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CONSUMER GOODS & RETAIL

Home CONSUMER GOODS & RETAIL Page 6

by EOS Intelligence EOS Intelligence No Comments

Consumer Goods in Sub-Saharan Africa: Think Local, Act Local.

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Sub-Saharan Africa’s strong GDP growth, growing middle-class, and fast urbanization have attracted many investors and foreign retailers to the region in recent years. There is no doubt that the region’s demographics offer massive opportunities for consumer goods industry. But, a closer look at the ground reality and recent experiences from multinational companies operating in the region reveals the magnitude of challenges that need to be carefully assessed.

Sub-Saharan Africa’s (SSA) recent growth, expanding middle class, rapid urbanization, and growing household incomes have made it a promising market for the consumer goods industry. In recent years, several reports and industry experts have labeled the region as the ‘next big thing’ with massive potential. Although there is no denying that the growth outlook and market opportunities in the region are promising, there are considerable challenges that firms have to assess and overcome in order to succeed in these frontier markets.

Reality Checks

“… we have realized the middle class here in the region is extremely small and it is not really growing.” – Cornel Krummenach, Chief Executive equatorial Africa region, Nestle (June 2015)


Industry Challenges

“If you look at how difficult it can be in Africa to move goods across a border, the fees and expenditure involved, the red tape, and the lack of suppliers for supermarkets, it’s discouraging.” – Boris Planer, Chief Economist, Planet Retail (March 2014)

Beyond the well-known infrastructure challenges, one of the more overwhelming challenges for consumer companies is to gain a complete understanding of the highly fragmented retail industry. As retailers and consumers remain widely scattered, effective route-to-market and distribution becomes a daunting task. In addition, the complex procedures, and bureaucratic obstacles result in supply disruptions and higher operating costs. For instance, Shoprite, a leading regional retailer, spends nearly US$ 20,000 weekly on import permits to transport goods for its stores in Zambia alone. In Nigeria, Shoprite keeps a warehouse full of flour, while PZ Cussons keeps up to three months of stock in Nigerian factories to ensure a constant supply.


How to Succeed

“To operate successfully beyond our home border we had to learn to trade over vast distances,” he explains. “We had to invest heavily in supply chains, information technology capabilities and international sourcing skills, as trading in Africa is still logistically difficult.” – Whitey Basson, CEO, Shoprite Group


The famous song ‘Africa’s not for sissies’ holds so true for the region’s consumer goods industry. As SSA is a culturally diverse region with its heterogeneous consumer goods market, retailers need to think local and act local. They need to develop a comprehensive understanding of consumers, their spending behavior, and shopping habits. As traditional retailing will continue to hold significant market share for quite some time, succeeding in SSA’s consumer goods markets will be challenging. The key for retailers is to assess the various challenges against the market opportunities. Companies will have to be agile to respond to sudden industry changes, at the same time flexible in tailoring their strategies as per needs of the evolving market.

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1) African Development Bank in 2011 estimated middle-class population in SSA to be over 300 million and defined “middle-class” as individuals earning between US$4 and US$20 a day. Standard Chartered Bank in its 2014 report projected the middle class in 11 major SSA economies to be around 15 million and estimated this figure to surpass 40 million by 2030. Standard Chartered Bank defined “middle class” as those earning between US$8,500 and US$42,000 a year.

2) Coca-Cola designed an innovative distribution model for African markets where bottlers deliver directly to distribution centers, who in turn deliver to retailers. This resulted in win-win situation for all as everybody in the supply chain ecosystem earns profit. Shoprite Group’s growth is heavily linked to its central distribution model that helped the firm to improve customer services and ensure smooth supply across the region.

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In May 2013, in our article ‘Africa is Ready For You. Are You Ready For Africa?‘, we also discussed six aspects that companies must consider when planning their Africa strategy and offerings.

by EOS Intelligence EOS Intelligence No Comments

The Rising Importance of Private Labels for GCC Retailers

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Despite the recent progress made by several Gulf Cooperation Council (GCC) retailers in developing their private labels, the industry is still lagging behind in comparison with western markets. Although regional retailers are well aware of the private labels’ potential, they have not fully leveraged their benefits. As the competition intensifies, regional retailers need to develop optimal private label strategies that can help them further enhance profitability and consumer loyalty.

With the evolving retail landscape, consumer attitude towards private label products has changed dramatically over the years in the GCC region. According to a 2014 Nielsen survey, nearly three-fourth (71%) of the respondents in Middle East and Africa agreed that their perception towards private label products have improved in recent times. Gone are the days when private label products were just seen as cheaper alternatives of national and multinational branded products.

Today, private labels include some innovative products that have no branded equivalent. Some of the premium private label products are superior to branded products in quality. Despite the growth of market share of private label products in recent years, the GCC retail industry is still lagging behind major matured retail markets in terms of private labels presence. Retailers now realize the need for making private labels an integral part of their growth strategies that can help them boost revenues and customer loyalty in the current retail environment characterized by intense competition and consolidation.

GCC - Retail Sales

The retail industry landscape in GCC region is constantly evolving, with the modern trade replacing traditional independent retail trade. As of 2013, the total occupied modern retail sales area was 5.3 million square meters. This is projected to reach 6.6 million square meters in 2018.

Retail industry has witnessed tremendous growth over the last decade and is one of the fastest growing sectors of the region. The growing expatriate population, increased purchasing power of consumers, modern lifestyles, and increasing influx of tourism revenues are fueling growth in the region’s retail sector. According to a 2015 report from Alpen Capital, retail sales in the GCC region are expected to grow at a CAGR of 7.3% between 2013 and 2018 to reach US$ 284.5 billion. Sales in supermarkets and hypermarkets across the region are expected grow at a CAGR of 9.2% during the same period.


GCC - Supermarket Sales

Given the retail industry’s strong growth outlook, a lot of potential opportunities exist for retailers to grow and differentiate themselves with private label strategies. However, till now retailers have largely failed to capitalize on this. Private label products have started to penetrate and enjoy success only across few product categories such as home care, packaged food, beverages, and hygiene products. Not only there is still an ample room for further growth in these categories, but the market remains untapped for other product categories such as personal care and hygiene products, and food categories including frozen food.

With the increased competition and industry consolidation, retailers need to re-think their strategies that can enable continuous growth and innovation. Therefore, many retailers are increasingly using private label as a strategic weapon to differentiate themselves and outperform competitors. According to SIAL Middle East, a leading event organizer in the region, 88% of the Middle East retailers they interviewed in 2014, were investing in private label expansion. Spinneys UAE recently announced to boost the exports of private labels in Middle East and North Africa (MENA) countries due to the increasing demand and recent success enjoyed by company’s private label offerings. Similarly Tesco, LuLu, and Carrefour have also announced their plans to further develop their private label offerings in the region within both food and non-food segments.

There are significant opportunities for GCC retailers in the private label space as these products are more profitable than branded products. By cutting the middleman (distributor) out, and by avoiding higher marketing costs associated with branded products, private labels enable retailers to increase gross margins. As today’s price conscious consumers are looking for best value for their buck, private labels offer consumers a wider range, better quality, and fairly priced products, thus creating a win-win option for retailers and customers in the current retail landscape. Moreover, private labels offer retailers with more bargaining power with their suppliers. It also helps retailers to have better control over their product offerings and category management. Although the opportunity for GCC retailers in private labels is clear, retailers in the GCC region have failed to reap their full potential. This is mainly because retailers within the region face an array of challenges.

Firstly, sourcing is a significant challenge for retailers as there are very few manufacturers in the region who have the capabilities to supply a range of high quality private label products. Most of these companies have existing manufacturing contracts with multinational retailers, which prohibit them from creating private label products for regional players. Other manufacturers and suppliers in the region face acute operational issues such as quality and supply chain management deficiencies that automatically make them unfit.

Secondly, the region has a diverse range of consumers of different nationalities, income levels, and other social demographics. Understanding their diverse needs is a challenge for retailers. So far, most of the retailers have focused solely on value, and failed to gauge the exact needs and expectations of these consumers due to lack of customer intelligence and the retailers’ limited ability to customize their private label offerings as per the regional market needs. GCC retailers have also failed to assess the current gaps in their assortment, and how they can utilize their private label offerings to fill these gaps.


Given the retail industry’s robust growth outlook, in order to grow and capture a bigger market share, retailers are using organic as well as M&A strategies. Therefore, M&A activity has also picked up within the industry. In the past few years many deals have taken place that involved region’s leading retailers such as Savola Group, Damas International, LuLu Group, and Al Meera Consumer Goods Co. As the retail landscape continues to consolidate, competition among retailers in the GCC will only get fiercer.

Private label is likely to become one of the key battlegrounds for retailers looking to succeed in these markets. As a first step, retailers should integrate private label with the company’s overall business strategy. Further, in order to succeed, retailers will have to develop a better understanding of the retail market landscape as well as shopping behavior of their target consumer segments. This will help them create targeted private label strategies tailored to shopper needs with optimal private label categories, branding, packaging, and pricing strategies. By collaborating with experienced manufacturers, GCC retailers need to ensure that right products are on the right shelves at the right time and price. It is critically important for retailers to strike the right balance between price and value. Cracking this code will allow retailers to strengthen growth and customer loyalty beyond 2015.

by EOS Intelligence EOS Intelligence No Comments

Luxury Brands Losing Ground in China, Looking Elsewhere

It was not very long ago, when the European luxury products market sprung back to life on the back of the booming Asian markets. Right after the global recession, most luxury brands, however, re-strategized their efforts towards the high-end luxury-hungry markets of China and other Asia-Pacific regions. For the last several years, China has been the industry’s main growth engine, helping make up for lackluster demand in Europe and Japan. But this period seems to be ending much sooner than the industry would have wished for.

Leading luxury brands, Louis Vuitton, Gucci, and Burberry, are losing their shine in the Chinese market, which along with Hong Kong and Macau, represent more than a third of global sales for most of these brands. This premature slump is attributed not only to the stagnation in the Chinese economy, but also to a maturity in consumer tastes in the region.

Over the past few years, there was an explosion of demand for luxury items that communicated wealth and status to the society. However, on the flip side, this led to over-exposure of luxury brands, which in time has resulted in them losing their premium status. This has translated into a shift in priorities among such consumers, who now feel a ubiquitous ‘logo-fatigue’ with such products and are looking for goods that provide a more unique and authentic image.

Unlike the more established European and American markets, where trends and consumer preferences take a long time to form and assimilate, Asian (especially Chinese) markets have witnessed consumer trends emerge, become a fad, and then be rejected, very quickly. The shorter life span of a trend makes it a challenge for these companies to move out of the ‘masstige’ market (a combination of mass and prestige market) and present a fresh take on luxury items with discrete or even absent logos. Several brands, such as Saint Laurent and Balenciaga, have realized this shift in consumer perception of luxury and have been successful in implementing it.

Although most leading fashion and luxury brands have now embraced this trend in their Asian strategy, the demand from China is not expected to recover enough to regain its peak. A large proportion of luxury products’ demand came from China’s deep-embedded culture of lavish gifting for favors (to government officials); however, President Xi’s latest campaign against corruption and lavish gifting have further dampened sales of luxury products, especially watches.

This puts the industry in a challenging spot to re-innovate themselves for the Asian consumers as well as to find new growth frontiers. While other Asian counterparts, such as India, continue to look promising, luxury brands are now establishing presence in African markets. Sub-Saharan Africa is being viewed as a promising market for luxury goods on the back of increasing urbanization, economic development and most importantly a burgeoning aspirational middle-upper class that view luxury goods as a sign of status and success. Although, growth is from a low base, the appetite for luxury goods in this market is expected to soar. Leading brands – Cartier, Louis Vuitton, Burberry, Gucci, Fendi, and Salvatore Ferragamo, have already set foot in Africa. While these brands are largely concentrated in South Africa and Morocco, luxury sales are also picking up in new markets like Angola and Nigeria.

Although most companies have started focusing on developing themselves in the African markets, it is far-fetched to say that these markets will be able to substitute the demand from China and other maturing Asia-Pacific regions, especially any time in the near future. This puts the industry in a precarious position in the coming years, settling down for moderate growth. Companies that push themselves at this time, to redefine luxury and bring about radical changes to advertising campaigns and store designs to recapture the audience have a strong chance of emerging as market leaders.

by EOS Intelligence EOS Intelligence No Comments

How To Confuse The Consumer – Organic Cosmetics or ‘Organic’ Cosmetics?

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Despite the ongoing crisis, there is a continuous interest in green, environmental, and health-centered benefits across consumer products, including personal care. While organic personal care and beauty products markets have been growing in several geographies, they are still a fraction of the overall cosmetics industry. Industry experts expect organic personal care and beauty products to continue on its growth trajectory; it might, however, be hampered by consumer’s increased scrutiny and lack of trust in the authenticity of organic claims.

Cash-stripped consumers do shop less and trade downwards in some of their purchasing choices, however, still remain under the universal pressure to stay young and to fit in the general convention of beauty, allowing the cosmetics and personal care markets to do pretty well. The ever existing need to beautify oneself, satisfy vanity, or to heal personal insecurities, had led to a healthy growth of beauty and personal care industry worldwide during the pre-crisis years. Despite the current slowdown, Euromonitor estimates the beauty and personal care market to grow 5% annually to reach US$562.9 billion by 2017, with the US sales alone accounting for US$81.7 billion.

The industry has not remained untouched by the widespread trend of going green, and natural and organic cosmetics segments have seen some good growth rates even amid crisis. Transparency Market Research estimates that the global demand for organic personal care products was about US$7.6 billion in 2012, with anticipated CAGR of 9.6% by 2018, when it is expected to reach US$13.2 billion. While this might be still a fraction of the overall beauty and personal care industry, the growth is promising, especially that more and more consumers express strong interest in organic cosmetics in hopes of their more beneficial or at least less harmful effect. The interest in organic cosmetics is particularly strong in a few developed countries, led by the USA, Japan, and Germany; however, other developed and developing markets are also exhibiting the trend. It is believed that, over long term, there are even greater opportunities in markets across Eastern Europe, China, Brazil, Mexico, or India, where health awareness is increasing, purchasing power is growing, and ‘going green’ trend is catching up. As a result of these opportunities, makers of organic and natural personal care products proliferate, led by names such as The Body Shop, Burt’s Bee, Dr. Hauschka, Weleda, Bare Escentuals, Herbal Essences, or Aveeno.

However, organic beauty and personal care products industry has its own dark face, and while the growth is promising, there are a few issues challenging the overall market growth.

If it quacks like a duck, is it… ‘organic’?

In several markets (probably most of them), many organic products are not organic at all. While certain level of organic regulation and certification has been achieved in the food industry, personal care industry lags far behind. Therefore, large part of cosmetics, despite having some natural or plant-derived ingredients, is made with synthetic and petrochemical compounds. Further, several of those naturally grown, supposedly organic ingredients, in reality are grown on soil that was treated with fertilizers and pesticides, thus has barely anything to do with organic – pesticides’ harmful effects can be transferred to end products, and further to consumer’s skin. The reason for such dishonesty is not hard to guess: truly organic products are far more expensive at each stage, from product development, to raw material sourcing, to production, as well as distribution, as their short shelf-life is a real challenge for both producers and retailers.

Producers benefit from lack of legislation, as they can put an ‘organic’ label on products with some (even marginal) natural content while using synthetic ingredients to achieve better product properties. However, such practice will harm the industry over long term, since it will destroy overall consumer trust and dilute the differentiation of genuine organic products. Legitimate organic cosmetics have to compete with conventional ones labeled as ‘natural’ or ‘organic’. It is fair to say that the ‘evil’ cosmetics producers just take advantage of the lack of law that would clearly regulate when a cosmetic product can and cannot be called ‘organic’. Organic personal care products are not government-regulated and no global or universal standard has been developed so far.

 

‘Organic’ Legislation Gap

The USA has not introduced any regulation that would control the use of ‘organic’ in labeling of personal care products. While USDA regulates organic agricultural products, which might also be used as ingredients in cosmetics (e.g. honey, cinnamon, avocado), it does not have authority over the production and labeling of cosmetics and personal care products as such. Therefore, if a cosmetic product’s ingredient is plant-derived but is not a food ingredient (e.g. plant-derived essential oils), it does not fall under jurisdiction of USDA, and producer’s claims go unregulated. At the same time, USDA issues certifications under the USDA National Organic Program, however it just allows cosmetics to be certified organic, it does not require it.

Similarly in Europe, there is no clear regulation on the types of claims. There are certain private organization certificates, such as Ecocert, which help guide consumers through the plethora of claims on labels. However, no legislation has made it mandatory for cosmetics producers to obtain such certification, therefore, ‘organic’ claims can still be made. The EU recently introduced new EU Cosmetics Regulation, which imposed uniform rules for all cosmetic products, including “Common Criteria” that identify principles for cosmetic product claims. However, organic cosmetics still lack regulatory definition, leaving an open gate for greenwashing.

Greenwashing in the spotlight

With increasing confusion about what really is and is not organic, several organizations and campaigns are pointing fingers at industry cheaters, calling for stricter regulation preventing false claims, and these organizations’ voices are increasingly audible. Drives such as The Campaign For Safe Cosmetics by a coalition of several organizations or Coming Clean Campaign by Organic Consumers Association, point out that governments do not regulate cosmetics industry for safety, long-term health impacts, or environmental damage they cause, and that producers label their health and beauty products falsely as ‘organic’. While these efforts have not led to fundamental changes in legislation, one goal has been achieved: consumers are increasingly aware that the word ‘organic’ on the label does not guarantee organic content. Moreover, consumers learn how to scrutinize the real-deal brands and differentiate them from the ones that just greenwash their products’ image. Just this year, some voices were raised indicating a slowdown in organic beauty products sales. It appears, that while market and consumer trends do remain favorable, the claims on organicity of such products do not convince consumers. Simply put, consumers no longer trust that ‘organic’ means really organic, and that such products can meet their expectations, especially given their higher price.

‘Organic’ or ‘with natural ingredients’?

The inclination to natural content in consumer personal care products is nothing new. However, with the overall confusion of what can and cannot be rightfully called organic from regulatory point of view, there is another issue – lack of clarity on the consumer side. Organic products are not always differentiated in consumer minds, and they are thrown in the same bag with all ‘free from parabens’ or ‘with natural ingredients’ products. This is not the same as a truly 100% organic product, made with organically grown, pure ingredients, with traceable and certifiable organicity of all raw materials used. Still, organic cosmetics marketers have not been able to define clear positioning for their products yet, and they seem to have settled for the word ‘organic’ do the job for them. Yet for many consumers, ‘organic’ and ‘with natural ingredients’ seem almost the same, and they perceive such products as alternative, artisanal, rather than luxury or aspirational, resulting in their lower commitment to purchasing choices remaining only within the ‘organic’ category.

The overall natural cosmetics market, with its organic segment, is growing, and several market leaders have managed to establish a reasonably strong position (while some brands, such as Herbal Essences or Aveena, still being a target of awareness and integrity campaigns). At the same time, there have been several failed attempts to bite a share in the organic sales cake – including Clarins shutting down its Kibio brand or L’Oréal’s Sanoflore brand’s unsatisfactory performance, with some less significant brands exiting the market within a couple of years of launching. The market is quite competitive and not easy to get to, and will be subject to increasingly tightening regulation, though it remains unknown when a truly, organic-oriented regulation will be introduced. Till then, it is up to individual consumers’ to understand the ingredients and research into particular producer’s practices to understand whether they really buy what they think they buy.

by EOS Intelligence EOS Intelligence No Comments

E-commerce in China – Intensive Competition In Spite of Low Penetration

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In the concluding article of our E-commerce Challenges in the BRIC series, we highlight the challenges faced by online retail companies in China. While China is one of the rapidly growing online retail markets, we discuss how aspects such as growing local competition, infrastructure deficiencies, issues with online security for buyers, and heavy dominance of price-based competition hinder the expansion of e-commerce in the country.

Given the Chinese economic growth story, good performance of its e-commerce market comes as no surprise. Exploding middle and upper class, rapidly growing disposable incomes, rising internet penetration, fascination with foreign brands and mobile solutions, all add up to a perfect scenario for online retail to flourish.

According to McKinsey & Company, China’s online retail market, estimated at US$210 billion in 2012, is the world’s second largest market after USA. It is expected that by 2015, it will reach US$305 billion and surpass the US market, having grown at a CAGR of around 34% during the 2010-2015 period. With the size of even up to US$650 billion by 2020, the momentum is expected to continue, especially that industry analysts emphasize that in China’s case, e-commerce has strong effect of generating additional consumption, and not only drives change of sales channels from the otherwise existent off-line sales.

Thanks to the favorable dynamics, Chinese e-commerce has been named the most promising destination for online retailers, which found reflection in China’s first position in AT Kearney’s 2012 E-commerce Index. Unlike in other markets, Chinese e-commerce space is dominated by virtual market places, where a plethora of merchants sell their products, without the need to invest in opening and managing own online stores. However, aspects such as these, along with other specific characteristics of the market, make doing e-commerce business in China a challenge.

China e-commerce

The Challenges

  • Strong and consolidating position of local players – the Chinese e-commerce market is dominated by Alibaba’s consumer-serving arms: consumer-to-consumer e-commerce platform, Taobao, and business-to-consumer marketplace, Tmall, which together account for close to 90% market share. Several local and foreign merchants, such as Microsoft, are increasingly joining Tmall and other e-marketplaces (as opposed to opening own online stores) to sell their products online to Chinese consumers, which leads to further consolidation of Alibaba’s position in the market. While the market is growing and space is expanding to absorb new entries, such strong and established local players are a significant challenge for newcomers, as well as existing online retailers.

  • Dominance of price-based competition – despite strong local players both in the field of direct online retailing as well as e-marketplaces, majority of them do not offer any particular differentiating factor or unique proposition. However, what makes competing with them particularly difficult is their ability to slack the prices and enter into price competition. With price being the key platform of competing, achieving profitability is very difficult, or even impossible, for instance, for retailers who sell imported products subject to high import duties.

  • Considerable infrastructure deficiencies – Infrastructure woes are a common challenge affecting e-commerce markets developing across all BRIC markets, including China. Only metropolitan areas have sufficient infrastructure to ensure that product delivery can reach in time (and reach at all). In rural areas and locations far from main hubs, there is no guarantee the orders will reach the customer, as the road infrastructure and delivery services tend to be non-existent or fragmented. The infrastructure issues are often indicated as the biggest challenge that hinders realization of the country’s full e-commerce potential, as online retailers are not able to control and improve the entire supply chain. This challenge is particularly difficult, given the already high expectations of Chinese online consumers, who not only expect wide selection and attractive prices, but also excellent and fast services, including short delivery times.

  • Insufficient security solutions for consumers to shop online – despite numerous industry analysts agreeing that the market will continue to grow with large numbers of consumers joining the online shopping crowd, there is a common consensus that security-related risks in China are still significant. This includes issues such as product quality, payment security, information security, consumer rights protection, illegal transactions, etc. All of these aspects still significantly impact consumer trust, deterring many of them from shopping online. Also, e-commerce providers have little control over these risk factors, as the security of online payment is handled by a third party. Cash-on-delivery method is not very popular due to other risks (robbery, fraud, etc.), which drives some e-commerce companies to partner with security services providers or to double the number of own couriers sent to deliver the order and collect the payments, to eliminate fraudulent activities (which generates considerable costs).

  • Low internet penetration in rural areas of the country – while the overall internet penetration is increasing, majority of this growth occurs in urban and metropolitan areas. Currently, it is estimated that not more than 35% of Chinese population uses internet, a ratio below levels in many developing countries. As large proportion of Chinese consumers is still located in the countryside, the internet usage growth confined to the cities limits the internet user base growth for the time being. Moreover, rural-based consumers are not very likely to start using the internet and build an interest in online shopping very soon. Therefore, e-commerce players are challenged with having their customer base currently limited mostly to tier 1 to tier 3 cities.


E-commerce in China is booming, in spite of several teething problems around infrastructure, online and offline security, and low internet penetration. The bigger challenges, however, impact new entrants, which are faced by a highly intensive competitive environment and a market driven purely by price competition. E-commerce will continue to grow in China; there is no question about it. The pace of growth will depend on how the market environment changes to mitigate the risks emanating from the current set of challenges.

by EOS Intelligence EOS Intelligence No Comments

E-commerce in India – Unfavourable Business Environment

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In Part III of our E-commerce Challenges in the BRIC series, we highlight the challenges faced by online retail companies in India. Unfavorable business environment, profitability issues, consumer’s set notions on shopping are some of the key aspects that we discuss, in order to better understand where India stands in the e-commerce space.

Despite India being a rightful member in the BRIC group from the economic development point of view, in terms of e-commerce development, the country is typically not clustered together with Brazil, Russia and China. In AT Kearney’s 2012 E-commerce Index, India was not ranked at all, and the market is described as lacking the necessary technology to connect vast numbers of potential users to the internet, and extremely poor infrastructure preventing reliable delivery and returns. Opinions, however, are divided. According to McKinsey & Company, India indeed does have problem with low internet penetration and significant infrastructure barriers, but these issues are challenging, not disabling, e-commerce market.

Currently, Indian online retail accounts for around 1% of India’s overall retail market, according to Euromonitor, and is estimated to reach about US$1.3 billion in 2013. This might be far behind the market size of other BRIC countries, however, looking at the anticipated CAGR of 34% between 2005 and 2015 to reach over US$2 billion with expected share in overall retail to increase to 8%, it appears that the Indian market does have opportunities to offer. Some forecasts indicate a considerably more intense growth, even up to US$15 billion by 2017. The varied forecasts show how big of a question mark the market and its growth trajectory are.

One thing appears to be true though – despite still being a comparatively small market, potential long term growth might turn India into an attractive destination, with current internet users expressing strong interest in online shopping.

The market has the potential to accelerate, however, currently several challenges hinder its growth.

India e-commerce

The Challenges

  • Very low internet penetration – it is estimated that the internet penetration is about 12.5% of the population, far less than in any other BRIC country. Existing connections are largely characterized by low average broadband speed and unstable, often interrupted signal, which results in high online transaction failure rate. None of the Indian economy’s favorable economic developments, such as growing incomes and rapidly expanding middle and upper class, will translate into flourishing e-commerce market until larger proportion of Indian population is online and has access to reliable, fast connection.

  • Infrastructure and logistics inadequacies – given India’s vast size, order delivery is and will continue to be a problem, as the country is not able to develop road infrastructure at a pace fast enough to meet the demand, therefore is postponing investments in infrastructure in rural and remote areas (where majority of Indian consumers are based). Large part of investment in the e-commerce market goes into warehousing infrastructure, inventory management, in-house logistics and delivery logistics, as currently only in tier-1 cities (and in a few tier-2 cities), e-commerce companies can ensure relatively timely and safe order delivery. Infrastructure issues significantly affect the online shopper’s willingness to shop regularly, and many of them abandon their online baskets after seeing the estimated time of delivery. From the e-retailer’s point of view, all these issues generate additional costs, as they either develop own delivery capabilities or partner with several delivery services providers (who often also lack delivery management technology such as fleet or parcel tracking). Overall, it is estimated that the logistics costs in India are among the highest in the word, primarily due to large proportion of poor quality physical infrastructure.

  • Strong off-line shopping culture – traditional, often small, local retailers for years have been part of the shopping landscape, becoming the synonym of shopping experience for Indian consumers. While this is changing with proliferation of malls and organized retail, those local shops still are a tough competition for potential online stores, especially that they have managed to build lasting, often personal relations with customers in their community. These traditional shops are located in the customer’s immediate neighborhood, with some of them offering free delivery, which makes online shopping advantage of purchasing from home much less relevant. Further, consumers’ familiarity with traditional, off-line shopping makes them wary and distrustful of online shopping, due to a range of reasons: the products cannot be touched and felt, e-commerce and online consumer protection laws are yet to be developed in India, and online payments security is still far from perfect.

  • Challenge with achieving profitability – given the nascent stage of e-commerce development in India and the overall high price-sensitivity of Indian consumers, fierce price competition (or even price wars) have been present in Indian e-commerce space. Players attempt to outbid each other with lower price, to the extent that some of them offered prices below their cost. Players’ profitability has also been compromised due to the need to invest and develop overall e-commerce ecosystems, and attract customers to the very concept of buying online. This resulted in the market being plagued with profitability issues, even for the market leaders such as Flipkart, Jabong, or Myntra, with several market exits by players who were not able to continue operations in such unsustainable way. Over time this will lead to higher consolidation in the market, as further companies decide to exit, while the stronger ones (probably with better financial backup) survive and acquire smaller players –more than half of e-commerce companies are expected to disappear over the next 6-8 months. These developments might put a brake on price reductions, but will continue to make it difficult environment for new market entrants.

  • Dominance of cash-based transactions – cash payments by far dominate in India, estimated at 80-90% of all payments and more than half of online transactions. The use of credit cards has been constant over past years, estimated at around single digit percentage share of population using a credit card. The use of debit cards has increased, and currently some 200-250 million issued cards, however, majority of Indians are still uncomfortable with this way of payment, and often do not feel the need to use it. While cash-on-delivery could be an option here, e-commerce thrives in environments with high use of electronic money. For the time being, cash-on-delivery is quite popular, however, it is risky and costly for e-retailers, as they have to finance the purchase and delivery till they receive the payment, and as many as 45% of orders are rejected without paying, generating costs. In attempts to rationalize costs to deal with profitability issues, online retailers will have to start promoting higher use of electronic payments, however this might mean losing a considerable customer segment of shoppers who will continue to be interested only in cash transactions. Therefore, few players are likely to decide to make such a bold move, and cash payment will continue hampering e-commerce market growth and negatively affect players’ bottom line.


India’s e-commerce market faces a mix of common challenges which exist across the BRIC countries, and inherent issues pertaining to unfavorable business conditions. Consumer culture and infrastructure issues aside, the fact that the market has to compete almost exclusively on price is hurting the current breed of players, and perhaps forcing potential new entrants into re-thinking their business models. The market is plagued with logistical nightmares, in spite of the fact that it only caters to a minuscule proportion of the potential customer base. In view of the challenges, it is no wonder that there are such divergent perspectives on e-commerce’s growth potential in India.

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Part I of the series – E-commerce in Brazil – Marred By Political and Social Influences

Part II of the series – E-commerce in Russia – Strong Impact of Consumer Culture

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E-commerce in Russia – Strong Impact of Consumer Culture

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Part II of our E-commerce Challenges in the BRIC series brings us to Russia, a market with significant growth opportunities which are impacted by customer’s traditional retail perceptions and infrastructure woes.

With a share of only 1.9% held by online sales in total retail sales, it would appear that Russian e-commerce market is almost irrelevant. However, the strong growth dynamics promising an average annual growth rate of 35% and a market size of US$36 billion by 2015, give a good context of the scale of opportunities. International online retailers are increasingly eyeing the Russian market with a view of capturing the growing e-commerce consumer base; however, some of the global giants, such as eBay or Amazon, still lag behind strong local competitors, such as Ozon.ru.

Opportunities are many, considering that already in 2011, Russia overtook Germany to become the market with the highest number of internet users, as well as the fact that it is Russia that prides the highest per capita income amongst all BRIC countries (with per capita income at PPP of US$17,700, compared with Brazil’s US$12,200, India’s US$3,900, and China’s US$9,100). However, as many e-commerce entities operating in this market have already discovered, Russian market is challenged by its own set of issues that hold back the market to expand even faster.

Russia e-commerce

The Challenges

  • Inadequate infrastructure – similar to many other developing countries with vast territories, Russia has by far insufficient and inadequate infrastructure, a fact that negatively affects delivery times, safety of cargo, and generally prevents the e-commerce market from developing to its full potential. Russia’s major transportation method is railway and road. With insufficient and outdated rail infrastructure, as well as bad or non-existent road network, paired with long distances required to cover in this large country, deliveries outside metropolises such as Moscow or Saint Petersburg often take a week to reach the online shopper. Also, on the online retailer side, delivering orders to customers across this huge country, particularly without a reliable national post system, generates significant costs and considerable time issues. Several larger players that have sufficient financial resources at hand need to invest in building own delivery networks and infrastructure wherever possible, as such services are not commonly available due to lack of specialized, reliable third party providers. This is, however, often impossible for smaller players or newcomers to the market, as it requires substantial investment.

  • Try-it shopping attitude – Russian shoppers often like to treat online shopping as ‘try-at-home’ service. They order many products, try them out at home, with the assumption that they might keep just few or even none of them. This requires online retailers to be rather flexible with product return options, and create process that allow for quick and efficient dealing with rejected products and cash refunds. This shopping attitude also results in retailers having relatively high inventory level, as well as devoting considerable time and resources to deal with orders that will eventually not generate revenue for them, as it is estimated that one in four deliveries of online purchases in Russia is refused and returned by the customer. Further, the infrastructure problems and lack of reliable public postal system clash with the try-it shopping attitude, as it makes it difficult for online customers to return purchased products, making them hesitant to shop online.

  • Cash payment shopping culture – credit and debit cards are not widely used by Russian shoppers, on the back of distrust towards safety of advance online payments and honesty of online retailers, as well as requirement for special card authorization before a purchase (online payment cannot be completed within a few clicks). This has led to high dominance of cash-on-delivery payment, which currently accounts for about 80% of online sales of products such as clothes, shoes, and electronics. Online retailers must cater to this demand, which requires them to finance product delivery while receiving payment later, leading to problems with cash flow and returns/rejects. Further, online retailers often incur additional costs of employing own team of cash couriers. While the use of debit and credit cards will increase, the process will be rather slow and long, as apart from developing reliable and safe online payment systems, a considerable cultural change to cash-oriented mindset in customers must occur.

  • Strong local competition – this is a challenge for newcomers to the Russian e-commerce market, especially foreign players. While it is still in early stages of development, there are several strong and successful local players (e.g. Ozon.ru, KupiVIP, Lamoda, Utkonos, Svyaznoy, X5, Wildberries.ru), who know how to navigate through nuances of online retail in the country, and enjoy strong, often loyal customer base. Ozon.ro is the unquestionable market leader, with grounded position, large customer base, own logistics arm, and wide offering, resulting in its extremely good performance (revenue hike of 91% in H1 2012 to US$232 million, expected to reach US$1 billion in 2014). Local competitive landscape is also infused with a number of smaller retailers that focus on narrower product categories, providing broad offering with a given category, e.g. consumer electronics provider Citilink or car spare parts store Exist.ru.

  • Consumer nationalist inclinations demanding localization – while many Russians appreciate foreign trends, there is a strong sense of nationalism that makes Russian shoppers less accepting and more likely to reject foreign influences and brands, if they do not localize their offering and do not provide fully Russian-language experience. This might pose a challenge for foreign e-commerce entities, expecting to transplant their business and operating models directly to the Russian market.

 

Russia’s e-commerce market is heavily influenced by customer mindsets and attitudes, which are still based on traditional shopping experiences, thus acting as hindrance to the pace of online retail growth. Inadequate and inefficient infrastructure has also played its part in creating challenges that result in cost and operational losses to existing players, and scares new entrants from investing in this space.

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E-commerce in Brazil – Marred By Political and Social Influences – read the first part of our E-commerce Challenges in the BRIC series.

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E-commerce in Brazil – Marred By Political and Social Influences

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The opportunities for e-commerce offered by several emerging countries, such as the BRIC, has been analyzed at length, and quite rightfully so, given their expanding economies, growing middle class, soaring disposable incomes, paired with higher internet and mobile penetration. While the opportunities coming from these transformations are plentiful, e-commerce markets in the BRIC countries also face serious challenges to their development, some of them common across all four countries, some unique to single markets.

We explore these challenges in a four-part series to understand the major roadblocks influencing growth of the e-commerce industries across Brazil, Russia, India and China.

Brazilian consumers are still relatively new to e-commerce, with current propensity to shop online often compared with the penetration rate witnessed in the US market in 2000-2001. This might seem like a small market, however, the e-commerce growth in Brazil is strong, estimated at 21% during the first half of 2012. According to AT Kearney, Brazil’s 80 million Internet users spend about US$10.6 billion online annually, the largest online spending across Latin American markets. Brazilians are expected to spend US$18.7 billion per year by 2017. These might be modest estimates, considering that eMarketer, a digital marketing portal, already forecasts that retail e-commerce sales in Brazil will grow by 14.8% in 2013, to reach US$13.26 billion. While the market appears to be poised for a very promising growth period, several challenges will continue to put a break on sudden growth.

Brazil e-commerce

The Challenges

  • Troublesome and bureaucratic procedures to set up and run e-commerce business – these structural problems make it difficult for local and foreign players to enter the e-commerce market (or set up a business entity in Brazil in general). Burdensome regulations and procedures mean that it might take even 6 months to establish an e-commerce entity. Further, while operating, the entities are often challenged by frequent litigations and lawsuits over variety of issues (e.g. the domain used). Even with no litigations, Brazil has a generally paperwork-heavy business environment, and this is particularly challenging in a relatively new industry such as e-commerce. All these difficulties have led to Brazil being placed at 130 (out of 150) rank in World Bank’s Ease of Doing Business in 2013 (behind countries such as Ethiopia, Yemen, Uganda, or Pakistan).

  • Inadequate e-commerce regulations – while setting up a business appears overly bureaucratic and regulated, several aspects of e-commerce operations are under-regulated, affecting clarity and smoothness of operation as well as consumer trust. Legislation is slowly, yet gradually being introduced, e.g. only in mid-2013, a seemingly basic and obvious requirement was introduced for e-commerce entities to clearly and visibly display their registration numbers, contact details, purchase terms and conditions, and customer’s rights. While this step is likely to help build customer trust, it covers just a tip of regulations necessary in the market.

  • Inadequate infrastructure affecting order delivery – the country’s weak and immature infrastructure has a negative impact on orders shipping. Brazil is a country with vast territory, and majority of transportation is done by road. The country’s road infrastructure (both city streets and highways) are in poor condition, many of them unpaved, affecting safety, delivery time as well as damaging the cargo and trucks. Overall, receiving a delivery package by a customer located outside of major Brazilian cities stretches to a week at a minimum, with frequent cases of customer complaints about packages not arriving within two weeks or more.

  • Underdeveloped shipping and delivery services – while delivery services are available, many of them are provided by small, often family owned companies, that have limited coverage area and lack parcel tracking systems, thus there is generally inadequate availability of reliable courier services. The government-owned national post, (Empresa Brasileira de Correios e Telegrafosand), does not commonly offer parcel tracking options, inviting fraud, and is considered unreliable and slow.

  • High taxes and complicated tax structure – issues with taxes are often placed amongst top challenges of e-commerce in Brazil. Taxes are high and numerous, which significantly increases overall costs – duties, taxes and fees can double the original price of a product, and can vary considerably depending on product category. Payroll taxes in business innovation sectors reach even 80%. It is estimated that on average, business owners and executives spend 30% of money and 50% of time on dealing with tax-related issues. Further, complex tax structure drives added costs for lawyers and accountants compensation in order to navigate through various issues with the tax regulators and facilitating tax differences between Brazilian states (as there is no uniform tax across the country).

  • Insufficient talent availability – Brazil’s expanding e-commerce market creates jobs that are difficult to fill, given the shortage of qualified workers, people with e-commerce experience or at least an understanding what a particular e-commerce job entails, e.g. e-commerce web designers, experienced IT and business process professionals or high-quality, competent customer service specialists. The lack of good customer service acts as a deterrent to customer base growth, as according to McKinsey’s Consumer and Shopper Insights from July 2012, Brazilian shoppers who no longer shopped online listed previous bad experience with customer service amongst key reasons for turning away from online purchases.

  • Online payment security concerns – the lack of trust amongst Brazilian consumers towards safety of online purchases and transactions, deters many of them from buying online and using internet banking in general. Therefore, the predominant payment option that is currently used and preferred by customers is the ‘boleto bancario’, a code receipt that is generated on the website during the purchase, printed by the online shopper and later taken physically to a bank or a post office where the payment for the purchase is made. On the one hand it allows to satisfy consumers concerns about payment safety and to tackle the issue of many users not having credit cards or internet-purchases enabled debit cards. On the other hand, however, it is contrary to the very concept of shopping online (i.e. without the need to physically go to the shop), and extends the entire process of completing the purchase. Further, in order for e-commerce entity to offer ‘boleto bancario’, it should be led by a Brazilian citizen or at least in partnership with a Brazilian citizen. While foreigners can fulfil prerequisites of offering ‘boleto bancario’, the process of filling those requirements is lengthy and difficult, especially when compared with PayPal functioning in several other markets.

  • Installments shopping culture – Brazilian customers are used to, and hence expect payment options that allow for multiple and no-interest instalments or delayed payment options, resulting in e-commerce entities requiring higher working capital to finance purchases while the customers’ payments for current purchases are received after several weeks. Further, bank involvement to handle the instalments increases costs for online retailers, since bank receives a commission (which is not paid by customers as their instalments are zero-interest).

  • Language barrier – while this challenge might not be of particular relevance to domestic start-ups, international online retailers find it demanding that the entire e-commerce experience must be provided in Portuguese, and that having previous experience in Spanish-speaking market does not automatically make it easy in Portuguese, as these are two different languages (though western parts of the country have considerable base of Spanish-speaking consumers). This pertains to everything from language used on the online store interface, entire customer service, as well as the fact that many local IT and programming specialist speak only Portuguese (with extremely limited English), making it difficult for foreign start-ups to simply copy their experience and solutions to the Brazilian market.

While there are several challenges that currently undermine the growth potential of e-commerce in Brazil, the gradual changes in regulatory environment, customer service and improvement in infrastructure should positively influence the demand for e-commerce services in the future.

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