E-tailers, with their astronomical valuation figures, are all the rage these days. The daily papers are full of stories of unprecedented funding figures. Flipkart declared that it is chasing the valuation figure of USD100 billion. Amazon’s valuation is 500 times its earnings. While its sales growth rate has been impressive at 40% (CAGR) over the last 10 years, the net profit figure has been disappointingly low at just USD 270 million on sales of USD 74 billion. Most of this, according to a report in The Economist, is contributed by independent vendors who sell on Amazon.
With their eyes on valuation, e-tailers are drawing customers with mindboggling variety and discounts. These discounts come from brand companies who are vying for customers’ attention in the online space. They are forced to offer these rebates to stay competitive. At the same time, they have to ensure their online ventures do not clash with offline prices. South Korean tech giant Samsung found itself in the midst of one such conflict – dealers demanded that the company price its phones the same in both online and offline channels.
Brand companies are grappling with the challenge of securing online presence without losing out on business coming in from traditional retailers who still contribute significant volumes.
Some may argue that the e-tail market for any consumer product category is too small to pose a threat to traditional retailers. A few may offer that traditional retail, which has survived the foray of modern retail, will continue to thrive even in the e-age.
The counter argument? Modern retail in India has not grown rapidly enough to offer fierce competition to traditional retailers. Bulk of the brand companies’ sales still comes from traditional channels. Therefore, modern retail cannot be compared with e-retail. The latter can disrupt traditional retail mainly because their business objectives are different, valuation and profits respectively.
The e-tailer enjoys two major advantages
1. Range amplification: An e-tailer can offer large variety without incurring inventory- carrying costs unlike conventional retailers.
2. Reach amplification: The rapid expansion of internet has made it possible for e-tailers to reach customers fast and at low costs.
In addition to these, e-tailers have the ‘unfair’ advantage of being valuation-driven and not profit-driven like the rest of the retail channels. They have already begun eating into the share of traditional retailers (as indicated by the abnormally high sales growth of e-tailers). This means brand companies are losing business, too. Their profitability would dip further if they sell large volumes to a few e-tailers, instead of numerous distributors like they have been doing so far. Margins could grow slimmer. Brand companies might be forced to move production to low-cost destinations; this could deal a severe blow to the country’s manufacturing sector.
Clearly, brand companies need to take measures to protect their interests. To begin with, they need to acknowledge that ‘buying sales’ by offering discounts would be detrimental to their interests in the long-term. They need to resist the lure of e-tailers and shift focus to strengthening their ties with traditional distributor channels which have two major advantages over e-tailers.
1. Offer the customer the opportunity to see and feel the product before buying.
2. Deliver the product instantly.
The disadvantages are
1. Retail footprint much smaller than reach potential
2. Inability to showcase full variety at all counters
Brand companies need to exploit the advantages and nullify the disadvantages. In other words, they need to be present in every relevant retail outlet in the country with a good enough range. Relevant can be defined as places where the customer is likely to be around. Japan’s Seven-Eleven stores are a good example for this. It is nearly impossible not to come across one of these stores in that country.
One way to achieve this here would be to reach out to the neglected mass of small retailers. If serviced efficiently by distributors, they can collectively bring in huge sales and dramatically improve reach. For this, companies need to address the flaws of their distribution strategy. They need to substitute their forecast-and-push model with the pull model which releases the distributors’ capital and enables them to expand range. Both distributors and retailers operate with low yet full range of inventory.
Brand companies can now go a step further and open dedicated e-stores to stay connected with customers who prefer to buy online. They can deploy the advantages of high availability (at their warehouses, distributors) to offer same-day deliveries. They can also display their full range on their virtual platforms. They can ensure that their products are sold at the same price across channels.
As brand companies rely on their many stockists to keep the promise of same-day deliveries, e-tailers will have to open multiple local warehouses to do the same. In doing so, they will lose out on the aggregation benefits of a central warehouse. These local warehouses would again suffer from stockouts, mismatched inventory if forecast systems or point reorder systems are used to stock them. These issues will eventually hit delivery reliability.
Meanwhile brand companies can move from strength to strength. With their e-stores open for business, they can do business with e-tailers on their own terms.