Look to customers, not investors
It is quite likely that most e-commerce start-ups being hatched in coffee shops of Bangalore – which are based on general merchandise retail – are already doomed. They need to search out new areas to service new customer needs if they want to have a shot at hyper growth and hyper valuations. Meanwhile, for traditional retail in India, the focus will primarily be on the existing biggies – Flipkart, Snapdeal and Amazon
The US National Retail Federation publishes an annual list of the Top 100 retailers in the country. The largest pure play online retailer in that list in 2015 is, of course, Amazon.com. What is interesting is that Amazon comes in at #9 in the list and is about 8 times smaller than Wal-Mart, which is at #1. This is strange in contrast to the situation in India.
Here Flipkart.com is not a retailer, but a marketplace. WS Retail, founded by the Bansals but not owned by them now, is the largest retailer on Flipkart. WS Retail in FY15 had tripled it’s sales to Rs 10,163 crores. This puts WS Retail right there with the big boys of Indian retail. Reliance Retail had a sales of Rs 17,640 crores in FY15 and Future Group’s retail businesses totalled Rs 14,557 crores. In India, online is distinctly in the same league as the brick and mortar players.
Is it because organised retail in India is still very young? After all, Reliance Retail has taken 7 years to turn a profit. Any new entrant in retail in India who is looking to scale, it seems, will face monumental challenges. How then did the e-commerce players scale so fast? Will this country somehow become an e-commerce heaven for start-ups and investors? We saw what worked in the past, but what is likely to work in the future?
The winner takes all
One of the most powerful features of the Internet is that it make history of geography. A server can reach any part of the world and service customers. So, one factor that most Internet start-up business plans emphasise is the ability to scale globally. Th is same feature also makes life difficult for Internet startups. Because Internet companies can effortlessly reach customers anywhere, this industry has a very strong tendency to consolidate. The fifth largest retailer in the US in 2015 was Walgreen. Their sales was $72 billion, indicating that the US brick and mortar retail industry has quite a few large players. However, in online advertising, four firms – Google, Facebook, Baidu and Alibaba – control half the digital advertising in the entire world. Similarly, in online travel, the US market is dominated by just two players, Expedia and Priceline. Given the very low marginal cost of adding customers, online companies with more money can innovate more rapidly, will have better data on customers to analyse and ensure that they deliver greater value. So, once an online firm has become really big in its market, new entrants who say they will compete by just being better may as well go home.
What does work, and works really well, is having artificial barriers to pure competition. So, online advertising is dominated by four firms and not two. Google, Facebook, Baidu and Alibaba. Why are Chinese companies rivalling the US behemoths and not, say, German ones? Baidu and Alibaba grew because their market was simply not accessible to the US firms. Th at allowed them to grow and build scale. This is why start-ups constantly look for new areas to get into. Th e challenge is that the area really has to be new in the eyes of the customer, not the promoters and the investors. Failing to do this is leading to several smaller e-commerce companies shutting shop… after burning investor money.
Given this, it is quite likely that most e-commerce start-ups being hatched in the coffee shops of Bangalore, which are based on general merchandise retail, are already doomed. They need to search out new areas to service new customer needs if they want to have a shot at hyper growth and hyper valuations. Meanwhile, for traditional retail in India, the focus will primarily be on the existing biggies – Flipkart, Snapdeal and Amazon.
Value is not the same as pricing
When Amazon entered business, it provided some significant benefits over existing retailers. It could personalise interactions with customers, which is very difficult to do in brick-and-mortar in scale. It could provide more reviews on books for prospective customers to read and decide on what they want to buy. Most importantly, Amazon removed the middle men and the margins that they were adding, thereby passing on the benefits of efficiency to the customer.
In contrast to this, e-commerce in India is focusing on driving down price, not through creation of an efficient model, but by discounting price. In a 2015 report titled Retailers and the Age of Disruption, Price water house Coopers surveyed the retail business. Th e customers surveyed were asked why they shopped at their favourite retailer. Th e answer: Th eir prices are good. Th at was the singlelargest response, from 55% of the respondents. When asked why they bought products online instead of in-store, the most popular answer was there were lower prices and better deals than in stores.
However, lower price is not the result of greater operational efficiency, either in sourcing or delivery. It has largely been done by discounting. Today, larger players are reversing this trend by charging more. Th e two big drains on profit are customer acquisition (read discounts) and fulfilment cost. While the former continues to be a big draw, as seen from the survey referred to, Flipkart and Amazon are now charging for delivery wherever order values are low.
Delivering great value to the customer has to be more than simply giving discounts. As many e-commerce companies have seen, once the discounts go, so do the customers. True innovation in creating value is still missing in the Indian e-commerce market. Similarly, a true push to integrate online and offline by existing brick and mortar players is also missing. Th is is very different from the US market where almost all the large retailers have significant online strategies.
The operational cutting edge
Searching for innovation that is relevant to the customer requires offering him something more than just value or removing a pain. So far, the standard e-commerce customer values the discount and being spared the pain of carrying the product home and searching for product availability. The latter are not small issues for the Indian customer. Urban centres are getting increasingly difficult to travel in and existing brick and mortar retailers are not meeting rural aspirations. Building on these areas can be powerful advantages.
But the larger and more serious players are increasingly investing in operational efficiency and we find clients in this space talking much more about operational performance goals. These create true economic value in our urban sprawls and extended hinterlands. In the same PWC survey referred to earlier, after discounts and brand, the next three reasons for shopping with their favourite online retailer were operational: they usually have items in stock, the returns process is good, and delivery is fast and reliable. So, the customer rates 60% of the advantage as getting the product and getting it home as critical.
There are clear opportunities for both brick and mortar retailers and for pure play e-commerce players to look towards operational innovation to create real economic value. What is important is for brick and mortar to experiment with hybrid models and for e-commerce players to look at customers, not investors. Innovation and efficiency can create additional value and can be passed on to customers as sustainable lower pricing. But pure discounting alone is merely intellectual laziness.
The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd