Wednesday, December 11, 2013

Rajiv Prakash, Former CEO, Survival Is Tough If Price Is The Only Value You Offer

The biggest impact of e-tailing is that the customer is made aware of the comparative and competitive prices of just about any product he wants to buy. Several retailers have already seen customers walking into their stores, seeing the products, then going online and purchasing them at a lower price, a practice known as showrooming.
We are also seeing a reverse phenomenon, where customers do their research online and find out the best price, then ask the neighborhood retailer to match the price. This is called reverse showrooming. The customer is thus taking the best of both worlds—the discounted price of the online retailer and the physical convenience of the local retailer.
LFRs are also under serious pressure as online purchases in large cities increase rapidly. Hence, they will need to expand to smaller cities, have smaller stores and create hybrid model
One of the biggest challenges for a brand is to ensure price and margin stability. In a virtual world, with lower cost-structures and strong funding, and where a lower price is one of the biggest USPs, product companies are finding it difficult to maintain MOPs. Over a period of time this will affect their business and margins.
It is time vendors start reviewing their go-to-market, factoring in the opportunities and challenges of the online business. As the Internet economy matures there could be a handful of large online retailers and online marketplaces with significant bargaining or price-dictating power which would weaken the competitive position of brands. Managing channel conflict between general and online retail and ensuring price stability are therefore key imperatives for a brand.
Online retailing is not just impacting smaller retailers but also putting tremendous pressure on LFR margins. With Internet penetration being higher in larger cities, consumers in these markets will increasingly prefer online purchases. As a result, the LFR chains will need to expand to smaller cities, occupy smaller footprints, and create hybrid offline-online formats. Most large retail chains have the processes and people in place to make this transition but don’t have an online mindset.
No doubt this transition will be tough for small retailers. Unlike an LFR, most small players don’t have deep pockets; neither do they have the processes or second-tier management to expand into smaller pockets or newer territories. Other challenges include the rising cost of operations, especially real-estate costs.
At the risk of sounding alarming I ought to state that unless you create a unique value proposition you may not survive. It may be wise to exit the business if the only value you are providing is a good price because you will never be able to beat the e-tailer or LFR on that.
Smaller retailers can create value by building a unique shopping experience which combines advice, services and merchandise. I don’t see why IT partners can’t start experimenting with the online model by listing themselves on online marketplaces.
Many vendors and retailers ask me, ‘For how long can large e-tailers continue offering lower prices and burning the capital they raised?’ My answer: ‘For a long time.’ For this one needs to look at China which is ahead of India in online retailing. The country has several international and local players who have been burning cash for more than half a decade and still nobody is making money. They all continue to receive more funding.

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