Re­tail as a Ser­vice: The New Busi­ness Model

Images Retail - - FRONT PAGE - – By Prof. Piyush Ku­mar Sinha, Di­rec­tor, CRI Ad­vi­sory and Re­search

Dom­i­nance of un­or­gan­ised mar­ket and grow­ing con­sumer base projects high growth po­ten­tial of In­dian re­tail in­dus­try. The cur­rent USD 932.96 bil­lion (2017) in­dus­try is es­ti­mated to grow by CAGR 14.3% to be USD 1.6 tril­lion mar­ket by 20211. The con­tribut­ing fac­tors are in­creas­ing pur­chas­ing power, dig­i­tal­i­sa­tion of con­sumers de­mand­ing con­ve­nience and po­lar­is­ing in­dus­try. This de­mands a par­a­digm change in the way re­tail­ers func­tion. The tra­di­tional and mod­ern chan­nels need to work to­gether to pro­vide seam­less shop­ping ex­pe­ri­ence across chan­nels and shift the fo­cus from prod­uct to ser­vice oljer­ings to gain a sus­tain­able com­pet­i­tive ad­van­tage.

In­dian re­tail is char­ac­terised by frag­men­ta­tion. A single re­tailer would never have a ma­jor share of the mar­ket as con­sumers have many op­tions to choose from, with mul­ti­ple re­tail­ers in each cat­e­gory and mul­ti­ple chan­nels to source from. (In­dia rank high­est in terms of per capita avail­abil­ity of stores.) This is at­trib­uted to the dom­i­nance of small for­mat re­tail in In­dia which is 93 per­cent of the to­tal re­tail mar­ket. The rest 7 per­cent is di­vided be­tween large for­mat stores like de­part­men­tal stores, su­per­mar­kets, spe­cialty stores, malls, and on­line. The price-based com­pe­ti­tion has proved that re­tail to be not a sim­ple and

sus­tain­able busi­ness un­less man­aged well. Deep pock­ets do not mean high mar­ket share and sus­tain­abil­ity.

The sec­tor needs to find new busi­ness mod­els and per­for­mance ma­tri­ces dif­fer­ent from GMV (Gross Mer­chan­dise Vol­ume) and scale. The ever-chang­ing cus­tomer ex­pec­ta­tions and re­duc­ing dif­fer­en­ti­a­tion in terms of prod­ucts and range would re­quire re­tail­ers to com­pete on cus­tomer ser­vice, which is be­yond just on-time de­liv­ery.

In­dian Re­tail Land­scape

In 2017, the In­dian re­tail in­dus­try was USD 932.96 bil­lion and es­ti­mated to be USD 1.6 tril­lion by 2021, grow­ing at CAGR 14.3 per­cent2. The pro­jected growth of or­gan­ised re­tail sug­gests the po­ten­tial for mod­ern re­tail in In­dia. The fac­tors that gov­ern In­dian re­tail mar­ket are chang­ing con­sumer shop­ping trends with in­creas­ing pur­chas­ing power, time strapped con­sumers get­ting dig­i­tal and po­lar­iza­tion of the in­dus­try.

Ris­ing Pur­chas­ing Power with Grow­ing Econ­omy

The In­dian con­sumer sec­tor has grown at 5.7 per­cent an­nu­ally be­tween FY 2005 to FY 2015. It is es­ti­mated to be the third largest con­sumer mar­ket by 2025, grow­ing at 12 per­cent an­nu­ally. The ris­ing GDP(6.7 per­cent in 2017 and fore­casted growth of 7.5 per­cent in FY 2019-20)3 has cre­ated the mid­dle-class seg­ment which is about 50 per­cent of the coun­try’s pop­u­la­tion. These mid-in­come con­sumers have higher pur­chas­ing power and af­flu­ence (see the chart). About 75 per­cent of In­dian youth (16 to 21 years old) spend more than INR 6,000 on cos­met­ics, ap­par­els and mo­biles (ASSOCHAM re­port). These are in­formed shop­pers and in­vestors with dis­cern­ing and ex­plo­rative shop­ping be­hav­ior. These con­sumers want it all. They are in­ter­ested in qual­ity and ex­pe­ri­ence at af­ford­able price with min­i­mum has­sle. Re­tail­ers would have to find new av­enues to meet the ex­pand­ing and chang­ing de­mands of these con­sumers.

The Time Strapped In­dian Con­sumers Get­ting Dig­i­tal

In­creas­ing num­ber of work­ing women, grow­ing single house­holds (9.04 mil­lion con­sti­tut­ing 11.6 per­cent of the to­tal house­holds as per 2011 cen­sus re­port) cou­pled with hec­tic work cul­ture (In­di­ans work for around 2,195 hours a year on av­er­age as per the Ar­cad is re­port)

re­sult in con­sumers opt­ing for con­ve­nience over lower price. More than 65 per cent of con­sumers say con­ve­nience is the driv­ing fac­tor of their shop­ping be­hav­ior as per a PWC study.

On­line re­tail­ing pro­vides con­sumers con­ve­nience with ac­ces­si­bil­ity and af­ford­abil­ity. E-com­merce in In­dia has grown at an an­nual rate of 51 per­cent, the high­est in the world, and is ex­pected to be $120 bil­lion in 2020 from $30 bil­lion in 2016 (ASSOCHAM-FOR­RESTER study). The in­creas­ing in­ter­net users(sec­ond largest, 445.96 mil­lion in 2017 and ex­pected to be 829 mil­lion by 2021) and in­creas­ing smart­phone pen­e­tra­tion (tele­com and broad­band ser­vices is USD 38.95 bil­lion in 20174 with sec­ond largest smart­phone mar­ket) in­di­cates grow­ing num­ber of con­sumers on var­i­ous dig­i­tal plat­form. Ac­cord­ing to Euromon­i­tor’s Global Con­sumer Trends 2016 sur­vey, more than 65 per­cent of on­line con­sumers vis­ited or up­dated their so­cial net­work­ing sites daily. The on­line medium is ex­pected to in­flu­ence 30 per­cent of the en­tire re­tail sales which would amount to $70 Bn of re­tail sales in 20195. The de­mon­eti­sa­tion in Novem­ber 2016, fur­ther cre­ated op­por­tu­ni­ties for dig­i­tal tran­si­tions and growth in In­dia. Ac­cord­ing to gov­ern­ment sources, be­tween Novem­ber 8 and De­cem­ber 7, 2016, e-wal­lets providers such as Ox­i­gen, Paytm and Mo­bikwik ob­served a spring of 271 per­cent in num­ber of daily trans­ac­tions and 503 per­cent in terms of value of trans­ac­tions. Most of the lead­ing cat­e­gories are grow­ing on­line.

These shifts are in­dica­tive of growth po­ten­tial of In­dian re­tail, mak­ing all prod­uct types ac­ces­si­ble and af­ford­able at var­i­ous dig­i­tal plat­forms. How­ever, on­line for­mat with heavy dis­counts and only 1 per cent con­ver­sion rate may find it dif­fi­cult to remain vi­able. About 8 per­cent of ini­ti­ated on­line trans­ac­tions are aban­doned dur­ing the process due to poor cus­tomer ser­vice (Data­mon­i­tor re­port, 2011)6. Hence, to reach these con­sumers, re­tail­ers would need to think be­yond ac­ces­si­bil­ity and af­ford­abil­ity of prod­uct and to cater to the ris­ing ex­pec­ta­tions of the con­sumers need to har­vest on ser­vices qual­ity or in­tro­duce in­no­va­tive ser­vices.

Po­lar­i­sa­tion of In­dian Re­tail In­dus­try

The in­creas­ing con­sump­tion and high com­pe­ti­tion pushes the in­dus­try to­wards con­sol­i­da­tion. The con­sumers buy mostly from two or three stores/sites in a cat­e­gory.

Big re­tail­ers ac­quire the mid-size re­tail­ers to scale their busi­ness and smaller ones find their niche to sus­tain. Among the top re­tail houses, Fu­ture Group and Bharti Re­tail have com­bined their re­tail in 2016 to be­come In­dia’s big­gest re­tail con­glom­er­ate with 7 key re­tail brands, 738 stores in 221 cities across In­dia7. Even the on­line e-com­merce is con­sol­i­dat­ing through merg­ers and ac­qui­si­tions. Hence, few big re­tail houses con­cen­trate in each cat­e­gory. The on­line con­sumer base is also skewed to­wards both in terms of de­mo­graphic and ge­o­graphic. Or­gan­ised re­tail in In­dia is 7-10 per­cent and on­line is 1.2 per­cent. About 52 per­cent of reg­u­lar shop­pers are in 26-35 age groups and al­most 65 per­cent of on­line shop­pers are male8. Only 24 per­cent of the on­line con­sumers use the medium for buy­ing9. In terms of ge­og­ra­phy large part of the con­sumers come from top metro cities. Mum­bai leads in on­line shop­ping fol­lowed by Delhi and Kolkata.

Fewer large re­tail houses and skewed con­sumer base trends push to­wards po­lar­iza­tion of the in­dus­try, cre­at­ing two types of re­tail for­mats. One acts as “one stop shop for all”, where con­sumers can get every­thing un­der one roof like Big­bazar and Ama­zon. Other for­mat is spe­cialised ser­vice providers con­cen­trat­ing on fo­cused of­fer­ings like Phar­measy. in and the­souled­ or Polyvore, which was a de­sign­ing web­site cen­tered on pro­vid­ing a plat­form for creative minds to de­sign, cre­ate and com­mu­ni­cate. Eataly, which is an Ital­ian food mall where every­thing re­lated to food is pro­vided, from food stalls, bev­er­age coun­ters, restau­rants, bak­ery, gro­cery items, to a cook­ing school, giv­ing con­sumers a com­plete food ex­pe­ri­ence. Croma, Vi­jay Sales and Food­hall are other such ex­am­ples. Both the for­mats pro­vide a com­plete ex­pe­ri­ence with cer­tain added ser­vices to cater to the chang­ing ex­pec­ta­tions of the con­sumers like pre­mium mem­ber­ship fa­cil­i­ties by Ama­zon and per­son­alised styling as­sis­tance by the­souled­

Trans­form­ing Re­tail­ing

Grow­ing pur­chas­ing power, in­creas­ing dig­i­tal­ized con­sumers and po­lar­iza­tion of the in­dus­try re­quire a par­a­digm change in the way In­dian re­tail mar­ket­place func­tions. De­liv­er­ing best prod­uct on-time is the ne­ces­sity but is not suf­fi­cient to gain con­sumer sat­is­fac­tion. On­line and large for­mat price stores are just a dis­penser sys­tem where con­sumers can pick and move. Its fast and con­ve­nient but not enough to reach the con­sumers’ love bracket. The con­sumer pref­er­ences are chang­ing to­wards hav­ing an ex­pe­ri­ence over own­ing a prod­uct, in­stant grat­i­fi­ca­tion over long-term ben­e­fit and va­ri­ety than loy­alty. Hence, re­tail­ers THE IN­CREAS­ING CON­SUMP­TION AND HIGH COM­PE­TI­TION PUSHES THE IN­DUS­TRY TO­WARDS CON­SOL­I­DA­TION. THE CON­SUMERS BUY MOSTLY FROM TWO OR THREE STORES/SITES IN A CAT­E­GORY. BIG RE­TAIL­ERS AC­QUIRE THE MID-SIZE RE­TAIL­ERS TO SCALE THEIR BUSI­NESS AND SMALLER ONES FIND THEIR NICHE TO SUS­TAIN.

that are trans­form­ing from just a prod­uct de­liv­ery sys­tem to cus­tomer ser­vice provider, help­ing con­sumers make bet­ter choice, are here to sus­tain.

Om­nichan­nel Pres­ence

The con­cept of max­i­miz­ing the Bas­ket size and value has changed with new for­mats. Price dis­counts, re­duced or no ship­ping cost, low or no switch­ing cost makes it highly price com­pet­i­tive. Con­sumers have ac­cess to range of prod­ucts through var­i­ous plat­forms height­ens the con­sumers’ ex­pec­ta­tions from re­tail­ers. More than 73 per­cent cus­tomers, within the age group of 25-34, use more than one chan­nel for mak­ing pur­chases.10 Against the pre­dic­tions, not all the on­line busi­nesses proved prof­itable stat­ing that brick-n-mor­tar for­mats will stay rel­e­vant. Con­sumers no longer think of off­line and on­line as sep­a­rate medium. They are look­ing for a seam­less ex­pe­ri­ence across all chan­nels and re­tail­ers need to build sys­tems to serve their cus­tomers any­time, any­where.

Om­nichan­nel pres­ence by a re­tailer is the key to con­sis­tent and un­par­al­leled ser­vice across all touch points. How­ever, the chal­lenges are re­verse lo­gis­tics man­age­ment and third-party lo­gis­tics in­ter­ac­tions. In­te­gra­tion of on­line search with in-store buy­ing can work only if the in­ven­tory is in cor­re­la­tion on both the plat­forms. In case cus­tomers do not find a prod­uct of their choice at the out­let they can or­der it on­line through the tablet at the out­let and have it de­liv­ered to their home. Nord­strom stores are 3,000-square­foot store opened with only ser­vice model. They dis­play mer­chan­dise only to try on, but not for sale. Shop­pers are pro­vided ser­vices like stylist and on­site tai­lor­ing. How­ever, the shop­pers can only or­der mer­chan­dise on­line which then can be de­liv­ered to the store on the same day. Con­sumers look for not just shop­ping but a per­son­al­ized shop­ping ex­pe­ri­ence. The re­tail­ers to reach these con­sumers need fo­cused and cus­tom­ized strat­egy. Dig­i­tal­iza­tion through in­ter­net and tech­nol­ogy can be used as an aid to the spe­cial­iza­tion. For ex­am­ple, Bloom­ing­dale’s Man­hat­tan flag­ship store uses in­ter­ac­tive win­dows as their show­case to dis­play their ap­parel to the passersby. The con­sumers can se­lect the dif­fer­ent cloth­ing and col­ors through the dis­play. They can even or­der by tex­ting “POLO” for a link to a check­out page.

This makes the passerby con­vert to con­sumers with­out them even en­ter­ing the store. Vir­tual dress­ing rooms are an­other ex­am­ple where re­tail­ers are try­ing to cre­ate cus­tom­ized shop­ping ex­pe­ri­ence.11

The def­i­ni­tion of suc­cess has changed. Busi­nesses have moved from cre­at­ing value to cre­at­ing valu­a­tion. Busi­nesses both on­line and off­line that shift from pric­ing model to non-price model would sus­tain. The re­tail­ers would have to cre­ate non-price propo­si­tions by de­liv­er­ing unique prod­uct or ex­pe­ri­ence to the con­sumers through a fo­cused strat­egy and best in class ser­vices.

Dig­i­tal­i­sa­tion of Dis­tri­bu­tion

Ev­ery cat­e­gory has its own pri­mary for­mat: ki­rana stores dom­i­nates gro­cery sec­tor, on­line is the pre­ferred plat­form for elec­tron­ics and mo­bile. Fur­ther the het­ero­gene­ity of the In­dian con­sumer makes it dif­fi­cult to fol­low same strat­egy across the na­tion. Re­tailer would need to un­der­stand the strengths and weak­nesses of a for­mat with re­spect to the dif­fer­ent tar­get mar­ket be­fore pen­e­trat­ing.

Re­tail­ers need to shift fo­cus to lo­calised ser­vice or con­sumer seg­ment. Think­ing local through local busi­ness part­ners could be an ap­proach to sus­tain and


suc­ceed in the po­larised mar­ket. The big re­tail­ers would have to work hand in hand with the tra­di­tional re­tail­ers. There are six mil­lion tra­di­tional stores con­sti­tut­ing of 42 per­cent of the phys­i­cal stores12 pro­vid­ing a mix of mer­chan­dise, credit, home de­liv­ery and per­son­alised ser­vices but has lim­ited reach. On the other hand, on­line stores pro­vide ac­cess, va­ri­ety, price and con­ve­nience but they have high op­er­at­ing cost and ac­qui­si­tion costs with

1.2 av­er­age bas­ket size. It is pro­posed that e-com­merce com­pa­nies to scale up their busi­ness can cap­i­talise on the sit­u­a­tion by part­ner­ing with tra­di­tional local stores to pro­vide com­mon val­ues like lo­cal­iza­tion, per­son­al­i­sa­tion and con­ve­nience13. The reach of a com­bined tra­di­tional-on­line model could also be ex­tended to ru­ral ge­ogra­phies to serve the 850 mil­lion con­sumers, about 70 per­cent of In­dian pop­u­la­tion and con­tribut­ing around half of the coun­try’s Gross Do­mes­tic Prod­uct (GDP)14.

This would en­hance the role of the whole­salers. They would need to be­come more value added ser­vice providers, en­sur­ing that re­tail­ers fo­cus on un­der­stand­ing and cus­tomised ser­vices and prod­ucts for their set of cus­tomer. A free ex­change of data from re­tail­ers to whole­salers and vice versa would be key. In­stead of just be­ing a bulk break­ing agency, they would have to be­come ag­glom­er­ates as well as dis­trib­u­tors of de­mand to smaller stores. Dig­i­tal­iz­ing the dis­tri­bu­tion chan­nel through small re­tail­ers and mod­ern­iz­ing the re­tail for­mats make the sys­tem more com­pet­i­tive and ef­fi­cient.

Way Ahead

The road ahead is trans­form­ing “Re­tail as a ser­vice”, fo­cus­ing on mar­ket of “one”. Each cus­tomer would need to be ser­viced dif­fer­ently. The per­for­mance ma­tric would move from chan­nel/for­mat profitabil­ity to cus­tomer profitabil­ity. Sim­i­larly, in­stead of store profitabil­ity, the chain would have to mea­sure profitabil­ity of the trad­ing ar­eas as the same re­tailer would use mul­ti­ple for­mats to ser­vice the same cus­tomer lead­ing to the re­duc­tion of the share of each for­mat. This would re­quire a dif­fer­ent set of skills even for brands that par­tic­i­pate on these plat­forms. Shop­per mar­ket­ing strate­gies would come to fore­front than hard­core con­sumer mar­ket­ing. Flip­kart part­nered with Mi­crosoft Azure as its ex­clu­sive pub­lic cloud com­put­ing plat­form to help its cus­tomers in shop­ping on­line. Ama­zon is the big­gest ex­am­ple, ac­count­ing for 26 per­cent of all on­line re­tail sales, with the help of its huge data bank is now con­vert­ing it­self into a per­son­alised ser­vices provider.

Re­tail­ers would need to change the game from prod­uct cen­tric to a ser­vice cen­tric ap­proach. Prod­ucts are no more the dif­fer­en­tia­tors. Con­sumers can lo­cate prod­ucts from any­where and at var­ied price points with sim­i­lar qual­ity. Re­tail­ers need to adopt Omni-pres­ence not only in the form of re­tail­ing but ser­vic­ing as well, pro­vid­ing the cus­tomers a com­plete shop­ping ex­pe­ri­ence. With the help of data in­te­gra­tion and tech­no­log­i­cal sup­port con­sumers can be served across chan­nels, where each con­sumer can have a per­son­alised shop­ping ex­pe­ri­ence. For eg. - a cus­tomer sees a sale at the store, sees few items they like on the e-com­merce page, and re­ceives a coupon from the store via email. When they go to the store, they can use the coupon, and know ex­actly what item they’re get­ting. That’s the kind of shop­ping ex­pe­ri­ence con­sumers are look­ing for15. Re­tail as a ser­vice is not easy to play as it pro­vides sus­tain­able com­pet­i­tive ad­van­tage to re­tail­ers ir­re­spec­tive of the size of the com­pany.

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