“WE WERE LATE TO THE PARTY and suffered because of technology failures,” says Govind Shrikhande, sipping masala chai at the Trident in Mumbai. “There’s another area where we messed up—we didn’t anticipate that private equity firms will bring billions of dollars to disrupt this industry.” You rarely expect a Fortune India 500 boss to admit to failure so readily. But Shrikhande, whose business card reads, “customer care associate and managing director, Shoppers Stop”, doesn’t shy away from describing his company’s attempts to cope with disruption as what they really were: disasters.
Like most pure-play brick-and-mortar retailers, Shoppers Stop, the country’s oldest department store chain founded in 1991, has seen e-commerce upstarts eat its lunch. Media reports published in October suggest that WS Retail, the largest seller on India’s
No. 1 e-commerce marketplace Flipkart, crossed Rs 10,000 crore in turnover in FY15—overtaking the combined sales of Shoppers Stop, Future Lifestyle, Tata’s Trent, and Aditya Birla Group’s Pantaloons, which have been slow in responding to the onslaught. To compound matters, now there’s the threat of online incursion by global retail behemoths like Zara and H&M: Last month in a landmark decision, the government allowed single-brand retailers with foreign direct investment to open e-commerce operations in India.
The development comes at a time when Shoppers Stop is striving to shake off woeful numbers from its books. A 2014 study by credit rating agency Crisil says Shoppers Stop’s sales per square foot, a vital performance indicator, shrank from Rs 8,518 in 2010-11 to Rs 7,837 in 2012-13, while the footfall-to-sales conversion ratio fell from 24% to 22%. Net profit collapsed 47% in the fourth quarter of FY14 after struggling through FY13. Hypercity, its hypermarket format, broke even only last year, after eight years in operation. Crossword, its chain of bookstores, has also bled cash and closed several stores.
Shrikhande, who started his career at textile manufacturer Mafatlal at a time when organised retail was unheard of, and is known for his fierce love of retail—he once called every other industry “boring”—is keeping calm. “I can bet on 2016,” he says. “There’s a lot of action happening right now that will start delivering from Q1 of next year.”
The reference is to a number of announcements the company has made with the goal of building muscle online, beginning with tie-ups with the country’s second-largest online marketplace Snapdeal and hyperlocal services startup ZopNow. (To be sure, such alliances, meant to ease a retailer’s online initiation till it is ready with a platform of its own, are increasingly routine. Croma, the Tata group’s electronics chain, recently ended its partnership with Snapdeal to focus on its own site.) Meanwhile, Shoppers Stop’s e-commerce platform—which won’t be a marketplace but carry the store’s own inventory—is expected to take a couple of years to stabilise and scale, and Shrikhande has acknowledged the company has a long way to go before it can build the kind of last-mile logistics that is make-or-break
To make up for lost time, Shrikhande has allocated a digitisation budget of Rs 60 crore, chiefly towards an omni channel strategy that will integrate Shoppers Stop’s offline and online presence. The problem: That could go down as chump change in the new world. Consider that digital wallet company Payu, all of three years old, is reportedly spending as much in brand building and marketing alone, to say nothing of the venture funding-fuelled spending glut by Flipkart and its ilk. It’s tempting to surmise that unless Shoppers Stop ups its game, its 25th birthday next year—also Shrikhande’s 15th year in the company—could be a bleak one.
The upside: Disillusion with the lavish ways of e-commerce is setting in. Shrikhande can take heart from the fact that Kishore Biyani’s retail bellwether Future Group, a few times the size of Shoppers Stop, has also earmarked a modest Rs 100 crore for its much talked-about omni channel push. There’s a growing sentiment that flashy e-commerce firms, which have mostly bought market share by competitive discounting, won’t ring the death knell for more conservative brick-and-mortar after all. Credit rating agency Crisil says the risk profile of the large brick-and-mortar retailers will likely remain stable over the medium term, with improving cash generation, modest capex, and realignment of business models in sync with changing customer preferences and technology. “Organised brick-and-mortar retailers have been repurposing themselves using a four-pronged strategy: an omni-channel model (offering an online experience to complement physical stores), expanding away from metros to tier II and III cities (to tap an expanding middle class and rising purchasing power), pushing private labels (to meet consumer demand for affordable products and protect margins), and consolidation (which has afforded scale, geographical reach, and efficiencies),” says Anuj Sethi, director at Crisil. The agency claims that despite the e-commerce boom, this combination will help brick-and-mortar see 13% to 15% growth.
Investors too are sanguine about the future of brick-and-mortar. “In India, the pot of gold does not reside in a mobile app or a website. The potential to make real money lies offline,” writes Haresh Chawla, partner at investment firm India Value Fund, in business daily Mint. “If offline retailers can get this into their heads without getting spooked, they stand to make a few tonnes of cash as opposed to virtual valuation dollars,” he adds.
In fact the mega customer-acquisition budgets of e-commerce firms could be playing into the hands of physical retailers. Kotak Institutional Equities puts the number of active e-commerce shoppers in India at 40 million, and Chawla says firms have splurged some $6 billion (Rs 37, 902 crore) to acquire them. Ergo, smart brick-and-mortar retailers could see e-retailers as merely creating consumption habits that they can piggyback on. Eventually, they can swing customers their way by offering the personal touch that a screen cannot match. It’s why Amazon, long feared as the wrecker-in-chief of brick-and-mortar, is opening physical storefronts of its own.
“Earlier, the thought among retailers was online is a curse. We now think it is a gift,” says Shrikhande. Tony Navin, Shoppers Stop’s senior vice president for partnerships and strategic initiatives, explains: “E-commerce and physical retail are no longer two separate silos. They are integrating, so we are like a mall with multiple delivery options.” In a conversation with Fortune India last year, Biyani, hailed as the father of organised retail in India, had also stressed this fundamental shift in identity under way in his company. “We are going to be a data and technology company,” he had declared, renouncing the stodgy image of traditional retail that savvy e-commerce firms have preyed on.
Others have made similar noise, but lack of data makes it impossible to judge results. Dubai-based Landmark Group, which owns the Lifestyle chain that is often discussed in the same bracket as Shoppers Stop, claims its omni channel business has grown 200% in the financial year to April 2015. But Savitar Jagtiani, who heads the group’s e-commerce business, “declined to reveal figures on the size of the company’s e-commerce user base or monthly unique visitors to its portal. He likewise ducked questions on the proportion of total sales that occurred online,” reports West Asian tech news portal ITP.net.
SHOPPERS STOP ISN'T EXACTLY A DIGITAL NOVICE. It has a huge following on social media and topped Fortune India’s list of companies with the highest social net worth two years in a row, on the back of over 7 million fans on Facebook (this year it’s second, trailing only Nestlé). However, in the absence of a platform to bring the followers home, that’s little more than a consolation prize.
The company invested in an online platform ahead of many others, and much before the e-commerce wave hit home—thrice. But each time the plan bombed, thanks in no small measure to poor timing and sheer bad luck. Arun Gupta, who was chief technology officer at Shoppers Stop between 2007 and 2012 and is now managing partner and director at consultancy firm Ingenium Advisory, says the first of these attempts was in 1999, just before the dotcom crash. “By the time they launched, the bust had already begun. The site shut down in a few weeks,” says Gupta, who was a service provider to Shoppers Stop back then. Then around 2008, when Flipkart was less than a year old, Shoppers Stop tied up with Novator, a Canadian technology vendor. But Novator’s biggest client, an American flower delivery company, pulled out, nearly bankrupting it and forcing it to shut down its India office. After that, the company moved on to an open-source e-commerce platform called Magento, but this time the vendor failed to get it off the ground. “The replacement vendor took a long time, and by the time we launched,” around 2011, when the e-commerce hype was peaking, “it was already a bit of a legacy platform,” says Gupta. “Those days, the aim was to get a platform up and running quickly and at a low cost,” he recounts. “But I do feel Shoppers Stop has learnt from its early mistakes.”
That’s an assessment that rings true during my conversation with Shrikhande. “After years of struggling with technology, we can admit that we made a mistake in terms of the direction we took,” he says. “The online format’s biggest strength is the combination of a wide assortment of products and the reach enabled by technology. We have always had the assortment,” but the technology drive was botched up by half-hearted moves. “Last year, we decided to get expert opinion rather than thinking we can do it all,” he says. “We went to Gartner, and they gave us a choice of three web commerce solutions: Hybris from SAP, IBMSmart, and ATG from Oracle. To help us pick the right technology and integrate it with our existing system, we brought in Cognizant.” The final choice, Hybris, also drives omni channel at Future Group as well as at international giants like Metro and Levi’s.
In another key move, this May Shrikhande hired Sachin Oswal, co-founder and former chief operating officer of e-commerce firm Infibeam, as CEO for the omni channel segment. (Over at Future Group, Biyani has appointed Vinod Bidarkoppa, former group IT director at British omni channel pioneer Tesco, as group chief information and technology officer.) Putting experts in charge is in fact critical to make a fist of omni channel. “Not everyone in the industry understands the concept well,” says Gupta. “More than budgetary constraints or problems in deploying the right technology, brick-and-mortar retailers are hobbled by the lack of well-defined processes needed to make a seamless transition online. There’s only so much software can do if you don’t have the right processes for delivery or returns. That’s a business problem, not a tech problem.”
OMNI CHANNEL OR MULTICHANNEL RETAIL is geared towards three broad outcomes. First, one view of the customer—whether you shop at the airport or in a city store or online, the retailer has real-time visibility into your choices. Second, one view of inventory. And third, one view of the order, from placement to delivery. “To achieve those outcomes, we are investing in technology in three phases,” says Shrikhande. First, Hybris, which went live in October. The next step, warehouse management, will be executed in the first six months of next year, followed by an order tracking system, in January 2017. Shrikhande says the exercise will change the buyer’s experience “dramatically”, and expects digital to generate 10% of sales in the next three years.
How far can Shoppers Stop stretch Rs 60 crore? “It’s another number,” says Gupta, while clarifying that he doesn’t have visibility into the company’s plans to hazard an accurate guess. “In an industry (e-commerce) where numbers are thrown like peanuts, who decides where to draw the line?”
Gupta touches upon one area where Shoppers Stop has the opportunity to leverage tech without burning a tonne of cash: It sits on huge amounts of customer data amassed through one of the most successful loyalty programmes in the business, with over 3.8 million registered customers. In the past three years, the focus has been on analysing this data to increase wallet share. So far, customisation based on analytics has fetched nearly Rs 300 crore in sales. “Our target for like-for-like store sales growth is 8% to 10%, and 2% to 3% of that will come from analytics,” says Vinay Bhatia, customer care executive and executive vice president–marketing, loyalty, and analytics.
A test case that speaks to the power of analytics: getting men to buy more trousers. Shoppers Stop had data suggesting that men have a skewed shirt-to-trouser ratio. The company ran a survey in its Malad store in Mumbai to understand why men were shunning trousers. About a quarter of the men said they only bought tailored trousers. Another 20% said they only wore jeans. That left 50% of men who said either the brand of their choice or the size or fit was not available at Shoppers Stop. The inventory at the Malad store was revamped based on this insight, and a message was sent to customers with an offer of getting a belt free on the purchase of two trousers. About 18% of these customers came to the store to shop—the company had expected only about 2% to 3% conversion. The scheme was then rolled out across stores, and the men’s trousers category grew 14% during the offer period, contributing a neat Rs 16 crore in sales.
Reading behaviour right has helped woo women customers too. One key insight: Most Indian women start building out their wardrobes with salvaar kamiz, move to kurtis, and then buy jeans as their first experiment with western wear. “She doesn’t match jeans with a top initially but with a kurti. From there she moves to a slightly longer western top, and then maybe to proper western wear,” says Bhatia. “If a woman is a consistent kurti wearer, she is likely to move to jeans. So we tied up with Levi’s and other brands to send communication on how to pair kurtis with jeans. Most communication about jeans otherwise tends to be too western—maybe not that appealing to the Indian shopper.”
SUCH MANOEUVRES help efforts to spruce up the books: While the company posted a loss in the June quarter of FY16 (“a one-time impairment in the value of investment in our duty-free airport retailing joint venture”), same-store sales, revenue, and margins showed some recovery. Profits fell in the September quarter, even as total income and Ebitda margins went up. But while those are nifty advances, they pale before adversaries like Zara that are known to boost revenue and profits almost at will by bringing smart algorithms and surgical precision into the business.
The fast-fashion leader has in the past joined hands with London Business School and University of California researchers to develop sophisticated price-optimisation models that increased revenues during stock-clearance sales. In another instance, it used complex operations research models to re-engineer its global distribution process and generate over $350 million in additional profits. “Around 2011, we partnered researchers at the Indian School of Business to build a revenue model based on our social following,” says Gupta, “but they couldn’t come up with an empirical model.” (To be fair, few companies anywhere in the world have managed to monetise social media fans. Gupta counts British clothing brand Wet Seal and American shoe company Puma among the success stories.)
In India, Zara, which operates through a partnership with Trent, became the first apparel brand to cross $100 million in sales earlier this year. Its 16 stores in the country report average sales of Rs 45 crore a year, higher than international rivals like Levi’s and Marks & Spencer, as well as Shoppers Stop and Lifestyle. Such prowess helps manipulate key partners: Already there are reports that malls in Indian metros are pushing old anchor tenants to move into smaller spaces, so that they can accommodate labels like Zara that adapt to fashion trends swiftly and are thought to have a wider cachet with youngsters. On his part, Shrikhande feels that Zara will find it tough to open hundreds of stores in India, and this trend might be restricted to the top 50-odd malls. That may be cold comfort though, given the government has allowed foreign single-brand retailers to sell online.
SHOPPERS STOP can take succour from its track record of reinvention. The company was born at a time when India was a closed market. In 1995, tariff barriers were lifted and international brands started trickling in. Competition really took off in the 1996-1998 period, when the Tatas launched Westside, followed by the entry of Lifestyle and Pantaloons. The next big wave came in 2001 when Biyani launched Big Bazaar under the Future Group. Then, around 2005, the other big industrial groups—Reliance, the Birlas, Bharti—entered the space. The next shake-up was after the 2008-09 meltdown, when speciality formats like Zara walked in.
Shoppers Stop’s response to competition has been a combination of store expansion and changes in brand positioning. From 1991 to 2000 the company operated seven stores. From 2000 to 2010 the store count went up to 30. In the last five years the count has jumped to 70-plus. “When we started, we were a men’s wear store, then we became a full-fledged department store, and by 2005 we were a premium department store,” says Shrikhande. In 2008 it repositioned itself from premium to bridge-to-luxury, bringing in brands like Tommy Hilfiger, Calvin Klein, and French Connection.
Against Zara and its tribe, the company is banking on Spanish label Desigual, which is priced at a premium, in the region of $80. There’s also designer Rocky S’s brand RS, Femina Flaunt, and actor Sonam Kapoor and Rhea Kapoor’s brand Rehson. The company is also moving away from slow categories like jewellery to focus on beauty and eyewear. Brands like Estee Lauder, MAC, Bobby Brown, and Clinique have delivered healthy like-to-like growth and robust margins, and the company plans to extend their presence to quick shopping destinations like airports through standalone stores. In the apparel category, it has added a new feature called the style hub in the centre of the store that gives the shopper a quick idea of what’s in fashion.
Big fixes are afoot at Hypercity too. “Food and grocery accounts for about 60% of a household’s total spend. That’s why we chose to focus on that category at Hypercity,” says Shrikhande. The first Hypercity store in Malad, a Mumbai suburb, was hugely successful. But things quickly went wrong. “With the Malad store, we experimented with the big-box format outside the city, and its success took us down the wrong path,” says Shrikhande. The next few locations failed to recreate the numbers, and since then Hypercity has shed a lot of flab. It has exited unprofitable categories like electronics and furniture to focus more on daily-wear apparel and food. From a footprint stretching 1.3 million sq. ft. over 12 stores, Hypercity now occupies a trimmer 1.25 million sq ft over 16 stores, and expects to be EBIT positive by end-FY16 and PAT positive by end-FY17.
Ultimately, the fate of Shoppers Stop’s fightback rests on its level-headed chief’s faith in retail. Through our chat, Shrikhande doesn’t skirt difficult questions or look to shift blame, steering clear of the denial that has sunk many a legacy company in the digital age. Even when he talks up Shoppers Stop’s omni channel future, he does so with quiet confidence. There is no hint of the aggression that marks the public statements of Kishore Biyani, for instance, who is known to lambaste the business model of fledgling e-commerce firms.
Shrikhande says Shoppers Stop will be all right because of one simple reason: Human beings love experiences. “You spend a few thousand rupees on a movie in a multiplex with your family, even though you know you can watch it for free on TV,” he says. “You spend that money because you want the experience. No one can take away that experience from physical retail.”