Retailing- at the Crossroads

Summary

Indian consumers learned digital shopping during the lockdowns of 2020. The entire retail sector is now at a crossroads. Horizontal platforms, super-apps, vertical specialists, niche marketplaces, and local outlets will all compete for the retail pie. The consumer will be the biggest beneficiary. Those players who meet and exceed her expectations will be the winners.

2020: Learning e-commerce

The year 2020 will be remembered for the pandemic and resultant lockdowns. There were periods when physical stores were shut and only e-commerce was permitted. Consumers who had never bought online had to discover digital shopping in a hurry. Likewise, with movements restricted, purchases from neighborhood shops had to be done digitally. Shopkeepers and roadside vendors quickly learned to accept orders on cellphones, get paid digitally, and make contactless delivery at the gate. The result was an accelerated learning cycle in digital purchasing- for urban consumers as well as local vendors and shop keepers. Across the world, online sales have spurted during 2020 and achieved the penetration levels earlier expected by 2025. The online-savvy Indian consumer is now set to exercise her preferences and drive the future trajectory of the retail sector.

The US experience in Retail

In the US, modern retail (MR) became the dominant format by 2000, largely replacing traditional retail (TR).  Amazon pioneered e-commerce around 1999 and disrupted the retail sector causing the demise of many MR chains. However, some chains e.g. Walmart, Best Buy, Home Depot, and Target successfully strengthened their online operations and regained leadership in their respective categories with an omnichannel presence and a mix of products and services.

Online businesses in the US are technology-driven and tend to be highly focussed- e.g. Visa in payments, Amazon in e-commerce, Netflix in entertainment, Facebook in social media, and Google in search. Of late there is a blurring of boundaries. Amazon has acquired a physical footprint through 500 Whole Foods Market stores and has added entertainment (Prime Video), payments (Amazon Pay), and gaming (Twitchy).  Facebook is venturing into shopping services to create social commerce.

Going forward, the horizontal platforms e.g. Amazon, as well as category specialists like Best Buy, and Target will coexist- innovating and competing for consumers with an omnichannel experience.

China – a different e-commerce trajectory

In China, with relatively little physical store space, consumers and retailers leapfrogged into the digital world. The e-retailing market in China is currently worth $2 trillion- more than that of the USA and Europe combined- with the share of mobile e-commerce being 90%. With 900 mn internet users, intense competition has led to e-commerce and other online firms demolishing the boundaries between different types of services that are still common in the West. Online platforms in China blend shopping, digital payments, social media, gaming, messaging, short-form videos, and live streaming celebrities- replicating a US type mall in digital form. The anchor cyber tenant is typically a super-app, like WeChat (owned by Tencent) having 1.2 bn users, which provides access to multiple services through mini-apps. For instance, it directs traffic to JD.com (e-commerce) and Pinduoduo (social e-commerce) in which Tencent holds stakes. About 71% of Chinese consumers use online to offline (O2O) services, e.g. click and collect, online restaurant booking, and offline returns of online purchases.

In this highly consumer-driven, competitive milieu, Alibaba, founded in 1999, has emerged as the world’s largest online retailer  (Revenue $72 bn and Net income $20 bn in 2020). It hosts the world’s largest B2B (Alibaba.com), C2C (Taobao), and B2C (Tmall) marketplaces. Alibaba also offers logistics (Cainiao), cloud computing (Alibaba Cloud), financial services & loans (Ant Financial), payments (Alipay), maps (Amap), entertainment (Alibaba Pictures), and even physical retail (Intime Dept Store and Freshippo) for O2O services.

Offering super-apps with a range of services from shopping to financial services is an attractive strategy for firms in other countries to evaluate.

The Retail Sector in India

In India, MR has grown over the last two decades to reach about 10% of retail sales. E-commerce accounts for only about 3%. Small shops (TR) still dominate the sector and account for around 87% of retail sales. The e-commerce penetration of 3% hides wide variations across categories. Almost half of all smartphones and about 25% of laptops in India are sold online. But grocery, which has over $600bn in annual sales, still has very low online sales and presents a major challenge.

The Table below gives the details (Source: Business Today 27th Dec 2020).

India Retail Sales Estimates

 

The Indian consumer has already experienced digital shopping during 2020. The number of internet users in India is currently around 620mn and likely to increase to 850 mn by 2022. This creates the potential for retailing to leapfrog into digital commerce. How it evolves depends on what consumers prefer and how different firms respond.

Outlook for the future

Till a few years ago, MR,  e-commerce, and TR were operating independently with the former two intent on gaining share from TR. With consumers seamlessly moving across channels, there is now a blurring of boundaries. All retailers are faced with choices and are responding in a variety of ways as outlined below.

• Horizontal platforms: There are several platforms that plan to offer a range of categories and services with super-apps, as seen in China. The most prominent players and their plans are summarised below.
  1. Amazon: The leader in e-commerce offers a wide range of product categories along with entertainment (Prime Video) and education (Academy). It intends to add payments (Amazon Pay) and expand grocery with Amazon Pantry and Amazon Fresh. Apart from the 500 grocery stores acquired from More, it is partnering with 100,000 local stores for fulfillment. It has set the benchmark in e-commerce for parameters like product range, fulfillment, check-out, and returns. Thus from a purely online start, it will have an omnichannel operation with multiple products and services.
  2. Reliance Retail: With about 12,000 physical stores across categories it has launched its super-app MyJio and has Jiomart (e-commerce),  Ajio (online fashion), JioTV & Jio Cinema (media & entertainment), Embibe (education), and JioHealthHub (Healthcare). It has acquired several online retailers like Urban Ladder (furniture), Zivame (lingerie), and Netmeds (pharma). Google and Facebook have invested in Reliance Retail and are likely to provide support with their capabilities. To expand grocery, Reliance plans to onboard local Kirana stores and integrate their inventory, sales, and delivery with Jiomart. Reliance-Jio already has over 410 mn telecom subscribers. These factors can give Reliance a formidable omnichannel presence across numerous product categories and services.
  3. Flipkart (Walmart): It is an e-commerce leader having multiple categories and, along with  Myntra has a strong online presence in fashion & apparel. It has bought stakes in Arvind Brands, Aditya Birla Fashion, and Ninjakart (fresh produce). It also has 28 Cash & Carry Walmart stores. With a focus on improving profits, it is expected to consolidate in fashion & lifestyle and expand other categories like grocery in a calibrated way.
  4. Tata Group: It has announced a super-app for users to shop across consumer-facing businesses of the Group.  It is also in talks for the acquisition of Big Basket for online grocery. It has the potential of becoming a successful cyber mall, with omnichannel capabilities, anchored by strong retail brands from the Group with further product categories and services added over time.

• Vertical Specialists: As seen in the USA, consumers search for firms that excel in a given verticle (e.g. Best Buy, Home Depot, and Target). After 2020, all physical retailers have accelerated their digital initiatives. Those who have the scale and capability, e.g. D Mart, Croma, Zara, and Tanishq, are investing to offer a seamless omnichannel experience to their customers. The others, especially mid-sized retailers, can explore working with one of the horizontal platforms. They will have to compete and achieve competitor benchmarks. Otherwise, they will face declining sales and will exit or get acquired.
• Online Niche Marketplaces: Niche areas like crafts, hobbies, antiques, and handicrafts can benefit greatly from the reach and scale economies of online marketplaces for custom products and services. More such marketplaces e.g. Etsy are likely to come up for such consumer groups.
• Traditional Retailers: TRs face a steady erosion of share in the future. Those in urban areas who have mastered digitally enabled sales have the option of operating on their own, providing door delivery and service at short notice to local consumers. They can also align with horizontal platforms for lower-cost supplies, inventory management, and local delivery. TRs who do not adapt and continue in the cash and physical mode face the prospect of reducing sales and a possible exit.
• Consumer Goods (CG) Companies:  With brand loyalty under strain and platforms promoting their higher-margin private brands, CG firms need to define their online role. While deciding, they need to evaluate the benefits of direct-to-consumer offerings- e.g. customer insights, brand building, innovation, and driving sales. Some like Apple, Nike, PepsiCo, and Adidas already have seamless omnichannel operations for sales and consumer interaction & feedback.
• Logistics: The need for delivery of e-commerce packages and that too in defined time slots is growing rapidly. For fresh produce, the requirements are even more stringent. Logistics companies like FedEx, Blue Dart, Delhivery, and Ecom Express addressing such requirements face a booming market.
• Technology vendors: Digital transformation is a priority for platform firms and most retailers. This creates rising demand for tech firms like TCS, IBM, and Oracle.

While ambitious plans and numerous acquisitions have been announced, timely execution, flawless technology integration, and organizational effectiveness will determine the outcome for each player. Clearly, all retailers will have to offer a seamless interface between online and offline to give a superior user experience. While the share of TR will keep shrinking, online is likely to accelerate. In some categories like electronics and durables, the shares of physical and online may become similar within a few years. In others, like grocery and fresh food, constituting the largest market segment, the penetration of online will be slow and incremental. The battle between different players will be fought on the basis of who provides a better consumer experience. Consumers will look for factors like search, range, availability, prices, check out, fulfillment/delivery, returns, and post-sales services while making their choice.

 

At the Crossroads

The entire retail sector is at a crossroads. Horizontal platforms, super-apps, vertical specialists, niche marketplaces, and local outlets will all vie for consumers. The retail sector will look very different in the next few years – as it evolves with multiple product categories and services, seamless online-offline consumer movements, and numerous competitors.  The consumer will be the biggest beneficiary of this transformation. Those players who meet and exceed her expectations will be the winners.