By Taponeel Mukherjee
As the retail industry story unfolds in India, new strategies come to the fore. Recent news of Amazon acquiring a stake in Future Retail is an indication that the strategy will be differentiated given the nature of the market and consumption trends.
Amazon's acquisition of a stake in Future Retail is in addition to the stake it took in Shoppers Stop, and the earlier Aditya Birla-backed "More" chain. These acquisitions are an indication that large retail players think that, to gain a greater market share, the online strategy will have to be complemented with an offline route as well.
Online retail sales as a percentage of total sales have shown a tremendous rise, going from 0.8 percent in 2014 to 3.6 percent of total retail sales in 2017. While the growth has been enormous and will continue to be fast, the fact that 95 percent of the market is still with the offline sector drives home a few important points. Access to offline stores provides a vast distribution network and brand accessibility, especially beyond the Tier 1 cities. Therefore, for a player interested in a higher market share, an offline presence is non-negotiable.
Additionally, besides the offline versus online demarcation, it is essential to understand that 90 percent of all retail in India is in the unorganised sector. The unorganised sector - primarily, physical stores -- thrives due to an extensive last-mile distribution network and long-term relationships. The key for new players is not necessarily the disruption of the unorganised sector but having access to retail stores that provide organised players with the same distribution networks and concomitant advantages.
Quite often discussions focus on the market share of online versus offline retail. While it is a relevant topic, the more pertinent discussion is the overall retail market growth rate. The retail market in India is expected to cross $1 trillion in the next three years. The greatest value generation for retail businesses is in capturing market growth as greater cash is generated by retail consumption.
A 2007 analysis by McKinsey titled "The Granularity of Growth" had some interesting lessons. A study of 200 large companies around the world showed that almost 80 percent of growth for the companies was driven by growth in the industry segments and successful mergers and acquisition strategies while only 20 percent was through gaining market share. The key learning for Indian retail players is that while market share matters, being a direct beneficiary of rising incomes in India is a lot more advantageous.
Given the industry dynamics in the last decade, retail e-commerce has dominated headlines. While e-commerce will continue to be a significant sector, the question is: What other exciting opportunities exist in Indian retail?
The creation of niche, sector-focused "digital first" businesses backed by consolidated research-driven manufacturing and distribution platforms hold potential. In the West, businesses such as "Seed Beauty" and "Hatch Beauty" are redefining the retail landscape. Given the creation of "digital first" brands driven especially by social media influencers, businesses such as Seed and Hatch have been able to speed up product research, development and fulfillment.
The division between manufacturing and branding businesses is what Poornima Vardhan, CEO of 335th, a luxury-focused platform, describes as the "delineation of product development and manufacturing from the branding and marketing". In common parlance, separation of the R&D and product development from branding creates the potential for business opportunities through specialisation. Such focused businesses hold promise in the Indian retail landscape.
The next decades might also herald the creation of retail platform businesses that "corporatise" a portfolio of Indian brands. The likes of Kering, Richemont and LVMH are examples of hugely successful global retail platforms that have delivered value. While Indian beauty products, jewellery and fragrances have been marketed to some extent, now is the time to create large scalable platforms that can combine front-to-back retail operations with global scalability for Indian brands. The ability to match Indian entrepreneurship with global capital and distribution will be the vital driver to create sustainable retail platforms.
There are many "markets" that offer opportunities in the Indian retail space. Therefore, while online mass retailers will look to create an offline presence, online "digital first" niche brands, backed by specialised manufacturing businesses, also hold value. It is vital to realise that given the diverse customer segments, different pockets of opportunities will require an agile approach.
In India, access to the online world has happened synonymously with rising incomes while the developed countries had significantly higher income levels when they got access to the internet. Therefore, a business strategy that deals with local dynamics and trends will determine the eventual winners.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at firstname.lastname@example.org or @Taponeel on Twitter)
(This story has not been edited by Social News XYZ staff and is auto-generated from a syndicated feed.)