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FlipkartandAmazonsettoovertakeretailgiants
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Flipkart and Amazon set to overtake retail

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TEAM YS, 11 JANUARY 2016

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Sanjeev Mukhija is an apparel manufacturer who harboured dreams of launching his own

Never Miss a Sto

brand in 2012. Back then online commerce was just about hovering somewhere above the

retail space. But Sanjeev, ever the entrepreneur, decided to take the riskand launched his
brand Breakbounce on Myntra. Three years later, his brands exposure to e-commerce has
made him consider setting up physical stores too.

As a manufacturer, e-tailing has given us a major push. But I believe both physical retailing
and e-tailing will co-exist, says Sanjeev. He adds that for a wider reach and brand
recognition, e-commerce is a greater platform at certain price points. This year will perhaps
be the one of the e-tailers taking on big-box retailers.

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Graphic by Aditya Ranade

But organised retailing has been a difficult proposition in India. According to a report by
Ernst&Young, the organised retailing pie, which includes new entrantsour fund-laden ecommerce playersform only 10 percent of a total market size of $550 billion. Let us not
get into why organised retailing is not growing as fast as it should be, but look at the revenue
figures in the charts. One finds the top e-commerce companies are actually closing in on the
revenues of brick-and-mortar players. Flipkart has already registered revenues of more than
Rs 10,000 crore on its platform. Amazon India too has been closing in with revenues nearing
$1 billion sales. Thanks to these companies big-bang sale days, the traffic for items such as
low cost apparel, footwear, mobile and other electronic items have moved online. While
brick-and-mortar retailing has grown by 10 percent, it is nothing compared to the 250percent growth numbers that e-commerce companies are experiencing.

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Harminder Sahni, Co-founder,Wazir Advisors, a retail consultancy, says,

Brick and mortar completely missed the opportunity of the

online revolution.

However, Harminder adds that it will be sometime before organised retailing would become
20 percent of the total retail market in India. Several senior analysts like to say that by 2020
the market size would be worth over $1 trillion, and e-commerce is expected to be close to a
third of that 20 percent, which would make it alone a business worth $70 billion. Big-box
retailers need to wake up to the change happening in major metros and Tier-Itowns.
Currently,though, e-commerce is not more than 1.5 percent of the retail market.

Consulting companies are already optimistic about e-commerce beating big-box retailers
this year. Arvind Singhal, Chairman,Technopak, an advisory firm, believes that e-commerce
biggies will certainly overtake physical retailers, including Reliance and Aditya Birla Group.
Flipkart claims $5 to 6 billion and Snapdeal claims $3 to 4 billion in Gross Merchandise
Value (GMV).

If that kind of business is going through their portals, the top three or four retail businesses
in India in 2016 could be the online players. I would include Paytm also. These four will bring
in $2 to 5 billion or more as GMV this year, he says,adding that its more difficult for

MOST POPULAR

physical retailers to grow, since they need retail space and capital inputs. The brick-andPOPULAR

mortar retailers are restrained by Foreign Direct Investment (FDI) and retail policies.

The Peppe

Satish Meena, Analyst,Forrester Research, says,

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Cash is expensive for big-box retailers. They are funding

their business with free cash flows or debt.

a software
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But let us put GMV in perspective: it is a number that does not take in to consideration the

operations

discounts, the returns and orders cancelled. So, when e-commerce companies quote these
numbers one need not necessarily panic.

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But here is how e-commerce and big-box retail would compete with each other this year:

Supply chain and warehousing

what they

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influential
ranks 8th

The supply chains of both these businesses are different. Big-box retail has already built a
supply chain, which ends with the transaction closed between the shop and the customer. It
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uses warehouse to support this format. The total warehouse space leased by organised

Ankita Jai

retailers is close to 50 million sq.ft. Future Group leads the pack with four million sq.ft. of
leased space.

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According to real estate consulting firm Knight Frank, India has one billion sq.ft. of
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warehousing space. The report forecasts that the demand will grow at a compounded
annual growth rate of nine percent, to touch 1.4 billion sq.ft. of space built by 2019. In terms

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of investments,e-tailers are estimated to take the fight to organised retailing.

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E-tailers are just about building the supply chain, which begins post the transaction. Around
$1 billion of investment has gone into setting up warehouses for the e-tail industry. Real

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estate consulting firm CBREs Indian Online Retail Driving Realty report states that almost
25 percent of the total warehousing and logistics space uptake across the country was by ePOPULAR

retail players.

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Their ability to use technology to understand customers and vendors will allow them to
automate their warehouses quicker, says Harminder of Wazir Advisors.
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Convenience versus omni-channel retailing

So you wa

business?

When it comes to convenience,e-tailers have beaten physical retailers hands down. Cashon-delivery is an Indian phenomenon and has become very popular. To beat this, physical

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retailers are investing in technology and are prepping all their stores to make deliveries on
the same day, which is termed as the omni-channel world. Say a consumer orders a shirt

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from a retail app, the tech in the background figures out what store is closest to the
consumer and whether it is the right fit. The delivery will then happen from the store. The
technology must be foolproof,as the consumers location and inventory by store has to be

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mapped to perfection. The retailers also have to be prepared to take returns. Success of

eight mon

omni-channels will largely depend on brands. A brand cant think of adopting only one
route in the current world of multi-channel retailing. It has to be present and available on all
the platforms possible. So, yes we have strategies for brick-mortar and e-commerce, says

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How to cre

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R K Jain, MD,Bonjour Group, which makes branded socks and leggings.

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Raising money

Retailers are dependent on free cashflows. Unfortunately for them,FDI rules do not allow
foreign investors to invest in multi-brand retail. The current rules allow 51 percent FDI in
retail. But there is a caveat; the rules left it to Indian States to decide whether to allow or bar
retailers with FDI raised. Working on a marketplace model, e-commerce has been allowed to
raise foreign capital,as it allows Indian mom-and-pop stores to benefit from sales enabled by
the platform. Flipkart has raised $3.2 billion, Amazon India has committed $2 billion to India
and Snapdeal has raised $1.6 billion.

Money to be burned

The adspends are the highest among e-commerce retailers (see chart). Sources in the
industry say that Amazon India and Flipkart spend more than Rs 150 crore per quarter to
win consumer mind share, which seems to be their real estate. Meanwhile,brick-and-mortar
retailers spent close to $14.7 billion on real estate alone between 2006 and 2012, according
to a report by real estate consulting firm Jones Lang LaSalle. Sources estimate that the
industry would have also spent around $5 billion on stock alone. However, many shut down
their operations too. They expanded to 1,000s of stores before rationalising to a few 100s.
Many, like Provogue and Koutons, shut shop because of debt burden. Subiksha, the grocery
store, shut shop because it could not raise money to maintain its working capital. Only
Reliance Retail, Shoppers Stop, Future Group and Aditya Birla Nuvo have survived of the
about 30 organised retailers that cropped up. It is estimated that around $10 billion was
spent on stock alone in the last decade.

End of the discounting wars

Today, customer acquisition has led to heavy discounting, which is managed by burning
investor money. This is not very sustainable and eventually they have to focus on bottom
lines, says Devangshu Dutta, CEO,Third Eyesight, a retail consultancy. This is where the
brick-andmortar chaps are waiting patiently. When focus turns to profitability, or to at least
generatingcash from operations, e-commerce companies could struggle. Perhaps 2016 is a
year of reckoning when discounting will drop and realistic business models will be built by ecommerce companies.

YourStorytake

Organised retailing is still going to take awhile to be a large part of the Indian market even
after the explosion of e-commerce. If anything, there will be a battle to organise retailing.
That said, e-commerce will perhaps dominate consumption, led by smartphones. Gartner
predicts that there will be more than 340 million smartphones sold by 2017. For now, let us
safely say that big-box retailers can learn a lot from e-commerce companies about using
technology, and e-commerce retailers can learn the art of churning cashflows from big-box
retailers.

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DeepakMenonAuthoratLovelaughternet&Co
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