Online wings for retail flight

The PC and spare market is characterised by constantly falling prices. An interesting conversation I had with one of the top spare part dealers of those days over how money is made in this scenario elicited this response – “at any time there will be one or more items that will be in demand mode (due to supply-demand mismatches) and these one or two items give us the margins to still make money. Unfortunately it is difficult to predict which ones…”

I think that the above is no longer true for the vast majority of products. Yet, what remains true is that stable businesses are all moving toward zones of uncertainty. And while they remain caught up in existential matters, they have no time to scan the horizon. Unlike the above example, today the issue is that unpredictability lies outside of one’s business.

When HP announced that it wants to get out of the PC business, due to sluggish sales, it made me sit up and wonder. After all, the desktop PC business is still growing at 4% Y-on-Y. So what gives it the idea?

Stagnancy prevails after some time

The basic issue is of business maturity. “Issue”, did I say? When I decided to quit my own PC business some 11 years ago, it was because white-box PC business was in a mature, stable mode by then. Profit margins, after all expenses (including deemed salary for the owners) was no better than bank interest on the capital deployed. So, yes, the business was growing, but ROI on capital was pathetic. And one had to run faster and faster to stay in the same place.

Possibly HP, too, came to the same conclusion. At some point in time, a business loses overall viability – of the time invested by senior people, energy and capital deployed.

What has this got to do with retail? Well, this is a business like any other. There are rents, salaries, taxes, shrinkage, obsolescence, damages and more. Salaries are not getting smaller (in fact for senior people, the $ cost in India is not far way from the $ cost in the US). Despite organised retail being a small fraction of the retail pie in India, I am already seeing the first signs of change creeping in.

Let’s see where this is coming from.

Why is this so?

The bulk of India’s population is rural or low-income urban. Bulk of their expenses is for rent, food, essential hygiene, fuel, education, mobile phones and basic clothing. These products are all low-margin and have little in the way of differentiation to command premiums. Take mobile phones – ARPU (Average Revenues per User) are about $3/month. How much lower can this get?

The real money lies with the upper and middle ‘class’. This includes the segment created by the IT/ITES boom. And it is this set that organised retail is targeting. The mushrooming shopping malls are a sign of this.

The fundamental issue is that these buyers are largely tech savvy. They have credit cards and they use the Internet aggressively. But they have shortage of a great commodity – that of time. There is traffic to contend with as well, an element which is worsening by the day, what with rapid urbanisation and easy credit to buy cars.

E-commerce: the next big change

Pure play e-commerce shops have made great inroads. They have to pay little rent, what with most products being drop-shipped direct to customers. Except for a handful of telephonic support executives, the number of employees is very low. Revenues per employee are orders of magnitude higher than a retail store and costs orders of magnitude lower. To top this, online prices are significantly lower – at least in those segments that have achieved maturity, like books.

This explosive combination has the fuse lit. Mumbai, a city known for time shortages and long commute time, is already India’s biggest online shopping city.

Retail includes food, entertainment, beauty and fitness. Let me tell you how I am becoming a ‘disruptive’ buyer across all these categories:

• When we have friends, we now prefer to order delivery - everything is available for delivery today. Liquor, the most profitable component for hotels, costs me only bottle rates at home.
• Movies on demand on satellite TV as well as on DVDs at home (pickup and drop) at less than the car parking fee at malls.
• A personal beauty professional comes home by appointment. We pay a fraction of what we would pay at a parlour and save on waiting time and taxes.
• A personal yoga teacher on DVD and a jogger keeps us fit and fine.
• Purchases of books, electronics, mobiles, even grocery have slowly moved online.

So yes, malls have crowds of the young people who go there to kill time and, yes, we too go to a mall and watch a must-see-on-big-screen movie once every three months.

Bypassing time

An interesting comment at a retail forum I heard - the US took 40 years to evolve the modern retail format. India will have to compress 40 years of evolution in the next five years. I think the above is an understatement – not only will we need to ‘catch up’, we will also need to incorporate the evolution that retail will undergo in the five year period as well.

Do we have the luxury of evolving linearly? I do not think so. Retail will have to leapfrog and skip some of the evolutionary steps the US and Europe went through. There is no luxury of time or of complacency.  Is retail listening?

The author is the AVP, Tally Solutions Pvt Ltd