Sangeeta, Senior Brand Manager for a consumer goods giant, was evaluating the risks and benefits of going online with her brands. Consumers were fast adopting to purchasing online and she had no doubts that her brand had to be present where they shopped. However, she was unsure of the risks arising out of a disruptive change.
Sundar, while packing jam sandwiches for his daughter’s school tiffin, felt thankful for the multitude of shopping options available to him. He had forgotten to buy her favourite jam. He had then used a midnight ordering option of an e-grocery start-up to get it delivered by 7 O’clock in the morning.
These are the signs of changing times. Thanks to the incredible convenience, consumers like Sundar are pushing brands to move online. However, this decision to add a new channel is not an easy one to make for an organization. It is a strategic decision involving analysis of future business potential, impact on profitability and fit with the existing organization structure & sales channels.
The last noteworthy channel addition in India happened with the advent of large format retailers like Big Bazaar, Shopper’s Stop and Foodworld. Modern retail came with its own handicap of high cost real estate, in-store investments and limited geographical catchment. The difficulty of managing costs have made modern retail a graveyard of many retail start-ups. Similarly, ecommerce comes with its own challenges of inflated cost structures and poor logistics infrastructure. Yet the possibilities of ecommerce are exciting. The increasing penetration of smartphones and 4G services are providing brands an unprecedented access to smaller towns, making this channel a difficult one to ignore.
The growth in ecommerce in India, was led by mobiles and mobile accessories, closely followed by apparel, footwear and personal items. Groceries and household products are the more recent additions to this pack. Also, the Indian ecommerce space is highly polarized, with bulk of the sale going to a few large ecommerce platforms. They have become the default buying destinations for consumers. As a result, brands prefer selling through the platforms rather than setting up their own website to avoid prohibitively high cost of customer acquisition.
This choice of a new channel raises the question of cannibalization vs incremental sale, an age-old dilemma for marketers. It is especially crucial for online channels, as this sale is likely to come with low or no profitability. Hence, an astute judgement is called for. Businesses need to carefully evaluate the extent of upfront investment in people, infrastructure and systems that they are willing to commit. Transaction Cost Economics (Ronald Coase, 1937) suggests that organizations can lower transactions costs by being prudent about which functions should be managed internally, and which are better outsourced. Organizations are outsourcing selected activities related to online selling, to specialized service providers. These activities include catalogue management, ecommerce logistics, analytics and systems integration. There are a host of start-ups vying for such opportunities in this space.
Besides outsourcing, organizations also need to consider several other aspects while making this transition:
1. Role of senior leadership: The top leadership needs to agree on a clear road map for ecommerce strategy, including investment commitments and sales & profitability expectations. The new channel needs nurturing during the ramp-up phase. Adequate support from rest of the organization, quick decision making and adherence to the strategic objective are critical for sustaining the momentum.
2. Organization structure: The ecommerce organization structure needs to be commensurate with the long-term ambitions for the online channel. One of the key decisions is whether to create an ecommerce structure within the existing sales team or to have it as a separate vertical. This has implications on sales target setting, incentive disbursement and allocation of company resources across the different sales channels. Support functions like marketing and supply chain may also need reconfiguring to provide the necessary focus to ecommerce. This can be done by having resources in the ecommerce team or dedicated personnel within the existing support function teams.
3. Choice of distribution intermediaries: Managing distribution for ecommerce requires different skill sets than that for traditional sales channels. The existing distributors may not be interested or capable of taking up the task. Brands are reaching out to a new breed of e-distributors, specializing in e-commerce logistics, managing online seller profiles, ratings and customer feedback.
4. Shift of Power: Large brands, especially in consumer goods space, have enjoyed significant power over the traditional distribution channels in India. However, as ecommerce platforms grow in size, they will gain bargaining power over brands. This has implications for the already challenged profitability for online sales. In the past, large, select sellers on platforms e.g. WS Retail, Cloudtail, have enjoyed an advantage over other sellers. This may reduce due to the enforcement of FDI norms for ecommerce. However, the consumer preference for the top few ecommerce platforms will continue to tilt the balance of power.
5. Managing conflicts: Different dynamics of online business can also lead to conflicts between offline retailers and online sellers. These conflicts may arise in pricing, promotions and product line availability. While separate product lines across various channels may be feasible in few cases, this horizontal conflict is here to stay.
6. Product strategy: Ecommerce channel may be more suitable to specific products of the company’s portfolio. Identifying the same and taking adequate measures to boost relevant products can provide greater traction for online sales. Ecommerce channel can also help the companies reach customers directly, and promote the products which have limited traction in the traditional sales channel.
Going online may be inevitable for organizations. How it is managed may make all the difference. Playing a long-term game with patience, resilience and a judicious balance in choices will determine the winners. It will be exciting to watch the journey that both consumers and brands will undertake, as they settle down to the newer ways of doing business.
Renuka Kamath (Professor, Marketing), Nilendra Singh Pawar (Associate Professor, Operations and Supply Chain)
[This article has been reproduced with permission from SP Jain Institute of Management & Research, Mumbai. Views expressed by authors are personal.]