'Phygital' blend becomes key to India's ecommerce race

Ecommerce platforms in India are racing to strike partnerships with the country's copius number of kirana stores in order to achieve the 'phygital' (physical and digital) blend that is becoming the key component in the race for dominance.

As one of the world's most populous cities and fastest growing economies, with a developing middle class and subsequent rising disposable incomes, and a huge headroom for internet and mobile penetration (around 40% of the population has internet access)—India is one of the most attractive markets for ecommerce. 

But it also presents a unique challenge. With a mix of densely populated cities and thousands of geographically dispersed rural towns, the retail sector has grown—and is still dominated by—small mom-and-pop shops, locally called kirana stores. There are more than 15 million kirana stores in India, and they account for 88% of the country's retail trade. The ‘organised’ sector, which includes organised grocery stores, department store chains and ecommerce, is expected to grow its share of the market from just 12% in 2017 to between 22% and 25% by 2021, according to a Deloitte report. Ecommerce accounts for just 3% of the overall retail market, but will more than double to 7%, to become a US$84 billion market, by 2021.

To ecommerce platforms, kirana stores offer a pre-established storage and distribution network. It's why Amazon recently announced it had struck partnerships with more than 20,000 kirana stores across the country for the storage and delivery of goods, as part of its fresh investment in the market (to the chagrin of many). The retail giant also has a program called Amazon Easy in India in which it trains shopkeepers to guide first-time internet users to shop online.

Amazon partners with thousands of kirana stores all over India as delivery points. It’s good for customers, and it helps the shop owners earn additional income. Got to visit one in Mumbai. Thank you, Amol, for letting me deliver a package. #MSME pic.twitter.com/VpoHUoJOIH

— Jeff Bezos (@JeffBezos) January 18, 2020

Rather than partnering directly with store owners, Walmart-owned Flipkart has invested $30 million in a Bangalore-based startup called ShadowFax—a logistics network which onboards neighborhood stores in 300 cities to use as storage and for delivery.

But there's a new kid of the block that has the potential to blow both Amazon and Walmart's 'phygital' efforts out of the water. India’s richest man Mukesh Ambani is fusing the data and technology capabilities of his telco Reliance Jio with his retail network Reliance Retail to create a new venture, JioMart.

JioMart is an online-to-offline (O2O) marketplace which enables consumers to buy groceries online and pick them up in a local store. The local stores will be equipped with Jio digital point-of-sale machines that can be used for digital transactions and inventory management. The stores will source grocery items from nearby merchants rather than a warehouse, which is how Amazon usually operates (although that is changing).

Ambani's advantage over Amazon and Flipkart is that he owns the nation’s largest retail chain, with over 10,000 outlets in 6,500 Indian cities and towns in Reliance Retail. He is also reportedly planning to create thousands of additional small grocery outlets to expand the JioMart network across India. JioMart has launched on a pilot basis in three locations.

In response, Amazon in early January struck a partnership with Future Retail, one of India's biggest retailers with more than 1,500 stores across 400 Indian cities, to gain a stronger offline foothold in the market. As part of the deal, Amazon will act as the official online channel for Future Retail's hundreds of stores, and it will add the chain's products to its two-hour Prime Now delivery program.

Is this 'phygital' blend unique to India, and which of the three players has the best chance of winning the race to become India's dominant ecommerce platform? Campaign asked ecommerce experts Ashish Bhasin, Sujar Kar and Josh Gallagher for their views.

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1. Is this 'phygital' blend unique to India?

Ashish Bhasin, CEO, APAC, Dentsu Aegis Network:

In a market like India it is never one or the other, it is one and the other. That is why we are seeing ‘phygital’ out here—thousands of small stores which can be supported by digital ecommerce.

India is not just Bombay, Delhi, Kolkata and Madras—there are 4,500 large towns and cities and 649,000 villages. The growth is not only coming from the big cities but from Tier 2/3/4 towns and cities as well. In this market, newer and newer models will emerge which will be centred on what's best for the market rather than just copying or replicating what is happening in the rest of the world.

So, the process of going ‘phygital’ when it comes to getting the logistics and distribution right, the challenges are going to be there for the next 10 years. It's almost like an infinite universe which has got so much scope to expand. It is a land grab on who gets it first and who gets it right, all the while providing value, because the Indian consumer is hugely value conscious.

Sujay Kar, commerce group lead, VMLY&R SEA and India:

While Alibaba in China has a successful model in Hema (with WeChat in China playing the role of cross-channel payments integrator so efficiently), and Amazon Go is the phygital hallmark for Amazon US, India’s phygital story is quite unique, given the scale of operations and diversity in the seller mix.

China is seeing a comeback of sorts from its physical stores in the last one year, and as a result, the integration of small retailers has become quite significant for Alibaba, especially to leverage events like 11.11 across smaller stores. Also, in-store digitisation is growing in China and US, with physical stores trying to build convenience in product selection, customer service, and checkout experience using digital.

India 'phygital' however is expected to be driven primarily through the power of assisted commerce, along with the factor of convenience. Ecommerce in India is still 3% of the overall trade, and the major share of digital users is yet to translate to digital shopping. Hence, assisted ecommerce, where a user can go to a store nearby which helps him or her in selecting and purchasing a product, may be crucial in bridging the trust gap.

Josh Gallagher, chief product officer for APAC at Mediacom:

While the 'phygital' mix may not be unique to India in concept, it will have disproportionate influence on success. The retail landscape in India sees close to 80-85% of retail business driven through unorganised small mom and pop grocery stores and with more than 10 million neighbourhood stores in India, no retail giant can compete with the immediacy afforded by this kind of proximity.

With the next 100 million customers coming from Tier 2/3 cities, and with such a large geography, having a growing business may mean looking at a new model.

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2. Who do you expect to win this ecommerce race?

Bhasin:

Which player survives will depend upon who has deep enough pockets, who understands the market best, and who provides the best value to the consumer. But ultimately, I think all will, because the universe is expanding. There is room for three to five big players to do well. Eventually there will be consolidation, but for the next five to 10 years, anybody who's making enough investments, getting logistics, getting the price points right, building trust and reputation, will win.

Kar:

As this would involve building a physical retailer-led hyperlocal business model to train the non-urban users and transform them into shoppers, the race is likely to be won by the player who integrates ‘phygital’ distribution most seamlessly and widely.

While in the shorter run, Amazon and Flipkart may be leading the race, JioMart looks like a clear disruptor, given the ecosystem of Reliance, where Jio acts as the digital service and consumer data platform, given its reach of 300 million mobility subscribers, and Reliance Retail brings its retail store width and distribution power to the table.

Whoever wins, it will be an exciting battle to watch. And should ultimately be beneficial for both the end user, and the small retailer.

Gallagher:

Along with an understanding on the difference on the next 100 million customers, and an ability to not treat them the same as the existing base, whoever wins the 'phygital' game will come out trumps. JioMart has taken the biggest first steps in enrolling thousands of stores in the outskirts of Mumbai with POS machines to enable local vendor sourcing for customer orders with secured revenues from data utilisation and wholesaling to these retailers.

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