Research And Publications

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


Dr. Shelja Jose Kuruvilla and Satyashri Mohanty

After intense lobbying by groups representing millions of India’s small traders and shopkeepers who say their businesses have been threatened by online retailers, the government has put in place a wide array of regulations to stem the tide of e-commerce in the country. These new policies1 restrict sale of products via companies in which e-commerce firms have an equity interest, disallow giants such as Inc and Walmart-owned Flipkart from pressuring sellers to sell exclusively on their platforms. These policies also demand that companies store data locally and put a cap on prices of selected item. These steps, however, are unlikely to slow online retailing in the country. On the contrary, as compared to physical store retailers, growth of online retailers is likely to continue at the same rapid pace. Their source of competitive advantage is a devastating combination of inherent strengths and a unique business model.

Advantage of accessibility (reach)

Over half a billion people are using the Internet in India. Most are doing so using smart phones2 .Riding the wave of this expanding Internet infrastructure and increasing smartphone penetration, online retailers have conquered new frontiers especially in Tier 2 and 3 cities where consumers have little access to major brands.

Advantage of space management (variety)

Unlike store retailers who are always constrained for space, these virtual entities enjoy access to unlimited shelf space where they can display an almost endless variety.

Advantage of inventory management (costs)

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 this multi-echelon distribution model and ship items direct 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 mismatched stock (what is demanded vs. what is available) at every downstream node in the chain.

Advantage of agile demand feedback (response to market dynamics)

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 are sure to be top-sellers. This has helped them go beyond fast fashion to ‘intelligent’ fashion and swiftly offer designs based on the hottest trends in the market.

Advantage of Pricing Flexibility (response to market dynamics)

Most physical store retailers need significant time to implement any price variation, and hence, are handicapped to impact 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.

Advantage of Dynamic Visual Merchandising (response to in-store behaviour)

They can also dynamically assimilate consumer buying behaviour to offer displays, specific to a single customer. For example, when a customer researches through the catalogues of a product range on Flipkart, the search patterns are recorded and a ‘persona’ is created for the customer so that when he returns to the website, the searching 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 (VM) for every visitor!

Business Model Advantage

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.

Traditional retail channel Vs E-Commerce

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 good companies. Kirana's and independent traders (wholesalers, dealers, and distributors) flourish in every nook and cranny of the country; this sector is one of the biggest sources of revenue and employment in the Indian economy. Therefore, it is important to evaluate how this channel stacks up in comparison to e-commerce players along the above discussed factors.

Despite the advent of organized 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 15-50% ROI in spite of the wafer thin margins of 2-3% that they accrue. This is a feat 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 and evaluate the product before purchase, and also their inability to instantly deliver them.

E-tailers are working on these by creating a few physical stores, giving free or speedier delivery options, using liberal return policies, offering the choice to ‘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.


Table 1: Comparative advantage of online and traditional channels

The Fall out – Future market dynamics

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 is also a cause of alarm 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 U.S., where negotiating power is either with big box retailers like Walmart or online companies like Amazon. Companies here sell to hundred-odd distributers 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 organized food and grocery retailers in the country typically have only ~14% gross margin. Internationally, many retailers command a far higher margin.

But with rise in volumes being sold through them, online retailers have already started increasing their influence on Indian suppliers. Unchecked, in time, India too is 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?

Saving traditional retail

The most crucial issue for this channel is its tendency to be bulky, sluggish and unresponsive to market changes (refer table 1). What’s worse, this channel is completely opaque; once merchandise enters it through a primary sale, its movement is invisible! Consumer goods companies that use this channel suffer from the following issues:

Inability to understand timing of demand

– Since there is always a huge amount of inventory in the channel, it delays demand information flow to the brand owners. The month-end sales skew, and the intermittent bull whip effect, created by schemes, only serves to bury this information further.

Inability to gauge true demand

– Frequent instances of stock outs at the point of sale, makes it impossible to gauge the potential demand for products.

Inability to pinpoint the location of demand

– 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, for many companies, the Delhi territory offers a lion’s share of their total sales. But from there, the goods spread across the country, thus blinding the company to geographic demand patterns.

Inability to gauge true demand for a new product

When there is excess inventory is the system, it also becomes very difficult for new products to find shelf space at retailers. Retailers are far more concerned with selling the aging 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 this channel can offer better visibility and become more responsive to demand. This will significantly mitigate all the other problems, too- i.e. a more agile inventory management system can ensure better availability of products 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 the fact that products are pushed down the distribution channel by companies based on forecasts causing rampant mismatch of inventory at different levels. Sales targets, discounts, and scheme based inventory movement create irrelevant inventory and aggravate the mismatches.

Evidently, 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.

Building visibility and agility in the traditional channel

This means that the current push sales method of inventory movement has to be eliminated and a mechanism of movement of inventory has to be implemented such 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 be a reflection of the sales of distributors to retailers and sales at distributors will be the reflection of market consumption from retail points. And if the company can get visibility what is sold to each retailer (IT systems at this level already exist though they rarely share this info), targeted initiatives can be undertaken at each individual retailer to increase sales.

For this, companies will have to make significant changes in the way they operate. They will have to

  • Move away from forecasting ‘push-based’ selling to ‘pull’ mode of inventory distribution which ensures that the inventory levels in the entire supply chain is lean, right from suppliers to retailers.
  • Transform the current combative relationship with distributors to a collaborative one of ‘channel partnership’ which will encourage the distributors to reach out to all potential retailers (big and small) in the territory and offer frequent and reliable deliveries.
  • Shift from target/ discounting-based sales strategy to a comprehensive Go-To-Market strategy which eliminates the practice of pushing unwanted inventory downstream and does not force partners to buy in volume 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. This will initiate inflow of daily data on real consumption directly from the battlefield.
  • Undertake targeted initiatives based on real demand visibility: The above steps 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 – irrespective of whether it is a small shop in the by-lanes of Dharavi or a large retailer located in a tier IV 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 vagaries of sales at retail points.

Traditional retail – Standing tall next to online retailers

This replenishment-based distribution system is a winning model for both consumer goods companies and traditional retail outlets. Inventory level 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 will also allow the channel to stay lucrative enough to attract investment and growth. This will also improve ‘reach’ of this channel in the growing economy of India.

Further, without inventory in the channel blocking visibility and working capital, this agile supply chain can allow companies to respond smoothly to emerging demand patterns in the market- i.e. prevent stock-outs and excesses, and ensure quick responses to pricing changes.

The model (as discussed so far) would address a significant part of the problem. The small stores, however, will continue to grapple with the challenge of offering variety to satisfy the evolving tastes of consumers. But this can be addressed, too. Most Kiranas a have a fair grasp of their catchment’s tastes, but are generally prevented from expanding variety due to inadequate capital and space. Since, the retailer’s capital will now only be engaged in small lots of a relevant range; with the freed up capital he can expand variety as and when he sees fit. The brand company can also prompt trial 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 instore display unit (can be a simple e-tablet) which showcases the much higher range available at the distributor and other retailers in the area. The displayed items can be customized to individual shoppers based on previous purchasing patterns and can be used to show products most relevant to the customer. The customer can make his choice and then, if unwilling to wait for the retailer to source it normally, can opt for the products to be couriered to him directly from the distributor or delivered by another retail partner. A margin sharing agreement can make this a win-win arrangement for all concerned parties.


The biggest challenge in implementing this new way of distribution will, of course, be to ensure that all stakeholders come on board and are on the same page. This is a matter of changing mindsets and current paradigms, not about government regulation and policies. Moreover, irrespective of regulations, as long as funds are plentiful and making profit is not an objective, online retailers will continue to adapt. It would be more purposeful for industry bodies like Retailers’ Association of India, All India Manufacturers’ Organization, Confederation of Indian Industry etc. to champion the cause of the livelihood of millions of small retailers and traders. If all companies can agree to play by the right rules, the traditional retail channel can co-exist with online retailers ensuring better competitive practices in the marketplace.


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