Patanjali going online

Mint has a piece on Baba Ramdev-led FMCG company Patanjali going online to further its sales.

Some may have seen the irony in Patanjali Ayurved Ltd tying up with foreign-owned/funded e-commerce companies, even as it swears to end the reign of foreign-owned consumer brands in the market.

Patanjali is only being pragmatic in doing what’s good for its own business, of being available where the consumers are. Its decision is one more pointer to the growing importance of e-commerce as a distribution channel for packaged consumer goods.

I have an entire chapter in my book dedicated to this – about the internet has revolutionised distribution and retail. In that I talk about Dollar Shave Club, pickle sellers from Sringeri and mobile manufacturers such as Xiaomi who have pioneered the “flash sale” concept. In another part of the book, I’ve written about how Amazon has revolutionised bookselling, first by selling online and then by pioneering e-books.

Whenever a new consumer goods company wants to set up shop, one of the hardest tasks is in establishing a distribution network. Conventional distribution networks are typically several layers deep, and in order to get to the customer, each layer of the distribution network needs to be adequately compensated.

Apart from the monetary cost, there is also the transaction cost of convincing each layer that it is worthwhile carrying the new seller’s goods. The other factor to be considered is that distributors at various levels are in a sense loyal to incumbent sellers (since they are responsible for a large portion of the current business), making it harder for new seller to break through.

The advantage with online retailers is that they compress the supply chain, with one entity replacing a whole network of distributors. This may not necessarily be cost-effective from the money perspective, since the online retailers will seek to capture all the value that all the layers of the current distribution chain are capturing. However, in terms of transaction costs it is significantly easier since there is only one layer to get past, and online retailers seldom have loyalty or exclusive relationships.

In fact, the size and bargaining power of online retailers (vis-a-vis offline distributors) means that if there is an exclusive relationship, it is the retailer who holds the exclusive rights and not the seller.

In Patanjali’s case, they have already established a wide offline network with exclusive stores and partnerships, but my sense is that they seem to be hitting the limits of distribution. Thanks to Baba Ramdev’s popularity as a yoga guru, Patanjali enjoys strong brand recall, and it appears as if their distribution is unable to keep pace with their brand.

From this perspective, going online (through Amazon/Flipkart) is a rational strategy for them since with one deal they get significantly higher distribution power. Moreover, being a new brand, they don’t have legacy distributors who might get pissed off if they go online (this is a problem that the Unilevers of the world face).

So it is indeed a pragmatic decision by Patanjali to take the online route. And after all, in the end, sheer commerce can trump nationalist tendencies and xenophobia.

Buying, Trying and Sizing

The traditional paradigm of apparel purchase has been to try and then buy. You visit a retail store, pick what you like, try them out in the store’s dressing rooms and then buy a subset. In this paradigm, it is okay for sizing to not be standardised, since how the garment actually fits on you plays a larger part in your decision making than how it is supposed to fit on you.

With the coming of online retail, however, this paradigm is being reversed, since here you first buy, and then try, and then return the garment if it doesn’t fit properly. This time, the transaction cost of returning a garment is much higher than in the offline retail case.

So I hope that with online retail gaining currency in apparel purchase, manufacturers will start paying more attention to standardised sizing, and make sure that a garment’s dimensions are exactly what is mentioned on the online retailer’s site.

The question is who should take the lead on enforcing this. It cannot be the manufacturer, for had they been concerned already about standardised sizing, they would’ve implemented it already. So far the retailer has only been an intermediary (a “pipe”, as Sangeet would put it).

However, with the transaction cost of failed transactions being borne by the retailers, and these transaction costs being rather high in online retail, I expect the likes of Amazon and Myntra to take the lead in ensuring that sizing is standardised, perhaps by pushing up the ease of search of garments from manufacturers who already practice such sizing (these retailers have sufficient data to measure this easily).

It will be interesting to see how this plays out. Given history, I don’t expect retailers to collaborate in coming up this a standard. So assuming each major online retailer comes up with its own standard, the question is if it will start off being uniform or if it will converge to a common standard over time.

I also wonder if the lead in standardising sizes will be taken by private brands of the online retailers, since they have the most skin in the game in terms of costs, before other manufacturers will follow suit.

In any case, I trust that soon (how “soon” that soon is is questionable) I’ll be able to just look at the stated sizing on a garment and buy it (if it’s of my liking) without wondering how well it’ll fit me.

Encouraging bad behaviour

While flipping TV channels last evening (an activity I seldom undertake nowadays) I came across this new advertisement for

I watched this advertisement 2-3 times, and to me the clincher seemed to be the fact that you can return goods to Myntra and get your cash back the same day.

The intention of the advertisement is clear – for someone who is uncomfortable with buying clothes online (like the woman in this advertisement), the fact that you can return the stuff and get your money back immediately can be a huge incentive to try.

The problem, however, is with the overall message it conveys. One of the biggest problems with online retail in India is the high rate of returns. Returns create friction in several ways – from the logistics cost to reversing payments to possible fraud to possible damage of goods. From this perspective, returns are undesirable behaviour as far as retailers are concerned.

In this context, it’s rather bizarre that Myntra is putting out an ad that promotes the use of returns. While it might be a decent incentive to attract new customers and expand the market, the problem is that it encourages your existing customers (who are likely to transact more than new customers) to misbehave!

In other words, Myntra’s latest ad actually encourages undesirable behaviour from customers! I find it quite puzzling.

PS: On the other hand, Myntra’s competitor Amazon is actually making returns less friendly. If you return an electronic product now, you can only get a replacement, and not your money back.

Cash on delivery

One of the big problems in the Indian e-commerce industry is that a lot of business happens through the “Cash on delivery” model, where the customer pays for the goods upon receiving it rather than at the time of ordering. According to sources, nearly three fourth of e-commerce in India is paid for using this model.

The problem with Cash On Delivery (COD) is that it leads to higher product returns and non-deliveries, since the recipient is not pre-committed to accepting it. While e-commerce vendors might try methods such as blacklisting customers in order to cut their losses, there is no clear solution in sight. COD is also a massive source of fraud, especially given that currently e-commerce platforms are more likely to subsidise rather than take a cut of transactions on their platforms.

One of the reasons given for the development of the COD model is the low credit card penetration in India (compared to other markets), and Indians’ unease with transmitting money online. Research (which I can’t be bothered to find and link to right now) shows that the Indian e-commerce industry actually took off once CoD was introduced.

Given that India is developing some new and innovative payment systems (the Immediate Payment System (IMPS) is one. There is a Unified Payments Interface (UPI) which is even better which is coming up), it will be interesting to see how the e-commerce industry in India shapes up from a payment standpoint.

There are two factors that drive CoD – one is the ease of payment transaction – you just hand over the cash to the courier when the goods are delivered. This is not seamless, of course, since it could involve problems involving change, and handling of large amounts of hard currency which makes it unsafe.

The other factor is trust – Indians don’t seem to trust vendors enough to pay for their goods before they receive them. While not prepaying gives the option to change mind at a later date, this can lead to significant friction in the system resulting in costs that are likely to get added to the customer (this doesn’t happen right now since platforms are still in heavy subsidy mode).

By paying for goods on delivery, the customer hedges against fraud by the vendor, and the transaction is smoother from the customer’s perspective.

While the industry claims that CoD is primarily due to lack of credit card penetration, my hypothesis is that it is more due to the trust factor. So far there has been no method (apart from possibly surveys which are internal to e-commerce platforms and which will never get disclosed) to understand which of the two it is.

With the development of new and innovative payment platforms, and the ability for a large number of people in India to transact online (willingness is another matter), this hypothesis can be tested. Once people have access to mobile apps that let them make instant and secure inter-bank payments (we are already on our way there), the low credit card penetration is unlikely to be a constraint against pre-payment for goods. If my hypothesis is true, the proportion of CoD will not fall despite the growth of these new payment methods.

There are flies in the ointment of course – platforms, driven by losses, are investing in moving customers away from CoD, so the data might not be very clear. Also, over time, people may develop more trust in e-commerce companies and start pre-paying, which will not tell us anything about their confidence levels right now.

We are in for interesting times!

PS: Like telecommunications (where most of India skipped the landline) and retail (where India skipped the “walmart step”), the payments industry in India is also likely to “leapfrog”, with a large part of the country set to bypass credit cards altogether.

Reverse auction platforms

Before my recent trip to Indonesia, I used this website called Cash Kumar to buy my foreign exchange. It was rather simple to use. I posted my location and my requirement for foreign exchange. I had to provide my phone number (and verify it by entering an SMS code; I think this was to make sure only genuine buyers asked for a quote) and then a message went out to all foreign exchange dealers in this part of town, and a few of them responded to my request with quotes.

One of them was significantly cheaper than the other, so I chose him, and CashKumar connected us up. This dealer sent the foreign exchange home. It was an incredibly smooth process.

This is one example of a platform that conducts “reverse auctions”, where a customer states his preferences and you have providers who bid (in a competitive fashion) to provide the said product or service. This results in significant ease-of-use by the customers (though not for service providers since they need to have someone monitoring the requests and bidding for them).

There are several other websites that follow this model. TaxiForSure used to operate like this (I haven’t used it in a while so not sure if it still does). Your request would be broadcast to all taxis around and if one of them accepted it, a match would be made. The difference there was there was no bidding, just matching.

Then there is this AirBnB clone called TravelMob where you can post your requirements (rather than selecting an existing posting), and providers will start responding to that.

One of the “hot” sectors currently in India is hyperlocal delivery, where you request for a product, which a provider procures and delivers for you. In this context, I was thinking of reverse auctions for grocery. You upload your shopping list which goes to nearby grocers (with infrastructure to deliver to you). Since it’s all commodities, the platform can solve some kind of a set covering problem to determine which grocer has to sell you what for you to get the goods at the cheapest rate (after accounting for transaction costs). And in the next couple of hours, more than one delivery can come in to deliver the goods, which you’ve paid for on the platform!

And this multiple delivery thing reminds me of the time when I was doing my MBA (a decade ago), when Dell’s supply chain was widely hailed in Operations Management classes. And the beauty of that supply chain was apparently that once you specified your requirements, the Dell supply chain would get to work and within the next few days different components of the computer would land up at your door!