Click and Dial

CLICK and DIAL
A NEW PATH FOR INDIAN RETAIL
Kanvic is a management consulting rm helping businesses develop winning strategies, drive protable growth and achieve operational excellence to reap long lasting rewards in fast growing Indian economy. We work with C-level executives to develop innovative solutions for business challenges of 21st century India by bringing in leading edge management thinking informed by in-depth research and sound analysis.
CLICK and DIAL

A NEW PATH FOR INDIAN RETAIL
Deepak Sharma Vlad Flamind
November 2011
kanvic.com
About the Authors

Deepak Sharma is a director and co-founder at Kanvic where he leads the strategy practice. Vlad Flamind is an associate consultant in the strategy practice.
Acknowledgements
Kanvic would like to acknowledge the contribution of the team behind this report. Shiv Kumar and Saba Khan helped in structuring the issues and provided valuable research inputs. Alex Baatz contributed in conducting research and analysis while Gehan Wanduragala provided editorial guidance. We would also like to acknowledge Nick Baker for designing the cover page.
Further information
We welcome your questions and comments on this report. For further information, please contact us at: Email: deepak@kanvic.com Phone: +91 99283 77800
Click and Dial - A new path for Indian retail
Contents
Foreword
8 10 14
Executive Summary
Reach and Consumer experience

The twin focus areas for retailers
Click and Dial
18
The emergent channels to improve reach and consumer experience
Winning the distance channels

A new path for Indian retail
36
Conclusion
54
Foreword
Indias economic growth is primarily sustained by the development of its immense consumer market. During the last two decades, household spending has expanded tremendously both in volume and scope, driven by the emergence of new consumer classes and the introduction of new product categories. This shift towards consumerism is not simply incremental but led by multinationals as well as local corporations marketing their products in India. These rms are constantly stretching the boundaries of the organised consumer goods market by including as yet unserved consumer segments in their strategies. Changes in consumption patterns are swift because successful companies have found the right balance between a tailored marketing strategy and a focus on consumer education. By increasing awareness and acceptance these companies are actively expanding the size of their markets. Until now, rms have predominantly innovated on price and product range as a means to increase their reach. As far as distribution is concerned, efforts have been constrained to widening brick and mortar channels as a way to get closer to the consumer. Our research however suggests that the future of distribution lies to a large extent in the development of distance channels, namely the phone and the internet.
This report informs companies about the current and future prospects of these nascent Click and Dial distribution channels. Furthermore, it presents Kanvics perspective on their expected development and highlights the major opportunities for companies to prosper in this market space, by adapting their strategy to the specics of the Indian consumer market.
Deepak Sharma Director and cofounder
Executive Summary
10
Executive Summary
The Internet and the phone are revolutionising the way retailers connect with their customers worldwide. In India these distance channels can become a major breakthrough for retailers striving to expand the reach of their business, and offer a new shopping experience to the emerging consumer classes. To reach more customers, Indian retailers have so far relied massively on the development of brick and mortar channels. As a result of their expansion strategies, close to 63,000 outlets have been constructed in urban areas between 2001 and 2010. Additional stores have increased the retailers reach but they have also been the source of tremendous inefciencies. Firstly, retailers have grown their distribution network faster than demand. A comparison of growth in total organised retail space against the growth of retail sales is a revealing indicator of this trend. While the retail space in sq. ft. rose by a CAGR of 42.9% between 2001 and 2011, aggregate sales increased by only 35.8% during the same period. In parallel to this, costs have also been put under pressure by high and unstable rental prices. Retailers thus operate more shops, but each one generates higher costs, and less revenues per square foot. To pursue their expansion strategy more efciently, retailers should exploit the potential offered by distance channels. By dismissing the need to have products and means of transaction close to the consumer, these alternative channels enable retailers to remotely address a vast consumer base which has been growing rapidly. On one side, the Internet is expected to see its user base expand signicantly as the market matures. If the 23% annual growth rate witnessed between 2006 and 2011 continues, the number of online customers will exceed 100 million by 2020. Growth will rst be driven by the growing popularity of the Web, accessed by Indian consumers both through personal computers and smartphones. The second driver will be found on the supply side. Evidence shows that more consumers will go online as the richness and diversity of the offer increase. In other
11
words, it will be e-retailers responsibility to stimulate demand in the newly created market space. On the other side, the phone can also become a substantial revenue stream for those organised retailers prepared to invest in the channel. Today most of the Rs. 11,339 Crore in this channel are generated from the unorganised sector where the offer is more commonly available. So many Indian urbanites are both phone owners and consumers of advertising that a vast market lies almost entirely untapped by organised retailers. As well as expanding their reach, retailers have also focussed their efforts on providing a new shopping experience to urban Indians. Air conditioning, tidy shopping shelves and frequent bargains have so far attracted consumers toward new organised retail formats. In the future however, convenience and time efciency will be the next battleelds for retailers. Societal changes will impact families dramatically, increasing the pace of life and thus the value that busy urbanites place on their time. Distance channels are already perceived as more convenient than traditional brick and mortar stores by a majority of users. It is more than likely that they constitute the answer to consumers call for convenience. To succeed in increasing reach and improving their customers shopping experience, retailers should adopt the right strategies. Four consumer segments should be considered in the Internet channel, each with a specic capacity to buy online and a specic interest in online shopping. Each of these segments should be targeted using a different approach. The two non-buyer segments, Window shoppers and Casual surfers, are the biggest and represent an opportunity for retailers to increase the size of their buyer base. Window shoppers are the 33 million Internet users that have not yet purchased despite a high interest in online shopping. They should be reached by rms through a focus on price, since their level of income tends to be lower relative to the buyer segment. To succeed protably in this segment, eretailers must adopt new models based on tailored pricing instead of the current heavy discount and group buying models that do not provide a path to economic viability. Casual surfers are the 41.2 million internet users that are neither interested in nor capable of making large purchases online. They can however be turned into window shoppers by companies focussing their efforts on increasing their interest for online shopping through the most effective means yet proven: social media.
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The two buyer segments, Travel buyers and Product buyers, are currently small but their volume and average sales per customer can be dramatically increased. Travel buyers currently number 8.5 million, and they only purchase intangible goods related to travelling, mostly transportation tickets. To overcome their concerns about product delivery and turn them into product buyers, retailers should enhance their logistics capability. Finally, another 8.5 million product buyers purchase a variety of tangible and intangible goods online. They are the current base of online consumers and should be made loyal by rms through improved customer communication and relationship management. In the phone channel, organised players will succeed by shifting their business model from a decentralised to a centralised one. To out-compete unorganised shops in this segment, they are bound to focus on reliability and availability. These features however require very effective logistics capabilities and customer contact points. At present, effectiveness is achieved through inefciency because retailers operate at low utilisation rates to meet consumers needs and maintain their advantage over unorganised shops. Centralisation should become the new model for the phone channel. Firms that achieve the right scale could indeed improve their efciency both by reducing their infrastructure costs and by increasing their capacity utilisation rates.
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The twin focus areas for retailers
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REACH AND CONSUMER EXPERIENCE ARE THE MAJOR FOCUS OF INDIAN RETAILERS
During the last six years, India has witnessed an impressive boom in retail, registering an annual growth in value of 9.3%. Estimated at Rs. 1,872,000 Crore in 2010, this market has been attracting substantial investments from organised companies wishing to grab their share of the pie, as shown in Exhibit 1.
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To increase their market penetration retailers have been focussing their strategy on two critical success factors: reach and consumer experience. Reach refers to the number of consumers having convenient access to the retailers selling points. To increase it, retailers are getting closer to consumers by expanding their distribution network. In the last four years, Indian cities have witnessed the emergence of 38,800 new organised retail outlets (Exhibit 2). This fast progression has increased the proximity of big retailers to their customers. In 2006 urban India counted one store for an approximate 12,130 inhabitants while four years later the gure dropped to 5,5651.
Knight Frank, ICRIER, BMI, Images F&R, Business Today, Indian Census, Kanvic analysis 16
As well as proximity, retailers are providing consumers with a new shopping experience, by introducing modern retail formats to rival the traditional corner shops known as Kiranas. These stores have offered the possibility for consumers to wander between air-conditioned shelves, looking for bargains among dozens of different products. Enthusiastic about atmosphere, choice and frequent promotions, middle class consumers have been adopting these formats rapidly as the fast penetration of organised retailers indicate (Exhibit 1).
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Click and Dial

The emergent channels to improve reach and consumer experience
18
Click and Dial

RETAILERS CAN IMPROVE REACH AND CONSUMER EXPERIENCE BY DEVELOPING DISTANCE CHANNELS
To improve reach and consumer experience retailers should consider developing alternative distribution channels, referred to as distance channels throughout this report (Exhibit 3).
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As opposed to the traditional brick-and-mortar shops, distance channels enable consumers to order remotely, either through a phone call or through a website interface, and receive their goods at the designated place without moving from their location (Exhibit 4)
These particular features rstly offer the opportunity to improve reach. By dismissing the need for physical contact between the buyer and the seller, retailers can target a wider customer base with fewer sales points. Secondly, these channels improve the consumers experience by answering their need for convenient and time efcient shopping. By enabling transactions to be made at distance and goods to be delivered to the customers door, retailers gain a competitive advantage.
20
Increasing reach through distance channels

Increasing reach is necessary for retailers to leverage xed costs
Retailers are setting up an increasing number of outlets to develop their reach. This distribution strategy compels managers to maximise sales because it generates substantial xed costs from the renting of real estate. Each square foot rented in a shop must be used to optimise revenues, be it through the display of a product, of an advert or through the installation of a cashier. Looking at the situation in urban India reveals that retailers are not leveraging their space efciently. The weight of rental costs in sales is actually above the international gures as shown in Exhibit 5.
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There are two reasons for this low efciency. On the one hand, retailers have been confronted with high rental prices. As shown in Exhibit 6 rents have increased signicantly during the period 2005-08. Although the trend is downward since then, rents still represent a major risk for the retailers efciency with regard to their weight in the cost structure and their tendency to uctuate sharply.
On the other hand, retailers are scaling up faster than the growth in demand. To get a foothold in the best areas, rms have been erecting malls and outlets at a tremendous rate. The total organised retail space has been expanded by 78.5 million sq. feet2 between 2001 and 2010. This represents a CAGR of 42.9% over the initial area. Organised retail sales however have grown at a slower 35.8% during the same period. To reach out to a wider consumer base, retailers are thus neglecting cost efciency, generating less sales per square foot of commercial space.
ICRIER, Knight Frank, Business Today, Kanvic analysis 22
Distance channels can widen reach more efciently

Distance channels empower suppliers to determine their own reach Brick and mortar shops have a limited reach because they require the consumer to come to them. When making their purchasing decision typical buyers will consider this as a constraint 3. As a result, they might decide to go to the nearest shop if the offers are undifferentiated or, simply abandon the idea of shopping if the inconvenience of moving seems greater than the benet of acquiring the goods. Distance channels eliminate this constraint because they enable the customer to select, pay, and receive goods without ever going to a shop. In this scenario, reach is not determined by consumer preferences, but by the suppliers capacity to process orders, payment, and delivery within a given perimeter as shown in Exhibit 7.
Almost three fourths of Indian consumers would not select a shop that requires more than 15 minutes to reach. (MGI)
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Distance channels give access to a wide and growing consumer base Distance channels give retailers the possibility to increase their reach though the setting up of distant sales points and delivery capabilities. Retailers developing these channels can tap into a nascent but fast growing consumer base.
INTERNET Between 2006 and 2011 the number of Indian consumers buying online has grown from 6.1 million to 17 million, which represents a 179% increase 4. These gures are promising, but a much larger potential could actually be unlocked if retailers expanded their presence in the virtual channel.
Internet connectivity is increasing
Urbanites are increasingly connected to the World Wide Web through both computers and smartphones. Between 2006 and 2011 the proportion of urban Indians going online has increased tremendously from 9.6% to 24.2% 5. The main factors explaining the increase in the number of Internet surfers accessing through computers have been the evolution of both computer literacy and Internet familiarity as shown in Exhibit 8.
4 5
India Online, Kanvic analysis IAMAI, Indian Census 2011, Kanvic analysis 24
On the one hand urban Indians have gained a better knowledge of computers between 2006 and 2011, and on the other hand, the computer savvy population is showing an increasing will to explore the capabilities of the Internet. The growth in Internet users is expected to accelerate because smartphones are reaching an increasing number of consumers (Exhibit 9). Today, around 80% of these mobile surfers also use computers to go online, but by 2020 it is probable that a large proportion of surfers will go online exclusively through their mobile phone. The estimated 378 million smartphones will then comprise around 60% 6 of the mobile phone base in urban India.
CMR India 2011, Datamonitor, Census 2011, Department of Telecommunications, Kanvic analysis 25
E-retailers can trigger substantial growth
The number of online Indians has been growing at close to 24% per year since 2006, driven by a fast 94% CAGR for smartphones and by a 23% CAGR for computer users7. The number of actual buyers however, has not caught up, with a slightly slower increase of 23% per annum (Exhibit 10).
Refer to Exhibit 9 for sources 26
This differential in growth rates reveals that the development of the Internet has not been fully exploited by retailers. While almost 60 million Indians became potential e-buyers between 2006 and 2011, only 11 million of them actually made a purchase8 . In other words, e-retailers are gaining reach but have not capitalised on this opportunity. Evidence indicates that the market potential can be tapped if more retailers choose to develop their virtual channels (Exhibit 11). With a greater availability of online supply, a larger proportion of consumers will opt to join the ranks of e-buyers. Currently, the supply is insufcient to meet the consumers expectation for variety and to increase their condence in a new and uncommon distribution channel.
India Online, IAMAI, Kanvic analysis 27
In India like in the rest of the world, one important driver for consumers to shop online instead of going through brick and mortar stores is their desire to nd a relatively wider range of products and bargains. Half of Indian buyers state choice as a motivation to buy online and almost 20% of non-buyers say they would switch to virtual channels if they found more variety 9.
As well as variety in the supply, consumer condence is another factor preventing the growth of the Internet channel. Almost 1/3 of surfers state their lack of trust in product quality and payment systems as a reason not to purchase through the Internet10. If more retailers had an online presence, it is likely consumer condence would also rise. The brand image and loyalty acquired in traditional retail channels will be the drivers supporting the
India Online India Online 28
10
increase in consumer condence. As additional famous retail names get associated with online retail, cautious consumers are very likely to change their perception about e-retail and consider it as a secure alternative.
PHONE At present the market for ordering through phone in urban India is estimated at Rs. 11,339 Crore11 . A far larger part of the urban population is ready to adopt this alternative channel but at present only a few organised retailers have made a move into this area. Firms willing to develop phone ordering services are therefore likely to increase their buyer base signicantly by lling this market gap.
Consumers are ready to purchase more over the phone
From the demand perspective, the Indian market for phone ordering holds a lot of potential because the main requirements for the customer base to expand are already met. The rst requirement for organised companies willing to reach consumers outside of their brick and mortar stores is to raise awareness about their product offerings. Looking at the reach of mass media in urban India indicates that rms can already advertise their products to almost every consumer (Exhibit 12).
11
NRAI, Business Today, Mydigital FC, APICS, Datamonitor, ICRIER, Image F&R, IAMAI, BMI, ASSOCHAM, Kanvic analysis 29
The second requirement for developing the phone channel is the capacity of consumers to place their orders from a distance. In that area also, the conditions are already optimal. By working on affordability, telecom companies have managed to exceed a 100% penetration rate for mobile phones in urban areas12.
Organised retailers can expand in this channel
Despite the tremendous potential of phone ordering, few organised retailers have ventured outside their brick and mortar stores. Most phone channel sales currently happen in the unorganised sector (Exhibit 13) where phone ordering is proposed to customers in an informal and non-systematic way. About a third of Kirana owners surveyed by ICRIER in 2007 claim to offer delivery services to their customers.
12
Urban and rural areas are distinguished using the Indian Census method as a benchmark 30
For almost half of them this measure has been taken as a way of resisting the pull of organised retailers over their customers13. Taking advantage of their small scale and proximity to a limited consumer base, Kiranas have a natural advantage to develop home delivery without building any specic capacity. The system is generally reliant upon Kiranawallahs simply delivering orders by foot or bike, to loyal customers residing in the close vicinity. On the organised side, the only mature segment for phone ordering is food services and more specically fast food. Players like Pizza Hut and Dominos have built sufcient capacities to generate demand and on average they realise 50% 14 of their sales through the phone ordering channel.
13 14
ICRIER MydigitalFC, Kanvic analysis 31
However, FMCG, durables and grocery retailers have been late to invest in phone ordering. As a result, the market is still not mature and no company has yet emerged as a leader. Outside the food service segment, e-retailers like eBay and Flipkart also generate sales through the phone channel. They utilise phone ordering to attract customers with limited experience in online shopping, presenting it as an alternative to ordering online. With the Internet as their main consumer interface, these rms are missing out on the majority of urban consumers that do not surf at all or that do surf but dont shop online. To tap into a wider consumer base, rms like Express Retail Service have recently started to enter the market, providing phone ordering without any web interface. Not wanting to miss the
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opportunity, leading retailers like Reliance and Walmart are also considering an entry in the phone delivery market15.
Improving customer experience through distance channels

Distance channels offer a different customer experience by focussing on convenience
The consumer shopping experience can be analysed through three dimensions as described in Exhibit 14. The rst dimension is the degree to which consumers are exposed to the products offered by suppliers. In this area physical channels have the advantage of enabling clients to see, touch and feel what is displayed on their shelves. Online channels compensate for this by providing extensive information on the products specications. Although consumers do not handle the actual good they purchase, the range and depth of information found online help facilitate the buying process. However phone channels provide the least exposure to products. They require the consumer to have a high familiarity with them, and to know in advance what they are willing to purchase and at what price.
15
Economic Times, The Telegraph 33
The second dimension refers to the time lag between the purchase of a product and its availability to the consumer. Here again, brick and mortar shops enable consumption immediately after purchase while distance channels require the consumer to wait for the order to be delivered. The attractiveness of distance channels lies in the third dimension. This takes into account the effort and time spent by consumers while shopping. Going to a brick and mortar shop and returning home with the goods is time consuming and requires effort. Consumers need to arrange their schedules, move to the shop, spend time between the shelves, wait in the line and return home with their goods. On the contrary, distance channels offer time effective and effortless shopping. Buying online or on the phone neither requires the consumer to travel nor to arrange their schedule, because distance shops can be accessed anytime - providing that a call centre is operational for phone channels - from any connected place 24/7.
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Consumers demand convenience

Looking at societal trends in urban India suggests that the demand for convenient shopping is bound to increase as consumers lead busier lives. Indian urbanites value their limited available time and therefore make trade-offs between shopping and other leisure activities. To reduce time spent on shopping many consumers attempt to decrease their buying frequency. Typical consumers organise their trips to stores on a weekly basis, shopping in bulk to avoid multiple trips to the shops. Others capitalise on the time spent for shopping to make it more valuable. For many households, shopping expeditions constitute an occasion for families to spend time together. With limited free time, consumers merge shopping with their social life. Besides the time spent while shopping, urbanites are also looking for opportunities to save time on their trips to and from the shops. On average, consumers are reluctant to spend more than 15 minutes 16 travelling to a store. As a result they tend to value locations that are easier to reach. This desire for fast and convenient shopping will increase as the lifestyle of Indian urbanites gets busier. The major factor that will profoundly affect the daily lives of urban Indians is their job. Looking at the labour market in India suggests that on average households spare time will decrease. The rst trend is women entering the workforce. During the last decade, the number of women working in urban areas has grown by more than 54% 17. In parallel, women are increasingly involved in the purchasing decisions of their households. In 2010 more than 40% of urban women were decision makers, representing a 9 percentage points increase from 200118 . With increasing responsibilities to carry in their professional and family lives, women will look for less time consuming ways of shopping in the future. The second trend is related to the type of jobs demanded by the labour market. By 2020, a class of urban executive workers will rise as the number of corporate managerial positions
16 17 18
MGI Indian Census, Kanvic analysis IMRB International 35
increases by 70% 19. More demanding jobs are therefore likely to reinforce the relative advantage for consumers from shopping through distance channels.
The importance of product exposure will fade

Indian consumers are accustomed to touching and feeling a product prior to purchase. It is a way for them to inspect the quality of products that are not usually standardised. This tendency however is likely to fade away as a new generation of consumer arises in urban areas. The appeal for branded, mass-market products is growing among younger consumers. As a consequence it is probable that over time, physical contact with the product will lose importance for Indian consumers in those categories where brands are highly valued and where products are increasingly standardised.
19
India Labour Report 2009, Team Lease, Indicus 36

a new path for Indian retail
37

COMPANIES SHOULD ADOPT THE RIGHT STRATEGIES TO SUCCEED IN THESE CHANNELS
Internet and phone channels can help retailers improve their reach and customer shopping experience. Demand for these alternative distribution channels is still nascent but substantial growth can be triggered. The way forward is for managers to adopt inclusive strategies, reaching consumers beyond current market boundaries. To seize this latent demand through the internet, retailers should consider a new consumer segmentation. Each segment should be targeted individually with the objective to increase consumer awareness, interest and trust. Leaders will place their focus on building marketing and logistics expertise. In the phone segment retailers must out-compete the unorganised sector to widen their reach. Developing this service sustainably will be a delicate matter, and to succeed leaders will have to shift from a familiar but less protable decentralised business model to a leveraged centralised one.
Internet retail comprises four consumer segments with different readiness to buy online
In the Internet channel, 91.2 million surfers can be segregated in two categories: the online buyers (18.6%) on one side, and the non-buyers (81.4%) on the other side.
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The buyer category can then be broken down in two segments. One segment is referred to as Travel buyers because it comprises the 8.5 million consumers that purchase goods exclusively related to travel; such as tours, transportation tickets, or hotel rooms. These travel goods are considered separately because they do not involve any physical delivery from supplier to consumer, dismissing a critical part of the purchasing process. The other segment is named Product buyers and is composed of another 8.5 million consumer that purchase any type of good online. These consumers are not exclusive in their choices, buying travel goods, durables, FMCG products or books regardless. The non-buyer category comprises all Internet users that do not purchase anything online. On the one hand, the Window shoppers segment regroups the 33 million surfers that visit shopping websites for informative purposes, that is to say without ever placing an order. On the other hand, the 41.2 million Casual surfers represent the segment of the market that does not even visit e-retail platforms. As shown in Exhibit 15 each of the four e-consumer segments has a different purchasing capacity and a different interest for shopping online20 . Together, these two criteria determine the segments readiness to buy online.
20
Capacity is dened by using two proxies: the average household income; and the percentage of surfers occupying the position of household head. Interest is dened by using two proxies: the degree of familiarity with Internet - expressed in number of years of experience with the web - and the occurrence of a product purchase through online shops.
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Product buyers show the most advanced degree of readiness. They posses both the highest purchasing capacity and the highest level of interest relative to other segments. Their major interest lies in their above average income levels, and in the fact that they are generally the head of their household, holding most of the purchasing responsibilities. Travel buyers also benet from a high purchasing capacity. Their readiness for e-retail is nonetheless lowered by a lack of interest in tangible goods sold online. This indifference is reected in the low frequency at which they visit shopping websites. Window shoppers show a signicant level of interest in e-retail but they have an insufcient purchasing capacity to actually buy goods online. However, with time they are likely to gain purchasing capacity and join the ranks of e-buyers. Their average household income is 21% lower relative to online buyers, but it is expected to rise in line with Indias economic growth.
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Window shoppers are on average 3 years younger than buyers, and they comprise mostly students and young professionals21. Casual surfers are currently not interested in online commerce. The primary reason discouraging their interest in alternative shopping channels are lack of awareness and a lack of disposable income. Due to the size of this segment and their potential to develop into online buyers with time they should not be ignored by e-marketers.
Companies selling online should approach the four consumer segments differently
Increasing product buyers loyalty through customer relationship
To capitalise on their buyer base, e-retailers should develop customer loyalty and generate incentives to increase per customer spending in both volume and value. At present, the average yearly expenditure per Product buyer is very low in India relative to more mature markets. Indian Product buyers for example spend ten times less than their American counterparts every year (Exhibit 16).
21
India Online, Kanvic analysis 41
This illustrates that substantial growth can be triggered by e-marketers within the existing customer base. Existing clients thus remain a major source of growth on which e-retailers should capitalise. To secure their valuable customer base, managers should improve client relationships. In this area success will be determined by the depth of knowledge that retailers have about their buyers and by the way they communicate with their customers. Developing direct sales contact points will enhance the customer relationship In traditional channels, consumers value their relationship with vendors. By nature, virtual channels reduce the interactions between the buyer and seller and thus raise barriers against loyalty-building contacts. Successful companies will be the ones that place focus on using telecommunications to restore the lost relationship. The rst level of interaction remains virtual and takes place through chats and blogs where customers are given the opportunity to express themselves. This practice is currently expanding in the Indian e-retail market place following trends in Europe and America.
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Indian consumers however will demand a deeper level of interaction because of their specic cultural traits. Call centres with operators standing ready to answer a customers queries in person will most certainly differentiate e-players competing for customer relationship. At present market leaders are the only companies to have set up such call centres. Smaller contestants achieving the sufcient scale to set up these centres should promptly take advantage of their position before new entrants attempt to capture market share. Developing CRM tools will enable effective marketing in an increasingly complex market Understanding the customers preferences to tailor the offer will be the second competitive battlefront for e-retail companies in India. As the population of Internet buyers grows, marketers will need to reach deeper levels of customer segmentation. Since sub-segments will increase the complexity of marketing strategies in terms of product, pricing and promotion, successful companies will have to lead through their capacity to adjust price and product offerings to the purchasing pattern of individual customers. Customer Relationship Management (CRM) is therefore bound to become a central component of marketing.
Converting travel buyers into product buyers though improved delivery services
The major reason for travel buyers not purchasing products online is their concern about product and service quality. Many consumers are concerned about receiving their products late (35%) 22. They also fear that the quality will not be as expected due to misleading advertising (40%) or due to damages occurred during transportation (25%). Companies have already taken action to reduce the mismatch in perceived quality between online adverts and the tangible product (see below) but a major focus on logistics will be required to convert travel buyers into product buyers. Creating trust through intangible improvements is not enough Companies have already worked on enhancing the layout of their website to increase the trust of e-shopper. The focus has been on providing a more accurate perception of quality and on displaying information in a user-friendly manner. The zooming and colour swapping functions for example are already available on 40% to 50% 23 of e-retail websites in India.
22 23
India Online www.ecommerce-guide.com: Ice your Competition with a Cool Return Policy 43
In addition, market leaders are also providing guaranties to their customers under the form of refunds or return policies. Buyers lacking trust can therefore nalise their purchase with the insurance that they will pay only if their expectations are met. However, it is likely that better layouts and after sales services will not sufce to bridge the condence gap entirely, especially if no action is taken to reduce the actual number of unsatised customers. Only 30% 24 of buyers state that they have never encountered any issue while purchasing on the Internet, which leaves companies plenty of room for improvement. Tangible improvements can be achieved through logistics Logistics play a vital role in e-retail because customer satisfaction is strongly dependent on the suppliers ability to deliver the goods in time, at the right quality and at the cheapest price. The combination of these three elements is probably the most basic expectation of customers. Each transaction made online is based on the buyers assumption that goods will reach their destination as promised. On the retailers side however, meeting this requirement is a great challenge. Complex IT systems must bridge the gap between remote physical stocks and the virtual stores where customers place their orders. Integration with third party logistics providers must be seamless, from the packing of the parcel in the warehouse to the nal client delivery. Delivery times must be stuck to, shipments tracked individually, and complaints and returns handled professionally. Achieving a 100% on-time-in-full rate25 is a crucial requirement for e-retailers wishing to reach higher levels of consumer satisfaction through tangible improvements. As competition intensies in the online market, delivery will become a major competitive battleeld, and leaders will depend on their logistics to maintain and grow their market position. Signicant effort should be made to reduce the currently large proportion of unsatised consumers. Close to 70% of buyers have experienced delays in delivery and 25% have received damaged goods at least once 26.
24 25
India Online
On-time-in-full rates refer to the proportion of shipments that reach their nal destination at the right time, quantity, quality and cost.
26
India Online 44
Converting window shoppers into buyers through tailored pricing

Since window shoppers have a high interest in online channels but a lower purchasing power than actual buyers, companies should reach down to them through pricing. The objective is to increase the buyer base in volume through attractive pricing and nudge them towards higher priced products gradually. With their lower purchasing power these clients will rst account for a marginal part of the revenue stream but if companies succeed in making them loyal their value will increase over time. To be attractive in an already low priced e-commerce market companies will however need to adopt a new perspective on pricing. The current pricing models are not sustainable In the area of pricing e-retailers have been actively focussed on granting substantial discounts (ranging from 5% up to 95%) betting on high negative price elasticity to grow sales volume. For some players this method has proven to be effective in attracting customers. Snapdeal for example has managed to sell 1000 units of watches in a single day by offering an 85% discount. However as new players enter the market to capture share, the viability of this approach will be threatened. To maintain high sales volumes under this business model companies will have to drive prices down further. If improved cost effectiveness is not achieved, margins will be lost and many players are likely to exit the market due to consumer and competitive pressure. To overcome this, some companies have decided to import the business model of groupbuying27 from the more mature European and American markets. This model appears promising because it provides security to e-players competing heavily on price. Group-sellers purchase their goods only when the required number of customers has placed an order on their site. Customers are offered low prices on the condition that they collectively generate enough sales to cover the sellers costs and margin. Although group-buying has potential, only a few companies will succeed in this increasingly crowded market place. At present 20 companies are operating in the segment and major Internet players like Google are also considering a move. Groupon and Amazons Living Social are the key players in the global group buying market. India has its own set of popular group buying sites like Snapdeal, Mydala, Dealsandyou, Taggle, Koovs etc. Times Internet, a subsidiary of Times Group launched its new deals site called TimesDeal, on May 2, 2011. The site is currently being launched in six Indian cities (Delhi-NCR,
27
Group buying refers to the creation of consumers groups that purchase in bulk together to benet individually from lower unit prices. 45
Mumbai, Bangalore, Pune, Kolkata and Chennai) to compete with the existing players in the Indian market. Pricing should be tailored to maximise prots In the future, the most successful companies will obtain leadership by adopting a new perspective on pricing. Discounts and group-buying are effective in generating sales volume, but they fail to maximise prots. Because these discounts are offered to all customers, including customers that were willing to pay more, they represent a high opportunity cost. For example, if a customer willing to pay Rs. 100 for a product benets from a 50% discount offered to everyone, the retailer loses the opportunity to generate an additional Rs. 50 of revenues. Instead, rms should tailor prices to the consumer segment they are targeting. On the one side, existing buyers, as mentioned earlier, should be provided with tailored offers according to their past buying patterns. Companies can track these buying patterns through widely available CRM software. On the other side, companies looking for faster growth should make a priority of converting window shoppers into buyers because in the currently restricted e-retail market they represent a signicant base of potential customers. To achieve this e-retailers should decrease their margins exclusively to attract these customers. One example is to provide incentives to new customers setting up an account. Once window shoppers make their rst purchase their behaviour should be tracked and pricing should be adapted to progressively capture more revenues.
Raising the awareness of casual surfers through social media

Growth in e-retail is constrained because casual surfers are not converted into buyers at a fast enough pace. To drive more sales e-retailers can increase the awareness of casual surfers through expanded use of social media. Social media is not sufciently exploited At present traditional communication in the form of web banners, search-engine referencing, and e-mailing are widely used to create awareness. However social media remains under exploited compared to other countries like the USA (Exhibit 17).
46
Two marketers out of ve are still unsure about increasing their spending in this advertising format and are waiting for clearer signs of effectiveness to make a move. This cautious attitude is one of the factors currently limiting the expansion of the online buyer base, and restraining the market from reaching its full potential. Social media is an optimal way to attract casual surfers To stimulate growth in the e-consumer segments managers should consider shifting more of their advertising expenditures to social media. Firstly, these platforms can generate tremendous awareness about e-retail because their reach is very wide. Indeed, the trafc on social media is increasing at an annual rate of nearly 30% 28 and today 84% 29 of online Indians are connected through these sites.
28 29
Business Today ComScore 47
In addition to the number of users they cater to, social media sites have the advantage of being particularly effective in building consumer interest and trust. An American survey 30 states that two thirds of consumers use information found on social media to make purchasing decisions, and that 67% are likely to pass this information on to others. Additionally, by using consumers as inuencers rms advertising on social media can also increase trust. Interestingly 60% of consumers said they trust information found on social media more than traditional adverts.
30
OTX 48
Retailers should scale up to penetrate the phone channel protably

Organised retailers have a limited presence in the phone channel relative to their unorganised counterparts. Apart from food service majors that captured share by focussing their business model on these channels, most retailers are currently providing limited delivery services because their logistics capacities are not yet geared for this channel. To capture market share these rms should invest heavily in building logistics networks and customer contact points that offer consumers the convenience they desire. However, only the rms that scale their operations will sustain protability by leveraging their expenditure on xed costs.
Big retailers can improve their competitiveness against the unorganised sector by developing their infrastructure
Organised players are competing with unorganised players
Small shops from the unorganised retail market exploit the natural advantage of their small scale to deliver to local customers for free. Their customer base is small and lives within a limited perimeter allowing them to provide the service without building specic logistics capability. Organised retailers aiming to compete in this Rs. 11,339 Crore market31 will need to offer a better alternative to the consumers at an affordable price (Exhibit 18).
31
Business Standard, Business Today, NRAI, IBEF, Mydigitalfc.com, Kanvic analysis 49
Unorganised retailers are strong competitors because they provide delivery services often for free and without imposing minimum order sizes. However, their weakness lies in their lack of capacity to sustain the availability and reliability of their service. Due to their small scale these shops can deliver to only a limited part of their customer base. Typically the service is made available to loyal clients with whom the owners maintain a close relationship. In addition, most of these shops are unable to guarantee delivery times due to a lack of dedicated staff or vehicle. Players in the organised sector can ll these gaps by providing systematic services. With dedicated call centres and eets of vehicles they have the potential to deliver to any customer on time. However, this level of service draws in substantial marginal costs. These are covered by some players through the charging of a fee or through the limitation of the service to a certain size of orders.
50
Ensuring the reliability of delivery services compels retailers to build excess capacity
As mentioned, providing delivery services requires investments in customer contact points and logistics infrastructure. To make sure that they serve every customer on time, retailers have to scale their investments according to estimates in daily demand peaks rather than average weekly demand (Exhibit 19). Otherwise they risk losing reliability as their competitive advantage because the service is likely to be refused to customers on days when the capacity is fully utilised.
Retailers aiming for reliability should scale up to make delivery more protable. As their capacity to take orders and deliver door-to-door is currently under-utilised they do not leverage their xed costs efciently. As a consequence the costs of delivery per customer are substantial. Since consumers may not be willing to pay a premium for the service having access to it for free in the unorganised sector margins are likely to be squeezed.
51
Centralisation will be the key to protability in the phone channel

The key to success in cost efciency will lie in the adoption of a new business model. Today phone ordering is done at the level of individual outlets. Like food service companies, retail stores operate small-scale vehicle eets and on-site call centres in central urban areas to deliver goods within a small radius. Retail groups that own hundreds of outlets across India therefore need to build their capacity store by store in a decentralised way. In that scenario the multiplication of under-utilised call centres and logistics infrastructure generates tremendous aggregates costs. By 2020, centralised structures taking orders from large-scale call-centres and performing home delivery trough centralised warehouses are likely to dominate the market due to their increased cost efciency. Improvements in urban road infrastructure will facilitate faster delivery of larger shipments made though vans or small trucks. Retailers will therefore be able to shift their call centres and warehouses to city outskirts and benet from lower real estate costs and better utilisation of their logistics capacity. Centralisation enables saving on rentals... Rentals are a major cost component for Indian retailers as illustrated previously in Exhibit 5. Conversely they are also a major leverage for improving efciency. Centralising the delivery service can enable retailers to use that leverage. Their rental cost can be signicantly reduced by shifting infrastructure from the inner to the outer city. Call centres as well as warehousing space that are operated in those areas can cost more than six times less, as shown in Exhibit 20.
52
...and improvements in logistics efciency. Moving away from central urban areas will be possible as long as retailers compensate for the loss of proximity to consumers by operating their logistics efciently. The advantage of operating at a bigger scale is the possibility to use larger capacity vehicles. In the non-centralised model, retailers are economically compelled to use two or three wheelers to perform delivery. Because each store has a relatively small consumer base, using larger vehicles would decrease the already low utilisation rate of the eet (Exhibit 19). In the centralised model however, using trucks can increase efciency. Fixed costs can be leveraged by a smaller eet comprising larger capacity vehicles. The cost of a cubic metre of a load drops as the size of the vehicle increases, offering a better leverage of volume (Exhibit 21). Therefore it is more efcient to transport a given load using trucks, than it is to use the two or three wheelers deployed in the traditional non-centralised model.
53
Moreover, larger trucks can be used for efcient milk run deliveries, thus decreasing the distance travelled with an empty load. At present, small capacity carriers transport goods mainly on the outward journey, using fuel to return to the warehouse empty. With the centralised approach a single van driver delivering to multiple customers could travel a greater distance with a full load, making every mile protable for retailers (Exhibit 22).
54
55
Conclusion
This report has outlined the prospect for distance channels to prosper in urban India, and claried the challenges ahead for retailers wishing to venture into this developing market space. The evidence gathered in this study suggests that distance channels are bound to expand and become part of the buying habits of Indian urbanites. As more consumers embrace these channels, retailers will be forced to change their business model. Throughout this report we have explained how retailers wishing to grab their share of the pie will need to thoroughly rethink their marketing and logistics strategies. However, the expansion of distance channel will not have implications exclusively for these retailers. Even if they lack interest in distance channels, pure brick-and-mortar players will inevitably be impacted by the changes occurring in consumer habits. The most obvious and signicant change for these retailers will probably be felt through a decrease in footfall and revenues. Because convenience and choice are becoming key criteria in consumers satisfaction, pure brick-and-mortar shops will certainly suffer a loss of competitiveness relative to distance channels. Another important change will come more specically from the rise of Internet buying. With the development of the Internet as a retail format, consumers are taking shopping to a whole new level. To nd the best offer, people get informed, share their satisfaction level through consumer reviews, scout for bargains and evaluate and compare products with the help of powerful search engines. This new tendency to prepare a purchase on the Internet can easily impact brick-andmortar shops. In more advanced e-retail markets like France for example, more than 80% of Internet users use the Internet to inform themselves before making any purchase, either in a virtual or in a physical store. As a consequence, the relationship between buyer and seller is changing. Extra-informed consumers are often more knowledgeable about the product
56
specications and rival brands than sales people on the shop oor, and for this reason they become difcult to attract and persuade on criteria other than price. Overall, the rise of demanding and savvy consumers is likely to change the rules of competition in the Indian retail market. This will compel leaders to rethink their business, begging a crucial question: How can I be part of tomorrows Indian retail story?
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A NEW PATH FOR INDIAN RETAIL

CLICK and DIAL

Deepak Sharma Vlad Flamind

About the Authors

Click and Dial - A new path for Indian retail

Reach and Consumer experience

Click and Dial

The emergent channels to improve reach and consumer experience

Winning the distance channels

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Deepak Sharma Director and cofounder

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Reach and Consumer experience

Click and Dial - A new path for Indian retail

Reach and Consumer experience

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Click and Dial

Click and Dial - A new path for Indian retail

Click and Dial

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Increasing reach through distance channels

Click and Dial - A new path for Indian retail

ICRIER, Knight Frank, Business Today, Kanvic analysis 22

Click and Dial - A new path for Indian retail

Distance channels can widen reach more efciently

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

E-retailers can trigger substantial growth

Refer to Exhibit 9 for sources 26

Click and Dial - A new path for Indian retail

India Online, IAMAI, Kanvic analysis 27

Click and Dial - A new path for Indian retail

India Online India Online 28

Click and Dial - A new path for Indian retail

Consumers are ready to purchase more over the phone

Click and Dial - A new path for Indian retail

Organised retailers can expand in this channel

Click and Dial - A new path for Indian retail

ICRIER MydigitalFC, Kanvic analysis 31

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Improving customer experience through distance channels

Economic Times, The Telegraph 33

Click and Dial - A new path for Indian retail

Click and Dial - A new path for Indian retail

Consumers demand convenience

MGI Indian Census, Kanvic analysis IMRB International 35

Click and Dial - A new path for Indian retail

The importance of product exposure will fade

India Labour Report 2009, Team Lease, Indicus 36

Click and Dial - A new path for Indian retail

Winning the distance channels

Click and Dial - A new path for Indian retail