Interview / Prof Nirmalya Kumar

'e-tailing will take a long time to take off in India'

He was here in Madras as a panellist to talk on 'Retailing or e-tailing' at the 'Retail India 2000' conference organised by the CII. Even though he was mobbed by delegates and the press after the panel discussion, he took time off to talk to Shobha Warrier.

Who are the customers of e-tailing in the developed world?

The customers have to be really targeted. If you are not really targeted, especially when it comes to grocery, you can never make money. The reason is that customer-acquisition costs tend to be somewhere between $200 and $700 because of brand advertising, incentives given, etc. So, if the cost of acquiring a customer is $200-700, you have to have a customer who remains with you long enough for you to be able to 'recover' that initial $200-700.

Is it worth spending that much money on a customer?

It is only worth for the right customer. The right customer for grocery e-tailing is a customer who orders 40 times a year on an average of $100 a year. The only people who seem to get to that level are households where, both, the husband and the wife work 100 per cent.

If the wife works 70 per cent, the first thing she does after work is grocery shopping. We find that the attitude of women who work 70 per cent towards grocery shopping through the Internet is identical to the attitude of those women who don't work at all because their mothers have taught them that buying the food is a part of the meal preparation for the children, and it is a very important part of the definition of a mother.

So, we have found that e-tailing is possible only in a household where both the husband and wife work hundred per cent.

The second thing that we have found is that you have to have children in the household. If you don't, the average order size is very low because children consume all kinds of stuff. Only if the order size is high, you can justify the delivery cost because the delivery costs are more or less fixed regardless of the size of the order.

So, you have to get the regular customer and that turns out to be the woman who works hundred per cent. You have to get high order size and that happens only when you have children. Only when you have this combination, you can try to get money. I don't say you can still make money, but that's where you can get close.

Is it not a very small percentage?

No. In America, it is a very big percentage. The percentage of both parents working in a household with children might be 15 per cent of all the households, I think. It may even go beyond that. When you get 3 per cent of the population, it is called a big percentage by the e-tailing models of supermarkets selling groceries on the Internet. Only then, will you be able to break even. So, you have to get 20 per cent of the 15 per cent to break even.

When I talked to Ronald Floto of the Dairy International, he said it was highly unlikely that people would go for grocery shopping on the Internet.

I think it is the one place where people have the highest chance of going e-tailing. I enjoy the process of shopping books or music but it is not so when I go grocery shopping. I don't know of anybody who enjoys grocery shopping except a few housewives who have nothing else to do. If you ask most working mothers, 'what do you think of super market shopping?, they will tell you, 'they hate it'.

The need is clearly there. Whether the customer is willing to pay for the shipping cost is not clear because grocery retailing is a 25 per cent gross margin and 3-4 per cent net margin business and if the average order is $100, you make about $3-4. So, you can't afford to subsidise shipping. You have to charge the customer for the full shipping because if you subsidise shipping, you will never make money.

Many retailers like Carrefour of France talked about having e-tailing also as a part of their business. If they do both simultaneously, will they be able to break even faster?

No. We have found that whenever retailers take on e-tailing, it is additional cost rather than additional revenue. That is because they have to run two systems and you don't have any cost savings. In the end, it will be bricks and mortar. But I think, the best retailers who are doing e-tailing may have the retailing operation separately. They have a dedicated 'hardware house' which is designed for picking individual items efficiently.

Do you think e-tailing is a passing fad and people would go back to traditional shopping once the initial excitement wears out?

No, it is not a passing fad at all. As most people are not doing it, it is not a fad as yet. Even in America, most people have not adopted e-tailing. What are you doing for the customer in e-tailing? You save them time. You give them better assortment. You save them the packing hassle. You save them the hassle of interacting with surly store clerks. It is open round-the-clock, and you can shop whenever you want rather than shop when the shop wants you to. These are the advantages of e-tailing, and these are very powerful advantages.

The only challenge for e-tailing is we have to find a cost model which allows us to break even because the customer is willing to pay extra but not so much.

How popular will e-tailing be after ten years?

In ten years, e-tailing will be 10 per cent in America which is the most developed in e-tailing. That's my guess. It is not based on any numbers; it is based on a complete hunch. You have to remember that we overestimate how good technology will be in next 2-3 years; that is in the short run. And, we always underestimate how much people will adopt technology in the long run, which is about ten years.

When you do e-tailing, are you not losing out on the experience of shopping in a store?

Exactly. You are completely right. You will not get those customers who love the experience of shopping. You will get only the time-starved customers who don't have the time to go for these experiences. You will never get the customer who goes to a shop for the experience.

What about browsing a book in a bookstore?

I agree with you. But we can also give some things on the Internet, which you can't get from the shop. For example, we can give you user reviews. We can give you the first chapter free to read. We can give a whole lot of other things too. In the case of books, the experience will be different. It won't be a mass market. Remember we only need 3-5 per cent to make money.

What about textiles? Will people ever shop their clothes on the Net?

There is a difference between fashion items and staple items. Plain underwear on the Internet, yes. Hanky, yes. White sheets, yes. But fashion items like suits, no.

It depends on the item. Those items will not move to the Internet where the customer feels the touch-feel-see is important. Those items will move to the Internet where touch-feel-see is not important. We won't feel a handkerchief before we buy it or a pair of black socks. But a suit, yes, I want to see how I look in it.

In India, Internet penetration is very low. Do you expect e-tailing to become popular here in India?

I don't see anything great in e-tailing in India in another ten years. We have to get the Internet penetration up. We have to get the speed of the lines up. Most people who live in the cities do not have to travel far to shop unlike in many other developed countries. Plus, the number of working wives is few in India. And, people are very price-sensitive here. I am not sure whether they are willing to pay extra for the shipping cost.

I personally think e-tailing will develop. But it is too far a step right now. It could be there in insurance, financial services, but not for grocery shopping. So, we will see both retailing and e-tailing existing side by side soon.

After some time, won't the people who shop on the Net yearn for a personal touch, like talking to a vegetable-woman or the milkman or the florist?

That personal touch is only valued by housewives who don't have anybody to talk to during the day. The working mothers, remember they are my segment for e-tailing, don't have the time to talk to the doodhwala, they don't have time to talk to the vegetable woman. If they have any time, they want to spend it talking to their children or to their husbands after coming home from work at six o'clock. Yes, you are right. Social interaction is very important but it is important for the housewives and not for the woman who is working hundred per cent.

Now tell me, you are a working woman. Do you have the time for such social interaction?

I like interacting with these people…

Then, I will never have you as our customer!

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