Online channels are rapidly disrupting Indian apparel retail, just as they have across the globe. To get ahead in a rapidly changing competitive landscape, leading brick and mortar players will need to shift through five gears.
Online sales of apparel in India reached a record Rs 3,200 crore in 2014. While this emerging channel accounts for substantially less than the Rs 1,60,000 crores generated through brick and mortar stores, the speed and manner in which e-retailers have risen to challenge incumbent players indicate that a fundamental market shift has been initiated.
When the first E-retailers made their entry into the Indian apparel market in 2007, online channels respresented a negligible fraction of organised apparel retail. But their value propositon - based on attractive prices, convenience, and choice - has quickly found resonance with Indian consumers. Between 2009 and 2014 these new channels have increased their size by a factor of 16, growing by 75% every year. In the same period, the annual growth of brick and mortar channels stood at a much lower 22%.
Some observers have claimed that such growth in e-retail cannot be sustained because existing players have not been growing profitably. They are right about players’ profitability but, they are missing the bigger picture regarding the importance of online channels. It is true that most online players rely on massive capital infusions to finance aggressive pricing strategies and scale-up their infrastructure. And it is conceivable that some of these players may consequently go out of business. But regardless of how the competitive landscape evolves, online demand for apparel will not vanish because of the compelling advantages the channel offers consumers. E-retail is uniquely able to showcase the widest possible variety of fashions, give instant accessibility to every corner of the country and direct highly customised recommendations and suggestions to the consumer.
Crucially, the players that are most exposed to this market shift are today’s leading apparel retailers. With new market spaces opening online, apparel retail has seen a new breed of players leaping over traditional barriers to entry such as established brand and store footprint to climb to the top. In only two years, Jabong and Myntra, two online marketplaces dedicated to apparel, rose from insignificant to fearsome players, dominating their market spaces and reaching scales not far from those achieved by incumbents with many years of presence in the market. If the same growth trends are maintained, it will only be a matter of time before these new marketplaces generate the same revenues as leading brick and mortar players.
However, the rise of online channels will not make brick and mortar obsolete. Although expanding at differing rates, both channels have continued to grow together. In this context, successful apparel retailers will be those that are able to connect with customers across both physical and digital touchpoints. As such, incumbents in India are in fact sitting in front of a tremendous opportunity. By developing online capabilities and combining them with their existing store footprint, they can reap the benefits of both channels.
On the one hand, stores will remain a powerful platform for brand building. They provide a way for consumers to experience the full dimension of a brand, through ambience, display and the personal touch of store staff. As online consumers become exposed to an increasing number of brands, having physical stores can be a major source of differentiation and legitimacy for apparel retailers. Stores can also offer much richer interactions with shoppers than online platforms, and allow retailers to build relationships on a personal level. This will help brands develop stronger bonds with their customers and generate repeat purchases. What is more, stores can become an integral part of the online logistics network. They can be used as pick-up points for online buyers, or as a network of forward storage facilities where orders transit on their way to a shopper’s home.
On the other hand, online channels can bring new tools to market products on digital and social platforms. Combined with the capacity to acquire and analyse vast amounts of customer data, they enable powerful features such as one to one advertising, or tailored recommendations and offers. Moreover, online platforms can tremendousely widen the reach of apparel retailers. Our analysis shows that a large proportion of the interest in online apparel in India is coming from smaller cities, where expansion through the brick and mortar model would be difficult and often unprofitable. Tapping these pockets of growth is much easier through online channels which offer a pan India strorefront and operate on a delivery basis.
If existing brick and mortar apparel players are to get ahead in the race to e-retail they will need to accelerate through five gears. First, they need to treat e-retail as an opportunity not a threat. Second, they need to get the technology edge. Third, they must make a strong commitment to the channel. Fourth, they need to truly integrate online to offline. Fifth and finally, they must evolve the culture of their organisation for the demands of the online age.
Treat e-retail as an opportunity, not a threat
The first shift that incumbent apparel retailers must make is to treat e-retail as an opportunity not a threat. Instead of resisting change, incumbent players should appreciate the potential to grow their business in new ways through online. There are three key elements to this opportunity for incumbents:
First, online opens the door to expanding your reach to a huge number of smaller Indian cities. There is a clear demand for branded apparel in these locations but brick and mortar is either too expensive or too difficult to build for many players. Online enables your brand to serve these pockets of demand across the country without the cost and risk of investing in physical stores.
Second, by building an e-retail presence, incumbents have the opportunity to rethink their format strategy to increase the sales productivity of their physical stores. As the popularity of online apparel retail grows, there is likely to be variation in penetration across product categories. Therefore, retailers can more profitably leverage the limited space of their physical stores by concentrating the merchandise mix on categories consumers prefer to buy offline. They can then adjust their store sizes and layouts accordingly. For example, highly standardised formal shirts may have few barriers to online purchase but, highly priced less frequent purchases - like wedding wear - may remain more popular offline. By focusing the in-store offering and experience on those categories that are most in demand by offline shoppers, they are more likely to generate higher revenue.
Third, through creating an online retail presence, apparel retailers can better plan their roll-out strategy for physical stores. This is because the real-time customer insights generated through e-retail can provide a more granular picture of demand by geography. Retailers can thus identify the cities that show sustained appetite for their products and explore the potential to build on this brand affinity by opening a physical store.
Get the technology edge
A major cause of the anxiety about e-retail among incumbents is their discomfort with the technology that is transforming their industry. A simple comparison of the online stores for leading Indian brick and mortar players and those of the leading e-retailers captures this weakness. For example, whereas the recommendation engine of Amazon or Myntra shows highly correlated apparel products, those of several leading brick and mortar retailers show products from unrelated categories and in entirely different price brackets. The power of such technology, when properly executed, is shown by the fact that recommendation and personalisation systems today generate around one third of all Amazon sales.
As a result, it is imperative that incumbents build or acquire a new set of capabilities in technology, as well as in digital and social marketing, and in logisitcs, if they are to successfully compete in e-retail. These capabilities should be partly developed in-house by hiring top-level executives with a proven track record in running functional departments at e-commerce companies. But they could also be obtained through acquisitions or partnerships with companies where the required competencies have already been built. India is home to a growing ecosystem of start-ups developing web applications and associated technologies. Retailers looking to strenghten their e-commerce positions should look closely at this space for acquistion targets and potential partners that would help them develop an innovative edge.
Make a strong commitment
Merely having an online store and waiting for customers to buy from it will not be sufficient to break through in e-retail. Incumbents must take a pro-active approach and commit sufficient financial and management resoures to grow their online channel. They must also be willing to experiment and innovate around their online strategy as success will only come through testing and tweaking the approach.
To ensure sustained impetus behind the online initiative, brick and mortar retailers will need to create key milestones to measure success. These can include the growth in traffic to their website, the number of page views and the level of engagement on digital media platforms. In time, the growth of these metrics will lead to increased contribution from online sales.
Integrate online to offline (O2O)
Once incumbent retailers have appreciated the opportunity, gained the technological know-how and fully committed to the channel, the next gear shift requires fully integrating their online and offline channels. This is what is known as online to offline strategy or ‘O2O’.
A move towards online to offline integration is already well underway in China, which is the most likely path that India’s e-retail development will follow – albeit several years behind. There, brick and mortar retailers are launching their online platforms, while pure-click companies are evolving from selling only online to setting up physical stores, creating a closed loop for the whole purchasing process. Japanese retailer Uniqlo offers a good example of O2O integration. In China, the company retails online through its own website and through a partnership with T-mall, one of China’s largest marketplaces. At the same time, it continues to increase its store footprint across the country to secure its position.
Uniqlo also extended the O2O integration to its offline and online marketing initiatives. The company partnered with leading Chinese social media platform RenRen.com to launch the highly successful Lucky Queue online game that rewards participants with prizes and coupons to redeem at the company’s physical stores. More than 1.3m people took part, bringing many customers to the company’s brick and mortar stores for the first time.
By engaging with customers seamlessly at whatever touchpoint suits them best at a given place or time, retailers can direct them to the most convenient route to purchase. This could be by selling to them online but allowing them to pick up in-store or at a nearby delivery point, or it could be by allowing them to order online at the store and get the product delivered to their home or office. In the O2O strategy there is no distinction or competition between an online and offline sale, they are simply different windows through which the customer experiences the retailer’s product.
Change the organisational mindset
Fifth and finally, online success for brick and mortar apparel retailers will above all be about promoting an evolution in the mindset and culture of their organisation. Many of those occupying leadership and executive positions started their careers before the digital revolution. As a result, their outlook on the retail business, their managerial habits and their strategic thought process might not always align with the realities of online retail. A culture where long-term planning and meticulous projections drive decision-making is required in a brick and mortar business, because adding new stores is expensive and because feedback from the market is gathered only periodically. However, this same culture can be detrimental to growth in an online environment, where new categories are launched monthly, where promotions happen daily, and where algorithms generate real-time insights about what a customer wants with incredible accuracy.
To achieve this shift in mindset will require a range of changes to the organisation. This could begin with creating awareness about the importance of the move to online and training people in the new tools and technologies that will become an essential part of their role. It is important to remember that the revolution in technology has distributed knowledge far more widely in organsiations and it is often more junior employees who possess the latest know-how. As a result, initiatives like reverse mentoring can be an effective way to share knowledge from the bottom-up and help senior managers get a handle on the latest developments.
There may also be a need to build cross-functional teams that combine deep knowledge of both physical and online retail to promote cross-pollination of ideas and encourage integrated solutions between the channels. Brick and mortar retailers will also need to change their organisational structure to bring e-retail functions to the core and place online champions at the highest levels of decision-making.
It is clear that the rapid adoption of online retail in India is much more than a passing fad. Incumbent apparel retailers will need to embrace it in its entirety if they are to play a major role in the next chapter of India’s retail story. By shifting through the five gears set out in this article, brick and mortar players can pick up the speed they will need to get ahead in the race to e-retail.