Great Indian Retail Dream: Euphoria Or Reality?

Retail is in vogue these days. Not a day passes without noticing a feature or article on retail in pink dailies. Everyone is talking retail as if it's the new age California gold rush. But in this hullabaloo, two thing are intriguing me – Nobody is talking about how e-tailing would evolve in India and how it may impact ‘bricks and mortar’ organized retail, Nobody is giving serious air time to so called ‘mom and pop stores’ and how they may influence organized retail's growth plans. And this makes me wonder - is all the retail buzz, billion dollars investment, and projected revenue a mere euphoria born out of flavour of the month syndrome or is it real? E-tailing: What is the future? This is perhaps the least discussed and most under-estimated phenomenon in the current obsession with retail that entire corporate India is displaying. Where is e-tailing headed, how it could evolve, and what impact it can have on development of organized retail is a question worth exploring. When billions of dollars are coming into play, it’s not prudent enough to leave any aspect, however insignificant it might appear, unexplored. One never knows when the underdog would tumble the whole game upside down! A few facts first: 40 millions internet users. 2 millions broadband connections. 140 millions mobile telephone subscribers. 45 millions credit/debit cards. How will these same facts be in 2015, the milestone frequently being discussed in the Great Indian Retail discussion? To be true, no body is sure, at least after seeing the growth trajectory of technology and internet over last 10 years. So let us try to explore a little with some commonsense. But before that, a tidbit: In 2002, the market capitalization of Chinese internet companies was Rs 2000 crores; today it is Rs 100000 crore!! In 2007, e-tailing is expected to hit Rs. 5000 crores in B2C segment. Currently, bulk of these is revenues generated from railway tickets and air tickets bought online. An estimate puts the retail e-tailing at around Rs. 400 crores i.e. around 2% of the $4 billion organized retail. According to IAMAI-IMRB study, Internet users are expected to grow to 54 millions by March 2008 with 80% or 43 million active users (usage of at least once in a month). Moreover, currently only 2 million broadband connections are there in India which is roughly 5% penetration among total internet users. This is expected to grow steeply in coming years. Also, according to IOAI, the current average transaction per user for online shopping is estimated to be around Rs. 1100 and the number of transactions per month is estimated to be 795000 per month. So how will the numbers look in 2015. A conservative guess from my side: 130 millions internet users; 100 million active users. 50 millions broadband connections. 300 millions mobile telephone subscribers. 150 millions credit/debit cards. Next thing worth mentioning is the growing usage of mobile phones and emergence of the mobile device as a convergence tool (phone + entertainment + camera + video camera + internet + PDA + GPS+ gaming). With the introduction of 3G services, access to internet will become fast and affordable alongwith always-on connectivity. As a buyer I have some needs like – Convenience Choice Value for money Speed of delivery Location neutrality Time neutrality Convergence The question that arises is how the combined effect of rapid growth in internet users, broadband penetration, emergence of mobile phone as a convergence device, and the technological advancement will impact the e-shopping scene? My answer is – it will revolutionize the e-shopping in India. The pieces of the puzzle will, in all likelihood, fall into place in the following manner: Rapid increase in internet penetration: With the penetration of broadband services expected to increase manifolds, faster speed and availability of more and more services on internet are going to drive the internet penetration at an amazing rate. In addition to this, availability of internet through mobile phones is going to increase the numbers of internet users significantly. Increase in availability of content in regional languages is another aspect that will drive the penetration level. To expect a 130-150 million internet users with around 100 million active users by 2015 would be a conservative estimate. Easy payment: One of the major roadblocks to growth of e-shopping is the payment mechanism. First, the credit card penetration is low. Second, apprehensions about security are high. Both of these can be adequately solved in coming years with emergence of mobile phone as a credit card. ICICI Bank has already testing a similar concept. The day may not be far when to pay through a mobile phone, you will just have to punch a few numbers and send a SMS. Better still, soon you may find mobile phones capable of scanning the bar code of your bill and transmitting the data to your bank for clearing payment. Always-on mobile connectivity: Majority of internet connections as of now are not wireless resulting in making them immobile. With increased use of wireless connectivity in coming years through presence of wi-fi in offices, airports, cafés, even entire city turning wi-fi, and access to anywhere-anytime internet through mobile phones, internet is bound to become quite mobile. So for accessing internet you may not have to visit your office or home. You might need just your mobile phone or just your laptop connected to the wi-fi surrounding you. This, in all probability, will make time and location irrelevant. World class back end operations: Current macro level supply chain in India is full of process inefficiencies resulting in massive economic waste. Organized retail is primarily driven by highly efficient backend operations and logistics. Heavy investments by players in organized retail in streamlining backend operations and bringing in process efficiencies will nevertheless enhance macro level supply chain and backend operations. But the real beneficiary of all these may not be organized retail but e-tail. It may be similar to the case of the internet bubble burst of 2001 – companies that invested heavily in under-sea cables going bankrupt and new companies buying these under-sea cable infrastructures at a cheap rate to make world flat in next 4 years! This irony may get repeated in e-tailing as well – backend infrastructure built by brick and mortar retail chains and benefits of these accruing to e-tailing companies. It is a possibility! Speed of delivery: Way back in 1998, when e-commerce just started in India, the delivery time was routinely around 25-30 days depending on the item bought. In 2006, this delivery time has shrunk to around 2-3 days. And my guess is that by 2015, the delivery time may further shrink to 2-3 hours with increased focus on streamlining backend operations, better technology, enhancement of process efficiencies, and better partnership with suppliers and logistics agencies. The day this 2-3 hours delivery target is achieved, that day would be the day of reckoning for e-shopping in India. One stop e-shop: One of shopper’s delights is the availability of various products and services under one umbrella. Retail chains have in past flourished by offering a number of products and services under one roof. The success of Walmart may not only be in the “everyday low prices”, equally likely is the “everything is here” factor. But still, the retail chains due to their physical nature have some constraints on making everything available under one roof. The virtual world is different. Here you don’t need to own everything at a place physically. Here you have to claim virtually that you deal in everything but you need not have possession of everything. It’s all about backend operations – hubs, suppliers, logistics. So with the paucity of time griping the consumers more acutely in near future and forcing her to find avenues to buy maximum of her needs at one place at her own convenience, e-tailing may be the ultimate winner. Let’s play a little with numbers… Let’s say we have 100 million active internet users in 2015. Assume that 40% of these active users do an average of Rs 3000 worth of e-shopping every month. The annual e-tailing revenues would come to Rs 144000 crores or $31 billion or 48% of projected organized retail in India by 2015. Take it another way – According to IOAI estimates, number of e-shopping transactions per month in 2005-06 was 795000. Average value of each transaction was Rs 1100. Assuming the growth of number of transactions at 50% every year till 2015, the number of transactions per month in 2015 would be around 30 million. Assuming the growth of average value of each transaction at a modest 12% every year, average value of each transaction would reach Rs 3050 by 2015. And this would turn into annual e-tailing revenue of Rs 110000 crores or $24 billions or 38% of projected organized retail in India by 2015. Now you take your own call on e-tailing, its future, and how it may impact the growth of much hyped organized retail. Kirana Stores: Darwinian evolution or something else? It might eventually turn out to be a David vs. Goliath story! Experts are quick to pass verdict that Kirana or so called ‘mom and pop’ stores will suffer in the organized retail game. But that may not be so easy. India is a nation of shopkeepers with around 12 million retail shops, majority of them occupying areas under 500 Sq feet. The shop density is highest in the world with 11 shops for every 1000 persons. These shops operate in localized environments, with localized terms and conditions including credit facility, and are on beck and call of customers, always ready to service them in the most convenient way or as desired by the customers. Why should I go to a mall 5 KM away from my house to buy my bread and butter when I can get it home delivered by the friendly shopkeeper across my house with just a phone call? Another thing that experts are forgetting is the car penetration and refrigerator penetration in India. Both are abysmally low for a nation of India’s size. But commonsense would tell that both are in someway connected to the growth of organized retail in western countries. Car penetration is 7 per 1000 people. Refrigerator penetration is 161 per 1000 households. As per NCAER, refrigerator penetration is expected to be 225 per 1000 households by 2010. To get the benefits of lower prices and convenience of malls you need a vehicle to travel 5-15 KM to the nearest mall and carry your booty back to home. Once at home, you need to keep foods and grocery part of your booty in proper refrigeration to last you a week or two. Given the low penetration of refrigerator and the tropical climate of India, that is a big challenge. Hopping mall to buy less than a week of supply is purely not worth all the discounts bundled together. Another fact of life in India is that, according to NCAER, out of 205 million households, around 90% of them have annual income less than Rs 2 lacs. Even within this segment, 71% have annual income of less than Rs 90000. This proportion of households – with less than Rs 2 lacs annual income – is not drastically changing in the next 5 years. And this is the segment that perhaps spends the highest on items like food and grocery – the same items that constitute about 75% of the great organized retail dream! This segment of the population makes small purchases weekly or every few days and depends to a large extent on monthly credit provided by kirana stores based on localized trust. Can the organized retail cater to this segment that lies at the heart of Indian retail? Organized Retail: Real or Mirage? No doubt that organized retail is going to be a growth sector with some opportunities to tap. But considering the income profile and habits of Indians, I guess that the organized retail at best can touch 50 million households or 200 million people by 2015. These will be mainly people in the Rs 2 lacs and above income bracket. Even within this segment, organized retail will have a tough fight from e-tailing and the evergreen Indian kirana. So where will this hullabaloo and big ticket investments lead? One thing is sure that huge investment will do a lot of good in improving the supply chain, particularly agri supply chain – and logistics operations in India. Organized retail players would do well to take into consideration the following: Have an e-tailing strategy side-by-side to effortlessly shift into e-tail mode if there is seismic shift in retail landscape. Futurebazaar, the online version of the Kishor Biyani promoted Future Group is perhaps a step in this direction. Avoid owning costly real estate to develop glitzy malls and hyper-malls. Emergence of e-tailing as a significant channel of retail can make all investments in posh real estate redundant. Instead, it would be better to focus on backend operations and development of hubs as these will come handy in case there is a need to shift to e-tailing mode. Explore partnership with kirana stores. They have unique advantage considering the demographic and income profile of consumers. All the hype about “everyday low price” may not undermine their localized advantage. If you want to serve 90% of Indian market, you will need a tie-up with them. Explore becoming a partner. Think about the franchisee route or become a distributor. Reliance Retail is perhaps exploring this! And finally, I would just say – It’s India, it’s different! So play safe.