Retailers look at online expansion as consumer preferences change

The second of a three-part series looks at how retailers, online and offline, are tweaking their strategies to remain relevant

He is arguably the king of brick-and-mortar retail. So, you have to take notice when Kishore Biyani, CEO of Future Group, says he is ready to get into a strategic alliance with online retail players and even offer them a minority stake. Biyani, who is fighting a bitter battle with e-commerce players like Flipkart and Amazon, says: “What we are seeing globally and in India is the convergence of online and offline retail as consumers move seamlessly from one to another, and the gap is  blurring. And we are open for a strategic alliance.” 

Only last year Biyani dismissed competition from e-commerce players, saying the latter should be worried about them as they had lower operational costs. His change in stance to go for alliances comes close on the heels of Walmart’s audacious announcement that it was buying out e-commerce giant Flipkart for $16 billion. 

For Walmart, which earlier made many aborted attempts to enter the brick-and-mortar multi-retail business, the acquisition is part of its global battle to take on Amazon in markets where the latter has an upper hand in the retail sweepstakes. That is especially true in the US, the largest market for both the players, where Amazon is taking Walmart head on after the acquisition of Whole Foods, a brick-and-mortar retail chain. 

Retail experts say Walmart will still be looking around for acquiring a brick-and-mortar retail business, which has eluded it in India, to provide physical touchpoints and stores to enable and expand its e-commerce play. That, however, might need some tweaking of the FDI policy on multi-branding. 

There are murmurs that Walmart as well as Amazon are in talks with Biyani (which has the largest grocery chain with high volumes of sales) for a possible alliance, even though the group CEO of Future Group has declined to comment on the possibility. Amazon has already tied up with local grocery retail stores like Modern Bazaar in Delhi, apart from creating its own centers to deliver food and grocery through its online portal Amazon Now.  

So, are Indian consumers ready for seamless shopping, which would lead to the convergence of offline and online retail like what Biyani and Walmart might believe in? Or, is it just a valuation game played out by large strategic investors, who are paying a hefty premium for the future potential of the Indian retail market even though it is still underdeveloped and not making any money. 

Arvind Singhal, chairman Technopak Advisors, which has consulted most Indian and global retail players, point out that the e-commerce business in India is highly overhyped. According to their estimates, e-commerce players contribute only 2-2.5 per cent of the $ 700 billion consumers spend on merchandise per annum and that also after huge discounting. That contribution looks even narrower when more than 40 per cent of their gross merchandise value comes from mobile phones. 

E-commerce players have a very negligible contribution in the $300 billion per annum consumers spend on basic food and only 3-4 per cent of the $60 billion forked out for clothing and fashion. Says Singhal: “The convergence of offline and online is clearly overexaggerated and is being used primarily to play the valuation game. Unlike in the US, where more than 70-80 per cent of the customers seamlessly shop online to offline, in India that number of customers would use both is around 15 per cent.” 

Analysts who closely follow the sector say with e-commerce players getting huge valuations, many brick-and-mortar retailers are also now aggressively looking at opportunities to partly monetise their business rather than be outliers. And the convergence model and story looks attractive. 

Retailers are already taking some tentative steps to converge their models. For instance, D-Mart, one of the largest retail players based on market cap, has launched a model under which shoppers can order online and either collect their stuff from 57 kiosks and pick up points across Mumbai city, or get it home-delivered at a particular time (with a 3 per cent extra charge of the value of the merchandise). D-Mart executives say currently, they are experimenting with the model in some parts of Mumbai and the plan is to expand it to other cities of Maharashtra and then to other states.

The Tatas through Trent are also making their second coming in grocery online business after closing shop in 2015. It has launched online portal StarQuik, which showcases over 10,000 products and offers to deliver them at home within three hours within 7 km from a Trent-run Star store. The prices and promotions are aligned both for the stores and online. StarQuick director K Radhakrishnan says, “We are working on covering areas where we do not deliver. We will become significant portion of Star stores. We have realised that there should be seamless integration between customers, stores and online operations.”   

Similarly, Future Group, after two unsuccessful online ventures, is looking at an app-based grocery delivery service for members of its Easy Day stores. The company will target the daily and weekly grocery requirement of consumers competing with the likes of Big Basket, Amazon Now and Grofers to their game. Biyani says they have created an ecosystem which will straddle online and brick-and-mortar commerce, logistics, payment systems, financial services, factories, among others.

           THE RETAIL REALITY CHECK

• The number of consumers who are active online shoppers in the country is around 40-50 million
• Only 15% of the consumers in India shop both offline and online compared to 80 % in the US
• Online retail sales are heavily skewed towards mobile phones, it has very negligible presence in grocery and foods
• Organised retail still constitutes for 8% of total sales, in the US it is 70% and in the UK as much as 80%. In China it is expected to be around 40%
• Indians spend over 40% of their money on merchandise on grocery and basic food, in the US it is not more than 9%                                                                                                                                                                  Sources: KSA-Technopak, industry