In my last blog, I primarily talked about the expected market size and the kind of product innovations we’re expecting to see this year. Moving on, let us now evaluate the channel play.
Effects Of The New Online Policy
Globally, online channel is expected to grow in 2019 and onwards by a couple of % every year. India, where the contribution of online is amongst the highest in the world, may end up showing huge decline across categories with the effect on mobile phones being more pronounced.
To set the right perspective:
a. The online contribution of mobile phones is expected to go up from 32% in 2017 to 38% in 2018.
b. Mobile phones is the single largest category contributing close to 65% of the revenues of #Amazon and #Flipkart.
Reason for decline: The new policy on e-commerce laid down by DIPP, governed by FDI. I’m sure all of you must have gone through it.
The policy is clear in its intent but may be subject to different interpretations which could allow e-commerce players falling in its purview a scope of circumvention. As it comes into effect on 1st February, one will see these interpretations coming into play and it may mean more clarifications and of course a watchdog to enforce the policy in its true essence. At the same time the offline channel has to manage itself better.
What does it mean for brands and offline?
The winners will be
a. The offline channel who till date were victims of online domination, and were on the verge of a total collapse.
b. Brands which were more offline focussed and were not able to make use of the online platform. Online will need more vendors to fill the gap arising out of the 25% limit set for a vendor.
c. Other winners will be the smaller online players like #Shopclues, #Snapdeal which could not compete with the deep pockets of the bigger ones in terms of offering cashbacks, freebies etc.
d. The non-exclusive small sellers on online platforms as they will get the same benefit as the bigger ones on logistics, warehousing or easy financing options as others. Remember the policy stipulates that there cannot be any differentiation in the services by e-commerce based on size of seller. So if e-commerce makes an offering on any brand/model for 3-4 partners with whom they have an “understanding”, other players on their platform would also get the same benefits.
The losers will be
a. The big e-commerce players like Amazon and Flipkart.
b. The big brands which will have issues of commitments from the online partners who may not be willing to commit if the products are available on other platforms.
c. Brands with exclusive tie-ups till now with one portal will now be forced to offer the products through other portals as vendors cannot put more than 25% of their inventory on one e-commerce platform. But there’s a catch! Online partner may try and bypass the exclusivity thing by shifting the onus from themselves to the brand i.e., it is the brand’s call. How this issue will be addressed is a question mark.
d. Brands like #Realme, #Huawei, #Asus, #Lenovo which have huge unsold stocks from the festive season lying with the online portals, and now need to liquidate them before 1st February to fall within the FDI norms. e. Some smaller brands as they cannot sell more than 25% of their inventory on one platform and have to either add more platforms or go offline, both of which will require larger investments.
f. The banks which were doing exclusive tie-ups with brands and e-tailers on specific products.
One will see the brands going all out for offline expansion starting January and this bodes well for the offline channel as they can set the terms. I can almost smell the fear. The phased expansion plan, lean margin structure mentioned by a brand will be put aside-just wait and watch. Show your financial muscle and set your terms.
But keep in mind one thing - does the current market condition favour high stocks at any level? If all these brands come offline , offline will be flooded and if the walk ins don't improve the trouble shifts from the Brands to the channel.
Brands would in any case have to bear the cascading effect on the cost of sales for them in terms of additional margins to channel, discounts to customers, more dedicated resources-meaning lower profits.
Brands will also look at setting up their own online stores the way #Mi has done successfully
Could we look at an online share of just 25-27% in 2019 – a shift in power of close to 10% to offline? It could only go lower if the buying by offline reduces. Can I see some offline partners jump with joy while Amazon, Flipkart and #Paytm and some other big boys fret. Fourth Good News. (Read the 1st three great news 2019 comes bearing here:https://bit.ly/2LST6KI)
Rise Of Organised Offline
While online sales and contribution should go down, I see the major threat to Bricks and Mortar stores coming from organised channel or chain stores which will see a rise in 2019.
We have some national ones like #Reliance and #Croma, and the LFRs in south like #Poorvika, #Sangeetha, #BigC/#LOT. Gujarat also has its own versions like #Poojara. (Many of the things mentioned by me of what offline could do to get more customer walk-ins are picked up from what I have seen at Poojara’s main store in Rajkot).
The concept of organised retail on a lower scale works specially well in southern states and is now gaining in Maharashtra.
Organised offline would be the most loved by the brands as they would give all the brands an immediate access to a whole lot of markets in one go. For the smaller brands or “Push Brands”they may be selective and demand much higher margins, and the fast moving or “PullBrands”could agree to work on very thin margins with faster rotations. This scenario is a win-win for brands and the organised retail as for the pull brands most of which work on thin margins, this channel reduces one layer of distribution being the buyer and seller themselves. For the push brands, they can centrally manage their offline business at lower fixed costs.
Since all of the organised retail are Indian companies, they would not come under the purview of regulated pricing and make special offers. How? Through their sheer buying muscle they can get much better margins as compared to Bricks and Mortar stores from the brands. These margins could be used by them as discount (predatory pricing), zero interest EMI etc. Some of the organised retailers are already offering zero interest EMIs.
Cashbacks come from banks are linked to the volume of business. The organised retail could, to some extent, replace the e-tailers in terms of the volume of business which is expected to grow substantially.
So while we regulate the online players which fall under the FDI regulations, what is it that we can or will do if organised retail does exactly what online has been doing – though maybe on a much lower scale and who knows to what levels the organised retail could grow.
How do the Bricks and Mortar stores react to this? For them, as suggested in one of my blogs earlier <https://bit.ly/2CQ8dl5>, one could work around a #OyoRooms concept in mobile phones with centralised buying at higher margins, mass coverage within or across states etc.
Focussed Effort In The Rural Market
With the urban markets getting saturated, 2019 will see brands strengthening their channel at city/town tier levels all the way down to the rural markets. After all Bharat is as aspirational as India:
a. In 2019-20, Mobile subscribers in Bharat (rural) are expected to grow more than double from the figures of 2015-16. From 308 million to 650 million. India (urban) would show a meagre growth from the same figure of 308 million to 350 million!
b. Smartphone penetration in Bharat expected to go up 9 times from 35 million to 315 million in the same period. For India, it will grow from 144 million to 385 million.
#Samsung is talking about increasing their WoD from 1,80,000 to 2,00,000 numbers. And this increase will all come from the rural areas. They were at 1,50,000 in 2017 end. With their presence in the feature phones’ segment in rural areas, it is just a question of getting their product roadmap and distribution aligned to be able to achieve this.
Xiaomi is talking about opening 5000 small format exclusive retail outlets in tier 3/rural areas and made a big event out of the launch of 500 such stores on the same day across India. However, I am not too sure about the success of the Xiaomi model for rural areas in terms of viability of distributors from an exclusive store in small towns. They have also talked about their plans to float an NBFC in India. Is it to support their growth in the Bharat space is a question.
Rural markets is where I do see a huge scope for the Indian brands with their existing presence in feature phones and brand recall. I would expect them to focus here.
Rise Of The Hybrid Channel Model
As announced by Mr. Mukesh Ambani at the Reliance AGM in July, Reliance Industries will integrate Reliance Retail’s physical market place with Reliance Jio’s digital infrastructure for an e-commerce platform. Tighter e-commerce rules applicable on Amazon and Flipkart falling under FDI regulations will make this strategy more potent.
Will one see the tie-ups of other organised retail with e-tailers as well?
Will this be the start of the hybrid or the omni channel model?
Will Reliance kill the competition both from existing online players and organised retail like #Walmart?
Tactical Channel Efforts
The time to really slice and dice data to decide on the channel strategy has come. While moving ahead on developing the channel based on geography and urban/rural divide, an interesting data point to be considered by brands would be the mobile internet penetration. I was surprised to see Himachal Pradesh as a leader here followed by Tamil Nadu – both above 40% against a national average of 30%. On the other side, for the developed states like Maharashtra and Gujarat the figure is below 30%. Punjab and Kerala two rich states are at 37% and 31% respectively. (Source – Kotak Institutional Equities)
The approach to channel margin has to change. It cannot be a simple equation of % mark-up. It has to be linked to the price segment the brand is targeting, the competition around and the volume projections. The game in mobile phones is more of volume or scale and less of margins. Give the channel a decent volume and rotation and they won’t complain on the margin.
My views on 2019 for brands in the next blog.