RETAIL 4.0: WINNING THE 20s THREE DECADES GONE BY, A NEW WORLD OF POSSIBILITIES AWAITS FEBRUARY 2020 About BCG Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage and driving bottom-line impact.
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About RAI Retailers Association of India (RAI) is the unified voice of retailers in India. A not for profit organization, RAI, works with various stakeholders to create the right environment for the growth of modern retail in India. It represents an entire gamut of retailers, from chain store retailers and department stores to independent emerging retailers. RAI encourages, develops, facilitates and supports retailers to modernize and adopt best practices. It works with all levels of the government and stakeholders to drive employment opportunities, promote retail investments, drive thought leadership, enhance customer choice and build industry competitiveness. Authors
Abheek Singhi Rachit Mathur Amrita Dutta Managing Director and Managing Director and Principal, Senior Partner, Partner, Boston Consulting Group Boston Consulting Group Boston Consulting Group Abheek Singhi Managing Director and Senior Partner, Boston Consulting Group
Kumar Rajagopalan CEO, Retailers Association of India (RAI) Foreword
Organized retail in India has been shaped by three distinct growth waves over the past decades. As we step into the 20s, we look back and reflect on how the major predictions by the industry, of the past decade, have played out. Have the themes around consumer preferences, retailer profitability, big-box formats, digital, e-commerce and the unorganized sector developed as anticipated?
This report talks about likely trends that could shape the industry in the next 5-10 years, considering multiple dimensions of consumer shifts, supply side innovations, data and technology driven disruptions, new competitive forces and regulations.
Retail in India continues to be fragmented. There is large headroom for the top five retailers to grow their market share from the current <5% to 10-12% in the next decade. In order to achieve this, retailers would need to drive business model innovations through themes around value proposition and operating model. The choices made would play a key role in shaping ‘Retail in the 20s’.
The BCG-RAI report “Retail 4.0: Winning the 20s” is a useful guide for retailers, as it outlines the way forward imperatives in the form of must do’s and choices. Whilst there is a strong consumption story waiting to unfold, retailers would need to adapt and rethink business models to stay ahead of the constantly evolving market dynamics and win in the next decade. CONTENT 10 28 44 REFLECTIONS OF FORCES EXPECTED TO THEMES FOR THE THE PAST DECADE SHAPE INDIAN RETAIL NEXT DECADE Retail in India has come a long way. Evolution has seen waves of growth over the past three decades which can be synthesized into three distinct waves. The first wave was all about a new physical world of retail experience through large format multi-brand stores and exclusive branded stores, the second was triggered by the entry of large players in food retail through hyper and supermarkets, and the third fueled by rise of e-commerce and foreign brands.
As we step into a new decade, retail is expected to cross the trillion-dollar mark on the back of multiple structural, socio-demographic and economic drivers to boost consumption – but winners will need to establish models to viably tap the demand.
We take a moment to reflect whether major industry expectations of the past decade have played out as anticipated. The past decade saw sustained profitable models emerge in large retail categories with ‘Value retail’ being a clear proposition that has appealed to consumers. Small neighborhood stores continue to stay relevant amidst competition from e-commerce and modern trade. E-commerce has shown strong growth but penetration and share vary across categories. Mixed pathways have started to gain prominence vs. pure channel specific customer journeys. Hence, while many predictions landed well, a few have turned out differently.
We believe that with constantly evolving market EXECUTIVE dynamics, the future of Indian retail is likely to be shaped by five distinct forces - consumer shifts, supply side innovations, data and technology driven disruptions, SUMMARY new forms of competition and regulatory direction. The India consumer is gradually but distinctly A significant portion of Indian retail continues to changing across multiple dimensions. The need for be fragmented. There is large headroom for the top convenience, personalization, shopping on trend, retailers to increase their market share from the multi-channel engagement and bias towards healthy current <5% to 10-12% over the next decade, tapping living are becoming basic expectations. While some into their established presence. This would require of these trends will continue to play out as is, a few retailers to regularly evaluate model choices, network could be conflicted with evolving preferences; e.g. expansion opportunities and partnerships to build convenience vs. gradual rise in sustainability, or hyper- an edge. How clearly and effectively one adopts, will personalization versus rising concerns around data determine future success. and privacy. Some of the other emerging trends such as preference for renting over owning, shift towards Innovation choices will need to be made on both the ‘core experiences and brand affinity could go up or down, as consumer value proposition’ as well as the ‘operating witnessed in global markets. model’. Based on BCG’s learnings globally, there could be multiple themes that play out/ gain prominence in the 20s. While some themes on value proposition Retailers in parallel are constantly transforming to such as convenience and experiential retail are already solve for challenges. Globally, players have innovated visible in India, nascent themes such as responsible on multiple fronts to improve retail economics. Some and alternate retail could gain scale. Models anchoring of these are likely to play out in India and gain scale. alliances, technology and the much talked about ‘gig Alliances/ ecosystems could emerge in multiple shapes economy’ could become the cornerstones of new retail. and forms to solve for growth, smaller store formats could gain prominence to drive improved economics, Some global retailers have built their own unique gig workforce could be a solve for flexible labor and models through a cluster of choices as they look at their private labels could extend across categories to deliver ‘winning script for the 20s’. Irrespective of the choice better margins/ differentiated proposition. set, there are some clear ‘no regret’ actions to win in the next decade. Retailers must improve organization New data and technology driven trends could agility and continue to develop their unique products/ disrupt retail to improve customer journeys, shopper experiences with customer relationship at the forefront. experiences and economics. The industry could also Partnerships would be key, along with building cost be impacted by new competitive forces who bring in efficient and technology enabled operations. a fresh perspective, e.g. social commerce and service We hope the report will serve as an inspiration and a call players extending into retail. Regulations would to action for retailers determined to winning the 20s. constantly shape retail on multiple fronts such as FDI rules, minimum wages, tariffs, etc. REFLECTIONS OF THE PAST DECADE
10 Retail 4.0: Winning the 20s Reflections of the past decade 11 Organized retail in India has come a long way Organized retail in India has come a long way, since its inception in the early 1990s. Wave 1 Wave 2 Three distinct Size of market growth waves have revolutionized Indian Organized players started competing retail over the past few With the opening up of the economy, with smaller stores, through larger decades. Regulations organized players launched modern trade multi-category stores and formalized related to opening up formats and exclusive branded stores supply chains the market and bold bets by domestic and international players 1991 2001 have fueled these waves. first Modern Trade store first hypermarket (Shoppers Stop in Mumbai) (Big Bazaar)
The market has grown 1995-96 2003 steadily in the past and is first exclusive Adidas, Reebok store first cash & carry likely to continue on this first Foodworld store from RPG (Metro in Bengaluru) growth trajectory in the 2006 long term, on the back 1997-98 Reliance enters organized of multiple structural, first Pantaloons store from Future Group retail with Reliance Fresh socio-demographic and first Westside from Trent economic drivers. 1990s New world of Physical Retail 2000s Entry of Hypers & Supers (Modern Trade & Exclusive Branded Stores)
FDI in cash & carry Future Group reached Milestones permitted (1996) $1 billion (2007) Select events
12 Retail 4.0: Winning the 20s Wave 4 Wave 3
What will drive the next big FDI permits led to the introduction of multiple foreign brands and attractiveness of wave of growth in the 2020s? e-commerce paved the way for a new digital age 2010 Zara first store in Delhi 2012 Amazon enters India
2015 H&M first store in Delhi 2018 Walmart acquires Flipkart Ikea first store in Hyderabad 2019 Uniqlo first store in Delhi 2000s 2010s Entry of Hypers & Supers Rise of E-commerce & Foreign Brands 2020s
Time 51% FDI in Multi-brand, DMart most valued retailer 100% in Single-brand (2013) in <1 year of IPO (2017)
Reflections of the past decade 13 India’s long term India retail market estimated to reach $1.1–1.3 Tn by 2025 consumption and retail growth drivers are expected to provide a Indian consumption likely to outperform developed countries strong foundation for future growth. Consumption 2025 ($ Tn) 3.2 18.1 2.4 2.5 1.8 However, in the past few 9.9% months, the economy Consumption CAGR1 (2019–2025) witnessed signs of a consumption 4.5% slowdown. The extent 3.6% 3.4% 3.4% of this slowdown varies across categories, channels and geographies, e.g. • Product categories such as white goods and mobile phones delivered double digit growth Indian retail expected to grow at 9-11% • E-commerce and physical multi-category Size of retail ($ Tn) CAGR organized retail grew 9-11% 1.1-1.3 robustly • FMCG grew by 7% over 0.7 the past 12 months
The strength of multiple structural, socio- demographic and economic drivers can 2019 2025 sustain high growth in the Note: 1. Private consumption expenditure at current market prices in US$ industry over the 20s. Source: RBI, IMF, EIU, Oxford Economics, Euromonitor, CCI Proprietary Consumption Model, BCG analysis
14 Retail 4.0: Winning the 20s Multiple structural, socio-demographic and economic drivers well in place to drive consumption over the next decade
Factor Shift Implications
Increase in income per capita Spend increase with income growth Income growth 2.5X from 2016 to 20273 2.5X from $1.6k to $4k per annum
Urban population by 2027 1.2– Average consumption per Urbanization 38% versus 32% in 20165 2.3X household in urban versus rural
Households to be nuclear1 by 20– Higher consumption of nuclear Nuclear families 75% 2027 versus 71% in 2016 30% versus joint families
Population will belong to Gen ‘I’2 Have options, higher appetite to Gen ‘I’ 80% by 2027 versus ~70% in 20165 spend, comfortable with credit
Farm and factory Steady increase in farm and Steady agri-supply and stable production income and operating commodity markets drive output growth environment4 consumption and price stability
Note: 1. Nuclear households are households comprised of a married couple or a man or a woman living alone or with unmarried children (biological, adopted, or fostered) with or without unrelated individuals. 2. Gen I constitutes individuals who have grown up in the liberalized economy (<14 years of age when economy started opening). 3. EIU Country data 4. Agricultural Situation in India 2014 report, published by Ministry of Agriculture. Industrial output means real mining, quarrying, manufacturing, construction and utilities, EIU data till 2021. 5. National commission on population data, Govt. of India
Reflections of the past decade 15 What would the industry have predicted? 10 years ago… Having outlined the size of prize (i.e the Indian retail market), Retail profitability improvement could be difficult, with let us take a moment 1 industry facing multiple challenges to look back at the past decade. Multiple retail formats expected to drive scale and returns, 2 with the rise of premiumization across categories The 2010s were shaped by multiple trends Small neighborhood stores would be threatened by increased such as: 3 competition from super/ hypermarkets and e-commerce • New FDI regulations making global brands accessible to the 4 Hypermarkets would gain prominence and lead growth Indian consumer • E-commerce unicorns, large 5 E-commerce would gain fair share across categories retailers and burgeoning startups giving consumers 6 Digital would likely create a face-off between pure online new shopping and offline channels experiences
7 Supply chain would move to integrated farm-to-fork
8 Role of store associates would diminish, given increasing use cases of technology
16 Retail 4.0: Winning the 20s What actually happened? 10 years later…
Sustained profitable models emerging across categories
Value retail clear winner amongst formats; ‘Value’ still the core of Indian consumption
Small neighborhood stores continue to be relevant owing to familiarity, proximity, monthly credit
Retail moving to smaller sized stores amidst rental pressures
E-commerce has grown but still has a long way to go; penetration varies across categories
Mixed pathways playing out; Multi-channel has unlocked growth for retailers
Some momentum observed in integration, end-to-end flows yet to be solved
Store associates still relevant, also play the role of experts and advisors
Reflections of the past decade 17 1 Select models across some categories showing profitability
Retail profitability EBITDA margin of select improvement could listed Indian retailers be difficult, with The real size of prize for retail has been industry facing demonstrated when concepts and operations are scalable, driving sustained multiple challenges Category EBITDA margin profitability. Indian retail is highly 10 years ago… fragmented today and offers massive headroom for growth Food and Grocery 6–8% Illustration: Listed retailer financial performance
EBITDA, Rs. Cr. 1,400 Apparel 8–11% 1,000 660
Footwear 14–16% FY16 FY17 FY18
EBITDA 7.7% 8.1% 8.9% Jewelry and Watches 10–11% margin 10 years later… EV/ EBITDA 39.2 58.5 Sustained profitable models emerging across Food QSR1 12–15% While some categories have started to see categories sustainable profitable models, a few others, such as consumer electronics/ appliances, continue to be challenged Note: 1. QSR - Quick Service Restaurant Source: Company annual reports, Analyst reports, Press search
18 Retail 4.0: Winning the 20s India values “value” 2
Pricing/ promotions still a key factor influencing purchase % respondents1 Multiple retail formats expected 100% 14% 13% 14% 6% 14% to drive scale and 7% 30% 33% 40% 14% 31% 26% 35% returns, with the rise 27% 3% 31% of premiumization 22% 19% 18% 25% 18% across categories 61% 45% 41% 52% 40% 45% 10 years ago… 33% 42%
Eat-out Order-in Staples Apparel Flight Hotel Electricals Mobile Food
Leisure travel
Brand Recommendation/own usage Pricing/Promotions Features of offering
What’s worked for value retail in Food and Grocery in India
Sharp/ consistent positioning of consumer Optimized assortment segments and shopping missions 10 years later… Price led proposition High throughput and turns Value retail clear Low cost operating model (supplier deals, winner amongst Clear in-store communication payment terms, optimal staff, rentals) formats; ‘Value’ still the core of Indian Note: 1. Considering Rank 1 responses only: Q - Thinking about your last purchase for XYZ, can you tell me the 3 most consumption important factors which helped decide what product should be bought? Data of only urban consumers Source: CCI Survey & BCG analysis 2019, N=1367
Reflections of the past decade 19 3 Kiranas associated with familiarity, proximity, monthly credit
Small neighborhood stores would be threatened with increased competition Convenient payment options from super/ Provide monthly credit hypermarkets and Store experience Great shopping e-commerce environment and Trust the quality 10 years ago… ambiance of product
Store has freshly Proximity stocked products Store is conveniently located from my house
Familiarity with store / owner of the store Pricing/Offers Reasonable prices / promotions compared to 10 years later… other stores Familiarity/trust with the channel Small neighborhood stores continue to Hypermarket Supermarket Kirana Online be relevant owing to familiarity, Note: Q: I am going to read out a number of statements and I would like to know which of these statements apply to any of these proximity, monthly channels. You can select multiple channels for each statement. I would like your impressions of these channels, whether or not you’ve purchased from them in the past; Data of urban consumers shown. Top 7 factors of channel preference are shown. credit Source: CCI Survey & BCG analysis 2019, N=918
20 Retail 4.0: Winning the 20s Shift to smaller formats observed, driven by 4 convenience and space productivity
Count and % of net stores added Hypermarkets would 88% ~3,700 gain prominence and 2014–2015 2% lead growth 10% 10 years ago… 59% ~2,400 2016–2017 21% 20%
52% ~3,700 2018–2019 35% 13%
Average size of store (sq. ft) 38k 11k 2k
Large format and Mid size Neighborhood and Hypermarket (>25k sq. ft) (4k - 25k sq. ft) convenience (<4k sq. ft) 10 years later…
Leading Indian Leading Indian food Leading Indian Retail moving Net stores multi-category retailer: and grocery retailer: apparel retailer: to smaller sized added in stores amidst 2018 & 2019 • 770 in mid size and • 600 in mid size and • 85 in mid size neighborhood neighborhood and neighborhood rental pressures • None in hypermarket • 180 in hypermarket • 16 in hypermarket
Source: Planet Retail, BCG analysis
Reflections of the past decade 21 5 Online disruption varies by category, with fast gains in Electronics and Toys & Games
E-commerce would Online share of total retail sales in India gain fair share across
categories Faster shift to online 10 years ago… 2008 1.4% 15.3% 2018 Electronics
2008 0.5% 13.0% 2018 Toys & Games
2008 0.3% 10.8% 2018 Apparel & Footwear
2013 0.1% 5.0% 2018 Homeware & Furnishings
2008 0.5% 2.3% 2018
Health Slower shift to online 10 years later…
E-commerce has 2008 0.2% Accessories & 1.8% 2018 grown but still a Eyewear long way to go; penetration varies 2010 0.1% 1.6% 2018 Beauty & across categories Personal Care
Source: Euromonitor. ‘Toys & Games’ excludes retailers specializing in computer games. ‘Health’ excludes prescription medication. Data not available for ‘Beauty & Personal Care’ prior to 2010, ‘Homeware & Furnishings’ prior to 2013.
22 Retail 4.0: Winning the 20s Online important for mobile and service categories; offline continues to dominate across others
Spend/ % spend by channel1 Trigger2 Occasions/ year occasion (Rs.)
Leisure 46% 54% Experimentative 1.8 15,051 travel
Order- 44% 56% Experimentative 13.8 605 in food
Mobile 35% 65% Functional 0.4 10,860
Apparel
Celebratory/ Apparel 7% 93% 7.2 2,097 Societal
Electricals 2% 98% Functional 1.5 718
Staples 1% 99% Functional 17.0 1,966
Online Offline (Includes modern trade, general trade)
Note: 1. Q - Can you tell me what proportion of total spends did you make across the channels for purchasing category? Data of only urban consumers. 2. Now I want you to think about the last time you purchased XYZ, what was the occasion/reason for your purchase? Data of only urban consumers. CCI Survey and BCG analysis, 2019, N=1367
Reflections of the past decade 23 6 Mixed pathways prevalent across many categories
Largely offline Digital would likely % transactions 100% 5% 5% 4% 7% create a face-off 16% between pure online and offline channels 10 years ago… 94% 94% 93% 91% 80%
1% 1% 2% 2% 4%
Packaged Fresh Health Staples FMCG food food care
Pure Online Pure Offline Mixed
10 years later… Players leveraging multi-channel to drive growth
Mixed pathways • Several online only players have extended their physical presence, playing out; Multi- either independently or via associations channel has • Many offline only players have scaled their e-commerce portfolios unlocked growth to build a complementary multi-channel presence for retailers
Source: CCI Digital daily survey, Digital deep dive panel, CCI Buzz to bucks 2016, press search, N=12088 transactions
24 Retail 4.0: Winning the 20s Significant mixed Largely online
23% 13% 34% 51% 52% 57% 58% 23% 65% 49%
54% 37% 34% 42% 38% 22% 17% 12% 14% 5%
Large Mobile Apparel Small Leisure Travel Movie Appliances Appliances tour ticket ticket
Online only players experimenting with physical stores
A leading Indian beauty retailer, as part of its offline expansion, has two types of stores – one houses luxury premium brands and the other carries a portfolio of brands that trend on its online platform
Offline only players growing online presence Some leading apparel players in India have established their online business and are actively looking to scale this channel – some even creating their own online only portfolios
Reflections of the past decade 25 7 Farm-to-fork integration largely unsolved, however headed in the right direction
Structural challenges and how it Supply chain would Some progress seen move to integrated affected the industry farm-to-fork Taxation and 10 years ago… sourcing • Differential tax regimes across states GST enables better efficiencies in logistics, consolidated • Suboptimal network of stock points and warehouses; 20% reduction in inventory build-up truck turnaround time
Transportation Transportation still mostly • Fragmented transport market and fragmented; 3PL growing at players increased logistics costs ~15% CAGR, yet only ~5% of logistics market
Infrastructure Road and ports have improved, • Poor infrastructure led to inefficiencies long way to go; cold chain through the value chain (ports, highways, infrastructure yet to scale, ~30% warehouses, cold chain) 10 years later… agricultural produce wastage Some momentum observed in Internal • Low technology adoption and limited integration, end-to- Retailers started to solve a few end-to-end communication affected challenges, e.g. supplier integration, end flows yet to be operations and collaboration rationalizing SKUs, using technology solved • Supplier integration limited to improve operations
Source: Secondary research, BCG experience
26 Retail 4.0: Winning the 20s Staff/ store experience and familiarity/ trust in channel 8 continue to be important for consumers Cross-category differences in preferred channel % respondents1 Role of store associates 100% would diminish, given 5% 8% 10% 13% 13% 9% 18% increasing use cases of 7% 5% 11% 5% technology 14% 10% 17% 8% 14% 9% 17% 27% 10 years ago… 16% 7% 35% 28% 31% 19% 23% 37% 10% 8% 21% 18% 13% 24% 30% 12% 16% 18% 16%
Staples Electricals Hotel Apparel Mobile Flight
Leisure travel Leisure travel Others Proximity Convenience to shop/ to pay Pricing/ attractive offers/ bargaining Familiarity/ Trust in channel Good staff/ Store experience Variety
Reinventing the store associate role 10 years later…
A leading beauty retailer has in-store makeup advisors, color and skincare experts, who Store associates provide customers with consultations, touch-ups and makeovers still relevant, also play the role A leading paint company has in-house color consultants who help customers decide of experts and what works best for their homes advisors
Note: 1. Q - Considering Rank 1 responses only: Can you look at the list below and rank top 3 reasons basis which you selected the channel? Data of only urban consumers Source: CCI Survey 2019, N=1367 and BCG analysis
Reflections of the past decade 27 FORCES EXPECTED TO SHAPE INDIAN RETAIL
28 Retail 4.0: Winning the 20s Forces expected to shape Indian retail 29 CONSUMER SUPPLY SIDE SHIFTS INNOVATIONS Given the attitudinal and Increased margin demographic change in pressures, retail consumer preferences, space crunch, rising there has been a costs are putting significant shift in the considerable strain way consumers shop on business models – forcing retailers to – pushing retailers to Forces that could constantly adapt to stay innovate to win in the shape the future ahead of the curve next decade Indian retail landscape
30 Retail 4.0: Winning the 20s DATA AND TECHNOLOGY NEW COMPETITIVE REGULATIONS DRIVEN DISRUPTIONS FORCES With the onset of the As boundaries across With changes in FDI, digital revolution, industries continue to GST and other rules, the it is imperative for blur, the retail industry Indian retail industry retailers to embrace might see itself facing continues to be sensitive data and technology competition from a to regulations and to shape consumer new genre of players a changing political shopping preferences – unsettling retailers landscape – driving and minimize costs – and traditional models retailers to rethink prompting retailers to by bringing in a fresh businesses and models up their game perspective
Forces expected to shape Indian retail 31 The Indian consumer is fundamentally changing
Preference Consumers in the past
Need for convenience Were willing to spend time/ effort in identifying right product out of offerings
Personalization Accepted mass product offering ‘push’; were willing to skim through and select
Shop on trend Shopped mainly for utility
Rent or own Took pride in owning possessions
Shift towards experiences Conservative outlook, believed in asset creation
Brand affinity Attracted to international brands
Relied on offline channels for entire Multi-channel engagement purchase journey
Focused on health largely by managing Healthy living food, exercise
Shift in purchase decision maker Men were the dominant decision makers
Many Indias Limited choice, were willing to go with mass product
Interaction and influence Select interaction with retailers via traditional media
Note: 1. CCI Survey, 2019, N=5000 and BCG analysis Source: Ten Trends That Are Altering Consumer Behavior in India, BCG 2019
32 Retail 4.0: Winning the 20s Consumer shifts Consumers of today Future expectation
Convenience on the rise with time compression, expectation to access Potential conflict with whenever and wherever: 57%1 use time saving products or services evolving preferences
Seek individualistic choices: 56%1 opt for personalization even at an added cost Shopping frequently to maintain a trendy lifestyle or image: 62%1 bought a product to stay updated with latest trends
Renting gaining favor with trend of asset-light lifestyle: 37%1 consider renting a practical option vs. buying
Slowly shifting towards experiences: 37%1 trading down on possessions for experiences or indulgences
Preferring Indian brands: 50%1 consciously buying Could go up or Indian over international down – Wild card
Gradually using multi-channel in purchase journeys, though Expected to preference varies across categories continue as is Actively spending on health and wellness to stay and look fit: 57%1 spend on healthy food, services and products
Women rising as key decision makers: 54%1 final say of women in purchases, rising say in male dominant categories
Local product and brand preferences vary across the country, as choice increases Interacting with family, friends, social media influencers, in addition to traditional channels
Forces expected to shape Indian retail 33 Evolution of some consumer trends might be conflicted by evolving preferences
‘Convenience culture’ Acceptance for hyper- Being more trendy could Potential trade-off on the rise, may conflict personalization, could conflict conflict with rising awareness of with awareness towards with rising concern for data excess consumption, leading to that could play out sustainability and privacy minimalism
Leading cosmetics General Data Protection US apparel start-up adopted brand anchoring around Regulation (GDPR) in the ‘less is more’ by minimalist Global example sustainability; became EU, aims to give individuals designs for daily wear; lean popular with young adults control over personal data closet, free of clutter
Source: Secondary research, BCG experience
34 Retail 4.0: Winning the 20s Indian consumers to further evolve, based on trends Consumer shifts observed in global markets
With increased incomes and more exposure to new ideas, experiences and technologies, the Indian consumer is steadily evolving.
Some trends may be nascent, yet to develop With more informed even in more mature choices, rise in ‘conscious markets, while others consumption’; more alignment may be gaining firm with corporate values ground across the globe.
With steady adoption in Despite a more connected It would be interesting automation, rising need world, shift towards single to see how these global for human and physical and loners with evolving trends play out in India element of retail society dynamics over the next decade.
Luxury department store Global sportswear retailer Singles’ day started as an redefined customer launched ad campaign obscure ‘anti-Valentine’s’ experience, by adding supporting a socio-political celebration for single Chinese staff with expert product issue; supported by in 90s; became prominent 24- knowledge who guide consumers, sales increase, hour online shopping event; consumers stock prices surge replicated globally
Forces expected to shape Indian retail 35 Globally, retailers continue to face multiple challenges
1 8
Reducing footfall in stores High supply chain costs Need to refresh brick and mortar 2 7 Need to drive transparency
3 6 Driving penetration to next tier towns Lack of talent and high attrition 4 5 Challenge Need to balance economics Need to retain talent
Limited multi-channel presence High employee costs Need to scale presence across channels Need to optimize variable staff mix
Suboptimal assortment planning Gross margins under pressure Need to rethink end–end merchandising Need to differentiate products
US retail store traffic declined at a Leading US retailer’s operating Top agenda of a leading food 4% average annual rate since 20101 profits declined over time2 and grocery retailer in China
2010 2014 2018 Profits as a % of revenue 0.0% Data and 2010 6.1 anecdotes -2.0% How do we drive rural 2013 5.6 penetration and integrate -3.0% -2.6% 2016 4.7 offline and online to tap into -3.8% China’s $5.3 Tn offline market? 2019 4.1 -6.0%
Source: 1. ProdCo, Morgan Stanley research, 2. Annual reports, BCG experience
36 Retail 4.0: Winning the 20s ... but ‘always on’ innovation high on the agenda Supply side innovations
Global example Trend playing out
Leading US retailer Retailers building Leading US retailer Retailers building US technology Retailers benefiting opened several a number of found huge own private company uses gig with flexible small-format small store success with its labels to improve workers as ‘personal workforce through stores, focusing on formats to deliver own private-labels; value proposition shoppers’, to help gig platforms curated inventory, convenience generates quarter and drive higher consumers shop for convenient of its sales margins groceries through locations app or website
Leading Chinese Retailers shifting to Global fast-food Retailers providing UK technology Retailers getting retailer expanded decentralized asset chain has it’s training and company built a warehousing physical footprint by ownership for own institute educational platform for renting solutions through transforming and rapid expansion on restaurant support – either out empty space shared spaces, integrating mom- through alliances management; in-house or in warehouses, whose costs flex and-pop stores into and ecosystems trained 275,000+ through tie ups allows retailers to with fluctuations in own ecosystem employees with educational variablize costs demand institutions
Source: Secondary research, Press search, BCG experience
Forces expected to shape Indian retail 37 Retailer led innovations likely to gain significance in India
Possible retailer trend How the trend would likely play out? Some implications
• Partnerships with small neighborhood stores Alliances and started, led by e-commerce, B2B, B2C Shift of power to few; consistent customer service ecosystems • Likely to evolve, scale and lead to ecosystems harder to implement over time
• B2C retailers starting smaller store formats Smaller to provide convenience/ ease of access Think through concentration of stores store formats • Likely to become more mainstream and within an area play out across markets
• Start-ups in ride sharing and eating out have Employees may become Leveraging started using flexible workforce transactional, amidst rising gig • Likely to extend to other retailers e.g. physical need for relational retail retailers with high variability in footfall
• Private labels have gained prominence in few Likely impact on quality/ categories, both offline and online Private consistency of products labels • Likely to extend to other categories, as in initial period, supplier retailers build new capabilities relationships
Source: Secondary research, BCG experience
38 Retail 4.0: Winning the 20s Alliances and ecosystems critical to retail Supply side innovations
Ecosystems could involve combinations of multiple Alliances and ecosystems critical as they alliances with different stakeholders enable players to leverage each other’s core Illustrative Big retailer capabilities
B2B Small/ Niche Nature of these alliances could vary from wholesale retailer the past, considering the advent of data / technology, fintech, social media giants Messaging/ Unorganized Social media small stores
No one size fits all solution. Players could leverage Data/ Fintech/ different shapes and forms of alliances, to create Technology Payments own ecosystems
Logistics/ Delivery Potential alliances Rationale
Big retailer Unorganized small stores Potential to scale quickly in hard to reach markets
Big retailer Niche retailer Augments customer value proposition
Retailer Fintech Delivery Messaging players Creates seamless transactions
Retailer Social media Technology players Enhances capability to understand consumer behavior, target consumers
B2B wholesaler Unorganized small stores Improves economics, access to consumer data
Source: Secondary research, BCG experience
Forces expected to shape Indian retail 39 Data and technology Data/ Technology driven disruptions will trigger new trends driven disruptions provide a real opportunity for those willing to move fast, Multiple emerging ... likely to drive key integrate operations and technologies trends Global examples outpace competition. Retail is evolving–and Natural language retailers must evolve processing Asian technology giant has mobile- Digital consumer journeys enabled stores, shoppers use app for as well. Physical robotics Biometric payments, AR based product information, recommendations, product trials, etc. personalized offers Augmented and virtual reality Voice technology AI at scale French retailer anticipates demand by categorizing large datasets quickly, Machine learning Inventory management, saw uptick in forecasting which keeps assortment planning, etc. stocks shelved Artificial intelligence
Big data Global coffee giant uses digital supply
Key drivers India in out playing Technologies Digital supply chain chain to maintain close control over Cognitive algorithms Schedule optimization, roasting process, to ensure coffee Mobile replenishment planning, etc. tastes same across stores 3D printing Social Biometric recognition Automation of operations Leading e-commerce player started using robotics testing autonomous vehicles that travel Cloud Facial recognition In-store stocking, last mile along sidewalks, to deliver packages delivery, etc. directly to doorsteps Block-chain Internet of Things Internet of Things Technology driven staff Leading US retailer provides VR headsets enablement to all stores for training and development Advanced analytics Computer vision VR assisted training, mobile - particularly for soft skills e.g. customer POS, etc. service, empathy Wearables Digital reality ... and more Source: Secondary research, BCG experience
40 Retail 4.0: Winning the 20s New genre of competitors will bring a fresh perspective to retail
Social commerce Cross-industry play Financial institutions
Right platform for user generated Cross-industry players entering Financial players strengthen small stores content, peer-network advocacy, retail by extending offerings/ by additional income, deeper customer integral part of shopping journeys business models relationships, streamlined payments
Example Example Example
In Thailand, social commerce drives Indian film entertainment company Some Indian Payments Banks 40%+1 of online sales in few categories, selling own branded F&B in partnering with small shops, where e.g. grocery, household products theaters, online channels, pop-up people can deposit/ withdraw cash/ stores in malls transfer to other banks
Note: 1. BCG Thailand consumer survey, 2016, BCG analysis
Forces expected to shape Indian retail 41 Regulatory changes could shape business models
Regulations ...and how they could likely play out Some implications
• Rethink models to compete with FDI Relaxation of FDI, 100% in multi-brand retail global retail giants
Minimum Higher minimum wage or benefits for • Reliance on flexible workforce, wage employees improve employee productivity
Gig Formalization or inclusion of independent • Increase pay/ benefits/ change formalization contractors as employees model to incorporate gig workers
Data privacy Stringent laws on capture, storage, • Clearly communicate, build greater protection utilization of personal data transparency for personal data use
Private Curtailment of private labels labels
• Rethink store economics and operating models Changes in tariffs, localized sourcing Tariffs norms, GST rules
Source: Secondary research, BCG analysis
42 Retail 4.0: Winning the 20s To summarize: Forces that could shape the future Indian retail landscape
Consumer shifts Supply side innovations Data and technology driven disruptions
Potential conflict with evolving • Alliances and ecosystems • Digital consumer journeys preferences • Smaller store formats • AI at Scale • Need for convenience • Leveraging Gig • Digital supply chain • Personalization • Private labels • Automation of operations • Shop on trend using robotics • Technology driven staff enablement Could go up or down - Wild card • Rent or own • Shift towards experiences • Brand affinity
Expected to continue as is • Multi-channel engagement • Healthy living • Shift in purchase decision maker New competitive forces Regulations • Many Indias • Interaction and influence • Social commerce • FDI in multi-brand retail • Cross-industry play • Minimum wage Emerging preferences based on trends • Financial institutions • Gig formalization in mature Geos • Data and privacy • Concern for data and privacy • Private labels • Mindful of sustainability • Tariffs/ Local sourcing/ GST • Need for human element • Minimalism • Conscious of corporate values • Rise of singles and loners
Forces expected to shape Indian retail 43 THEMES FOR THE NEXT DECADE
44 Retail 4.0: Winning the 20s Themes for the next decade 45 In the next decade, top players could take on a bigger slice of the industry
A significant portion of Current Estimated Indian retail continues to be fragmented. There is large headroom for the top 5 retailers to increase their market share from the current USA UK India India <5% to 10-12% in the (2018) (2018) (2019) (2030) next decade, based on: • Learnings from developed markets (typical share of Size of retail 25-30%) market ($ Tn) ~3.3 ~0.5 ~0.7 1.8-2.0 • Recent trajectory (share steadily increased from ~1% in 2010 to <5% in 2019) • Rise of alliances / ecosystems expected to play out going Top 5 players 25-30% 30-35% <5% 10-12% forward, which allows market share for steady increase in consumer share of wallet
Source: Euromonitor, Company annual statements, Analyst reports, BCG analysis
46 Retail 4.0: Winning the 20s Winning the 20s would require a holistic rethink of business models In order to win in Indian retail, players would need to actively respond to Forces that could shape retail in Retailers would need to make changing trends across the the next decade business model innovations industry.
Retailers who stop improving their core Consumer shifts Value proposition business, could gradually Product range, lose their competitive Target Brand price, quality, advantage and run the risk segments promise design, service of falling revenues, store Supply side closures, losing scale (Factoring lens of business economics) innovations (“Vicious Retail cycle”)
Strong interplay Data and technology based on Retailers must instead driven disruptions choices made constantly innovate to improve formats, drive customer experience, push for bigger baskets, loyalty, Operating model lower costs and improve New competitive profits forces Store Cost (“Virtuous Retail cycle”) Channel concept model
Value Organization, Data and chain, Go Regulations alliances Technology to market
Themes for the next decade 47 Key themes around value proposition likely to unfold
Based on BCG’s learnings globally and forces that Low Responsible Retail Mainstream sustainability, localized sourcing, fair trade could potentially shape Conscious play and alignment with consumer values retail going forward, we believe multiple themes could play out and gain Alternate retail New business models, e.g. subscriptions, renting, or prominence over the next Non traditional offerings solution based retailing 5-10 years.
These themes could Personal Retail Individual level personalization, customization of translate into choices for Individual is important product/ service retailers either on Value Proposition or Operating Model. Omni-channel Retail Uniform, smooth and integrated experience across in- Seamless channels store and online channels
Each of these choices would come with a set of Spectacular Retail Retailtainment (entertainment, gamification, experiences, imperatives, that need to Experience led additional services) to engage/ involve consumers be thought through.
Value Retail Low price India values “value”
Level of maturity with sufficient scale observed currently in India Convenient Retail Ultra-convenient in-store experience, delivery, online Quick and easy journey; customer access through smaller stores High
Source: BCG analysis, experience
48 Retail 4.0: Winning the 20s .. along with complementary choices to be made on operating model
Level of maturity with sufficient scale observed currently in India Players can pick a theme or choose to straddle Low High across multiple themes, depending on category, geography, investments, synergy with core etc.
Prominence of each Alliances and High-tech Gig Multi- Many No frill theme would vary by ecosystems channel Indias category Collaboration Data Flexible Be present Regional Low cost e.g. High engagement is key driven play labor everywhere play operation categories would see more innovative models Partnerships/ Automation, Gig Presence in Anchored Low costs, of spectacular retail alliances AI; predictive platforms both physical on needs, leverage with players, technology, – flexible stores and preferences private including digital supply labor (day online of different labels, Despite different unorganized chain, voice of week, channels, regions to provide themes, a few elements to create tech, digital time of day, to drive improve minimal would continue to hold ecosystem, payments location) accessibility local play shopping prominence increase experience reach e.g. Customer experience is still very important – has different implications across themes
Source: BCG analysis, experience
Themes for the next decade 49 Globally, few retailers making choices across themes to craft ‘Win the 20s’ strategy
Omni-channel Gig High-tech
Personal
Leading Chinese e-commerce company creating a unique food & grocery ecosystem • Mobile app for information/ payments, omni-channel • Personalizes recommendations through customer journey Multi- Convenient • Convenience by leveraging store as a fulfillment center channel • Gig personnel for deliveries Alliances • Integrates physical store operations with online ecosystem & ecosystems • Efficient inventory management, fully digitized supply chain
Spectacular Personal Responsible
Leading American sportswear retailer focusing on accessibility, innovation, customization • Stores/ assortment localized to catchment • Personalizes videos with tailored recommendations • Provides basketball court, style consultations to experience products Multi- • Convenience - pick-ups at smart lockers, Consumers message associates for Convenient return / exchange channel • Digitalizes demand sensing and inventory, responsive supply chain High-tech • Supported a sociopolitical issue
Source: BCG analysis, experience
50 Retail 4.0: Winning the 20s Alternate
Spectacular Gig Leading global furniture retailer delivering low price and unique shopper experience • Flagship store with VR, innovative 3D experience • Smaller format stores in urban areas, curated assortment • Subscription model for temporary furniture rentals Value Multi- • AR at home using mobile apps to envision look Convenient • Gig for customer DIY installations channel • Multi-channel, in-store/ online shopping
Omni-channel
Personal Multi- Indian start-up creating a health and wellness channel omni-channel ecosystem • Entire solution for health/ wellness High-tech • Subscription and app-based healthy food service Convenient • Personalizes healthcare solutions • Gym subscription for fitness, mental well-being Alternate • Machine-driven technology to personalize offerings • App-based technology for managing operations
Themes for the next decade 51 Some Must Do’s to win the next wave of retail
Speed organization, be on Develop destination Build cost efficient and Look out for partners, the constant look-out to products/ experiences, technology enabled retail alliances help to evolve retail model to stay the more differentiated operations, essential maximize resources, relevant with emerging the better ingredient to success capabilities, play to trends own strengths
Build own unique Improve customer Attract best talent Apply a test and learn portfolio/ platform - experience, personally with new capabilities approach, consider invest in models that connect with customers, when and how to scale work, divest where focus on customer aligned with goals needed relationship vs. product leadership alone
52 Retail 4.0: Winning the 20s ... while others are optional based on choices made
Themes Call for action Watch outs
Responsible Find appropriate product/ service proposition that Balance consumer willingness to retail can be sufficiently scaled pay vs. higher costs
Alternate Look for emerging models, develop internal Disrupt yourself before getting retail innovation capabilities to build new concepts disrupted by others
Personal Understand current data, build advanced models Balance hyper-personalization with retail to monetize, road-map to enhance models privacy
Omni-channel/ Outline shopper’s journey across channels, Don’t lose your loyal customer due Multi-channel optimize operations for frictionless experience to cross channel friction
Spectacular Build a compelling offer, find expertise Re-evaluate associate role and retail internally/ externally to execute experience offer profile – need experts
Convenient Right store formats, redefine role of store, rework No longer a race to have most stores, retail infra to service faster/ more seamlessly but right stores in right locations
Harness technology across value chain, find right Balance human element, employee High tech partners to develop and scale adoption while deploying digital
Understand where flexible labor provides greater Balance transactional gig labor vs. Gig returns, evaluate end-end costs customer warmth
Themes for the next decade 53 For Further Reading
Boston Consulting Group publishes reports on related topics that may be of interest to senior executives. Recent examples include:
Demystifying the online food consumer: An $8 Bn Fashion Forward 2020 opportunity A report by Boston Consulting Group in association with A report by Boston Consulting Group in association with Facebook March 2017 Google, January 2020 The New Indian: The Many Facets of a Changing Ten Trends That Are Altering Consumer Behavior in Consumer India An article by Boston Consulting Group, March 2017 An article by Boston Consulting Group, October 2019 Decoding the digital opportunity in retail Going for gold by creating customers who create A report by Boston Consulting Group, February 2017 customers A report by Boston Consulting Group, February 2019 Decoding Digital @ Retail: Winning the omnichannel consumer Decoding value creation in retail A report by Boston Consulting Group, February 2016 A report by Boston Consulting Group, February 2018 Retail 2020: Retrospect, Reinvent, Rewrite Digital Consumer Spending: A $100 Bn Opportunity A report by Boston Consulting Group, February 2015 A report by Boston Consulting Group, February 2018 Note to the Reader
ABOUT THE AUTHORS FOR FURTHER CONTACT Abheek Singhi is a Managing Director and Senior Partner, in the If you would like to discuss the themes and content of this report, Mumbai office of Boston Consulting Group and led the Consumer and please contact: Retail practice in Asia-Pacific. Rachit Mathur is a Managing Director and Partner, in the New Delhi office of Boston Consulting Group and leads the Consumer and Retail Abheek Singhi practice in India. Managing Director and Senior Partner, Amrita Dutta is a Principal in the Mumbai office of Boston Consulting BCG, Mumbai Group. +91 22 6749 7017 [email protected]
ACKNOWLEDGMENTS This study was undertaken by Boston Consulting Group (BCG) with Rachit Mathur support from the Retailers Association of India (RAI). Managing Director and Partner, We would like to thank Kumar Rajagopalan, Bhakti Modle and BCG, New Delhi Dr. Hitesh Bhatt from the Retailers Association of India for their +91 124 459 7293 support and guidance while developing this report. [email protected] We would like to thank Kanika Sanghi, Mitesh Goradia, Chirag Khandelwal and Ekta Seth for their assistance in writing this report. We are thankful to Jasmin Pithawala for managing the marketing Amrita Dutta process as well as Jamshed Daruwalla, Saroj Singh, Rajthilak R and Principal, Vijay Kathiresan for their contribution to the editing, design and BCG, Mumbai production of this report. +91 22 6749 7000 [email protected]