India has also interestingly leapfrogged into the era of e-commerce even while it is stabilizing in organized offline retail
The past decade saw the entry of large Indian conglomerates like Reliance, Tatas, Bharti Group, Birlas and Goenkas in the modern retail market. The big boys of global retail like Carrefour, Wal-Mart, and Metro etc have also started to establish their footprints in the Indian retail space. A recent study from Deloitte projects the Indian retail industry to increase to $750-850 billion by 2015 from the current $518 billion. Despite this, the organized modern retail is only 8 percent of the Indian retail market.
The retail industry in India has gone through a tumultuous journey with some high profile exits, buyouts and collapses and has reached some stability only after the recent FDI announcements.
Today, the overall global economic context has a profound influence on the optimism of consumers, demand, industry dynamics and the investment climate. All of these deeply impact the large scale investment decisions required in retail.
In the coming decade structural issues like the European crisis, the fiscal challenges in the US and political logjams in India will continue to be present, resulting in certain amount of economic turbulence. The consequence of this will be that both consumer sentiments and the investment climate will swing between highs and lows.
Despite these uncertainties, the online retail e-commerce business has started taking off alongside off-line retail.
Both organized brick and mortar stores and the online markets also depend on scale, brand, operational efficiency and buying power to be successful.
With so much of commonalities, in a fiercely competitive market, the e-commerce businesses will need to take a few lessons from the experience of offline retail in the last decade. Many lessons are inherent to a new industry but some of them are unique to the Indian market. They can ignore them only at their own peril.
Pitfalls to Avoid
The potential of the Indian market is big and that is definitely true in the long term. In the short term, spanning two to three years or even a time span of five years, the total market for new industries is notoriously unpredictable. Market potential and forecasts get hindered by a plethora of reasons including regulations, supply chain and the consumer’s slow adaptation. The business planning has to factor this. Typically, it underestimates the level of fluctuation. The forecasts from leading research and consultancy houses in 2006 pegged the Indian modern retail to be between $70bn and $90bn in 2011. But it actually grew to be around $30bn.
Owing to the highly unpredictable nature of the market, the cash burn in the initial years can be very uncertain and wreck any plan.
In the very short-run, the chase for transactions and customers can be very seductive but they use disproportionate cash. This can lead to businesses going bust despite having a good potential model. Lack of cash can not only pose questions on the survival of the business but continuous inadequate capital can make the business slowly uncompetitive with lessening influence over vendors due to delayed payments, employee uncertainty, hampered branding ability and several other sub-optimal choices. This is what happened to several promising retail businesses.
In offline retail, metrics like turnover, number of stores were the determining factors in valuation and funding initially. But the investment paradigms based on these parameters changed once global economic context changed dramatically in 2008. The investors moved from size as the principal parameter of valuation to operational profits. It is important to prepare and be ready for such changes.
Best Ways to Negotiate the Challenges
The best way to do handle this is to start small and test the business model as thoroughly as possible before taking bigger risks which have more in-built uncertainty. So, geographic expansion or category proliferation can wait till the business reaches the ballpark profitability range.
Withdrawal of supplier credit lines can overnight topple businesses. This usually can start with a single issue which sparks off panic and leads to a set of cascading actions across the entire vendor eco-system. The flow of stocks is squeezed and then the business cannot get back to stability without resolving the cash crisis fully.
People & Culture
It is a cliché but people make or break companies more so in new, dynamic markets. Success in old, stable industries is not necessarily a predictor of performance in ecommerce organizations. Some of the key competencies needed in ecommerce like innovation, risk taking and creative problem-solving do not get tested in established markets. But new and volatile industries put a premium on capabilities like out of box thinking; ability to handle failure and an entrepreneurial approach. The selections should be done accordingly. The organizational culture has a very significant role in also helping this talent to flourish. An open and non-hierarchical culture will enable the talent to take risks and innovate.
The Indian consumer shows very low brand loyalty in the new shopping formats. The near absence of switching costs exacerbates this in online businesses.
Hence strategic positioning becomes crucial. It goes beyond brand positioning. It is important to ensure that the various elements of value chain have a set of inter-locking and self-reinforcing elements to deliver this positioning and value to the customer. There were contradictions in organizational elements and brand deliverable in many new offline businesses.
In 2012, 8 million consumers used the net to buy in India. That is a fraction of the eventual potential. But the potential is in the long-term. In the medium-term, irrespective of any other narrative the strategy has to centre on cash flow and profits. This is easier said than done. But the key to durable success lies in this.
Finally, the e-commerce business will need oodles of patience and persistence as nothing will happen overnight.
Salil Sahu is responsible for running HSIL, a part of Wadhawan Retail Limited. He joined as the CEO of HSIL in July, 2007 posts the takeover of the company by the Wadhawan group. Salil began his career as a Management Trainee in Shaw Wallace & Co. He has extensive experience in Sales, Marketing, Strategy and General Management and has spent the last 10 years in P&L management. He has worked in Wipro, Heinz, Shaw Wallace and a start-up and has been part of many pioneering initiatives. He has also steered the successful acquisitions of retail businesses for the Wadhawan group.