The pandemic advanced digitisation by a few years across industries, especially retail. You would be hard-pressed to find someone who hasn’t tried an e-commerce platform even once. People have been busy shopping online for everything — from groceries and comfort wear to personal gadgets and furniture. So, what kind of business models will survive when the dust settles? Vertical, horizontal, digital-first or omnichannel? To sharpen our understanding of the future of retail, editor N Mahalakshmi spoke to a panel of leaders — Amar Nagaram, CEO, Myntra; Ambareesh Murty, co-founder and CEO, Pepperfry; and Karan Mohla, partner, Chiratae Ventures — at the Outlook Business Leading Edge 2021, presented by IDFC FIRST Bank.
Mahalakshmi: Nagaram, can you take us through how this pandemic has changed the online retail business, especially for the fashion segment? How have you responded to these changes?
Nagaram: Technology has always been the backbone of an e-commerce company, especially for Myntra. It has driven every investment we’ve made. In 2020, the pandemic did change consumer behaviour, especially with online fashion purchases. The Tier-II and III cities were a little sceptical about online shopping until then. But, with the lockdown, access to a lot of essentials became a problem overnight and a lot of people started trying out e-commerce for the first time. Myntra was able to grab the opportunity.
This is a country of too many cultures. In Metros or Tier-I cities, people tend to use fashion to stand out whereas, in Tier-II or III, people try to blend in. So, for us to actually understand (the different fashion sensibilities) and cater to that need by turning around our catalogue in almost no time, given all the constraints such as disruption in the global supply chain and getting brands on board, we reinvented our ways into the market. We were, in fact, one of the first platforms, if not the only platform, to operate at a large scale with close to 5,000 stores. When the pandemic dies down, people will go back to their old ways. So, it’s crucial for a player like us to give more reasons for people to stick with us even after the crisis ends and that’s where the new investments are going in.
Mahalakshmi: Murty, what has changed in your segment? I read one of your interviews where you said that your sales were back to pre-COVID levels in August and, thereafter, they’ve been galloping faster.
Murty: The fact that e-commerce penetration shot through the roof, especially during the lockdown, is important. In my category, as people were spending more time at home, they realised that they could not put up with that slightly lumpy sofa or that lamp which didn’t just give the perfect light anymore. That worked well for my category. I think this behaviour is here to stay because we have become more conscious about the things around us. The second thing that was super important was that in our sector, 90% of the services are unorganised with people getting things made at home by hiring carpenters. During the lockdown, people became uncomfortable with letting anybody walk into their home and (even if they were okay with it) the societies didn’t allow it. Therefore, there was a trend of buying ready-made things, even in furniture. Thirdly, not all houses were equipped for work from home because a lot of us hadn’t invested in appropriate seating or tables. Hence, sales in the work-from-home category shot up. These were the three fundamental changes from the consumer end that happened.
There were two things that we did. The first thing that we worked on was becoming the first supply chain up and running when things opened up. I think we did that. We own our own supply chain, and therefore, even in a large-box category such as furniture, we managed to be the first ones delivering to customers. Second, in our category, we work with a lot of MSMEs. We often don’t realise that the impact of the pandemic hasn’t been on big businesses but on the small ones. So, we ensured that our business partners who are MSMEs make it through the worst of it. We did go through a fairly sharp learning curve as things opened up.
Mahalakshmi: Everybody is predicting that, for the past five or six years, commercial real estate did well and now, it’s time for residential real estate to grow. So that should be good news for you as well.
Murty: There are two things that always affect us — one is discretionary spending and the other is (the performance of) real estate, especially residential real estate. The last few years haven’t been that great on both fronts and one is hoping that things will turn around. Perhaps, as the law of averages kicks in, that sector may make a comeback. It will help.
Mahalakshmi: Mohla, tell us a little more about the big trends, apart from contactless, which you see as enduring?
Mohla: Two clear things stood out. For the more mature companies, for instance, Lenskart, which was highly offline first, it was a big shift at the scale at which they are. What really kicked in was the speed at which retailers and brand owners had to do digitisation. It had been done at a gradual pace before, but the pandemic accelerated it in a big way and at scale. In some cases, the business models had to change because either supply chains were broken or shut down or they had to change the mix of the categories completely overnight without necessarily having the right skills. In this case, they had to be much more creative to reach out to customers and educate them while changing everything on the backend. It required changes, both with building the organisation and selling the product.
During the lockdown period, it was stressful, not just for our portfolio but for a lot of people. Apart from contactless delivery, the tools for the digital infrastructure, both from a company’s perspective and consumers’ perspective, changed quite dramatically. I stay away from making statements that everything will go digital or go back. It’ll be a mix of the two. This year and probably 2022 will really reveal what will be a long-term trend. Post Jio, this is probably another turning point for India’s digital economy and we’re all in a privileged position.
ML: Nagaram, you made a point about penetrating Tier-II and III cities. How does the economics of chasing the next level of customers alter your business? Over the last year, how much of your sales came from repeat customers and how much from new users?
Nagaram: What was eye-opening for us in 2020 was our understanding of Tier-II and Tier-III customers, especially in the context of fashion. During the lockdown, when we were not operational for nine weeks, we launched Myntra Studio. It put out content made by influencers from their homes for Myntra. It served two purposes—we stayed on top of our consumers’ minds even when we were not operational; and we attracted a lot of new customers from Tier-II and III cities. When we opened up, we were quick to realise that there is a difference between how metros and Tier-1 cities, and Tier-II and III cities look at fashion. But, we also realised that the pandemic was making uniform fashion needs across geographies. Comfort and loungewear became an essential and beauty products were flying off the shelves across geographies. Ethnic wear, quite surprisingly, got a lot of traction in metro and Tier-I cities, which was not the case until 2020. Comfort wear was moving to Tier-II and III cities. In 2020 alone, one in two consumers came from Tier-II and III cities, and one in three consumers was new to the platform. Tier-II and III average basket size is still lower than metros’ and Tier I cities, but since the share of the former is growing significantly on the platform, we are in the process of rejigging our unit economics to make sure this works for us.
In fact, one of the big steps we have taken is leveraging Flipkart’s logistics which is built for Tier- II and III. Flipkart serves in 29,700 PIN codes.
ML: Is that becoming a challenge for you, Murty, in your segment? What is your penetration in the next level or would you continue to focus on Tier I which itself has a long runway?
Murty: E-commerce penetration in furniture is lower than in other categories such as fashion. So, we think there’s a lot of headroom for growth, even in Tier-I or metro cities. That said, two things happened from a small-town perspective. First, we are an omnichannel business — about 30% of sales that we did before COVID-19 were people walking into Pepperfry studios across the country. After the lockdown restrictions eased, even the footfall into our stores returned. Second is that we realised that there has always been a demand for business opportunities in smaller towns, especially in the furniture category. This demand has escalated. For example, we get roughly three requests a day from people in towns to set up Pepperfry franchise outlets. Though, what is also important is that an enabling ecosystem is created. For us, with franchisees who understand the local language, we understand the local consumer and what sells in that particular market. That was something that really took off for us through 2020.
Last year, we had 60 outlets. Today, we are at about 80-odd, of which, the last 20 to 25 were opened in the last three months.
Mahalakshmi: How do franchisee outlets alter your business economics?
Murty: You’ve got to look at it multilaterally. The cost of acquiring customers becomes much lower when you have a presence in an omnichannel setup. It builds customers’ trust, and therefore, their willingness to buy goes up, especially in a high-involvement category such as furniture in which the average order value is high. It also increases average cart sizes because the moment you have somebody walking into a Pepperfry studio, they don’t just buy two pieces of furniture. They will make a cart and potentially change five or six pieces of furniture they have. This increases and improves unit economics from that standpoint but also you are paying a franchise commission, therefore, there is a set off. In the balance, it works just as well as a business you do online in a metro city.
ML: Mohla, how does it work for other businesses? Myntra, for example, is able to ride on Flipkart. For several other standalone businesses, is this larger penetration really coming at the cost of unit economics?
Mohla: No. Murty gave a great insight into how the franchise model works for them. It’s actually similar for Firstcry, Lenskart and Myntra. Since all of them are vertically focused platforms, each played to their particular strength. For example, Firstcry partnered with hospitals very early on, to simply deliver products to young parents. So the parents’ introduction to the platform is done quite early and the programme has been running well. Over time, the company also built a fairly large community of mothers, aiming to get them to transact with Firstcry eventually. You can’t start a community platform, you have to build it, that’s how you earn trust and get insights into people not just from metros and into those who have never bought anything apart from diapers.
It’s a longer process but you have to be patient. With Lenskart, they addressed this customer issue of ‘how would I look with a particular pair of glasses?’. In the early days, they arranged for home trials like Myntra did. Later, the company acquired an Israeli firm, after which it was possible to render a virtual 3D image to test the look. These are incremental changes but they bring exponential improvements over the long term. Other improvements could be creating an omni-channel business through franchising, creating the right kind of partnerships with other people in the ecosystem, and making it easier for the customer to purchase to try and then return if needed. Flipkart did this way back with its ‘no-questions-asked’ return. The company also has to work on the backend such as with supply chain innovation and warehousing. Ultimately, it’s about educating the customer, getting him or her comfortable and finding a way to get that customer return again and again. Repeat customers are what builds long-term value. That’s true for any new business that we’ve invested in, in the last couple of years.
Mahalakshmi: Does that push the breakeven numbers forward? Do entrepreneurs and investors have to be more patient?
Mohla: I think quite differently. In retail, every successive generation of companies wants to be able to get to the unit economics level sooner than the previous ones did. As an investor, we are also trying to get there sooner. Knowing early on whether the business is working or failing is important because then you aren’t forced to reinvent. Actually, the pandemic did some good for a few of the early companies because it forced them to gain some perspective and go back to the drawing board. Things (breaking even and making profits) happen sooner today than they did maybe three years back, but an understanding of the workings of a market is more crucial today.
Mahalakshmi: Nagaram, with Myntra, what is your strategy for the offline business?
Nagaram: Our strategy has been that offline will continue to be an experience centre and not necessarily a distribution centre. This is something we offer as part of a suite for all the exclusive international brands that come on board. In fact, we run more than 40 stores across the country for different brands and we have integrated the store experience with the app experience seamlessly for an (omni-channel) retail experience for the consumers. We have entered into strategic partnerships with both Arvind and Aditya Birla groups, and more of their stores will come onboard. It should not matter where the consumer is buying or discovering a product from. The channels complement each other.
Mahalakshmi: What is in it for the consumer and how do you convince him/her of it?
Nagaram: With Myntra, we’re happy to be that online mall where the brand affinity is retained. Today, when you want to shop from a brand, you know where to go. It has almost become a muscle memory for you, and that’s the role we want to play at Myntra online. With Myntra’s M-mall, every brand has its unique online store. We probably are the first platform in the country giving brands a platform to express their ethos to their consumers in the way they want. We have close to 40 leading international brands already setting up stores on the platform today. During the unlock phase, when people were not comfortable going to an offline store, stores were able to move their inventory because the brand’s salience was kept alive with the omnichannel integration.
Offline, we want to be an infinite aisle in a store. We are keeping our infinite catalogue in the (partner) store, so that people can shop on Myntra (at the store) and get the purchase delivered to them. Also, if they buy anything from the Myntra app and have a size issue, they can go to a nearby store and return it or have it altered. They don’t have to wait for a return (couriered) from Myntra to get the right size. The two channels (online and offline) will work for the customer rather than against each other. Thankfully, all the brand partners have been encouraging of this new kind of retail experience.
Mahalakshmi: But, when I shop on Myntra, say for a pair of trousers, its shows me everything from a local brand for Rs. 400 to Marks & Spencer, GAP and Mango for Rs. 4,000 to Rs. 5,000. How do you create brand distinction?
Nagaram: Our algorithm is also learning, as we speak and it gets better the more you come to the platform. That’s how we learn about you. One of the challenges e-commerce faces in this country is the excess of brands and styles. Too many options are also a problem. We have layered the platform with a personalisation filter to display products relevant to you or those that you are most likely to buy. That’s on the customer side. The other side is giving brands their space to interact with the customer. On M-mall, you will see the brand talking to you. Thirdly, Myntra Studio puts together content by influencers that the customers would like to see. The influencers get to talk about what they are passionate about while bringing in sales, and they also make money out of it. We’re trying to create an ecosystem where the consumer, brand and influencers can come together.
Mahalakshmi: Murty, post pandemic, has the way you view customer-acquisition spend changed? If yes, how? Is it very ROI-driven?
Murty: Strategically speaking, our approach to customer acquisition or to building our business started with the brand. We have always worked to be the starting point for a customer’s purchase cycle related to furniture, online or offline. It was actually perfectly fine for us if we were the ending point. Our investors might have a different point of view on it because we would like to be the ending point, too, but we definitely wanted to be the starting point for the customers’ purchase journey which meant that organic traction or organic recall for the brand was something that we always sought to build and that’s where our investments in the early years of Pepperfry were going into. Therefore, television and offline media played a big role. Close to 80% of our business today comes from customers who we don’t need to pay any acquisition costs for. They come directly to our website and buy the product.
We continue to expand this strategy and we look at various market frameworks. If there are markets where the category development index is low and the brand development index is high, we disproportionately spend online. If there is a market where the category development index itself is low, irrespective of what the brand development index for Pepperfry is, we spend more offline. These are what decide the split between online and offline spends for us, and within online, if it’s search ads or social.
One of the things that happened through the pandemic, across businesses, is that strong brands got stronger. Many direct-to-consumer niche brands came up, too. For Pepperfry, the traffic went up while our customer acquisition cost came down. Suddenly, the ROI on customer acquisition improved substantially. This happened across e-commerce this year and tax will come down too. As Mohla said, it’s not necessary in a post-pandemic world that breakeven points and so on shift out, if anything actually break even points might shift in a post-pandemic world. I mean, depending on the prioritisation that business does of whether it's profitability versus being gung-ho only on growth and tax reductions, therefore, marketing spend reductions and such were key levers in driving towards profitability and that’s something that we saw at Pepperfry.
Today, we are closer to profitability than we’ve ever been in our journey and that’s a function of top-line and of our overall spend stack changing, and that’s something that you will notice across e-commerce businesses. One of the pain points in India was (platforms) getting a lot of visits but they didn’t lead to conversions. I think that changed in 2020.
Mahalakshmi: Very beautifully put, I’m very glad you brought up this point about strong brands getting stronger. Mohla, has this led to sort of a polarisation in the market?
Mohla: In certain segments, forced digitisation gave rise to a lot of potential challenger brands. You can call them D2C brands or digital-first brands. We saw this across businesses, especially in personal care and beauty. These are not brands that had just come up six months before the pandemic. They had their supply chain sorted, and had a clear understanding of the brand positioning and what the pricing should be. They had done their research on customer acquisition. Should we all go on Facebook? The clear answer was no, because the only people that really benefit there are Facebook and Google. But you have to go through other and smarter ways to get your customer. This tends to build offline distribution and your discoverability online over time goes higher. So certainly in beauty and personal care categories, you can probably name ten brands that became significantly stronger over the last one year. Partly because they were challenging large multinationals or even Indian brands, which were not able to move as quickly.
Like Murty said, there were other categories in which incumbents, who have really come up in the last ten years, became stronger because their overall proposition to a customer in terms of value, availability and need (fulfillment) gained significantly. But, a takeaway from the pandemic period is that there is an opportunity for challenger brands, maybe in a lot of categories. In some cases, having the right brand attributes makes a difference, while in others, it could be the right distribution or pricing, or all three, especially when you are creating a category.
Mahalakshmi: Murty, most new-age entrepreneurs say competition is good. But really, for most businessmen, competition is never good, especially in your industry which has global players with deep pockets and presence. It’s a lot tougher in such cases. So what is your strategy to protect and grow?
Murty: We follow the same strategy we’ve always followed, which is to know your customer really well, have products and services relevant for them, and deliver them with the best possible experience. If you stick to these three, you really don’t need to worry about deep pockets and so on.
Mahalakshmi: Nagaram, you are already on top. So where do you go from there?
Nagaram: We are talking about a market that is penetrated hardly by 5%. We still have a long way to go and that’s where we’re investing our efforts— understanding the new user, personalisation and staying true to our vision of democratising fashion using technology.
ML: Mohla, what are the models that will thrive in the future? We see a lot of categories creating leaders of their own away from the platforms, and more and more verticals making their presence felt. How do you see this shaping up over the next three years?
Mohla: When you look at digital commerce, it’s just about 5% or so of overall retail, and organised retail is just 15% at best. So, we’re really talking about 5% of a small part. The challenge and the opportunity are to get to that 20 or 30 or 40% over time, but not over five generations. That quantum leap has to happen in a short period of time. How? Obviously, it’s not so straightforward but I think the platforms that will succeed will have a few things in common. I think one is over-indexing on technology. We were fortunate enough to be investors in Myntra from the early days and it really helped us understand the use of technology even back in 2009-10, which, in turn, helped us understand other companies we are invested in. We understood how technology plays a crucial role. The minute you are able to over-index on not just the front end, since it is not just about marketing and acquiring a customer, but also at the back end and how that comes together is super important. We’re comprised of several fairly large, populous countries and understanding how they are different, not just in language or culture, but from a spending power perspective and understanding how each customer segment will behave is the second crucial thing. The third thing is figuring out how to create different brands within your own platform because ultimately, your margins will become high when you have your own brands or sub-brands. At least these three things will be key to any model going forward.