THE UGLY TRUTH

Coming soon to a website near you: The carnage of Indian e-commerce

Quartz india
Quartz india

At 148 years old, India’s salt-to-steel conglomerate Tata Group wants to get hip and cool.

So, for its first big gamble on India’s booming e-commerce space, the group says it will only sell Camels—that’s short for “certified authentic merchandise everybody loves”—on its online shopping platform, Tata CLiQ.

It may be a contrived marketing ploy aimed at eventually drawing 100 million customers, but that doesn’t matter. The battle for a share of India’s burgeoning urban, young internet shoppers, is getting bloody. And the Tatas may just have opened a new front.

The group’s move comes four months after Reliance Industries (RIL) launched an online fashion portal Ajio.com to sell branded clothing and accessories to women. Owned by India’s richest man, Mukesh Ambani, RIL runs a large network of fashion, grocery, and electronic stores in the country.

There’s also the Aditya Birla Group, led by 48-year-old billionaire Kumar Mangalam Birla, which runs one of India’s largest fashion retail businesses with departmental stores such as Pantaloons and brands such as Allen Solly. It launched a multi-brand online fashion store, abof.com, in Oct. 2015. Birla, who views online retail as a “sunrise sector from an investment point of view”, plans to “build another billion-dollar business of the group in this space.”

In all, over half-a-dozen large, one-time brick-and-mortar-only retailers are going up against the big guns of India’s e-commerce ecosystem—who, incidentally, are themselves struggling.

Flipkart, India’s largest online retailer, for instance, is hamstrung by everything from devaluation and top-level exits to massive organisational restructuring due to a dearth of funding options. Other players, too, are suffering due to subdued investor sentiment. India’s three largest e-commerce players—Flipkart, Amazon and Snapdeal—are bleeding money to woo customers, reporting combined losses of over Rs5,052 crore in fiscal 2016.

Yet, everyone seems to be betting on one thing: the potential of Asia’s third-largest economy, home to 1.2 billion people.

But that’s in the distant future. For now, expect more carnage.  Traditional retailers had little choice but to follow the wallets online. 

“It is true that the online retail market is big and it can absorb multiple players, but it’s not infinite. It’s not like 10 players can succeed at the same time,” said Sanchit Vir Gogia, chief analyst and CEO of Greyhound Research, a research and advisory firm.

“Large offline brands becoming bullish on the online space will have a massive impact on e-commerce in India,” he added.

A long time coming

For years, India’s $600 billion brick-and-mortar retail industry mostly kept itself at an arm’s length from online commerce. Even the handful who saw the light moved reluctantly and invested little.

But, as consumers ditched the high streets and malls to log onto shopping websites, traditional retailers had little choice but to follow the wallets online.

Between 2009 and 2014, the Indian e-commerce industry’s sales (pdf) registered compounded annual growth rate of 34% to reach $16.4 billion.

There’s more coming. By 2020, e-commerce will contribute 25% of all sales in India’s organised retail sector, according to a May 31 report by Google and consulting firm AT Kearney. That means, in four years, the segment will generate $60 billion in gross merchandising value (GMV) or total value of goods sold online.

The internet, said AT Kearney partner Ajay Gupta, “will influence 50% of all purchase decisions, be it in discovery or comparison.”

By now, the old retail warhorses have a sense of the inevitable.

“The way things are growing, with more smartphones and mobile devices in hands of consumers, digital is the future mode of engagement with shoppers,” said Kulin Lalbhai, executive director at Arvind Limited, a large textile manufacturer and retailer.

In 2012, the 80-year-old family-run company began selling its brands through online retailers such as Amazon, Jabong, and Myntra. These labels include international heavyweights like Tommy Hilfiger, Arrow, Nautica, and now Aeropostale.

On May 12, Arvind spent $10 million to launch NNNow.com, an omni-channel venture where it plans to blend sales through a website, mobile app, and physical stores. The company will sell over 30 of its fashion labels—besides selling exclusive online collections and third-party brands—and hook its in-store inventory across 1,200 stores to NNNow.com.

May the force…

These transitions from offline to online won’t be easy.

“It will be a formidable task for new companies to build businesses,” said Sanjeev Mohanty, chief executive at online fashion retailer Jabong.com. Owned by Global Fashion Group, Jabong is among the leading online fashion retailers in India with a GMV of over $61 million.

In the time that brick-and-mortar players procrastinated before getting on the internet, the dynamics of the online business have changed.

Simply consider the cost of reaching potential consumers. “If you had to spend X three years ago to reach Y, at today’s cost of investment and hyper-competition—with clear established players—you will have to spend 3X,” Mohanty explained.

That’s perhaps why the former Benetton Group managing director remains confident that incumbents such as Jabong and Myntra will continue to dominate the online fashion market.

It’s unlikely to be much different in other segments. “Amazon, Flipkart, Snapdeal have had enough of a head start. It will take the new retailers another 6-12 months to make any dent in their market shares,” said Arvind Singhal, chairman and managing director at consulting firm, Technopak Advisors.

However, it will add pressure on the Amazons, Flipkarts, and Snapdeals, who have struggled to attain a semblance of profitability, even as they emptied their coffers to retain market share through deep discounting.

These debilitating discounts, though, are unlikely to stop.

“The companies that have entered the online retail market now are very big and some of them will definitely take the deep-discounting route, which will hurt incumbents immediately,” said Greyhound Research’s Gogia.

Others such as Arvind’s NNNow.com and Aditya Birla’s abof.com have vowed not to get into the discounts game. That may well mean a longer, unprofitable wait for online market share even as they leverage their offline presence.

A silver lining

The impending chaos notwithstanding, there does seem to be some consensus on what the future of Indian retail might look like.

“The future of retail is probably in the multi-channel retail model where companies will need to have a presence in both online and offline space,” reckoned Gogia.

Jabong’s Mohanty foresees a similar situation. “It will be like it is in the United States, where more large retailers see a big part of their sales coming from online,” he said, “…so it will be the same sort of evolution in the Indian market, but more gradually.”

In the US, even now big-box retailers, including Walmart and Target, are investing millions of dollars to build e-commerce channels to take on the likes of Amazon.  Whatever happens, it isn’t going to be a quick and bloodless affair.  Only close to 8% of all US retail sales are made online, with apparel companies having gained the most number of shoppers online. In some cases, though, the figure is upwards of 15%, suggests a May 2015 article by Bloomberg.

If indeed that’s the direction India’s retail sector takes in the long term, the brick-and-mortar players eventually may have an advantage.

“Now if that happens, the offline guys are positioned far better than the online ones because they already have stores, which is the more capital-intensive part of this model,” explained Gogia, “It will be extremely hard for the online guys to compete in that space.”

Whatever happens, it isn’t going to be a quick and bloodless affair. Maybe Camels isn’t such a bad choice by the Tatas for a name. After all, it’s going to be a long and difficult journey ahead for India’s e-commerce sector.

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