The Edge Factor Archive

Survival to Revival – Future of Traditional Retail

With e-commerce gaining on fast in India, growing at a 40% CAGR, it’s time for single channel retail supply chains to reinvent themselves.

Huge transitions are taking place in retailing, globally. Now, the early signs of tectonic shifts in consumer buying habits have started appearing in India too. E-tailers have given rise to a new generation of consumers who are driven by choice, convenience and discounts. Fighting this big gorilla needs a fundamental understanding of customer value and a rethink of traditional retail supply chains that are not designed to handle large assortment at low cost.

Go online or go home!

Dedicated e-commerce companies in India are changing the game for traditional retailers. Overwhelming array of choices, heavy discounts and convenience is fuelling the e-commerce industry to grow at a 40 per cent CAGR. Proliferation of SKUs with choices of ‘endless assortment’ and service levels of a day or even less is creating a cost barrier that is difficult for traditional retailers to overcome. According to a McKinsey survey, the cost advantage for pure play e-commerce companies like Amazon is 3 to 4 per cent. Moving to one-day supplies for traditional retailers would mean significant increase in distribution centers (DCs) and hence, higher costs. Handling product varieties that far outstrip what retail shops can hold is near impossible when existing logistics are optimised around stores.

Fighting the new 800-pound Gorilla

It is a battle royale but not an impossible one to succeed. A traditional single channel retail supply chain has to reinvent itself if it has to win this war. Here are few things retail formats can do:

  • Understand & build relationship with empowered customers: Indians spend three hours daily on smartphones and almost 32 per cent of smartphone users prefer shopping online [Ericsson consumer labs study]. A significant percentage of these shoppers also uses smart phones while inside a store. Designing online promo offers by marrying demographic, transactional and customer intelligence while shopping inside a store is a good starting point. Big Bazaar and Lifestyle announce promos on public announcement systems. Why not use technology instead? Wal-Mart is employing strategies such as ship-from-store, pay-with-cash, scan-&-go, same-day-delivery and crowd sourcing to enrich customer experience.
  • Move away from products on shelf to building customer experience in a multi-channel format including e-commerce: A large percentage of Reliance Retail’s online products are different from its store inventory. This prevents self-cannibalization between the two channels. Over the last few years, Reliance has added new product categories such as jewelry, autozone, furniture and lifestyle.
  • Rethink supply chain from scratch: For most retailers, investing in more DCs is out of question. They must now have a unified view of how their supply chain can be designed to manage traffic from multiple channels and, hence, need to unify their distribution assets. Walmart and Macy’s have started using their stores as mini DCs. Smaller retailers may have to look at adding new capacities or using third party logistics services.
  • Rethink role from a provider of location for products to an orchestrator of multiple channels of product movement: Dedicated online inventory and store inventory will have to be treated as same. Depending on traffic from different channels, inventory allocations have to be managed to improve fulfilment and reduce markdowns of a dedicated inventory. Benefits will be lower working capital requirements, lower DC cost and higher revenues. Investing more science in DCs will improve throughput. Lean concepts have to now transform our traditional ‘godown’ approach.

Retailers in India challenged by their inability to attract large funding cannot afford to invest significantly in this transformation. This journey has to be calibrated. But the end transformation will be significant.