Brick-and-mortar retailers are going online to take on e-tailers
Godrej Group's premium food retail chain Natures Basket recently tied up with online retailers Snapdeal and Amazon India to take its gourmet food basket of over 400 products to 8,500 cities. The food retailer has also revamped its own e-commerce platform promising doorstep delivery within three hours. "We expect an exponential rise in traffic and conversion rates that can lead to about 10 times growth in our online business revenues," says Mohit Khattar, CEO, Godrej Natures Basket.
According to Khattar, the company will also tie-up with other online marketplaces (the likes of Flipkart) to widen the reach of its retail entity. "There is growing demand for premium food products and online is a great platform to make our products available through the length and breadth of the country," he says. Earlier, the company catered to only five cities - Mumbai, Pune, Delhi, Bangalore and Hyderabad - through its brick-and-mortar stores.
Natures Basket is by no means the only physical retailer trying out the online platform. Almost all Indian brick-and-mortar organised retailers are trying to get ahead of the curve and take on the e-tailers in their own backyard. Putting together an omni-channel strategy that links physical and web-based stores to offer customers multiple options to shop has become a necessity for the likes of the Rs 10,000-crore Future Group, which has tied up with Amazon India to sell its private labels, and even for Reliance Retail, the country's biggest offline retailer, with its Reliance Fresh Direct.
While Future Group has invested Rs 100 crore to spruce up its e-commerce strategy, Reliance promises 'convenience' with its online marketplace offering over 6,000 products. "Unlike most online retailers, who are playing the discounting game, our promise to consumers would be convenience and on-time delivery," says a Reliance spokesperson.
Fashion and apparel stores are not far behind. Shoppers Stop, for example, has invested Rs 20 crore to link its online (shoppersstop.com) and offline activities.
"Earlier, we were multichannel and our online store was not connected with the physical stores. Now we have realised that omni-channel would give us better economies of scale," says Govind Shrikhande, Managing Director, Shoppers Stop. The company expects its omni-channel play to be up and running in about a year, and contribute five to eight per cent to its overall revenue.
The Wake-up Call
The alarmingly empty shopping malls during the festival season in 2014 came as an eye-opener for brick-and-mortar retailers, more so, as they had expected sales to pick up with a revival in consumer sentiment after India got a stable government at the Centre. But Flipkart's Big Billion Day and Amazon's Diwali Dhamaka week just before the festival played spoilsport, and several retailers such as Shoppers Stop and Big Bazaar registered a drop in same-store sales during Diwali. "A month before Diwali everyone was talking that it (October-December quarter of 2014) would be the best quarter in 10 years. Suddenly, 20 days before the festival, all hell broke loose," says Subrata Datta, CEO, Fabindia. The company will have its omni-channel strategy soon, he adds.
But, can the omni-channel retailing model get the brick-and-mortar brands back to their heyday? The strategy to linking physical and web-based stores can not only help retailers win customer confidence through the touch-and-feel experience at their physical stores but also benefit from their online sales channels on the back of technology-driven value-added services and timely deliveries. A seamless marriage of online and offline channels will offer the customer a host of options. One can either pick up a merchandise of one's choice from the store or buy it online. Alternatively, a customer could walk into a physical store and book the order using a digital kiosk if the product is out of stock and get it delivered at home.
Rising to the Occasion
The fact that retailers across the board are suddenly looking at an omni-channel strategy is evidence enough that the online retail onslaught has made them nervous. Mukesh Sawlani, CEO of AND Designs, admits that physical retailers did not expect e-tailers to make an impact so early. "Nobody realised that the (e-commerce) market would grow so fast on the back of discounting. We also did not realise that so much money would pour in." Kabir Lumba, Managing Director of Lifestyle International, who recently launched a separate division to look after the company's e-commerce business, agrees: "We can't afford to be oblivious about e-commerce."
There are some exceptions, though. Kishore Biyani, Chairman of Future Group, says: "Lower footfalls and lower revenues (in our retail stores) last year was certainly not due to the onslaught of online retailers, but due to the festival season coming earlier than usual." Biyani claims that same-store sales during the festival season grew 14 per cent from a year earlier in the second half of 2014 - the highest ever in the company's history.
Analysts, however, feel the threat is imminent and offline players must face reality. "Our research shows that more than 50 per cent customers go online at some stage of the search and discovery process. So, by not being online, you lose 50 per cent of the chance of being considered by a set of customers," says Debashish Mukherjee, Partner (Consumer and FMCG Practice), A.T. Kearney. The consultancy projects the online retail market in India to expand to $55 billion by 2020 from $2 billion currently. Mukherjee expects the omni-channel business of brick-and-mortar retailers will contribute significantly to this growth.
Shantanu Rastogi, Principal at private equity firm General Atlantic, says e-commerce must be a part of a retailer's plan. "If a consumer is a loyal customer of your brand, but for some reason she is not able to travel to your store, she would want to buy it online. If you are not available online, she will end up investing on another brand and you may lose her forever."
Online Play
Physical retailers are experimenting with various online formats. While the Future Group and Godrej Natures Basket are pushing sales through their own omni-channel presence as well as tie-ups with online marketplaces, consumer durables retailer Croma has joined hands with Snapdeal to expand its online reach. Sports lifestyle retailers such as Nike and Puma, on the other hand, have opted for a shop-in-shop format with online portals such as Jabong.
Says Kaku Nakhate, Country Head, Bank of America: "It is better for a brick-and-mortar brand to partner with an e-commerce partner and use the platform, because the person running e-commerce is more tech-savvy. There is no need for brick-and-mortar brands to take on the cost (of investing in technology) and burn themselves."
Jagat Dave, MD, Ambit Corporate Finance, prefers the dual strategy. He says it makes sense for fashion retailers, such as Fabindia, Madura Garments and Arvind, to have their own portals as well as tie-ups with online marketplaces as it would help them to manage their inventory better. "If a retailer is straddled with high inventories at select physical locations, he can leverage the reach offered by online through appropriate incentives," he says.
At What Price
Pricing has become a sore point for almost all offline retailers. For example, when Myntra sells a Biba garment or a Hidesign bag at a 40 per cent discount, it has a negative impact on sales in the physical stores of the brands. "The biggest disadvantage for a physical retailer wanting to have an e-commerce presence is the inability to price arbitrage," says Nandini Chopra, MD of consultancy company Alvarez and Marsel. N. Shatrujeet, COO, Madura Garments, echoes similar views: "There is no way a physical retailer can compete with an Amazon or a Flipkart in terms of pricing."
But how do e-tailers manage to sell products at, say, a 40-50 per cent discount? "It's the online retailers' strategy to acquire customers," explains Chopra. It is not that they buy products from brands at a lower price, but incur losses to build a customer base. "A friend bought three designer lehengas from Jabong at almost half the MRP and was even offered the luxury of ordering three lehengas to pick the one she liked and return the others," she adds. Such deep discounts and innovative services have helped e-tailers race ahead in wooing customers, but the equity of brands that they sell take a beating.
However, most brick-and-mortar brands are now taking hard calls. "While it is tempting to take on as much business as you can, in the interest of the brand we have become brave enough to say that we will not partner with portals if they offer deep discounts," says Sawlani of AND Designs. Fabindia and Woodland, too, have decided to put their feet down. "Till last Diwali they went berserk and that started affecting our store sales. We called these guys and said we're stopping your shipment. For a month we kept very low. Now, they have started coming back and saying they will mend their ways," says Harkirat Singh, MD, Woodland.
Apart from that, offline stores are also looking at online-only strategies. For example, while Fabindia and AND Design allow online marketplaces to offer discounts on old inventory, Woodland has created exclusive lines of shoes for online consumption. "By doing so, we are ensuring our online products don't clash with our physical store products," explains Singh.
Expanding Visibility
AND Designs plans to spruce up its omni-channel play by installing digital kiosks at all its stores across the 80 cities it operates in and link them to its online platform. "E-commerce will help us to reach out to 500 cities," says Sawlani. Shoppers Stop, too, is working on its omni-channel strategy to tap niche markets by selling exclusive brands such as L'occitane which will not be available anywhere but Shoppers Stop's physical and online stores, while Future Group is launching a host of smaller brands that are not available at its stores. "If an E-Zone store sells 30 brands of tablets at its physical stores, the unlimited online aisle would have 60 brands of tablets on sale, some of them being our own brands," explains a Future Group spokesperson. Biyani, in fact, wants to increase contribution of his private brands to 70-80 per cent from the existing 20 per cent on the company's omni-channel platform.
Innovation will also be key to grab eyeballs. For example, Madura Garments' omni-channel platform will not only sell garments but also play an advisory role. "Since it would be stupid on our part to fight a price war, we decided that our online platform should play an advisory role to fulfil a customer's stated or unstated needs. This will help us to keep our consumers with us," says R. Satyajit, COO, International Brands and New Business, Aditya Birla Retail. The company has recently launched an initiative, Van Heusen My Fit, which gives suggestions on how to get a perfect fit.
The Challenge
For most brick-and-mortar brands, e-commerce contributes 8-10 per cent of revenues globally. For instance, US retailer Macy's, which has the most successful e-commerce platform, reported $3.1 billion of omni-channel sales last year, while its total sales stood at $27 billion. Considering India's vast geography, prohibitively huge real estate prices and unfriendly regulations, one may expect e-commerce contribution for physical retailers to be much higher, but that would certainly not be the case because most retail brands have not penetrated the small towns and cities.
Unlike matured economies, where offline stores have helped create awareness about the benefits of online shopping among their consumers, in India it has clearly been an after-thought. "I would blindly shop at Macy's online. The price is not the sticky point, it is the brand which makes me access Macy's.com. But I don't trust Shoppersstop.com. The company has built 10 years of brand equity around its stores, but has never helped me build a habit to visit Shoppersstop.com," says Chopra.
Shrikhande of Shoppers Stop admits that the omni-channel play will be one of the toughest journeys for all brick-and-mortar retailers in India. "Connecting the 72 stores and four distribution centres to the 400 brands across eight sizes and stock-keeping units is never easy. It needs technology and a lot of data crunching. The other big challenge would be to ensure on-time delivery."
Though most brands will depend on third-party supply chain and logistics companies to deliver, there are teething problems even in that segment. "During the sale period, every retail brand is on sale and the logistics companies don't yet have the capabilities to deliver so many orders on time," says Sawlani of AND Design.
To add to the woes of brick-and-mortar retailers, they do not have the kind of financial backing that their online peers have. "The fact that the likes of Snapdeal and Flipkart are able to offer such crazy discounts and set up the logistics chain is because they have the luxury of burning private equity money," says Chopra.
Perishable Merchandise
Though an omni-channel presence is getting increasingly important for retailers across the board, the going will be very tough for food and grocery brands. "The big challenge would be handling supply chain and logistics as the category consists of a large amount of perishables. Neither the retailers nor the logistics providers are equipped for it," says Peshwa Acharya, former marketing head of Reliance Retail. Agrees Dave of Ambit: "Imagine delivering eggs or seafood to a home. That introduces a completely different element. You can't imagine the complexity in terms of inventory management, sourcing, and supply chain."
Says Khattar of Godrej: "We are not going to sell cold cuts, cheese and wine on Snapdeal. However, we do sell them on our own platform as that caters to a much smaller geography and we are able to handle the supply chain and logistics." Similarly, Shaswat Goenka, Sector Business Head, RPG Retail (Spencer's), says that considering the challenges of online grocery and food retail, his priority will be to first focus on the profitability of his brick-and-mortar stores before venturing into online food and grocery retail. "The logistics issues in online retailing kill the business," he says, adding that work is on to get the company future-ready with the launch of Spencer's Retail mobile app that would tell customers how far the nearest Spencer's outlet is and the best deals available at the stores. "The idea is to enhance customer service and win their loyalty before introducing newer platforms," he says.
For example, Tesco Online in the UK gets a substantial chunk of revenue from its e-commerce platform. Apart from the regular branded products that Tesco sells, it also sells a large offering of gourmet food and wines under its own brand, which has a huge following. "A large part of Tesco's online sales come from these differentiated offerings. The Indian food and grocery retailers have to differentiate in order to be successful," he explains.
For Acharya, food and grocery retail is the holy grail of online retail. "Once it is cracked, it will be a cakewalk for the other verticals," he adds. Life will continue to be challenging for brick-and-mortar brands, but they must get their act together or risk losing the share of their wallet as well as footfalls to their online peers. "India has to go through the cycle where the customer has to first evolve. Retailers are up with a generation who want to buy from Jabong or Snapdeal for the discounts they offer. As they mature a set of more sophisticated customers will evolve, who will be willing to shop and spend online as well as at offline stores," says Rastogi of General Atlantic.
Till then, the challenge for brick-and-mortar stores is to help consumers develop both online and offline brand loyalty for their products by providing better shopping experience and improved services.
- WITH INPUTS FROM ARPITA MUKHERJEE
