This report informs companies about the current and future prospects of these nascent ʻClick and Dialʼ distribution channels. Furthermore, it presents Kanvicʼs perspective on
their expected development and highlights the major opportunities for companies to prosper in this market space, by adapting their strategy to the specifics of the Indian consumer market.
2. Kanvic is a management consulting firm helping businesses develop winning
strategies, drive profitable 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.
3. CLICK and DIAL
A NEW PATH FOR INDIAN RETAIL
Deepak Sharma
Vlad Flamind
November 2011
kanvic.com
5. 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
5
7. Click and Dial - A new path for Indian retail
Contents
Foreword
8
Executive Summary
10
Reach and Consumer experience
14
The twin focus areas for retailers
Click and Dial
18
The emergent channels to improve reach and consumer experience
Winning the distance channels
36
A new path for Indian retail
Conclusion
54
7
8. Click and Dial - A new path for Indian retail
Foreword
Indiaʼs 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 firms 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, firms 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.
8
9. Click and Dial - A new path for Indian retail
This report informs companies about the current and future prospects of these nascent
ʻClick and Dialʼ distribution channels. Furthermore, it presents Kanvicʼs perspective on
their expected development and highlights the major opportunities for companies to
prosper in this market space, by adapting their strategy to the specifics of the Indian
consumer market.
Deepak Sharma
Director and cofounder
9
10. Click and Dial - A new path for Indian retail
Executive Summary
10
11. Click and Dial - A new path for Indian retail
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
retailersʼ reach but they have also been the source of tremendous inefficiencies.
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 efficiently, 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 significantly 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 first 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
12. Click and Dial - A new path for Indian retail
words, it will be e-retailersʼ 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 efficiency will be the next battlefields 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 consumersʼ call for convenience.
To succeed in increasing reach and improving their customersʼ shopping experience, retailers
should adopt the right strategies.
Four consumer segments should be considered in the Internet channel, each with a specific
capacity to buy online and a specific 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 firms through a focus on price, since their level of income
tends to be lower relative to the buyer segment. To succeed profitably in this segment, e-
retailers 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.
12
13. Click and Dial - A new path for Indian retail
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 firms 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 inefficiency because retailers
operate at low utilisation rates to meet consumersʼ 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 efficiency both by reducing their
infrastructure costs and by increasing their capacity utilisation rates.
13
14. Click and Dial - A new path for Indian retail
Reach and Consumer experience
The twin focus areas for retailers
14
15. Click and Dial - A new path for Indian retail
Reach and Consumer
experience
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.
15
16. Click and Dial - A new path for Indian retail
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 retailersʼ 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 figure dropped to 5,5651.
1 Knight Frank, ICRIER, BMI, Images F&R, Business Today, Indian Census, Kanvic analysis
16
17. Click and Dial - A new path for Indian retail
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).
17
18. Click and Dial - A new path for Indian retail
Click and Dial
The emergent channels to improve reach and consumer
experience
18
19. Click and Dial - A new path for Indian retail
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).
19
20. Click and Dial - A new path for Indian retail
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 firstly 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 efficient shopping. By enabling transactions to be made at distance and
goods to be delivered to the customerʼs door, retailers gain a competitive advantage.
20
21. Click and Dial - A new path for Indian retail
Increasing reach through distance channels
Increasing reach is necessary for retailers to leverage fixed 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 fixed 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
efficiently. The weight of rental costs in sales is actually above the international figures as
shown in Exhibit 5.
21
22. Click and Dial - A new path for Indian retail
There are two reasons for this low efficiency. On the one hand, retailers have been confronted
with high rental prices. As shown in Exhibit 6 rents have increased significantly during the period
2005-08. Although the trend is downward since then, rents still represent a major risk for the
retailersʼ efficiency with regard to their weight in the cost structure and their tendency to
fluctuate sharply.
On the other hand, retailers are scaling up faster than the growth in demand. To get a foothold
in the best areas, firms 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 efficiency, generating less sales per square foot of commercial
space.
2 ICRIER, Knight Frank, Business Today, Kanvic analysis
22
23. Click and Dial - A new path for Indian retail
Distance channels can widen reach more efficiently
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
benefit 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 supplierʼs capacity to process orders, payment, and delivery
within a given perimeter as shown in Exhibit 7.
3 Almost three fourths of Indian consumers would not select a shop that requires more than 15 minutes to reach. (MGI)
23
24. Click and Dial - A new path for Indian retail
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 figures 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 India Online, Kanvic analysis
5 IAMAI, Indian Census 2011, Kanvic analysis
24
25. Click and Dial - A new path for Indian retail
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.
6 CMR India 2011, Datamonitor, Census 2011, Department of Telecommunications, Kanvic analysis
25
26. Click and Dial - A new path for Indian retail
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).
7 Refer to Exhibit 9 for sources
26
27. Click and Dial - A new path for Indian retail
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 insufficient to meet
the consumersʼ expectation for variety and to increase their confidence in a new and uncommon
distribution channel.
8 India Online, IAMAI, Kanvic analysis
27
28. Click and Dial - A new path for Indian retail
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 find 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 confidence 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 confidence would also rise. The
brand image and loyalty acquired in traditional retail channels will be the drivers supporting the
9 India Online
10 India Online
28
29. Click and Dial - A new path for Indian retail
increase in consumer confidence. 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 significantly by filling
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 first 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 firms can already advertise their products to almost
every consumer (Exhibit 12).
11NRAI, Business Today, Mydigital FC, APICS, Datamonitor, ICRIER, Image F&R, IAMAI, BMI, ASSOCHAM, Kanvic
analysis
29
30. Click and Dial - A new path for Indian retail
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 Censusʼ method as a benchmark
30
31. Click and Dial - A new path for Indian retail
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 specific 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
specifically fast food. Players like Pizza Hut and Dominos have built sufficient capacities to
generate demand and on average they realise 50% 14 of their sales through the phone ordering
channel.
13 ICRIER
14 MydigitalFC, Kanvic analysis
31
32. Click and Dial - A new path for Indian retail
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 firms are missing out on the majority of urban consumers that do not
surf at all or that do surf but donʼt shop online.
To tap into a wider consumer base, firms like Express Retail Service have recently started to
enter the market, providing phone ordering without any web interface. Not wanting to miss the
32
33. Click and Dial - A new path for Indian retail
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 first 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 productʼs specifications. 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
34. Click and Dial - A new path for Indian retail
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.
34
35. Click and Dial - A new path for Indian retail
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 householdsʼ spare time will
decrease.
The first 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 MGI
17 Indian Census, Kanvic analysis
18 IMRB International
35
36. Click and Dial - A new path for Indian retail
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
37. Click and Dial - A new path for Indian retail
Winning the distance channels
a new path for Indian retail
37
38. Click and Dial - A new path for Indian retail
Winning the distance
channels
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 profitable 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.
38
39. Click and Dial - A new path for Indian retail
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
segmentʼs readiness to buy online.
20Capacity is defined by using two proxies: the average household income; and the percentage of surfers occupying the
position of household head. Interest is defined 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.
39
40. Click and Dial - A new path for Indian retail
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 benefit 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
reflected in the low frequency at which they visit shopping websites.
Window shoppers show a significant level of interest in e-retail but they have an insufficient
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 Indiaʼs economic growth.
40
41. Click and Dial - A new path for Indian retail
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 buyersʼ 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
42. Click and Dial - A new path for Indian retail
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 first 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.
42
43. Click and Dial - A new path for Indian retail
Indian consumers however will demand a deeper level of interaction because of their specific
cultural traits. Call centres with operators standing ready to answer a customerʼs 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 sufficient 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 customerʼs 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 India Online
23 www.ecommerce-guide.com: Ice your Competition with a Cool Return Policy
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44. Click and Dial - A new path for Indian retail
In addition, market leaders are also providing guaranties to their customers under the form of
refunds or return policies. Buyers lacking trust can therefore finalise 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 suffice to bridge the
confidence gap entirely, especially if no action is taken to reduce the actual number of
unsatisfied 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
supplierʼs 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 retailerʼs 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 final 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 intensifies
in the online market, delivery will become a major competitive battlefield, and leaders will
depend on their logistics to maintain and grow their market position. Significant effort should be
made to reduce the currently large proportion of unsatisfied consumers. Close to 70% of buyers
have experienced delays in delivery and 25% have received damaged goods at least once 26.
24 India Online
25On-time-in-full rates refer to the proportion of shipments that reach their final destination at the right time, quantity,
quality and cost.
26 India Online
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45. Click and Dial - A new path for Indian retail
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 first 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 group-
buying27 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 sellerʼs 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 Amazonʼs 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,
27Group buying refers to the creation of consumers groups that purchase in bulk together to benefit individually from
lower unit prices.
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46. Click and Dial - A new path for Indian retail
Mumbai, Bangalore, Pune, Kolkata and Chennai) to compete with the existing players in the
Indian market.
Pricing should be tailored to maximise profits
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 profits. 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 benefits from a 50% discount offered to
everyone, the retailer loses the opportunity to generate an additional Rs. 50 of revenues.
Instead, firms 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 significant 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 first 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 sufficiently 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).
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47. Click and Dial - A new path for Indian retail
Two marketers out of five 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 traffic 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 Business Today
29 ComScore
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48. Click and Dial - A new path for Indian retail
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 influencers firms 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
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49. Click and Dial - A new path for Indian retail
Retailers should scale up to penetrate the phone channel profitably
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 firms should invest heavily in building logistics networks and customer contact points that
offer consumers the convenience they desire. However, only the firms that scale their
operations will sustain profitability by leveraging their expenditure on fixed 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 specific 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
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50. Click and Dial - A new path for Indian retail
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 fill these gaps by providing systematic services. With
dedicated call centres and fleets 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.
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51. Click and Dial - A new path for Indian retail
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 profitable. As their capacity
to take orders and deliver door-to-door is currently under-utilised they do not leverage their fixed
costs efficiently. 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.
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52. Click and Dial - A new path for Indian retail
Centralisation will be the key to profitability in the phone channel
The key to success in cost efficiency 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 fleets 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 efficiency. 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 benefit 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 efficiency. Centralising the delivery
service can enable retailers to use that leverage. Their rental cost can be significantly 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.
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53. Click and Dial - A new path for Indian retail
...and improvements in logistics efficiency.
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 efficiently.
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 fleet (Exhibit 19). In the
centralised model however, using trucks can increase efficiency.
Fixed costs can be leveraged by a smaller fleet 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 efficient to transport a given load using trucks, than it is
to use the two or three wheelers deployed in the traditional non-centralised model.
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54. Click and Dial - A new path for Indian retail
Moreover, larger trucks can be used for efficient 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 profitable for retailers (Exhibit 22).
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56. Click and Dial - A new path for Indian retail
Conclusion
This report has outlined the prospect for distance channels to prosper in urban India, and
clarified 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 significant change for these retailers will probably be felt through a
decrease in footfall and revenues. Because convenience and choice are becoming key criteria
in consumersʼ satisfaction, pure brick-and-mortar shops will certainly suffer a loss of
competitiveness relative to distance channels.
Another important change will come more specifically 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 find 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-and-
mortar 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
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57. Click and Dial - A new path for Indian retail
specifications and rival brands than sales people on the shop floor, and for this reason they
become difficult 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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58. Click and Dial - A new path for Indian retail
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