After intense lobbying by groups representing millions of India’s small traders and shopkeepers, who say online retailers have threatened their businesses, the government has established numerous regulations to stem the tide of e-commerce in the country. These new policies(1) restrict the sale of products via companies in which e-commerce firms have an equity interest and disallow giants such as Amazon and Walmart-owned Flipkart from pressuring sellers to sell exclusively on their platforms. These policies also require companies to store data locally and put a cap on the prices of selected items. These steps, however, are unlikely to slow online retailing in the country. On the contrary, compared with physical store retailers, the growth of online retailers is likely to continue at a similar rapid pace. Their source of competitive advantage is a devastating combination of inherent strengths and a unique business model.  <h5>Advantage of accessibility (reach)</h5>Over half a billion people in India are using the internet. Most are doing so using smartphones.(2) Riding the wave of this expanding internet infrastructure and increasing smartphone penetration, online retailers have conquered new frontiers, especially in Tier-2 and Tier-3 cities where consumers have little access to major brands. <h5> Advantage of space management (variety)</h5>Unlike store retailers, who are always constrained by space, these virtual entities enjoy unlimited shelf space to display an almost endless variety. <h5> Advantages of inventory management (costs)</h5>At the same time, the online model also allows overheads and inventory costs to be kept low. Physical retail chains tend to have inventory distributed in the entire sequential multi-tier structure - manufacturer, centralised warehouse, regional distribution centres and physical stores. Online retailers have done away with the multi-echelon distribution model and ship items directly from a warehouse to the customer. This means that they do not have to maintain these facilities, especially the stores. Moreover, servicing from an aggregated location means that, unlike physical stores, they do not have to contend with the problem of mismatched stock (what is demanded v/s what is available) at every downstream node in the chain.  <h5>Advantage of agile demand feedback (response to market dynamics)</h5>To ensure that they have the right inventory, online retailers also leverage an in-depth understanding of real-time demand data. For example, Ratatouille, an artificial intelligence-based software, helps Myntra predict which designs will be top-sellers. This has helped them go beyond fast fashion to ‘intelligent’ fashion and swiftly offer designs based on the hottest market trends. <h5> Advantage of pricing flexibility (response to market dynamics)</h5>Most physical store retailers need significant time to implement any price variation and, hence, are handicapped in impacting price-demand elasticity. However, virtual stores can do it almost instantly - they can dynamically set prices according to customer activity on the website, competitors’ pricing, product availability, item preferences, and other factors. <h5> Advantages of dynamic visual merchandising (response to in-store behaviour)</h5>They can also dynamically assimilate consumer buying behaviour to offer displays tailored to each customer. For example, when a customer researches the catalogues of a product range on Flipkart, their search patterns are recorded, and a ‘persona’ is created for the customer so that when he returns to the website, the search time is drastically reduced by showing the most relevant products that the customer would be interested in buying – it is like changing the visual merchandising of a store for every visitor!    <h2>Business model advantage</h2>These advantages are further strengthened by the online retailers’ very mode of operations - most are able to patiently absorb sustained losses for a long period of time while aggressively pursuing top-line growth.  <h5>Traditional retail channel v/s E-commerce</h5>The biggest competition for these online retailers is the traditional channel in the country. Currently, this traditional channel accounts for well over 90% of the business for most consumer goods companies. Kirana stores and independent traders (wholesalers, dealers, and distributors) flourish in every nook and cranny of the country; this sector is one of the most significant sources of revenue and employment in the Indian economy. Therefore, it is important to evaluate how this channel stacks up against e-commerce players on the above-discussed factors.  Despite the advent of organised physical store retailing in India towards the end of the last century, traditional retail continued to thrive. Wholesalers in this channel are so efficient that they often earn an ROI of 15%-50% despite the wafer-thin margins of 2%-3% that they accrue. This is a feat that not many in modern trade have been able to consistently replicate! But as e-commerce becomes more popular, this channel is bracing for a different kind of challenge. As indicated by the table below (Table 1), the online model enjoys much better efficiency levels. The only chink in the armour of these apparently unassailable retailers seems to be their inability to let customers physically interact with and evaluate the product before purchase, and their inability to deliver the goods instantly.  E-tailers are working on these by opening a few physical stores, offering free or faster delivery options, adopting liberal return policies, allowing ‘try before you buy’, etc. Moreover, in time, e-commerce can potentially exceed the reach of traditional retailers. Thus, a significant shift of market share to online retailers looks inevitable. Many predict that traditional stores will slowly but surely be wiped out.<figure class="image"><img src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1778501624.png"></figure><h2>The fallout: Future market dynamics</h2>This impending decline of the traditional channel is bad news not only for the millions of small stores and traders in the traditional channel but also for consumer goods companies. As dominant online retailers emerge, the market dynamics for consumer goods companies will completely turn on its head.  Today, in India, consumer goods companies hold sway, unlike in countries like the US, where negotiating power is either with big-box retailers like Walmart or online companies like Amazon. Companies here sell to a hundred-odd distributors, and they, in turn, cater to thousands of retailers; there is no single entity in this chain with enough clout to negotiate for more favourable terms. Even the largest organised food and grocery retailers in the country typically have a gross margin of only about 14%. Internationally, many retailers command a far higher margin.  But as volumes sold through them rise, online retailers have already begun to increase their influence over Indian suppliers. Unchecked, in time, India too will likely move to a scenario similar to that experienced in more advanced nations, where suppliers to the few dominant retailers experience a relentless downward pressure on prices.  Clearly, it is in the best interest of consumer goods companies to protect the endangered traditional channel. But the question is how? <h2>Saving traditional <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/retail-solutions/">retail</a></h2>The most crucial issue for this channel is its tendency to be bulky, sluggish and unresponsive to market changes (refer to Table 1). What’s worse is that this channel is completely opaque; once merchandise enters it through a primary sale, its movement is invisible! <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/consumer-goods-retail/">Consumer goods</a> companies that use this channel suffer from the following issues: <h5>1. Inability to understand the timing of demand</h5>Since there is always a large amount of inventory in the channel, it delays the flow of demand information to brand owners. The month-end sales skew and the intermittent bullwhip effect created by schemes only serve to bury this information further.  <h5>2. Inability to gauge true demand</h5>Frequent stockouts at the point of sale make it impossible to gauge product demand.  <h5>3. Inability to pinpoint the location of demand</h5>When wholesalers who operate without territory allegiance are in the system, the location of demand is not clearly known for any targeted marketing efforts. For instance, many companies derive a lion's share of their total sales from the Delhi territory. But from there, the goods spread across the country, thus blinding the company to geographic demand patterns. <h5>4. Inability to gauge true demand for a new product</h5>When there is excess inventory in the system, it also becomes very difficult for new products to find shelf space at retailers. Retailers are far more concerned with selling the ageing inventory (before it becomes unsellable). Without a fair chance to fight for customers’ attention, many new products die undeserved and premature deaths. The good news is that this can change if the channel offers better visibility and becomes more responsive to demand. This will significantly mitigate all the other problems, too - i.e., a more agile inventory management system can ensure better product availability at lower inventory levels. Implementing an IT system at millions of retailers is impractical; it is a gargantuan task unlikely to be accomplished in the near term. Moreover, the problem in the channel cannot be solved by an IT system; the issue is far more fundamental. Most problems in this channel stem from companies pushing products down the distribution channel based on forecasts, resulting in a rampant mismatch of inventory across levels. Sales targets, discounts, and scheme-based inventory movement create irrelevant inventory and aggravate mismatches.  A huge contributor to the apathy in this channel is the prevailing distribution practices of consumer goods companies. If they change these practices, they can help protect millions of small shopkeepers and themselves. <h2>Building visibility and agility in the traditional channel</h2>This means that the current push sales method of inventory movement has to be eliminated, and a mechanism for inventory movement must be implemented so that sales at all nodes in the channel are true reflections of consumption at a lower node. Then, sales from the company to distributors will reflect distributors’ sales to retailers, and sales at distributors will reflect market consumption from retail points. And suppose the company can get visibility into what is sold to each retailer (IT systems at this level already exist, though they rarely share this information). In that case, targeted initiatives can be undertaken at each retailer to increase sales.  For this, companies will have to make significant changes in the way they operate. They will have to:<ol><li>Move away from forecasting ‘push-based’ selling to ‘pull’ mode of inventory distribution, which ensures that the inventory levels in the entire supply chain are lean, right from suppliers to retailers.</li><li>Transform the current combative relationship with distributors into a collaborative ‘channel partnership’, encouraging distributors to reach out to all potential retailers (big and small) in the territory and to offer frequent, reliable deliveries.</li><li>Shift from target/discounting-based sales strategy to a comprehensive Go-to-Market (GTM) strategy, which eliminates the practice of pushing unwanted inventory downstream and does not force partners to buy in volumes while ensuring continuous growth in sales. This will also allow management to focus on enablers, actions, and metrics needed to increase and track the growth of the company’s retailer base, range enhancement, and sales patterns at each retailer.</li><li>Undertake targeted initiatives based on real demand visibility: The steps above can boost the quantum of information available to the consumer goods company. Intelligence thus available from the retail network is comparable to ‘big data’. The company can now track what is selling (or not) and from where – whether it is a small shop in the by-lanes of Dharavi or a large retailer in a Tier-4 town. This access to detailed consumption patterns, along with the capacity to quickly mitigate issues, can enable the company to gain unprecedented ability to react to the vagaries of sales at retail points. </li></ol> <h2>Traditional retail: Standing tall next to online retailers</h2>This replenishment-based distribution system is a winning model for both consumer goods companies and traditional retail outlets. Inventory levels for all parties (company, distributor, retailer) in the channel will fall, inventory can turn faster, and profitability will improve. This will not only offset the inventory-cost advantage of online retailers but also allow the channel to remain lucrative enough to attract investment and growth. This will also improve the reach of this channel in India - a growing economy.  Further, without inventory in the channel, blocking visibility and working capital, this agile <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/solution-frameworks/supply-chain-and-distribution/">supply chain</a> can allow companies to respond smoothly to emerging market demand patterns, i.e., prevent stockouts and excesses and ensure quick responses to pricing changes.  The model (as discussed so far) will address a significant part of the problem. The small stores, however, will continue to grapple with the challenge of offering variety to meet consumers’ evolving tastes. But this can be addressed, too. Most kirana stores have a fair grasp of their catchment area’s tastes but are generally prevented from expanding variety due to inadequate capital and space. Since the retailer’s capital will now be engaged only in small lots of a relevant range, with the freed-up capital, he can expand variety as and when he sees fit. Brand companies can also prompt trials by offering information on consumption and demand patterns gathered from other retailers in the area.  To further augment the variety visible to shoppers, retailers can use an in-store display unit (e.g., a simple e-tablet) to showcase the much wider range available from the distributor and other retailers in the area. The displayed items can be customised for individual shoppers based on previous purchasing patterns and can be used to show products most relevant to each customer. The customer can make his/her choice and, if unwilling to wait for the retailer to source it, he/she can opt to have the products couriered to him/her directly from the distributor or delivered by another retail partner. A margin-sharing agreement can create a win-win arrangement for all parties involved.  <h2>Conclusion</h2>The biggest challenge in implementing this new way of distribution will, of course, be ensuring that all stakeholders come on board and are on the same page. This is about changing mindsets and current paradigms, not about government regulation and policies. Moreover, regardless of regulations, as long as funds are plentiful and making profits is not an objective, online retailers will continue to adapt. It would be more purposeful for industry bodies such as the Retailers Association of India, the All India Manufacturers’ Organisation, the Confederation of Indian Industry, etc., to champion the cause of livelihoods of millions of small retailers and traders. If all companies can agree to play by the proper rules, the traditional retail channel can co-exist with online retailers, ensuring better competitive practices in the marketplace.

Key Takeaways

Can traditional retailers survive the e-commerce onslaught? A replenishment-based distribution system can help consumer goods companies protect their traditional channel from being decimated by e-commerce.

Battle for India’s retail market: Who will rescue traditional stores from online retailers?

After intense lobbying by groups representing millions of India’s small traders and shopkeepers, who say online retailers have threatened their businesses, the government has established numerous regulations to stem the tide of e-commerce in the country. These new policies(1) restrict the sale of products via companies in which e-commerce firms have an equity interest and disallow giants such as Amazon and Walmart-owned Flipkart from pressuring sellers to sell exclusively on their platforms. These policies also require companies to store data locally and put a cap on the prices of selected items. These steps, however, are unlikely to slow online retailing in the country. On the contrary, compared with physical store retailers, the growth of online retailers is likely to continue at a similar rapid pace. Their source of competitive advantage is a devastating combination of inherent strengths and a unique business model.  <h5>Advantage of accessibility (reach)</h5>Over half a billion people in India are using the internet. Most are doing so using smartphones.(2) Riding the wave of this expanding internet infrastructure and increasing smartphone penetration, online retailers have conquered new frontiers, especially in Tier-2 and Tier-3 cities where consumers have little access to major brands. <h5> Advantage of space management (variety)</h5>Unlike store retailers, who are always constrained by space, these virtual entities enjoy unlimited shelf space to display an almost endless variety. <h5> Advantages of inventory management (costs)</h5>At the same time, the online model also allows overheads and inventory costs to be kept low. Physical retail chains tend to have inventory distributed in the entire sequential multi-tier structure - manufacturer, centralised warehouse, regional distribution centres and physical stores. Online retailers have done away with the multi-echelon distribution model and ship items directly from a warehouse to the customer. This means that they do not have to maintain these facilities, especially the stores. Moreover, servicing from an aggregated location means that, unlike physical stores, they do not have to contend with the problem of mismatched stock (what is demanded v/s what is available) at every downstream node in the chain.  <h5>Advantage of agile demand feedback (response to market dynamics)</h5>To ensure that they have the right inventory, online retailers also leverage an in-depth understanding of real-time demand data. For example, Ratatouille, an artificial intelligence-based software, helps Myntra predict which designs will be top-sellers. This has helped them go beyond fast fashion to ‘intelligent’ fashion and swiftly offer designs based on the hottest market trends. <h5> Advantage of pricing flexibility (response to market dynamics)</h5>Most physical store retailers need significant time to implement any price variation and, hence, are handicapped in impacting price-demand elasticity. However, virtual stores can do it almost instantly - they can dynamically set prices according to customer activity on the website, competitors’ pricing, product availability, item preferences, and other factors. <h5> Advantages of dynamic visual merchandising (response to in-store behaviour)</h5>They can also dynamically assimilate consumer buying behaviour to offer displays tailored to each customer. For example, when a customer researches the catalogues of a product range on Flipkart, their search patterns are recorded, and a ‘persona’ is created for the customer so that when he returns to the website, the search time is drastically reduced by showing the most relevant products that the customer would be interested in buying – it is like changing the visual merchandising of a store for every visitor!    <h2>Business model advantage</h2>These advantages are further strengthened by the online retailers’ very mode of operations - most are able to patiently absorb sustained losses for a long period of time while aggressively pursuing top-line growth.  <h5>Traditional retail channel v/s E-commerce</h5>The biggest competition for these online retailers is the traditional channel in the country. Currently, this traditional channel accounts for well over 90% of the business for most consumer goods companies. Kirana stores and independent traders (wholesalers, dealers, and distributors) flourish in every nook and cranny of the country; this sector is one of the most significant sources of revenue and employment in the Indian economy. Therefore, it is important to evaluate how this channel stacks up against e-commerce players on the above-discussed factors.  Despite the advent of organised physical store retailing in India towards the end of the last century, traditional retail continued to thrive. Wholesalers in this channel are so efficient that they often earn an ROI of 15%-50% despite the wafer-thin margins of 2%-3% that they accrue. This is a feat that not many in modern trade have been able to consistently replicate! But as e-commerce becomes more popular, this channel is bracing for a different kind of challenge. As indicated by the table below (Table 1), the online model enjoys much better efficiency levels. The only chink in the armour of these apparently unassailable retailers seems to be their inability to let customers physically interact with and evaluate the product before purchase, and their inability to deliver the goods instantly.  E-tailers are working on these by opening a few physical stores, offering free or faster delivery options, adopting liberal return policies, allowing ‘try before you buy’, etc. Moreover, in time, e-commerce can potentially exceed the reach of traditional retailers. Thus, a significant shift of market share to online retailers looks inevitable. Many predict that traditional stores will slowly but surely be wiped out.<figure class="image"><img style="aspect-ratio:4000/4206;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1778501596.png" width="4000" height="4206"></figure><h2>The fallout: Future market dynamics</h2>This impending decline of the traditional channel is bad news not only for the millions of small stores and traders in the traditional channel but also for consumer goods companies. As dominant online retailers emerge, the market dynamics for consumer goods companies will completely turn on its head.  Today, in India, consumer goods companies hold sway, unlike in countries like the US, where negotiating power is either with big-box retailers like Walmart or online companies like Amazon. Companies here sell to a hundred-odd distributors, and they, in turn, cater to thousands of retailers; there is no single entity in this chain with enough clout to negotiate for more favourable terms. Even the largest organised food and grocery retailers in the country typically have a gross margin of only about 14%. Internationally, many retailers command a far higher margin.  But as volumes sold through them rise, online retailers have already begun to increase their influence over Indian suppliers. Unchecked, in time, India too will likely move to a scenario similar to that experienced in more advanced nations, where suppliers to the few dominant retailers experience a relentless downward pressure on prices.  Clearly, it is in the best interest of consumer goods companies to protect the endangered traditional channel. But the question is how? <h2>Saving traditional <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/retail-solutions/">retail</a></h2>The most crucial issue for this channel is its tendency to be bulky, sluggish and unresponsive to market changes (refer to Table 1). What’s worse is that this channel is completely opaque; once merchandise enters it through a primary sale, its movement is invisible! <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/consumer-goods-retail/">Consumer goods</a> companies that use this channel suffer from the following issues: <h5>1. Inability to understand the timing of demand</h5>Since there is always a large amount of inventory in the channel, it delays the flow of demand information to brand owners. The month-end sales skew and the intermittent bullwhip effect created by schemes only serve to bury this information further.  <h5>2. Inability to gauge true demand</h5>Frequent stockouts at the point of sale make it impossible to gauge product demand.  <h5>3. Inability to pinpoint the location of demand</h5>When wholesalers who operate without territory allegiance are in the system, the location of demand is not clearly known for any targeted marketing efforts. For instance, many companies derive a lion's share of their total sales from the Delhi territory. But from there, the goods spread across the country, thus blinding the company to geographic demand patterns. <h5>4. Inability to gauge true demand for a new product</h5>When there is excess inventory in the system, it also becomes very difficult for new products to find shelf space at retailers. Retailers are far more concerned with selling the ageing inventory (before it becomes unsellable). Without a fair chance to fight for customers’ attention, many new products die undeserved and premature deaths. The good news is that this can change if the channel offers better visibility and becomes more responsive to demand. This will significantly mitigate all the other problems, too - i.e., a more agile inventory management system can ensure better product availability at lower inventory levels. Implementing an IT system at millions of retailers is impractical; it is a gargantuan task unlikely to be accomplished in the near term. Moreover, the problem in the channel cannot be solved by an IT system; the issue is far more fundamental. Most problems in this channel stem from companies pushing products down the distribution channel based on forecasts, resulting in a rampant mismatch of inventory across levels. Sales targets, discounts, and scheme-based inventory movement create irrelevant inventory and aggravate mismatches.  A huge contributor to the apathy in this channel is the prevailing distribution practices of consumer goods companies. If they change these practices, they can help protect millions of small shopkeepers and themselves. <h2>Building visibility and agility in the traditional channel</h2>This means that the current push sales method of inventory movement has to be eliminated, and a mechanism for inventory movement must be implemented so that sales at all nodes in the channel are true reflections of consumption at a lower node. Then, sales from the company to distributors will reflect distributors’ sales to retailers, and sales at distributors will reflect market consumption from retail points. And suppose the company can get visibility into what is sold to each retailer (IT systems at this level already exist, though they rarely share this information). In that case, targeted initiatives can be undertaken at each retailer to increase sales.  For this, companies will have to make significant changes in the way they operate. They will have to:<ol><li>Move away from forecasting ‘push-based’ selling to ‘pull’ mode of inventory distribution, which ensures that the inventory levels in the entire supply chain are lean, right from suppliers to retailers.</li><li>Transform the current combative relationship with distributors into a collaborative ‘channel partnership’, encouraging distributors to reach out to all potential retailers (big and small) in the territory and to offer frequent, reliable deliveries.</li><li>Shift from target/discounting-based sales strategy to a comprehensive Go-to-Market (GTM) strategy, which eliminates the practice of pushing unwanted inventory downstream and does not force partners to buy in volumes while ensuring continuous growth in sales. This will also allow management to focus on enablers, actions, and metrics needed to increase and track the growth of the company’s retailer base, range enhancement, and sales patterns at each retailer.</li><li>Undertake targeted initiatives based on real demand visibility: The steps above can boost the quantum of information available to the consumer goods company. Intelligence thus available from the retail network is comparable to ‘big data’. The company can now track what is selling (or not) and from where – whether it is a small shop in the by-lanes of Dharavi or a large retailer in a Tier-4 town. This access to detailed consumption patterns, along with the capacity to quickly mitigate issues, can enable the company to gain unprecedented ability to react to the vagaries of sales at retail points. </li></ol> <h2>Traditional retail: Standing tall next to online retailers</h2>This replenishment-based distribution system is a winning model for both consumer goods companies and traditional retail outlets. Inventory levels for all parties (company, distributor, retailer) in the channel will fall, inventory can turn faster, and profitability will improve. This will not only offset the inventory-cost advantage of online retailers but also allow the channel to remain lucrative enough to attract investment and growth. This will also improve the reach of this channel in India - a growing economy.  Further, without inventory in the channel, blocking visibility and working capital, this agile <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/solution-frameworks/supply-chain-and-distribution/">supply chain</a> can allow companies to respond smoothly to emerging market demand patterns, i.e., prevent stockouts and excesses and ensure quick responses to pricing changes.  The model (as discussed so far) will address a significant part of the problem. The small stores, however, will continue to grapple with the challenge of offering variety to meet consumers’ evolving tastes. But this can be addressed, too. Most kirana stores have a fair grasp of their catchment area’s tastes but are generally prevented from expanding variety due to inadequate capital and space. Since the retailer’s capital will now be engaged only in small lots of a relevant range, with the freed-up capital, he can expand variety as and when he sees fit. Brand companies can also prompt trials by offering information on consumption and demand patterns gathered from other retailers in the area.  To further augment the variety visible to shoppers, retailers can use an in-store display unit (e.g., a simple e-tablet) to showcase the much wider range available from the distributor and other retailers in the area. The displayed items can be customised for individual shoppers based on previous purchasing patterns and can be used to show products most relevant to each customer. The customer can make his/her choice and, if unwilling to wait for the retailer to source it, he/she can opt to have the products couriered to him/her directly from the distributor or delivered by another retail partner. A margin-sharing agreement can create a win-win arrangement for all parties involved.  <h2>Conclusion</h2>The biggest challenge in implementing this new way of distribution will, of course, be ensuring that all stakeholders come on board and are on the same page. This is about changing mindsets and current paradigms, not about government regulation and policies. Moreover, regardless of regulations, as long as funds are plentiful and making profits is not an objective, online retailers will continue to adapt. It would be more purposeful for industry bodies such as the Retailers Association of India, the All India Manufacturers’ Organisation, the Confederation of Indian Industry, etc., to champion the cause of livelihoods of millions of small retailers and traders. If all companies can agree to play by the proper rules, the traditional retail channel can co-exist with online retailers, ensuring better competitive practices in the marketplace.

<h5>Battle for India’s retail market: Who will rescue traditional stores from online retailers?</h5>

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Consumer goods companies can save traditional retailers from the threat of online retailers. Know how.