British retail strategy

Right under where I currently live, there’s a Waitrose. Next door, there’s a Tesco Express. And a little down the road, there’s a Sainsbury Local. The day I got here, a week ago, I drove myself nuts trying to figure out which of these stores is the cheapest.

And after one week of random primary research, I think I have the classic economist’s answer – it depends. On what I’m looking to buy that is.

Each of these chains has built a reputation of sourcing excellent products and selling them to customers at a cheap price. The only thing is that each of them does it on a different kind of products. So there is a set of products that Tesco is easily the cheapest at, but the chain compensates for this by selling other products for a higher rate. It is similar with the other chains.

Some research I read a year or two back showed that while Amazon was easily the cheapest retailer in the US for big-ticket purchases, their prices for other less price-sensitive items was not as competitive. In other words, Amazon let go of the margin on high-publicity goods, and made up for it on goods where customers didn’t notice as much.

It’s the same with British retailers – each of their claims of being the cheapest is true, but that applies only to a section of the products. And by sacrificing the margin on these products, they manage to attract a sufficient number of customers to their stores, who also buy other stuff that is not as competitively priced!

Now, it is possible for an intelligent customer to conduct deep research and figure out the cheapest shop for each stock keeping unit. The lack of quick patterns of who is cheap for what, however, means that the cost of such research and visiting multiple shops usually far exceeds the benefits of buying everything from the cheapest source.

I must mention that this approach may not apply in online retail where at the point of browsing a customer is not “stuck” to any particular shop (unlike in offline where a customer is at a physical store location while browsing).

Variable pricing need not be boring at all!

Shopping offline can be underwhelming

Maybe to compensate for the amount I’ve been buying on Amazon over the last few days (mostly baby stuff), I set off on Sunday to buy some stuff offline. And it was a most disappointing experience.

The biggest problem was the lack of choice and availability and inventory. I first went to a Levi’s showroom to buy a pair of jeans, having ripped three of them in the course of the last year (thanks to squatting I’m guessing).

I asked for comfort fit jeans and was shown a pair. Was rather underwhelming and I asked for more. Turned out that was the only pair of comfort fit jeans in the store.

And then I was looking to buy a pair of shorts. At least three stores on Jayanagar 11th Main Road were visited, only to be told none of them stocked shorts (Levi’s, Wills Lifestyle, Woodlands). I might have cribbed about lack of effective categorisation in online shopping but it’s a more acute problem offline, given the transaction cost of going to a store.

On Jayanagar 11th Main Road, for example, you have brand stores of every conceivable brand, but few stores have chosen to differentiate themselves by what they sell, rather than what brand. So you lack stores that specialise in shorts, or T-shirts, and so on.

For a while now I’ve been looking for a new pair of spectacles (hate my current frame, so I end up wearing contact lenses even when I don’t want to). GKB offered some choice, but nothing spectacular. SR Gopal Rao said they didn’t have large size frames, and had no clue when they’d arrive.

And there ended my shopping trip. The only things I’d been successful buying was a packet of freshly made rusks from a bakery (feel damn lucky most bakeries in Bangalore have in-house kitchen where they bake stuff fresh) and some medicines.

When your demands run into the so-called “long tail”, I guess nowadays online is the best bet. So I’ll possibly buy another pair of jeans online, having bought one pair from Korra and returned a pair to Amazon. I don’t normally buy clothes online, but on other tabs of my browser I’m checking out shorts on Amazon.

Oh, and I must mention Lenskart, who might end up getting an order for a pair of spectacles. They’ve set up what I call “experience centres” where you can check out their range of frames and try them on. Orders are fulfilled through their online store, since prescription glasses cannot be sold over the counter anyway (since the glasses need to be ground). I strongly believe that this is how retail will shape out in the future.

Why restaurant food delivery is more sustainable than grocery delivery

I’ve ranted a fair bit about both grocery and restaurant delivery on this blog. I’ve criticised the former on grounds that it incurs both inventory and retail transportation costs, and the latter because availability of inventory information is a challenge.

In terms of performance, grocery delivery companies seem to be doing just fine while the restaurant delivery business is getting decimated. Delyver was acquired by BigBasket (a grocery delivery company). JustEat.in was eaten by Foodpanda. Foodpanda, as this Mint story shows, is in deep trouble. TinyOwl had to shut some offices leading to scary scenes. Swiggy is in a way last man standing.

Yet, from a fundamentals perspective, I’m more bullish on the restaurant delivery business than the grocery delivery business, and that has to do with cost structure.

There are two fundamental constraints that drive restaurant capacity – the capacity of the kitchen and the capacity of the seating space. The amount of sales a restaurant can do is the lower of these two capacities. If kitchen capacity is the constraints, there is not much the restaurant can do, apart from perhaps expanding the kitchen or getting rid of some seating space. If seating capacity is the constraint, however, there is easy recourse – delivery.

By delivering food to a customer’s location, the restaurant is swapping cost of providing real estate for the customer to consume the food to the cost of delivery. Apart from the high cost of real estate, seating capacity also results in massive overheads for restaurants, in terms of furniture maintenance, wait staff, cleaning, reservations, etc. Cutting seating space (or even eliminating it altogether, like in places like Veena Stores) can thus save significant overheads for the restaurant.

Thus, a restaurant whose seating capacity determines its overall capacity (and hence sales) will not mind offering a discount on takeaways and deliveries – such sales only affect the company kitchen capacity (currently not a constraint) resulting in lower costs compared to in-house sales. Some of these savings in costs can be used for delivery, while still possibly offering the customer a discount. And restaurant delivery companies such as Swiggy can be used by restaurants to avoid fixed costs on delivery.

Grocery retailers again have a similar pair of constraints – inventory capacity of their shops and counter/checkout capacity for serving customers. If the checkout capacity exceeds inventory capacity, there is not much the shop can do. If the inventory capacity exceeds checkout capacity, attempts should be made to sell without involving the checkout counter.

The problem with services such as Grofers or PepperTap, however, is that their “executives” who pick up the order from the stores need to go through the same checkout process as “normal” customers. In other words, in the current process, the capacity of the retailer is not getting enhanced by means of offering third-party delivery. In other words, there is no direct cost saving for the retailer that can be used to cover for delivery costs. Grocery retail being a lower margin business than restaurants doesn’t help.

One way to get around this is by processing delivery orders in lean times when checkout counters are free, but that prevents “on demand” delivery. Another way is for tighter integration between grocer and shipper (which sidesteps use of scarce checkout counters), but that leads to limited partnerships and shrinks the market.

 

It is interesting that the restaurant delivery market is imploding before the grocery delivery one. Based on economic logic, it should be the other way round!

Categorisation and tagging

Tagging offers an efficient method to both searching and for identifying customer preferences on the axis most appropriate for the customer

The traditional way to organise a retail catalogue is by means of hierarchical categorisation. If you’re selling clothes, for example, you first divide it into men’s and women’s, then into formal and casual, and then into different items of clothing and so on. With a good categorisation, each SKU will have a unique “path” down the category tree. For traditional management purposes, this kind of categorisation might be useful, but it doesn’t lend itself well to both searching and pattern recognition.

To take a personal example (note that I’m going into anecdata territory here), I’m in the market for a hooded sweatshirt, and it has been extremely hard to find. Having given up on a number of “traditional retail” stores in the “High Street” (11th Main Road, 4th Block, Jayanagar, Bangalore) close to where I stay, I decided to check online sources and they’ve left me disappointed, too.

To be more precise, I’m looking for a grey sweatshirt made with a mix of cotton and wool (“traditional sweatshirt material”) with a zipper down the front, pockets large enough to keep my hands and a hood. Of size 42. This description is as specific as it gets and I don’t imagine any brand having more than a small number of SKUs that fit this specification.

In case I were shopping offline in a well-stocked store (perhaps a “well stocked offline store” is entering mythical territory nowadays), I would  repeat the above paragraph to a store attendant (good store attendants are also very hard to find nowadays) and he/she would pick out the sweatshirts that would conform to these specifications and I would buy one of them. The question is how one can replicate this experience in online shopping.

In other words, how can we set up our online customer catalog such that it becomes easy for shoppers to search specifically for what they’re looking for. Currently, most online stores follow a “categorisation” format, where you step into two or three levels of categorisation, where you’re shown a large assortment. This, however, doesn’t allow for efficient search. Let me illustrate by my own experience this morning.

1. Amazon.in : I hit “hoodies” in the search bar, and got shown a large assortment of hoodies. I can drill deeper in terms of sleeve length, material, colour and brand. My choice of material (which I’m particular about) is not there in the given list. There are too many colour choices and I can’t simply say “grey” and be shown all greys. There is no option to say i want a zip-open front, or a cotton-wool mix. My search ends there.

2. Jabong (rumoured to be bought by Amazon shortly): I hover over “Men’s”, click on “winter wear” and then on “hoodies”. There is a large assortment of both material (cotton-wool mix not here) and brand. There are several colours available, but no way for me to tell the system I’m looking for a zip-down hoodie. I can set my price-range and size, though. Search ends at a point when there’s too much choice.

3. Flipkart: Hover over “men’s”, click “winter wear” and then sweatshirt. Price, size and brand are the only axes on which I can drill down further. The least impressive of all the sites I’ve seen. Too much choice again at a point when I end search.

4. Myntra (recently bought by Flipkart, but not yet merged): The most impressive of all sites. I hover over “Men’s” and click on sweaters and sweatshirts (one less click than Jabong or Flipkart). After I click on “sweatshirts” it gives me a “closure” option (this is the part that impresses me) where I can say I want a zippered front. No option to indicate hood or material, though.

In each of the above, it seems like the catalog has been thought up in a hierarchical format, with little attention paid to tagging. There might be some tags attached such as “brand” but these are tags that are available to every item. The key to tagging is that not all tags need to be applicable for all items. For example, “closure” (zippered or buttoned or open) is applicable only to sweatshirts. Sleeve length is applicable only to tops.

In addition to search (as illustrated above), the purpose of tagging is to identify patterns in purchases and know more about customers. The basic idea is that people’s preferences could be along several axes, and at the time of segmentation and bucketing you are not sure which axis describes the person’s preferences best. So by having a large number of tags that you assign to each SKU (this sadly is a highly manual process), you give yourself a much superior chance of getting to know the customer.

In terms of technological capability, things have advanced much in terms of getting to know the customer. For example, it is now really quick to do a Market Basket Analysis based on large numbers of bills, which helps you identify patterns in purchase. With the technology bit being easy, the key to learning more about your customers is the framework you employ to “encase” the technology. And without efficient tagging, you are giving yourself a lesser chance of categorising the customer on the right axis.

Of course for someone used to relational databases, tagging requires non-trivial methods of storage. Firstly the number of tags varies widely by item. Secondly, tags can themselves have a hierarchy, and items might not necessarily be associated with the lowest level of tag. Thirdly, tagging is useless without efficient searching, at various levels, and it is a non-trivial technological problem to solve. But while the problems are non-trivial, the solutions are well-known and advantages large enough that whether to use tags or not is a no-brainer for an organisation that wants to use data in its decision-making.