Sleepless in India How Retailers and Product Manufacturers Can Embrace E-Commerce As customers migrate to online channels, traditional players are tossing and turning about where they fit in. The leaders are finding ways to embrace the change and dream big.
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India’s $17 billion e-commerce market, growing at a CAGR of 37 percent over the past two years, is raising a few eyebrows and making some of the country’s retail giants and product manufacturers a tad uncomfortable. Stories about billions of dollars of funding for online-only retail start-ups and huge sales such as Big Billion Days have instilled fear and triggered talks of an industry disruption. Not surprisingly, the old-guard retailers and product manufacturers are not getting much sleep these days. Will these online-only players disrupt the brick-and-mortar players? Traditional retailers are operating in a fog of fear. Complaints of deep discounts have reached the Ministry of Commerce and Industry, and some retailers have entered into alliances with online players to expand their reach, including the partnership between Nature’s Basket and Amazon. Shoppers around the world have embraced multichannel shopping. A.T. Kearney’s Connected Consumer Study finds that while more people are using multichannel offerings, the online, pureplay leaders—those operating only on the Internet—continue to stand out.1 In India, 87 percent of connected consumers prefer to shop online at these pure-play sites, which appear to be stealing market share from traditional retailers.
In India, 87 percent of connected consumers prefer to shop online, stealing market share from traditional retailers. In the future, we may see stiff competition over customer convenience rather than over deals and discounts. Online retailers could discover a business model where customer acquisition costs balance the physical store cost and continue to flourish, beating pure-play e-commerce players. In addition, low profitability, as seen in today’s major e-commerce players, could force the e-commerce bubble to burst, with lack of funding slowly killing this new market. Predicting the endgame begins with an understanding of what is propelling the rapid growth of e-commerce: • Customer behaviors and expectations are changing as they gain access to more choices, lower prices, and greater convenience. • Technological advances, especially in logistics and payment methods, are powering the digital channel for commerce. • More people have access to the online channel thanks to greater mobile and Internet connectivity. • E-commerce players are offering attractive prices and exclusive deals, including for smartphones. These trends are opening up an opportunity for both traditional retailers and product manufacturers. Rather than acting out of fear, forward-thinking players can make it a game changer with three strategic moves: sense, select, and strike.
To read more, see Connected Consumers Are Not Created Equal: A Global Perspective at www.atkearney.com.
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Sense Digital Disruptors’ Next Move Over the past two years, many Indian shoppers have turned to online and mobile shopping. The biggest value proposition of pure e-commerce players has been their wide range of products in multiple categories, the convenience of online shopping and home delivery, and their deep discounts. These players gave customers in tier 2 and tier 3 cities convenient access without having to invest in the capital that is required for physical stores. They addressed concerns about payment gateways and fulfillment with methods such as cash on delivery, assured delivery, no-questions-asked replacement, zero cancellation fees, free shipping, and options to pay in monthly installments. Massive discounts have been the preferred customer-pull strategy for these e-commerce players, and as a result, shoppers have taken to online shopping in a big way. Many Indian customers are adopting the “showrooming” trend—browsing products in a store, gathering information and advice from salespeople, and then buying online at discount prices. However, these e-commerce players are not yet profitable. E-commerce is an inherently thin-margin, high-volume business, which means there is a constant battle to stand apart from the crowd. The top players are well aware that deep discounts will not be a differentiator over the long run.
E-commerce players have given customers in tier 2 and 3 cities convenient access without the need to invest in the capital required for physical stores. To build sustainable profits and increase market share, e-commerce players are now turning to customer-centric offerings. For example, online retailer Zovi is offering a value-added service with its virtual trial room, an online interactive interface that allows buyers to “try on” merchandise. And Shopnineteen is targeting specific customer needs by offering products for professional women. The online retailer has a range of new collections every two weeks, with orders dispatched for delivery within 24 hours. For men, the Trunk Club is solving a common problem for its target customers, offering a personal stylist to help them build their wardrobes. Another interesting aspect is Indian players’ shift from traditional inventory models to marketplace models. This move was not unexpected, given the foreign direct investment (FDI) regulations that inhibit inventory-led models in e-commerce along with stories of Alibaba’s success in China, a market that is similar to India. Consider the evolution of online shopping in China, the number two country in our 2015 Global Retail E-Commerce Index.2 India seems to be on the same path. Pure e-commerce players are now choosing to compete in select product categories, targeting microsegments and underpenetrated tier 2 and tier 3 cities (think Zovi and Freecultr) and pushing their own brands and labels into the assortment mix (think Zivame). Eventually, like Alibaba, they will complement their online stores with pop-up or permanent physical stores, a trend called reverse showrooming. To read more, see Global Retail E-Commerce Keeps On Clicking at www.atkearney.com.
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Differentiated
Figure 1 Evaluate the impact of e-commerce on your business
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Your value proposition
Low impact
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Economic attractiveness for e-commerce
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Source: A.T. Kearney analysis
When trying to sense digital disruptors’ next move, one good practice for traditional retailers and product manufacturers is to do a careful assessment of the many possibilities offered by the pure-play e-commerce players. Start by evaluating the impact of e-commerce disruption to your firm. Whether you are a traditional retailer or a product manufacturer, the impact can be assessed across two dimensions (see figure 1): Extent of differentiation in the value proposition. Do your products and merchandise have a unique position in your target market—a specific focus segment or a unique product or brand pull? Are you targeting local, regional, or nationwide markets? How strong are your store brands and private labels? Economic attractiveness for e-commerce. Products with high price points and margins that are typically able to absorb higher distribution costs are better suited for the economics of e-commerce. Categories where customers are more willing to buy online, such as products that people do not need to touch or try on, are inherently better suited to online channels. A combination of value proposition differentiation and economic attractiveness will determine where your product or retail store falls. If you are in the bottom right quadrant (for example, with a generic product offering in a category with high economic attractiveness for e-commerce), you are under maximum threat of disruption. The zone with the lowest threat in today’s market is the one where the retailer or product manufacturer has a differentiated offering in a category that is economically less favorable for e-commerce. Remember, the economic favorability of e-commerce is evolving every day, and more categories are likely to be affected over time. Sleepless in India
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Select Your Response For traditional retailers and product manufacturers, a response that follows the same path as the digital disruptors or directly attacks them will not be enough. So what is a good response? The answer differs depending on the type of player. Traditional retailers A.T. Kearney’s e-commerce strategy framework will help you select the right response to the e-commerce opportunity. Depending on the zone you fall under, you can adopt one of four strategies (see figure 2): Wait and watch. Players in the top left quadrant of our strategy framework, with low economic attractiveness for e-commerce and differentiated merchandise, can wait and watch. For example, Le Marche, a gourmet food retailer in the Delhi National Capital Region, has a differentiated value proposition. As a category, gourmet food is still in its nascent stages of adoption in India, and the grocery segment has unfavorable economics for e-commerce. While the advent of delivery start-ups such as Grofers and Big Basket has improved the prospects for digital channels in this segment, pure e-commerce options have yet to mature. For a niche player such as Le Marche, investing huge amounts of money in the online game may still be a bit too risky. Interestingly, some global retailers are adopting an “ignore” strategy. For example, Primark, the Irish clothing retailer of Associated British Foods, does not yet sell online. Profits rose by nearly 30 percent in 2014, and in September the company opened its first store in Boston, Massachusetts. With no digital channels, Primark believes in strategic placement of its physical
Wait and watch
Go omnichannel
Develop a unique product and sales proposition
Enter the pure-play marketplace
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Figure 2 Four e-commerce strategies for traditional retailers
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Economic attractiveness for e-commerce
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Source: A.T. Kearney analysis
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stores. Will Primark continue to ignore this new channel, or is it simply waiting to make the right move? Only time will tell. Go omnichannel. Those in the top right quadrant, with a differentiated offering and a high margin product category most suited for e-commerce economically and otherwise, should invest in an e-commerce platform to supplement physical stores. A traditional retailer cannot compete on the variety of products offered by online-only players. Focus on competing on the quality of your merchandise, convenience, or an augmented customer experience with valueadded services. Globally, leading retailers that have integrated their channels have seen higher revenues through greater core customer coverage and wallet share, stronger customer engagement and greater loyalty, lower costs, and better inventory turns. Most international players already have robust omnichannel strategies. Macy’s, for example, captured a 1.3 percent earnings increase after launching its omnichannel strategy, which includes an integrated online inventory, locationbased mobile offers and rewards, and personalized online catalogs. Players arriving late to the game can close the capability gap by merging or acquiring an online player. Walgreens has acquired drugstore.com to accelerate its online strategy, and Nordstrom bought Hautelook to position itself in the growing “flash sale” segment. Closer to home, Mahindra Group acquired online retailer BabyOye to integrate the online channel with its offline network for baby care products under the Mom & Me brand. Enter the pure-play marketplace. Traditional retailers that fall in the bottom right quadrant cannot afford to ignore or wait but must act now. The best approach will be to take advantage of strategic tie-ups and create a differentiated value proposition. Recent examples of big retailers embracing this model are Future Group’s alliance with Amazon to sell its products online, starting with apparel and moving on to home, electronics, and food categories. The two firms are also exploring potential synergies in data sharing, co-branding, cross-promotions, and sharing distribution networks. In a similar collaboration, Snapdeal agreed to create Tata Croma’s Flagship Store on its e-commerce portal to sell electronics, including mobiles, tablets, and laptops. Another interesting trend is traditional retailers that have generic merchandise but are planning to start their own marketplace ventures. Relaxed FDI norms for the marketplace model and an established offline distribution and fulfillment network make this an attractive proposition. Spencer’s, for example, plans to be the dominant seller on this new platform with 95 percent of its business. The balance will be through sellers in adjacent segments such as customer electronics. Given the low margin and fulfillment challenges in the segment Spencer’s operates in, having its own e-commerce platforms may not be an economically attractive option. Instead, a marketplace model allows retailers to improve margins in adjacent categories and manage healthy investments through the FDI route. In the long run, players in this quadrant will face the threat of marketplaces introducing their own brands at lower prices. Investing in a differentiated value proposition will be crucial for survival. Develop a unique product and sales proposition. Retailers in the bottom left quadrant, with a generic offering in low to medium margin product categories currently considered unfavorable for e-commerce, should focus on differentiating their value proposition. Traditional retailers cannot compete in today’s market with generic offerings and no e-commerce options. Differentiation will improve growth potential while continuing with current channels. Pure-play traditional grocery retailers are a good example.
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Grocery retailers around the world have adopted an array of strategies to capitalize on the online channel. From using existing stores or delivery start-ups to reach online shoppers to providing click-and-collect options, this industry is expected to change in the near future. For these retailers to take advantage of this opportunity, they will need to develop a unique selling proposition to differentiate in a commoditized grocery segment. For example, UK retailer Tesco Homeplus, the second largest discount chain in South Korea, offers nearly 500 items, including food, office supplies, and toiletries, at its virtual store at a subway station in Seoul. Customers use their smartphones to scan product barcodes, purchase products on the spot, and schedule a time for home delivery. Product manufacturers The digital channel is good news for product manufacturers. Whether operating in a low-margin business or having a limited customer reach, e-commerce presents new opportunities to expand product reach and strengthen the brand position. A.T. Kearney’s e-commerce strategy framework can help these players select the right response to the e-commerce opportunity (see figure 3). Develop partnerships with online retailers. For those in the top left quadrant, with lower economic attractiveness for e-commerce but a differentiated and established brand, partnerships with online retailers will allow your brand and the retailer to work together to test new concepts. Patanjali Ayurved, the fastest-growing consumer products company in India with annual sales of INR 2,028 crore (US$307 million), recently entered into an exclusive partnership with Future Group to make its entire range of products available in Big Bazaar outlets across the country. It will be interesting to see how the relationship develops to tap into Future Group’s e-commerce foray. While e-commerce players can provide easy access to largely untapped
Develop partnerships with online retailers
Invest in your own website to sell to customers
Develop a unique product and sales proposition
Expand your reach by working with pure e-commerce players
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Figure 3 Four e-commerce strategies for product manufacturers
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Economic attractiveness for e-commerce
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Source: A.T. Kearney analysis
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markets, online retailers can provide important insights into customers’ buying trends and behaviors across channels. For this reason, manufacturers would be wise to choose the right retailer. After all, success depends on integrating content, cross-promotions, and investment when creating a platform to share information. Invest in your own website to sell to customers. This strategy is best suited for product manufacturers in the high-margin business with a niche position or targeted customer offering. At first, it might not seem like an intelligent move to invest heavily in developing a website, but consider the possibilities. Nike captured big benefits by integrating its online and social media channels to deliver customized orders to its customers. Designer labels Ritu Kumar and Sabyasachi are also good examples. With niche positioning in the market, they can use their digital channels to replicate a direct customer reach with customized offerings. Manufacturers selling directly to customers (DTC) are the fastest-growing merchant category online, with a growth rate of about 15 percent. The biggest challenge in this model is the balancing act between your customers and your retailers, unless you want to be a pure direct-to-customer play. For example, plastic toymaker Step2 posts on its website both the customer price and the pricing and links to merchants that sell its products, including Walmart and Amazon, thus positioning its website as a one-stop shop.
Manufacturers selling directly to customers are the fastest-growing merchant category online, with a growth rate of about 15 percent. Expand your reach by working with pure e-commerce players. Manufacturers in the bottom right quadrant are operating in the zone that wins on volume and reach. To increase your reach to newer markets and segments, use pure e-commerce players operating in the respective product segments. Effective positioning of products for e-commerce requires having an understanding of customers’ buying trends. What do they prefer buying online versus in physical stores? Our Connected Consumer Study shows that electronic goods, fashion and apparel, tickets, and services are the most popular online categories in India, with more than 75 percent of study participants buying these categories online. Two electronics companies, Motorola and Xiaomi, have launched their new products online—targeting millions of customers in urban and suburban Indian markets at the same time. Also, in a first-of-its-kind partnership, Snapdeal has aligned with Tata Value Homes to sell affordable homes online. E-commerce players also present a unique opportunity for small and medium-size businesses to expand their reach. Local weavers in Varanasi, for example, used Snapdeal’s platform with a recent pilot launch between Snapdeal, India Post, and post offices in Varanasi. The platform will provide easy access for millions of Indians who are interested in owning traditional Banarasi weaves. Local post offices act as drop-off points for the weavers, and India Post delivers the weaves to buyers. Develop a unique product and sales proposition. Companies in the bottom left quadrant, with a generic product offering in low to medium margin product categories currently considered unfavorable for e-commerce, should focus on differentiating their value proposition. A generic
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product in the low margin segment might not be able to compete with others in the market. Most of the small players in the grocery segment in India could fall in this category. Differentiate your brand from competitors to move to the upper left quadrant and enable opportunities for partnering with online retailers.
Prepare to Strike These strategies require a thoughtful review of current operations and ways of working. Each strategy will need a thorough assessment of the organizational and cultural implications. Plan carefully while sensing digital disruptors’ next move, define a strategic road map after selecting the ideal move for your company, and then strike.
Authors Suketu Gandhi, partner, Chicago
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Neelesh Hundekari, partner, Mumbai
[email protected]
Kaushika Madhavan, partner, Mumbai
[email protected]
Vidisha Suman, consultant, Gurgaon
[email protected]
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