore, it presents Kanvicʼs perspective on ...

This report informs companies about the current and future prospects of these nascent ʻClick and Dialʼ distribution channels. Furthermore, it presents Kanvicʼs perspective on
their expected development and highlights the major opportunities for companies to prosper in this market space, by adapting their strategy to the specifics of the Indian consumer market.

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Click and dial   a new path for indian retail Click and dial a new path for indian retail Document Transcript

  • CLICK and DIALA NEW PATH FOR INDIAN RETAIL
  • Kanvic is a management consulting firm helping businesses develop winningstrategies, drive profitable growth and achieve operational excellence to reaplong lasting rewards in fast growing Indian economy.We work with C-level executives to develop innovative solutions for businesschallenges of 21st century India by bringing in leading edge managementthinking informed by in-depth research and sound analysis.
  • CLICK and DIALA NEW PATH FOR INDIAN RETAILDeepak SharmaVlad FlamindNovember 2011kanvic.com
  • About the AuthorsDeepak Sharma is a director and co-founder at Kanvic where he leads the strategypractice. Vlad Flamind is an associate consultant in the strategy practice.AcknowledgementsKanvic would like to acknowledge the contribution of the team behind this report. ShivKumar and Saba Khan helped in structuring the issues and provided valuable researchinputs. Alex Baatz contributed in conducting research and analysis while GehanWanduragala provided editorial guidance. We would also like to acknowledge NickBaker for designing the cover page.Further informationWe welcome your questions and comments on this report. For further information,please contact us at:Email: deepak@kanvic.comPhone: +91 99283 77800 5
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  • Click and Dial - A new path for Indian retailContentsForeword 8Executive Summary 10Reach and Consumer experience 14The twin focus areas for retailersClick and Dial 18The emergent channels to improve reach and consumer experienceWinning the distance channels 36A new path for Indian retailConclusion 54 7
  • Click and Dial - A new path for Indian retailForewordIndiaʼs economic growth is primarily sustained by the development of its immenseconsumer market. During the last two decades, household spending has expandedtremendously both in volume and scope, driven by the emergence of new consumerclasses and the introduction of new product categories.This shift towards consumerism is not simply incremental but led by multinationals aswell as local corporations marketing their products in India. These firms are constantlystretching the boundaries of the organised consumer goods market by including as yetunserved consumer segments in their strategies.Changes in consumption patterns are swift because successful companies have foundthe right balance between a tailored marketing strategy and a focus on consumereducation. By increasing awareness and acceptance these companies are activelyexpanding the size of their markets.Until now, firms have predominantly innovated on price and product range as a meansto increase their reach. As far as distribution is concerned, efforts have beenconstrained to widening brick and mortar channels as a way to get closer to theconsumer. Our research however suggests that the future of distribution lies to a largeextent in the development of distance channels, namely the phone and the internet. 8
  • Click and Dial - A new path for Indian retailThis report informs companies about the current and future prospects of these nascentʻClick and Dialʼ distribution channels. Furthermore, it presents Kanvicʼs perspective ontheir expected development and highlights the major opportunities for companies toprosper in this market space, by adapting their strategy to the specifics of the Indianconsumer market.Deepak Sharma Director and cofounder 9
  • Click and Dial - A new path for Indian retailExecutive Summary 10
  • Click and Dial - A new path for Indian retailExecutive SummaryThe Internet and the phone are revolutionising the way retailers connect with their customersworldwide. In India these distance channels can become a major breakthrough for retailersstriving to expand the reach of their business, and offer a new shopping experience to theemerging consumer classes.To reach more customers, Indian retailers have so far relied massively on the development ofbrick and mortar channels. As a result of their expansion strategies, close to 63,000 outlets havebeen constructed in urban areas between 2001 and 2010. Additional stores have increased theretailersʼ reach but they have also been the source of tremendous inefficiencies.Firstly, retailers have grown their distribution network faster than demand. A comparison ofgrowth in total organised retail space against the growth of retail sales is a revealing indicator ofthis trend. While the retail space in sq. ft. rose by a CAGR of 42.9% between 2001 and 2011,aggregate sales increased by only 35.8% during the same period. In parallel to this, costs havealso been put under pressure by high and unstable rental prices. Retailers thus operate moreshops, but each one generates higher costs, and less revenues per square foot.To pursue their expansion strategy more efficiently, retailers should exploit the potential offeredby distance channels. By dismissing the need to have products and means of transaction closeto the consumer, these alternative channels enable retailers to remotely address a vastconsumer base which has been growing rapidly.On one side, the Internet is expected to see its user base expand significantly as the marketmatures. If the 23% annual growth rate witnessed between 2006 and 2011 continues, thenumber of online customers will exceed 100 million by 2020. Growth will first be driven by thegrowing popularity of the Web, accessed by Indian consumers both through personal computersand smartphones. The second driver will be found on the supply side. Evidence shows thatmore consumers will go online as the richness and diversity of the offer increase. In other 11
  • Click and Dial - A new path for Indian retailwords, it will be e-retailersʼ responsibility to stimulate demand in the newly created marketspace.On the other side, the phone can also become a substantial revenue stream for those organisedretailers prepared to invest in the channel. Today most of the Rs. 11,339 Crore in this channelare generated from the unorganised sector where the offer is more commonly available. Somany Indian urbanites are both phone owners and consumers of advertising that a vast marketlies almost entirely untapped by organised retailers.As well as expanding their reach, retailers have also focussed their efforts on providing a newshopping experience to urban Indians. Air conditioning, tidy shopping shelves and frequentbargains have so far attracted consumers toward new organised retail formats.In the future however, convenience and time efficiency will be the next battlefields for retailers.Societal changes will impact families dramatically, increasing the pace of life and thus the valuethat busy urbanites place on their time. Distance channels are already perceived as moreconvenient than traditional brick and mortar stores by a majority of users. It is more than likelythat they constitute the answer to consumersʼ call for convenience.To succeed in increasing reach and improving their customersʼ shopping experience, retailersshould adopt the right strategies.Four consumer segments should be considered in the Internet channel, each with a specificcapacity to buy online and a specific interest in online shopping. Each of these segments shouldbe targeted using a different approach.The two non-buyer segments, Window shoppers and Casual surfers, are the biggest andrepresent an opportunity for retailers to increase the size of their buyer base. Window shoppersare the 33 million Internet users that have not yet purchased despite a high interest in onlineshopping. They should be reached by firms through a focus on price, since their level of incometends to be lower relative to the buyer segment. To succeed profitably in this segment, e-retailers must adopt new models based on tailored pricing instead of the current heavy discountand group buying models that do not provide a path to economic viability. Casual surfers are the41.2 million internet users that are neither interested in nor capable of making large purchasesonline. They can however be turned into window shoppers by companies focussing their effortson increasing their interest for online shopping through the most effective means yet proven:social media. 12
  • Click and Dial - A new path for Indian retailThe two buyer segments, Travel buyers and Product buyers, are currently small but theirvolume and average sales per customer can be dramatically increased. Travel buyers currentlynumber 8.5 million, and they only purchase intangible goods related to travelling, mostlytransportation tickets. To overcome their concerns about product delivery and turn them intoproduct buyers, retailers should enhance their logistics capability. Finally, another 8.5 millionproduct buyers purchase a variety of tangible and intangible goods online. They are the currentbase of online consumers and should be made loyal by firms through improved customercommunication and relationship management.In the phone channel, organised players will succeed by shifting their business model from adecentralised to a centralised one.To out-compete unorganised shops in this segment, they are bound to focus on reliability andavailability. These features however require very effective logistics capabilities and customercontact points. At present, effectiveness is achieved through inefficiency because retailersoperate at low utilisation rates to meet consumersʼ needs and maintain their advantage overunorganised shops. Centralisation should become the new model for the phone channel. Firmsthat achieve the right scale could indeed improve their efficiency both by reducing theirinfrastructure costs and by increasing their capacity utilisation rates. 13
  • Click and Dial - A new path for Indian retailReach and Consumer experienceThe twin focus areas for retailers 14
  • Click and Dial - A new path for Indian retailReach and ConsumerexperienceREACH AND CONSUMER EXPERIENCE ARE THE MAJOR FOCUS OF INDIANRETAILERSDuring the last six years, India has witnessed an impressive boom in retail, registering anannual growth in value of 9.3%. Estimated at Rs. 1,872,000 Crore in 2010, this market has beenattracting substantial investments from organised companies wishing to grab their share of thepie, as shown in Exhibit 1. 15
  • Click and Dial - A new path for Indian retailTo increase their market penetration retailers have been focussing their strategy on two criticalsuccess factors: reach and consumer experience.Reach refers to the number of consumers having convenient access to the retailersʼ sellingpoints. To increase it, retailers are getting closer to consumers by expanding their distributionnetwork. In the last four years, Indian cities have witnessed the emergence of 38,800 neworganised retail outlets (Exhibit 2). This fast progression has increased the proximity of bigretailers to their customers. In 2006 urban India counted one store for an approximate 12,130inhabitants while four years later the figure dropped to 5,5651.1 Knight Frank, ICRIER, BMI, Images F&R, Business Today, Indian Census, Kanvic analysis 16
  • Click and Dial - A new path for Indian retailAs well as proximity, retailers are providing consumers with a new shopping experience, byintroducing modern retail formats to rival the traditional corner shops known as Kiranas. Thesestores have offered the possibility for consumers to wander between air-conditioned shelves,looking for bargains among dozens of different products. Enthusiastic about atmosphere, choiceand frequent promotions, middle class consumers have been adopting these formats rapidly asthe fast penetration of organised retailers indicate (Exhibit 1). 17
  • Click and Dial - A new path for Indian retailClick and DialThe emergent channels to improve reach and consumerexperience 18
  • Click and Dial - A new path for Indian retailClick and DialRETAILERS CAN IMPROVE REACH AND CONSUMER EXPERIENCE BYDEVELOPING DISTANCE CHANNELSTo improve reach and consumer experience retailers should consider developing alternativedistribution channels, referred to as distance channels throughout this report (Exhibit 3). 19
  • Click and Dial - A new path for Indian retailAs opposed to the traditional brick-and-mortar shops, distance channels enable consumers toorder remotely, either through a phone call or through a website interface, and receive theirgoods at the designated place without moving from their location (Exhibit 4)These particular features firstly offer the opportunity to improve reach. By dismissing the needfor physical contact between the buyer and the seller, retailers can target a wider customer basewith fewer sales points.Secondly, these channels improve the consumers experience by answering their need forconvenient and time efficient shopping. By enabling transactions to be made at distance andgoods to be delivered to the customerʼs door, retailers gain a competitive advantage. 20
  • Click and Dial - A new path for Indian retailIncreasing reach through distance channelsIncreasing reach is necessary for retailers to leverage fixed costsRetailers are setting up an increasing number of outlets to develop their reach. This distributionstrategy compels managers to maximise sales because it generates substantial fixed costs fromthe renting of real estate. Each square foot rented in a shop must be used to optimise revenues,be it through the display of a product, of an advert or through the installation of a cashier.Looking at the situation in urban India reveals that retailers are not leveraging their spaceefficiently. The weight of rental costs in sales is actually above the international figures asshown in Exhibit 5. 21
  • Click and Dial - A new path for Indian retailThere are two reasons for this low efficiency. On the one hand, retailers have been confrontedwith high rental prices. As shown in Exhibit 6 rents have increased significantly during the period2005-08. Although the trend is downward since then, rents still represent a major risk for theretailersʼ efficiency with regard to their weight in the cost structure and their tendency tofluctuate sharply.On the other hand, retailers are scaling up faster than the growth in demand. To get a footholdin the best areas, firms have been erecting malls and outlets at a tremendous rate. The totalorganised retail space has been expanded by 78.5 million sq. feet2 between 2001 and 2010.This represents a CAGR of 42.9% over the initial area. Organised retail sales however havegrown at a slower 35.8% during the same period. To reach out to a wider consumer base,retailers are thus neglecting cost efficiency, generating less sales per square foot of commercialspace.2 ICRIER, Knight Frank, Business Today, Kanvic analysis 22
  • Click and Dial - A new path for Indian retailDistance channels can widen reach more efficientlyDistance channels empower suppliers to determine their own reachBrick and mortar shops have a limited reach because they require the consumer to come tothem. When making their purchasing decision typical buyers will consider this as a constraint 3.As a result, they might decide to go to the nearest shop if the offers are undifferentiated or,simply abandon the idea of shopping if the inconvenience of moving seems greater than thebenefit of acquiring the goods.Distance channels eliminate this constraint because they enable the customer to select, pay,and receive goods without ever going to a shop. In this scenario, reach is not determined byconsumer preferences, but by the supplierʼs capacity to process orders, payment, and deliverywithin a given perimeter as shown in Exhibit 7.3 Almost three fourths of Indian consumers would not select a shop that requires more than 15 minutes to reach. (MGI) 23
  • Click and Dial - A new path for Indian retailDistance channels give access to a wide and growing consumer baseDistance channels give retailers the possibility to increase their reach though the setting up ofdistant sales points and delivery capabilities. Retailers developing these channels can tap into anascent but fast growing consumer base.INTERNETBetween 2006 and 2011 the number of Indian consumers buying online has grown from 6.1million to 17 million, which represents a 179% increase 4. These figures are promising, but amuch larger potential could actually be unlocked if retailers expanded their presence in thevirtual channel.Internet connectivity is increasingUrbanites are increasingly connected to the World Wide Web through both computers andsmartphones. Between 2006 and 2011 the proportion of urban Indians going online hasincreased tremendously from 9.6% to 24.2% 5.The main factors explaining the increase in the number of Internet surfers accessing throughcomputers have been the evolution of both computer literacy and Internet familiarity as shown inExhibit 8.4 India Online, Kanvic analysis5 IAMAI, Indian Census 2011, Kanvic analysis 24
  • Click and Dial - A new path for Indian retailOn the one hand urban Indians have gained a better knowledge of computers between 2006and 2011, and on the other hand, the computer savvy population is showing an increasing will toexplore the capabilities of the Internet.The growth in Internet users is expected to accelerate because smartphones are reaching anincreasing number of consumers (Exhibit 9). Today, around 80% of these mobile surfers alsouse computers to go online, but by 2020 it is probable that a large proportion of surfers will goonline exclusively through their mobile phone. The estimated 378 million smartphones will thencomprise around 60% 6 of the mobile phone base in urban India.6 CMR India 2011, Datamonitor, Census 2011, Department of Telecommunications, Kanvic analysis 25
  • Click and Dial - A new path for Indian retailE-retailers can trigger substantial growthThe number of online Indians has been growing at close to 24% per year since 2006, driven bya fast 94% CAGR for smartphones and by a 23% CAGR for computer users7. The number ofactual buyers however, has not caught up, with a slightly slower increase of 23% per annum(Exhibit 10).7 Refer to Exhibit 9 for sources 26
  • Click and Dial - A new path for Indian retailThis differential in growth rates reveals that the development of the Internet has not been fullyexploited by retailers. While almost 60 million Indians became potential e-buyers between 2006and 2011, only 11 million of them actually made a purchase8 . In other words, e-retailers aregaining reach but have not capitalised on this opportunity.Evidence indicates that the market potential can be tapped if more retailers choose to developtheir virtual channels (Exhibit 11). With a greater availability of online supply, a larger proportionof consumers will opt to join the ranks of e-buyers. Currently, the supply is insufficient to meetthe consumersʼ expectation for variety and to increase their confidence in a new and uncommondistribution channel.8 India Online, IAMAI, Kanvic analysis 27
  • Click and Dial - A new path for Indian retailIn India like in the rest of the world, one important driver for consumers to shop online instead ofgoing through brick and mortar stores is their desire to find a relatively wider range of productsand bargains. Half of Indian buyers state choice as a motivation to buy online and almost 20%of non-buyers say they would switch to virtual channels if they found more variety 9.As well as variety in the supply, consumer confidence is another factor preventing the growth ofthe Internet channel. Almost 1/3 of surfers state their lack of trust in product quality and paymentsystems as a reason not to purchase through the Internet10.If more retailers had an online presence, it is likely consumer confidence would also rise. Thebrand image and loyalty acquired in traditional retail channels will be the drivers supporting the9 India Online10 India Online 28
  • Click and Dial - A new path for Indian retailincrease in consumer confidence. As additional famous retail names get associated with onlineretail, cautious consumers are very likely to change their perception about e-retail and considerit as a secure alternative.PHONEAt present the market for ordering through phone in urban India is estimated at Rs. 11,339Crore11 . A far larger part of the urban population is ready to adopt this alternative channel but atpresent only a few organised retailers have made a move into this area. Firms willing to developphone ordering services are therefore likely to increase their buyer base significantly by fillingthis market gap.Consumers are ready to purchase more over the phoneFrom the demand perspective, the Indian market for phone ordering holds a lot of potentialbecause the main requirements for the customer base to expand are already met.The first requirement for organised companies willing to reach consumers outside of their brickand mortar stores is to raise awareness about their product offerings. Looking at the reach ofmass media in urban India indicates that firms can already advertise their products to almostevery consumer (Exhibit 12).11NRAI, Business Today, Mydigital FC, APICS, Datamonitor, ICRIER, Image F&R, IAMAI, BMI, ASSOCHAM, Kanvicanalysis 29
  • Click and Dial - A new path for Indian retailThe second requirement for developing the phone channel is the capacity of consumers toplace their orders from a distance. In that area also, the conditions are already optimal. Byworking on affordability, telecom companies have managed to exceed a 100% penetration ratefor mobile phones in urban areas12.Organised retailers can expand in this channelDespite the tremendous potential of phone ordering, few organised retailers have venturedoutside their brick and mortar stores.Most phone channel sales currently happen in the unorganised sector (Exhibit 13) where phoneordering is proposed to customers in an informal and non-systematic way. About a third ofKirana owners surveyed by ICRIER in 2007 claim to offer delivery services to their customers.12 Urban and rural areas are distinguished using the Indian Censusʼ method as a benchmark 30
  • Click and Dial - A new path for Indian retailFor almost half of them this measure has been taken as a way of resisting the pull of organisedretailers over their customers13.Taking advantage of their small scale and proximity to a limited consumer base, Kiranas have anatural advantage to develop home delivery without building any specific capacity. The systemis generally reliant upon Kiranawallahs simply delivering orders by foot or bike, to loyalcustomers residing in the close vicinity.On the organised side, the only mature segment for phone ordering is food services and morespecifically fast food. Players like Pizza Hut and Dominos have built sufficient capacities togenerate demand and on average they realise 50% 14 of their sales through the phone orderingchannel.13 ICRIER14 MydigitalFC, Kanvic analysis 31
  • Click and Dial - A new path for Indian retailHowever, FMCG, durables and grocery retailers have been late to invest in phone ordering. Asa result, the market is still not mature and no company has yet emerged as a leader.Outside the food service segment, e-retailers like eBay and Flipkart also generate sales throughthe phone channel. They utilise phone ordering to attract customers with limited experience inonline shopping, presenting it as an alternative to ordering online. With the Internet as their mainconsumer interface, these firms are missing out on the majority of urban consumers that do notsurf at all or that do surf but donʼt shop online.To tap into a wider consumer base, firms like Express Retail Service have recently started toenter the market, providing phone ordering without any web interface. Not wanting to miss the 32
  • Click and Dial - A new path for Indian retailopportunity, leading retailers like Reliance and Walmart are also considering an entry in thephone delivery market15.Improving customer experience through distance channelsDistance channels offer a different customer experience by focussing on convenienceThe consumer shopping experience can be analysed through three dimensions as described inExhibit 14. The first dimension is the degree to which consumers are exposed to the productsoffered by suppliers. In this area physical channels have the advantage of enabling clients to see,touch and feel what is displayed on their shelves. Online channels compensate for this byproviding extensive information on the productʼs specifications. Although consumers do not handlethe actual good they purchase, the range and depth of information found online help facilitate thebuying process. However phone channels provide the least exposure to products. They require theconsumer to have a high familiarity with them, and to know in advance what they are willing topurchase and at what price.15 Economic Times, The Telegraph 33
  • Click and Dial - A new path for Indian retailThe second dimension refers to the time lag between the purchase of a product and itsavailability to the consumer. Here again, brick and mortar shops enable consumptionimmediately after purchase while distance channels require the consumer to wait for the orderto be delivered.The attractiveness of distance channels lies in the third dimension. This takes into account theeffort and time spent by consumers while shopping. Going to a brick and mortar shop andreturning home with the goods is time consuming and requires effort. Consumers need toarrange their schedules, move to the shop, spend time between the shelves, wait in the line andreturn home with their goods. On the contrary, distance channels offer time effective andeffortless shopping. Buying online or on the phone neither requires the consumer to travel nor toarrange their schedule, because distance shops can be accessed anytime - providing that a callcentre is operational for phone channels - from any connected place 24/7. 34
  • Click and Dial - A new path for Indian retailConsumers demand convenienceLooking at societal trends in urban India suggests that the demand for convenient shopping isbound to increase as consumers lead busier lives. Indian urbanites value their limited availabletime and therefore make trade-offs between shopping and other leisure activities.To reduce time spent on shopping many consumers attempt to decrease their buying frequency.Typical consumers organise their trips to stores on a weekly basis, shopping in bulk to avoidmultiple trips to the shops.Others capitalise on the time spent for shopping to make it more valuable. For manyhouseholds, shopping expeditions constitute an occasion for families to spend time together.With limited free time, consumers merge shopping with their social life.Besides the time spent while shopping, urbanites are also looking for opportunities to save timeon their trips to and from the shops. On average, consumers are reluctant to spend more than15 minutes 16 travelling to a store. As a result they tend to value locations that are easier toreach.This desire for fast and convenient shopping will increase as the lifestyle of Indian urbanitesgets busier. The major factor that will profoundly affect the daily lives of urban Indians is theirjob. Looking at the labour market in India suggests that on average householdsʼ spare time willdecrease.The first trend is women entering the workforce. During the last decade, the number of womenworking in urban areas has grown by more than 54% 17. In parallel, women are increasinglyinvolved in the purchasing decisions of their households. In 2010 more than 40% of urbanwomen were decision makers, representing a 9 percentage points increase from 200118 . Withincreasing responsibilities to carry in their professional and family lives, women will look for lesstime consuming ways of shopping in the future.The second trend is related to the type of jobs demanded by the labour market. By 2020, aclass of urban executive workers will rise as the number of corporate managerial positions16 MGI17 Indian Census, Kanvic analysis18 IMRB International 35
  • Click and Dial - A new path for Indian retailincreases by 70% 19. More demanding jobs are therefore likely to reinforce the relativeadvantage for consumers from shopping through distance channels.The importance of product exposure will fadeIndian consumers are accustomed to touching and feeling a product prior to purchase. It is away for them to inspect the quality of products that are not usually standardised. This tendencyhowever is likely to fade away as a new generation of consumer arises in urban areas. Theappeal for branded, mass-market products is growing among younger consumers. As aconsequence it is probable that over time, physical contact with the product will lose importancefor Indian consumers in those categories where brands are highly valued and where productsare increasingly standardised.19 India Labour Report 2009, Team Lease, Indicus 36
  • Click and Dial - A new path for Indian retailWinning the distance channelsa new path for Indian retail 37
  • Click and Dial - A new path for Indian retailWinning the distancechannelsCOMPANIES SHOULD ADOPT THE RIGHT STRATEGIES TO SUCCEED INTHESE CHANNELSInternet and phone channels can help retailers improve their reach and customer shoppingexperience. Demand for these alternative distribution channels is still nascent but substantialgrowth can be triggered. The way forward is for managers to adopt inclusive strategies,reaching consumers beyond current market boundaries.To seize this latent demand through the internet, retailers should consider a new consumersegmentation. Each segment should be targeted individually with the objective to increaseconsumer awareness, interest and trust. Leaders will place their focus on building marketingand logistics expertise.In the phone segment retailers must out-compete the unorganised sector to widen their reach.Developing this service sustainably will be a delicate matter, and to succeed leaders will have toshift from a familiar but less profitable decentralised business model to a leveraged centralisedone.Internet retail comprises four consumer segments with different readiness tobuy onlineIn the Internet channel, 91.2 million surfers can be segregated in two categories: the onlinebuyers (18.6%) on one side, and the non-buyers (81.4%) on the other side. 38
  • Click and Dial - A new path for Indian retailThe buyer category can then be broken down in two segments. One segment is referred to asTravel buyers because it comprises the 8.5 million consumers that purchase goods exclusivelyrelated to travel; such as tours, transportation tickets, or hotel rooms. These travel goods areconsidered separately because they do not involve any physical delivery from supplier toconsumer, dismissing a critical part of the purchasing process. The other segment is namedProduct buyers and is composed of another 8.5 million consumer that purchase any type ofgood online. These consumers are not exclusive in their choices, buying travel goods, durables,FMCG products or books regardless.The non-buyer category comprises all Internet users that do not purchase anything online. Onthe one hand, the Window shoppers segment regroups the 33 million surfers that visit shoppingwebsites for informative purposes, that is to say without ever placing an order. On the otherhand, the 41.2 million Casual surfers represent the segment of the market that does not evenvisit e-retail platforms.As shown in Exhibit 15 each of the four e-consumer segments has a different purchasingcapacity and a different interest for shopping online20 . Together, these two criteria determine thesegmentʼs readiness to buy online.20Capacity is defined by using two proxies: the average household income; and the percentage of surfers occupying theposition of household head. Interest is defined by using two proxies: the degree of familiarity with Internet - expressed innumber of years of experience with the web - and the occurrence of a product purchase through online shops. 39
  • Click and Dial - A new path for Indian retailProduct buyers show the most advanced degree of readiness. They posses both the highestpurchasing capacity and the highest level of interest relative to other segments. Their majorinterest lies in their above average income levels, and in the fact that they are generally thehead of their household, holding most of the purchasing responsibilities.Travel buyers also benefit from a high purchasing capacity. Their readiness for e-retail isnonetheless lowered by a lack of interest in tangible goods sold online. This indifference isreflected in the low frequency at which they visit shopping websites.Window shoppers show a significant level of interest in e-retail but they have an insufficientpurchasing capacity to actually buy goods online. However, with time they are likely to gainpurchasing capacity and join the ranks of e-buyers. Their average household income is 21%lower relative to online buyers, but it is expected to rise in line with Indiaʼs economic growth. 40
  • Click and Dial - A new path for Indian retailWindow shoppers are on average 3 years younger than buyers, and they comprise mostlystudents and young professionals21.Casual surfers are currently not interested in online commerce. The primary reasondiscouraging their interest in alternative shopping channels are lack of awareness and a lack ofdisposable income. Due to the size of this segment and their potential to develop into onlinebuyers with time they should not be ignored by e-marketers.Companies selling online should approach the four consumer segmentsdifferentlyIncreasing product buyersʼ loyalty through customer relationshipTo capitalise on their buyer base, e-retailers should develop customer loyalty and generateincentives to increase per customer spending in both volume and value. At present, the averageyearly expenditure per Product buyer is very low in India relative to more mature markets. IndianProduct buyers for example spend ten times less than their American counterparts every year(Exhibit 16).21 India Online, Kanvic analysis 41
  • Click and Dial - A new path for Indian retailThis illustrates that substantial growth can be triggered by e-marketers within the existingcustomer base. Existing clients thus remain a major source of growth on which e-retailersshould capitalise. To secure their valuable customer base, managers should improve clientrelationships. In this area success will be determined by the depth of knowledge that retailershave about their buyers and by the way they communicate with their customers.Developing direct sales contact points will enhance the customer relationshipIn traditional channels, consumers value their relationship with vendors. By nature, virtualchannels reduce the interactions between the buyer and seller and thus raise barriers againstloyalty-building contacts. Successful companies will be the ones that place focus on usingtelecommunications to restore the lost relationship. The first level of interaction remains virtualand takes place through chats and blogs where customers are given the opportunity to expressthemselves. This practice is currently expanding in the Indian e-retail market place followingtrends in Europe and America. 42
  • Click and Dial - A new path for Indian retailIndian consumers however will demand a deeper level of interaction because of their specificcultural traits. Call centres with operators standing ready to answer a customerʼs queries inperson will most certainly differentiate e-players competing for customer relationship. At presentmarket leaders are the only companies to have set up such call centres. Smaller contestantsachieving the sufficient scale to set up these centres should promptly take advantage of theirposition before new entrants attempt to capture market share.Developing CRM tools will enable effective marketing in an increasingly complex marketUnderstanding the customerʼs preferences to tailor the offer will be the second competitivebattlefront for e-retail companies in India. As the population of Internet buyers grows, marketerswill need to reach deeper levels of customer segmentation. Since sub-segments will increasethe complexity of marketing strategies in terms of product, pricing and promotion, successfulcompanies will have to lead through their capacity to adjust price and product offerings to thepurchasing pattern of individual customers. Customer Relationship Management (CRM) istherefore bound to become a central component of marketing.Converting travel buyers into product buyers though improved delivery servicesThe major reason for travel buyers not purchasing products online is their concern aboutproduct and service quality. Many consumers are concerned about receiving their products late(35%) 22. They also fear that the quality will not be as expected due to misleading advertising(40%) or due to damages occurred during transportation (25%). Companies have already takenaction to reduce the mismatch in perceived quality between online adverts and the tangibleproduct (see below) but a major focus on logistics will be required to convert travel buyers intoproduct buyers.Creating trust through intangible improvements is not enoughCompanies have already worked on enhancing the layout of their website to increase the trustof e-shopper. The focus has been on providing a more accurate perception of quality and ondisplaying information in a user-friendly manner. The zooming and colour swapping functions forexample are already available on 40% to 50% 23 of e-retail websites in India.22 India Online23 www.ecommerce-guide.com: Ice your Competition with a Cool Return Policy 43
  • Click and Dial - A new path for Indian retailIn addition, market leaders are also providing guaranties to their customers under the form ofrefunds or return policies. Buyers lacking trust can therefore finalise their purchase with theinsurance that they will pay only if their expectations are met.However, it is likely that better layouts and after sales services will not suffice to bridge theconfidence gap entirely, especially if no action is taken to reduce the actual number ofunsatisfied customers. Only 30% 24 of buyers state that they have never encountered any issuewhile purchasing on the Internet, which leaves companies plenty of room for improvement.Tangible improvements can be achieved through logisticsLogistics play a vital role in e-retail because customer satisfaction is strongly dependent on thesupplierʼs ability to deliver the goods in time, at the right quality and at the cheapest price.The combination of these three elements is probably the most basic expectation of customers.Each transaction made online is based on the buyers assumption that goods will reach theirdestination as promised. On the retailerʼs side however, meeting this requirement is a greatchallenge. Complex IT systems must bridge the gap between remote physical stocks and thevirtual stores where customers place their orders. Integration with third party logistics providersmust be seamless, from the packing of the parcel in the warehouse to the final client delivery.Delivery times must be stuck to, shipments tracked individually, and complaints and returnshandled professionally.Achieving a 100% on-time-in-full rate25 is a crucial requirement for e-retailers wishing to reachhigher levels of consumer satisfaction through tangible improvements. As competition intensifiesin the online market, delivery will become a major competitive battlefield, and leaders willdepend on their logistics to maintain and grow their market position. Significant effort should bemade to reduce the currently large proportion of unsatisfied consumers. Close to 70% of buyershave experienced delays in delivery and 25% have received damaged goods at least once 26.24 India Online25On-time-in-full rates refer to the proportion of shipments that reach their final destination at the right time, quantity,quality and cost.26 India Online 44
  • Click and Dial - A new path for Indian retailConverting window shoppers into buyers through tailored pricingSince window shoppers have a high interest in online channels but a lower purchasing powerthan actual buyers, companies should reach down to them through pricing. The objective is toincrease the buyer base in volume through attractive pricing and nudge them towards higherpriced products gradually. With their lower purchasing power these clients will first account for amarginal part of the revenue stream but if companies succeed in making them loyal their valuewill increase over time. To be attractive in an already low priced e-commerce market companieswill however need to adopt a new perspective on pricing.The current pricing models are not sustainableIn the area of pricing e-retailers have been actively focussed on granting substantial discounts(ranging from 5% up to 95%) betting on high negative price elasticity to grow sales volume. Forsome players this method has proven to be effective in attracting customers. Snapdeal forexample has managed to sell 1000 units of watches in a single day by offering an 85% discount.However as new players enter the market to capture share, the viability of this approach will bethreatened. To maintain high sales volumes under this business model companies will have todrive prices down further. If improved cost effectiveness is not achieved, margins will be lost andmany players are likely to exit the market due to consumer and competitive pressure.To overcome this, some companies have decided to import the business model of group-buying27 from the more mature European and American markets. This model appears promisingbecause it provides security to e-players competing heavily on price. Group-sellers purchasetheir goods only when the required number of customers has placed an order on their site.Customers are offered low prices on the condition that they collectively generate enough salesto cover the sellerʼs costs and margin. Although group-buying has potential, only a fewcompanies will succeed in this increasingly crowded market place. At present 20 companies areoperating in the segment and major Internet players like Google are also considering a move.Groupon and Amazonʼs Living Social are the key players in the global group buying market.India has its own set of popular group buying sites like Snapdeal, Mydala, Dealsandyou, Taggle,Koovs etc. Times Internet, a subsidiary of Times Group launched its new deals site calledTimesDeal, on May 2, 2011. The site is currently being launched in six Indian cities (Delhi-NCR,27Group buying refers to the creation of consumers groups that purchase in bulk together to benefit individually fromlower unit prices. 45
  • Click and Dial - A new path for Indian retailMumbai, Bangalore, Pune, Kolkata and Chennai) to compete with the existing players in theIndian market.Pricing should be tailored to maximise profitsIn the future, the most successful companies will obtain leadership by adopting a newperspective on pricing. Discounts and group-buying are effective in generating sales volume,but they fail to maximise profits. Because these discounts are offered to all customers, includingcustomers that were willing to pay more, they represent a high opportunity cost. For example, ifa customer willing to pay Rs. 100 for a product benefits from a 50% discount offered toeveryone, the retailer loses the opportunity to generate an additional Rs. 50 of revenues.Instead, firms should tailor prices to the consumer segment they are targeting. On the one side,existing buyers, as mentioned earlier, should be provided with tailored offers according to theirpast buying patterns. Companies can track these buying patterns through widely available CRMsoftware. On the other side, companies looking for faster growth should make a priority ofconverting window shoppers into buyers because in the currently restricted e-retail market theyrepresent a significant base of potential customers.To achieve this e-retailers should decrease their margins exclusively to attract these customers.One example is to provide incentives to new customers setting up an account. Once windowshoppers make their first purchase their behaviour should be tracked and pricing should beadapted to progressively capture more revenues.Raising the awareness of casual surfers through social mediaGrowth in e-retail is constrained because casual surfers are not converted into buyers at a fastenough pace. To drive more sales e-retailers can increase the awareness of casual surfersthrough expanded use of social media.Social media is not sufficiently exploitedAt present traditional communication in the form of web banners, search-engine referencing,and e-mailing are widely used to create awareness. However social media remains underexploited compared to other countries like the USA (Exhibit 17). 46
  • Click and Dial - A new path for Indian retailTwo marketers out of five are still unsure about increasing their spending in this advertisingformat and are waiting for clearer signs of effectiveness to make a move. This cautious attitudeis one of the factors currently limiting the expansion of the online buyer base, and restraining themarket from reaching its full potential.Social media is an optimal way to attract casual surfersTo stimulate growth in the e-consumer segments managers should consider shifting more oftheir advertising expenditures to social media. Firstly, these platforms can generate tremendousawareness about e-retail because their reach is very wide. Indeed, the traffic on social media isincreasing at an annual rate of nearly 30% 28 and today 84% 29 of online Indians are connectedthrough these sites.28 Business Today29 ComScore 47
  • Click and Dial - A new path for Indian retailIn addition to the number of users they cater to, social media sites have the advantage of beingparticularly effective in building consumer interest and trust. An American survey 30 states thattwo thirds of consumers use information found on social media to make purchasing decisions,and that 67% are likely to pass this information on to others. Additionally, by using consumersas influencers firms advertising on social media can also increase trust. Interestingly 60% ofconsumers said they trust information found on social media more than traditional adverts.30 OTX 48
  • Click and Dial - A new path for Indian retailRetailers should scale up to penetrate the phone channel profitablyOrganised retailers have a limited presence in the phone channel relative to their unorganisedcounterparts. Apart from food service majors that captured share by focussing their businessmodel on these channels, most retailers are currently providing limited delivery servicesbecause their logistics capacities are not yet geared for this channel. To capture market sharethese firms should invest heavily in building logistics networks and customer contact points thatoffer consumers the convenience they desire. However, only the firms that scale theiroperations will sustain profitability by leveraging their expenditure on fixed costs.Big retailers can improve their competitiveness against the unorganisedsector by developing their infrastructureOrganised players are competing with unorganised playersSmall shops from the unorganised retail market exploit the natural advantage of their smallscale to deliver to local customers for free. Their customer base is small and lives within alimited perimeter allowing them to provide the service without building specific logisticscapability. Organised retailers aiming to compete in this Rs. 11,339 Crore market31 will need tooffer a better alternative to the consumers at an affordable price (Exhibit 18).31 Business Standard, Business Today, NRAI, IBEF, Mydigitalfc.com, Kanvic analysis 49
  • Click and Dial - A new path for Indian retailUnorganised retailers are strong competitors because they provide delivery services often forfree and without imposing minimum order sizes. However, their weakness lies in their lack ofcapacity to sustain the availability and reliability of their service. Due to their small scale theseshops can deliver to only a limited part of their customer base. Typically the service is madeavailable to loyal clients with whom the owners maintain a close relationship. In addition, mostof these shops are unable to guarantee delivery times due to a lack of dedicated staff or vehicle.Players in the organised sector can fill these gaps by providing systematic services. Withdedicated call centres and fleets of vehicles they have the potential to deliver to any customeron time. However, this level of service draws in substantial marginal costs. These are coveredby some players through the charging of a fee or through the limitation of the service to a certainsize of orders. 50
  • Click and Dial - A new path for Indian retailEnsuring the reliability of delivery services compels retailers to build excess capacityAs mentioned, providing delivery services requires investments in customer contact points andlogistics infrastructure. To make sure that they serve every customer on time, retailers have toscale their investments according to estimates in daily demand peaks rather than averageweekly demand (Exhibit 19). Otherwise they risk losing reliability as their competitive advantagebecause the service is likely to be refused to customers on days when the capacity is fullyutilised.Retailers aiming for reliability should scale up to make delivery more profitable. As their capacityto take orders and deliver door-to-door is currently under-utilised they do not leverage their fixedcosts efficiently. As a consequence the costs of delivery per customer are substantial. Sinceconsumers may not be willing to pay a premium for the service – having access to it for free inthe unorganised sector – margins are likely to be squeezed. 51
  • Click and Dial - A new path for Indian retailCentralisation will be the key to profitability in the phone channelThe key to success in cost efficiency will lie in the adoption of a new business model. Todayphone ordering is done at the level of individual outlets. Like food service companies, retailstores operate small-scale vehicle fleets and on-site call centres in central urban areas todeliver goods within a small radius. Retail groups that own hundreds of outlets across Indiatherefore need to build their capacity store by store in a decentralised way. In that scenario themultiplication of under-utilised call centres and logistics infrastructure generates tremendousaggregates costs.By 2020, centralised structures taking orders from large-scale call-centres and performing homedelivery trough centralised warehouses are likely to dominate the market due to their increasedcost efficiency. Improvements in urban road infrastructure will facilitate faster delivery of largershipments made though vans or small trucks. Retailers will therefore be able to shift their callcentres and warehouses to city outskirts and benefit from lower real estate costs and betterutilisation of their logistics capacity.Centralisation enables saving on rentals...Rentals are a major cost component for Indian retailers as illustrated previously in Exhibit 5.Conversely they are also a major leverage for improving efficiency. Centralising the deliveryservice can enable retailers to use that leverage. Their rental cost can be significantly reducedby shifting infrastructure from the inner to the outer city. Call centres as well as warehousingspace that are operated in those areas can cost more than six times less, as shown in Exhibit20. 52
  • Click and Dial - A new path for Indian retail...and improvements in logistics efficiency.Moving away from central urban areas will be possible as long as retailers compensate for theloss of proximity to consumers by operating their logistics efficiently.The advantage of operating at a bigger scale is the possibility to use larger capacity vehicles. Inthe non-centralised model, retailers are economically compelled to use two or three wheelers toperform delivery. Because each store has a relatively small consumer base, using largervehicles would decrease the already low utilisation rate of the fleet (Exhibit 19). In thecentralised model however, using trucks can increase efficiency.Fixed costs can be leveraged by a smaller fleet comprising larger capacity vehicles. The cost ofa cubic metre of a load drops as the size of the vehicle increases, offering a better leverage ofvolume (Exhibit 21). Therefore it is more efficient to transport a given load using trucks, than it isto use the two or three wheelers deployed in the traditional non-centralised model. 53
  • Click and Dial - A new path for Indian retailMoreover, larger trucks can be used for efficient milk run deliveries, thus decreasing thedistance travelled with an empty load. At present, small capacity carriers transport goods mainlyon the outward journey, using fuel to return to the warehouse empty. With the centralisedapproach a single van driver delivering to multiple customers could travel a greater distancewith a full load, making every mile profitable for retailers (Exhibit 22). 54
  • Click and Dial - A new path for Indian retail 55
  • Click and Dial - A new path for Indian retailConclusionThis report has outlined the prospect for distance channels to prosper in urban India, andclarified the challenges ahead for retailers wishing to venture into this developing market space.The evidence gathered in this study suggests that distance channels are bound to expand andbecome part of the buying habits of Indian urbanites.As more consumers embrace these channels, retailers will be forced to change their businessmodel. Throughout this report we have explained how retailers wishing to grab their share of thepie will need to thoroughly rethink their marketing and logistics strategies. However, theexpansion of distance channel will not have implications exclusively for these retailers. Even ifthey lack interest in distance channels, pure brick-and-mortar players will inevitably be impactedby the changes occurring in consumer habits.The most obvious and significant change for these retailers will probably be felt through adecrease in footfall and revenues. Because convenience and choice are becoming key criteriain consumersʼ satisfaction, pure brick-and-mortar shops will certainly suffer a loss ofcompetitiveness relative to distance channels.Another important change will come more specifically from the rise of Internet buying. With thedevelopment of the Internet as a retail format, consumers are taking shopping to a whole newlevel. To find the best offer, people get informed, share their satisfaction level through consumerreviews, scout for bargains and evaluate and compare products with the help of powerful searchengines. This new tendency to prepare a purchase on the Internet can easily impact brick-and-mortar shops. In more advanced e-retail markets like France for example, more than 80% ofInternet users use the Internet to inform themselves before making any purchase, either in avirtual or in a physical store. As a consequence, the relationship between buyer and seller ischanging. Extra-informed consumers are often more knowledgeable about the product 56
  • Click and Dial - A new path for Indian retailspecifications and rival brands than sales people on the shop floor, and for this reason theybecome difficult to attract and persuade on criteria other than price.Overall, the rise of demanding and savvy consumers is likely to change the rules of competitionin the Indian retail market. This will compel leaders to rethink their business, begging a crucialquestion: How can I be part of tomorrows Indian retail story? 57
  • Click and Dial - A new path for Indian retailkanvic.comCopyright 2011 Kanvic Consulting Private Limited. All rights reserved. 58