How can traditional retailers fight Back?

Let us understand, what are the strengths brick-and-mortar retailers have

1)    Established Brand Name

2)    Customers

3)    Strong Relationship with suppliers

4)    Offline Retail touch points

Using the above strengths retailer can really innovate by making their stores in to extension of their online offering.  Retailers who have footprint across multiple locations can offer Web return in store, buy online and pick up at the stores, Store inventory mapped in the backend and Orders dispatched from the store where free shipping can be offered, payment booths and even drive-through customer service centers for online sales to their brick-and-mortar buildings.

The new connected customer wants convenience of Online as well as benefit of offline (instant delivery).

Let us consider Typical Shopper Mr. Sharma, an information technology specialist in Bangalore. He shops for items like clothes, electronics and even groceries online. But he also likes to receive his purchases as soon as possible. He placed his order on the eCommerce store of a food grocery retailer in the morning and picked up the order from a nearby branch during his 45-minute lunch break that day. And there were no expensive shipping fees.

In my opinion, this type of strategy will create disruption and will set be an offensive strategy against pure-play online retailers.

Unfortunately, stores have been portrayed as old school and an expensive-to-manage liability with several disadvantages. But the advantages of having a physical footprint are many.

One advantage is the ability to reach customers who pay with cash. As Cash on Delivery is perfected by online players and which is opted by many online customers.

Retailers can offer shoppers to order merchandise online and pay for it with cash at a store when they pick the item.

Another advantage Offline retailers hold over their online-only counterparts is same-day delivery and returns. If offline retailer offers store pickup for items bought on the Web, they can add a drive-through service that will allow customers to return or exchange purchases without leaving their cars.

Entire exchange process can be made fast and easy, when customer wishes to exchange certain products he fills the exchange form, selects new merchandise. Customers can meet an operations executive outside say Shoppers Stop store, He will provide a mobile phone receipt or printout, and the merchandise is exchanged.

The Store can push a drive-through service which is next of Buy Online and Pick up offline. Initially, we used to view the pick-up-in-store feature as a way to draw consumers into stores and encourage customers to buy more. Now, Stores would rather close the deal on an online order as soon as possible so shoppers do not go elsewhere or loose sales altogether.

Traditionally in mature markets the online orders for in-store pickup also tended to be much larger than typical in-store purchases, and that customers who picked up orders in the store visited about 50 percent more often than customers who shopped only in the stores.

Many retailers in the mature markets, let people place orders online and pick up items within a day at a selected location, forgoing shipping charges. The retailers say this option is especially popular with bulky items that do not qualify for free shipping, and for people in a rush.

Retailers can go even further by integrating the physical and online merchandise selections. They can combine offline and online inventory combined, which will increase the stock turn ratio. Customers can also be given an option to choose inventory from particular store for immediate purchase. If the product of a desired color and size is not available in that particular store or online inventory but available in the store which is in other city then order still can be fulfilled and customer is not lost.

If traditional retailers play to their strengths, I am sure we will definitely see Pure Play online players opening offline stores.

“E-tailing is to retail what the steam engine was to horse manure in Victorian England” he said, using an example to demonstrate that Evolution can be both incremental and disruptive.

“E-tailing is to retail, what the steam engine was to horse-manure in Victorian England – revolutionary, not evolutionary”
Sanjiv Mehta, Chairman, HUL

In the 1870’s England faced a problem of too much horse manure – because the main means of transportation was the horse driven carriage. While urban planners were struggling with how to manage / dispose manure, James Stevenson invented the steam engine.  Within a short span of 20 years, the problem of horse manure disappeared.
Pace and Evolution
Indian Retail is evolving at such a rapid pace that any discourse on its evolution is tinged with an after taste of being dated before its completion “HUL has been in India for about 80 years now, and we can safely say that the pace of evolution in recent times means that we have seen more change in the past 10 years than the previous 70 put together!” – He said.
How and where Indian’s shop
Shopping is part of life in India –in many cases, it is entertainment. Indians undertake a large no. of small trips for food and FMCG – about one shopping trip per day (27 in the month). The average cash memo size is Rs 137.

Targeting “main” shopping trips
Spends are concentrated around main shopping – 2/3rd of spends takes place 1/3rd of the total trips.  For Retailers and FMCG companies alike – this is the target. Most of the “top up” trips are to smaller kiraanas, the main trip could be to large kiraana or to Modern Trade (MT).
Understanding the shopping purpose is the key to get the shopper proposition right for a retailer. The next door shopkeeper understands that and hence continues to do well.
He listed 8 change agents and 4 Trends to watch.
Change Agent 1: GDP
The story of India and the story of Indian retail are inextricably linked. Contributing 12% of GDP and employing 8% of population – Retail’s fortunes are tied to the country’s growth.

Living Standard Measures (LSM) show the existence of a ballooning “upper middle class” – with a propensity for consuming premium brands.
Sanjiv Mehta, Chairman, HUL

Change Agent 2: LSM
LSM refers to Living Standard Measure – a robust measure as compared to the traditional SEC (Socio-Economic Class).
With economic growth, the LSM composition of Indian households shifted from the usual pyramid to a diamond. A large number of consumers moved into the LSM 5+ Category, creating brand and category opportunities.
While LSM 5+ has moved from 25% of the urban population to 57% in 2004-9, LSM 8+ has moved 4.5% to 11.5% of the population.
In absolute terms the LSM 8+ HH have tripled in five years with CAGR of 25% against a CAGR of 21% for LSM 5-7 and overall 3.4% for the total urban households.
This means that in by 2013 LSM 8+ would have become 25% of the urban population, implying a rapidly ballooning upper middle class amenable to consume more.
Change Agent 3: Non Food & Grocery Spends
As people get affluent the spending shifts from Food & Grocery, which constituted 70% share of shopper wallet more towards the space of health, beauty, consumer electronics and entertainment .
This also explains the rapid growth in channels like Chemist and “Fancy Stores”, which were earlier specialist channels dealing in limited FMCG products. Now they stock 35% more FMCG category and SKUs than they were doing about 5 years back

Change Agent 4: Urbanization
Some facts:
1.    India has 42 cities with population of more than a million – expected to reach 68 cities by 2030.
2.    6 mega cities with populations of 10 million or more, 13 cities with more than 4 million residents.
Urbanization will be accompanied by a 3 to 7 fold increase in total GDP and a 4 to 8 fold increase in urban GDP in every state by 2030.
McKinsey global institute (MGI) projects that the population of India’s cities will increase from 340 million in 2008 to 590 million by 2030— we will witness over the next 20 years an urban transformation the scale and speed of which has not happened anywhere in the world except in China.
Also 20 cr rural Indians who live in the proximity of the India’s 70 largest cities would benefit from spread of urbanization and have an estimated 10 to 20% higher monthly incomes than the rural average.
The windfall capital gains due to land price hike would add to the wealth here. Access to urban centers and high media penetration would lead to consumption behaviors that are “urban” in nature.
Change agent 5: Infrastructure (or the lack thereof!)
Urbanization will be accompanied by increasing stress on infrastructure, there by reducing mobility within the urban agglomerates and retaining relevance for channels of accessibility.
Cost of doing business in base metros would go up due to infrastructure bottlenecks and the tier 2 and 3 towns presents a key opportunity in terms of higher growths.

The stress on urban roads has reflected in the decrease in the number of shopping trips. The opportunity is not just e-tail, it’s also about capturing greater share of wallet in each trip.

We have noticed that between 2008 and 2012 no. of shopping trips in urban India are consolidating due to high inflation and stress on time in larger metros where daily commute time has gone up by 30%.

Change Agent 6: Media
Due to explosion in digital media channels the marketers now have the opportunity to customize the message for every individual consumer.
However, it also poses a challenge as it is leading to rapid fragmentation of media channels. In this context both in store as well as E commerce become important as they integrate purchase channel with communication channel.
Change Agent 7: Modern Trade
In the last 20 years, Modern Trade is responsible for converting shopping from a transaction to an experience. We see the scenario post 2010 as being one of consolidation with 2 or 3 large players and smaller regional focused players.
FDI
More than the timing of FDI, it’s about the impact on supply chains across the country.
E-tailing
E-Tailing will do to the industry in the next 5 years what Modern Trade has done to the traditional trade in the last 15. Companies and Channels alike will have to evolve from a selling approach or activation at a sales channel to also doing sales at a predominantly consumer interaction and activation channels
Brand Engagement
The consumer’s ability to filter out unwanted brand intrusions is at an all time high with the advent of DVRs and Digital, and will only increase.

There is enough market play for all channels – Traditional kiraanas, Large kiraanas, Modern trade and E-tail to grow. But their growth challenges are different.
The kiraanas need to become experiential, e-tail needs to fix supply chain and modern trade needs to find “local” relevance.

Brands will have to work hard to engage with consumers where they want, how they want and in store will become one of the most critical channels for active brand interaction and engagement.
Hence we see category management and joint marketing plans with retailers as an essential means to fire up consumption leading to synergistic same store growths.

The consumer’s ability to filter out non-relevant brand messages has increased. Brand consciousness has also gone up.  These trends make brand management challenging.
Sanjiv Mehta, Chairman HUL

Brand consciousness
In the Indian shopper decision hierarchy brands are the main purchase driver. Retailers and marketers need to ensure brand access, otherwise, customers will go elsewhere – or go online.

Growth & Co-existence
There is enough “Play” in the market – all channels can grow for at least another 20 years.

Traditional Retail will have to react – adopt modern trade’s focus on the ‘shopping experience’.

The Small Kiraana will retain relevance through accessibility for “Top Up” Shopping. Its layout will evolve to allow for greater shopper interaction.  Experiments such as “Meal for Today” and “Treat for Myself” are preliminary experiments in this direction.
The Large Kiraana will move closer to match the Modern Retail experience by adding Services like Home Delivery, Credit, and Loyalty Programs etc as they fight to cater to “Main Shopping” trips.
The Wholesale will consolidate or fragment based on the local market response to Cash & Carry. Where Wholesalers move to add Value Added Services like Credit, Delivery and increase Assortment, apart from retaining rate competitiveness on predominantly unbranded categories, Wholesale will see a consolidation.
Where Wholesalers retain relevance only through reach and local knowledge, Wholesale could see a further fragmentation.
Modern trade retailers will also have to constantly keep on redefining themselves as when the newness of the format fades and price comparing becomes the order of the day what is the USP that differentiates two MT retailers operating in the same suburban catchment?

Where is the Indian consumer today compared to 10 years back?

Previously our addressable market was 30 crore Indians. In the last 10 years, another 15 crore new voters have come in.

This segment is young, democratic in its thinking, and wants to “fit in”.

They will buy organic. They will also buy frozen for convenience.  The frozen french fry at home costs Rs 10 – at McDonalds it costs Rs 30 – they see value in both formats.

Value for the customer of today is CONTEXTUAL. That’s the single biggest change.

Is consumption in India de-growing?

You need to contextualize this.  McDonalds India,  has the highest rate of Same Store Growth  – globally.

We are growing at 20%.  Previously,  growth rates of 30 to 40% were common. That does not mean de-growth.

In the last 5 years, countries such as Philippines, Thailand, China, Indonesia and India have seen similar growth rates in consumption.

In an Asia Pacific context – a 20% growth rate is good. Its very good.

Do you see the frozen french fry as competition?

No. Anything which grows the category is good for the market.

Our reference point is the QSR category.  People in India still eat out less than 8 times a week – versus 28 in Thailand. So we see immense market potential.

Are you surprised by the pace of consumption in India?

No.  The shift of power from West to East has been clear for a while now.

“I’m a DND man” – [DND = markets other than Americas, Western Europe and Japan]

None of the CPG categories are anywhere close to maturity.  Take laundry. We went from cottage soaps to machine produced soaps, to whiteners and now to Comforters.

Different sub-markets in India are making this transition at different speeds.

Even where you have adoption, there is scope for growth from both penetration and from increasing the frequency of consumption.

Does government have a role to play in retail?

In some ways the government is struggling with the “Gandhian” dynamic – that of non-consumption.

The government’s role is  to encourage consumption.

This is only possible when they realize that

MORE Consumption = Good Development.

More consumption = More manufacturing = More Turnover = More Taxes = More Revenues = More Growth = More Consumer confidence = More Consumption.  Governments role is to recognize this cycle.

Can you recall any legislation by the Government which catalyzed Consumption?

The role of the government to enable. Without getting into FDI debates – they need to adopt a “Compassionate Capitalism” framework.

Indians have superior commercial instincts, once they have a framework, they don’t need the government to grow.

Is democracy a stumbling block to consumption?

At 7% GDP growth, the country see’s prosperity.

Between 2003 and 2013 – Indians increased their eating out from 3 times a week to 8 times a week. IN Thailand its 42 times a week.

In  China we are opening 300 restaurants a year. In India – its 30 restaurants a year.

Democracy has nothing to do with it. Its about growth and “tipping points”.

What will drive growth in emerging markets?

As people have more discretionary money to spend – personal care and beauty takes up some of the spend.

Market penetration in this category is low so you will see explosive growth.  Markets like Thailand and Philippines consume 30x what India does in personal care …. Tremendous headroom.

The most relevant channels for this are Modern Trade and E-tailing so these channels will see high growth.

What we look at when we review a market is population, money, growth and most importantly consumer confidence.  In India, the slowdown has not impacted money in the wallet as much as it has confidence.

What categories will drive growth in your business?

Breakfast Foods,  frozen foods, chocolates and yes personal care and beauty.

Other categories which see high growth are “occasion wear” and fast fashion.

For QSR it’s the shift to online for home delivery, Mobile ordering.

Non retail channels – example birthday parties, and social media to recommend experience.

What’s so big about BIG Data?

Gives you the ability to personalize marketing.  It’s granular marketing at its finest.

Your ability to use “convergence” technology and mass customize the brand experience is what creates consumer relevance.

Customers are INDIVIDUALS.  The experience of AAP (Aam Aadmi Party) shows that they want to be treated as individuals.

For us, BIG Data helps enhance our ability to understand shopper mission and answer the question of “who is the shopper in the ½ km catchment” – then target him with range, assortment  and promotion.

Role of the small retailer

The small retailer is the smart retailer.  Modern retail will serve the top 30% of the consumption pyramid,  the 300-500 SKU retailer will serve the rest.

92% of retail is non-modern.  To harness these, the key will lie with manufacturing. There is a need to focus on productivity and innovation in manufacturing to service this retailer – in the face of increasing cost of doing business.

Advice to young retailers?

Use technology to personalize. Build brand relevance.  Go long on Consumption.

Tremendous potential to grow consumption. Surf the coming wave.

Invest. It’s the bottom of the cycle.

Opening Remarks

Incredible diversity of consumer segments in India. A few examples:

1. Urban <20 yrs – don’t tune into TV / Radio / newspapers.  Communicate thru data not voice.

2. The traditional consumer who shops once a month, but ‘tops up’ once a day.

3. The 35-55 salaried – ‘caught’ between two generations.