impact of e commerce on indian retail
TRANSCRIPT
Gurpreet Wasi, Principal Consultant, IMRB Retail I March, 2015
OPINION : Is E-Commerce eating into Indian Retail ?
About IMRB
IMRB is one of the top 20 Market Research companies in the world, and has a legendary reputation as the ‘University of Market Research’ in India. IMRB is part of WPP group as part of Kantar, which is WPP’s research, insight & consultancy network, the 4th largest research conglomerate in the world.
About IMRB RETAIL
IMRB RETAIL is the specialist Retail Research and Advisory unit of IMRB International. IMRB RETAIL provides outstanding research, insights and perspectives for the Retail Industry through its outstanding talent pool of Retail Industry specialists. IMRB RETAIL’s defining trait is the ability to convert retail industry information and data into expert judgements. We leverage our deep understanding of Consumer & Shopping Behaviour to provide unique business insights for retailers.
Internet’s hot pursuit of the Indian Consumer !
• Nearly 30,00,00,000 Indians today have internet access. Out of them 17,30,00,000 on mobile internet (IAMAI and IMRB have estimates)
• Availability of low-cost smartphones and increasing penetration of mobile broadband will help India overtake the US as the world's second largest Internet user-base by 2016 (eMarketer)
• The B2C e-commerce market in India has exhibited rapid growth and has attracted large investments from the PE/VC community. With positive fillips from the demand and supply side, this market is likely to reach $60Bn by 2017 ( Delloite)
• With a large supply chain and logistics network that does not require middlemen in most cases, online shopping sites have been enticing consumers with aggressive discounts, predatory pricing, putting market share ahead of profitability.
Online retail witnessing dramatic growth from nascence to critical mass.
E-commerce Marketplaces– To be or not to be dilemma for Indian Brands !
• India doesn’t allow FDI in online retail, but allows foreign funds in marketplaces.
• Flipkart, Snapdeal, Myntra and Jabong all received between $50 million and $360 million over the past year and with the entry of Amazon, the world’s largest online retailer, which launched its India marketplace last June, competition has significantly intensified
• Most brands are happy to have their products on these marketplaces because they have the kind of reach and supply chain that brands can’t match. Brands across many categories probably get lower margins selling online, but it’s such a big channel that they can’t afford to not have some kind of presence
• India’s e-commerce companies, funded by private equity firms, are still in the investment phase. In such a scenario, these companies are not only cutting their own profit margins excessively, but even impacting those of offline retailers
Online retail could have significant direct and indirect impact on the consumption landscape in India. • Online retail is hitting the business of Offline retailers through deep discounting and deeper
penetration
• Fashion brands have already noticed consumers adopting the practice of “showrooming”— browsing merchandise at a store and then purchasing the goods online because of attractive discounts
• Under pressure from offline retailers and wholesalers, brands like Lenovo, Toshiba have issued warnings that e-com sites are not their authorized resellers, several apparel brands are requesting e-retailers to reduce coupon discounts ranging from 20-40%. Canon has stopped selling its products on some websites. Adidas banned its dealers around the world from selling Adidas products on major e-commerce sites including eBay and Amazon…
• Not just cannibalization of sales, there is fear among brands that their image can get hurt if the prices are too low.
Brands are realizing that prices and demand in the future may be dictated by the online channel
Brick & Mortar – the story so far..
• In 2012 FDI was allowed in Multi Brand Retail, but there has been no great rush by International companies for the Indian Market
• The FDI proposal includes restrictions like minimum local sourcing from SMEs, designated levels of investments at the backend, approvals required from state governments and presence in million plus cities – making it a rather tall order for most foreign retailers
• Also the overall economic and political climate that prevailed till a few months ago, has played a key role in the muted impact of this ‘big – bang’ reforms
• With sky rocketing real estate prices, consumers spoilt by choice and challenging market conditions, Indian Retail has been a rocky road till now…
Will the e-commerce success make the ride more rough… or will it be the much needed shot in the arm for Indian Retail ?
Brands are reinventing their act !
• Many clothing brands including Puma, Lee and others are actively working with online retailers to test demand in smaller cities and towns, and collaborate on discounting strategies, especially on leftover stock.
• On the other hand, some brands are responding to the threat from e-tailers by adopting an “omni-channel” approach: offering the same benefits, value and shopping experience across all mediums.
• Large brick and mortar retailers like Shoppers Stop, the MobileStore, Croma and Spencer’s Retail are talking up their strategy of integrating their stores with their websites and trying to make e-commerce a crucial medium of sales
• Most of these retailers have invested in building their online capabilities, albeit that the business share currently is extremely small, at <5%.
It is the writing on the wall for most retailers to align all their channels and not grow them separately
What's happening in other markets of the world…
US, China, others…
• Developed markets like the US already observe 7.7% retail sales via the online channel and expect it to reach 10% by 2017.
• In China, online retail accounts for 5% of the total retail sales and in absolute terms, it is expected to overtake US online retail very shortly.
• On a broader note, e-tailing is estimated to have added 2% to China’s private consumption in 2011 and expected to add 4-7% by 2020. These are significant metrics when it comes to stimulating demand from such a huge base.
• Global e-retailers have not been able to make much headway in developing markets like China, Brazil, and Russia where domestic players have emerged as market leaders by leveraging their superior understanding of consumer needs.
Of the Top 20 online retailers globally, 14 of are brick and mortar retailers, and each of them has shared their intent to invest in the online channel ! (Planet Retail)
Particularly in the US..
• In the US, e-commerce took off when modern retail was already mature and too big to ignore. While in India, both e-commerce and modern retail are growing alongside.
• In the US, prices are not regulated and the prices in different retail channels may vary hugely. In fact, the US retail environment has created price warriors among bricks-and-mortar stores also. India follows the MRP model, which makes it easier for consumers to see the extent of discount.
• In the US, Amazon and eBay faced similar problems from the traditional supply chain when they were fast expanding in the 2000s and they continue to be criticized for steep discounting practices and, in some cases, sales of unauthorized and even fake products.
• The steep discounts only widened the difference between online and offline prices, as until recently online retailers had been exempted from paying sales tax in the US.
• Amazon’s experience in the US indicates that while discounting by e-commerce firms in India may decrease in future, their prices will always be comparatively lower and bricks-and-mortar retailers will simply have to find ways to cope with it
A few other Global Trends
• It is interesting to note that globally, the share of the online channel in food & grocery (F&G) retail is negligible.
• However there are certain hybrid concepts like the ‘Drive Format’ which is a form of ‘Click & Collect’ gaining ground in markets like France.
• This format was nearly a Euro 4Bn market in France in 2013 having grown at 75% YoY. This concept looks to target young shoppers who are looking for convenience where the customer creates the order online but collects it physically from the store
• Another interesting trend is the successful performance of niche online retailers in the developed markets i.e. everygrandfatherclock.com, allswivelbarstools.com etc.
E-tailing India – what lies ahead
• The market place model has seen significant amount of FDI, either through the PE/VC route or with the entry of global players like Amazon. From the policy perspective, it is the inventory owned model that is now looking for government approval.
• In 2014 it was believed that FDI norms would get relaxed in B2C e-commerce. But that seems doubtful with the change in regime, especially with its negative view with regard to Multi brand retail
• It remains to be seen as to how the current government views the online retail market opportunity which could be a potential market discontinuity in the India consumption story
Online retail in India could be a disruptive model for it helps players avoid two major challenges – high rentals and lack of skilled manpower. If provided with the right regulatory enablers and economic conditions, the online market opportunity could be substantially higher than predicted
Online could well be creating new consumption
• Deloitte recently conducted a survey in the European market which revealed certain interesting facts on the importance of Omni channel:-
– Up to 37% of transactions made online are likely to be additional to in-store purchases
– Up to 25% of recent online purchases were goods which could not have been purchased locally
– Up to 63% of shoppers used multiple channels when making orders above 100 Pounds In China
• In China, surveys have revealed that slightly less than half of every Yuan spent online is new consumption generated from the online channel – this proportion is expected to be even higher in lower tier cities.
The online channel is clearly, driving the overall industry’s size higher and propelling consumption – a trend that would hopefully be replicated in India.
Thank You !
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Gurpreet Wasi Principal Consultant - RETAIL