Several fascinating changes are underway in India that will fundamentally transform how Indians will shop just a few years ahead, and thereby irreversibly alter the composition of various formats of retail businesses, especially those catering to the needs of urban, semi-urban, and even the relatively large (say, the top 50,000 of the estimated 650,000) villages. This change will create, in the near term, a rapidly escalating conflict between physical retailers (and mall owners having physical retailers as tenants or revenue-sharing partners) and the e-tailers. There are already many visible examples of this conflict with reports of threats from mall owners to brand owners to ensure "price" parity between the physical and online retail channels. However, such threats (or hopes) on behalf of physical retailers, select brands, and mall owners and shopping establishments' landlords are unlikely to work (notwithstanding even the questionable legality of such action from the point of view of competition laws) since the tide is clearly in favour of e-commerce (of both services and merchandise).
Underpinning this transformation are five major factors. The first, and perhaps the most important, is the increasing time-poverty of the core consuming class in urban India. The very rich are able to "outsource" many of their mundane, time-intensive activities to a retinue of assistants leaving them with more time for leisure, recreation, and shopping (the very poor may have the time but no disposable, discretionary spending income). But the middle class faces more pressures on its time as it juggles jobs, longer commutes, attending to the myriad needs of children, social obligations, higher cost and shrinking availability of trained domestic help, the nuclearisation of families and so on. Indeed, if time could be bought, it would command a rapidly growing premium from the typical middle-class urban Indian household.
The second factor is the impact of sustained double-digit consumer price inflation across India. From the barely comfortable five to six per cent range of yesteryear, the average Indian consumer has endured several successive years of double-digit inflation. With the economy slipping to a very low growth trajectory, most Indian consumers (other than the uber rich) have seen nearly stagnant or even declining inflation-adjusted incomes. As a result, a growing number of consumers have started to trade-down and look for cheaper options.
The third factor is the fact the 15-34 age group now comprises the largest demographic grouping in India, numbering about 435 million. The next big age group is the 1-14 comprising about 345 million. The age group 35-59 now accounts for just about 27 per cent (about 325 million) of India's population. It is no surprise that the majority of Indian consumers today have many new needs and aspirations. On account of digital media, there is also an increasing convergence across geographies and socio-economic strata when it comes to these new needs and aspirations.
The fourth factor is the exponential increase in internet connectivity across urban and rural India. From about 150 million unique internet users at the beginning of 2014, India would probably see this number grow to over 300 million by 2016 (with bulk of the growth coming through rising penetration of smart phones). While the quality and speed of connectivity remains patchy today, it is likely to improve rapidly with the anticipated aggressive roll-out of 4G networks.
The fifth is the emergence of an exceptionally vibrant ecosystem of e-commerce entrepreneurs who are relatively young, more ambitious, tech savvy and risk loving. They are able to adapt their business models almost on a monthly basis as they get a better handle on consumers' needs and the challenges of running e-tailing business in India. Unlike the corporatised "brick and mortar" retail where international giants are still struggling to make their presence felt, the e-tail universe in India already has two of the world's biggest and most successful retailers present in India (eBay and Amazon) and making an impact. There is seemingly also no dearth of capital for the more promising e-businesses.
On the other hand, corporatised physical retail has not really lived up to the early promise and potential. The last 20 years have seen entry of some of the most formidable businesses and entrepreneurs in the retail sector. Sadly, for various reasons, most have struggled and continue to struggle to find the right business model, format, and management capable of delivering both growth and profitability while also creating customer delight. At this time, physical retail faces even more headwinds that include inadequate availability of appropriate quality and right-priced real estate, rising operating costs that include salaries and utilities, and almost no access to global capital, thanks to the highly convoluted and impractical policy for foreign direct investment in multi-brand retail.
With all these challenges for the brick and mortar retailers, and in the backdrop of the fundamental changes in Indian consumer behaviour, "e" is likely to emerge as the most attractive retail channel for a large segment of the urban Indian consumer and offer the maximum competition to corporatised physical-format retailers, especially those in high streets and shopping malls. Indeed, by 2023, our estimates suggest that e-commerce will be the dominant "organised" retail channel in the top 75 Indian cities (cities with population of one million or more). It will account for as much as 30 to 35 per cent of total merchandise sale by value in these cities and about 20 per cent of total merchandise sales in the rest of urban India. Traditional, small, independent retail outlets will continue to account for a significant 35 to 40 per cent of total merchandise sales in the top 75 cities and closer to 50 to 55 per cent in urban India overall. The share of organised "brick and mortar" channel sales will be limited to between 25 to 35 per cent in the top 75 cities and between 20 to 25 per cent for all of urban India.
So, the earlier the mall owners/retail landlords (and some brand owners too) accept the reality of "e-tail" and take steps to adapt to these fundamental shifts, the better it would be for them. Indeed, there are many possibilities for such mall owners and landlords to rejig their spaces and business model to co-opt "e-tailers" as their partners rather than see them as adversaries. Likewise, brands should not focus too much on preserving their "price integrity" across various shopping channels but instead, collaborate with their channel partners (physical retailers and e-tailers) to find ways of stimulating consumer demand and grow their businesses faster.
Arvind.singhal@technopak.com
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
