Niranjan Gidwani, the consulting director and member for UAE Superbrands council explores the consumer durables industry, and the impact of digital influence on the market.
In the last eighteen months or so, the influence of digital has grown “disproportionately”.
It would be noteworthy to mention here that there is a key difference between digital online sales, and digitally influenced sales. More and more shoppers are definitely getting digitally influenced, using the internet more and more before, during and after buying consumer durables. As a thumb rule, mobile phones and core wearables still dominate a bulk of all consumer durables sold online. With several brands offering different variants and SKUs of the same products online, this sale is being speeded up. Small appliances, with a ticket value which could be considered as “impulsive purchase” are also picking up.
However, as the e-commerce market is maturing, sales of bigger, pricier appliances such as TVs, washing machines, and ACs have also started to shift online. Rising smart phone usage, a decline in smart phone prices at the low and mid-range, and offers by e-commerce companies are prompting consumer shift to online.
Brands and distributors would realize that when it comes to buying goods online, in the consumer durables category, the general trend so far is that somehow shoppers prefer pure play e-commerce aggregators like Amazon, Flipkart, Noon etc. more than brand or distributor websites for shopping. A very large number of online buyers prefer buying via e-commerce aggregators, while a very small number prefer buying through the brand website or the brand or distributor app.
When we start looking at e-commerce statistics for this industry, they significantly understate the role of digital because it is only a small percentage of people who purchase online, but it is important to note that a larger percentage of people are influenced online.
Over the next three to five years, it is estimated that that the percentage of those who will be influenced online is likely to be over two-thirds. This is a very significant number.
What then happens to the brands and distributors who have, and continue to invest large money in physical infrastructure and stores. One key area comes out very clearly. Top brands and their distributors would have to increase their spending on digital ad spends for a mind share of click-happy customers. Hence, it is essential to look at a re-allocation of the cost budget from distribution to ads & promotion spends.
For a long time, physical distribution competency has been a benchmark to gauge a consumer brand or a distributor’s dominance. The larger or deeper the physical distribution network, the higher a brand ranks on competitive positioning. This is likely to change.
For the first two decades of this century, many large retailers focused their efforts on expansion of both storefronts and square footage. However, retail market conditions have profoundly changed since then. Some well-known retailers went insolvent in recent years, and many survivors have cut back and/ or announced store closures.
The lack of willingness or means to adapt to a more volatile and fast changing market environment can immediately result in serious troubles for large and small retailers alike, regardless of how established they are in the market or how successful they have been in the past. ‘Business as usual’ is no longer an option in the retail sector, driven by new technologies and the influence of pioneering digital-first companies like the Amazons of the world.
Today, consumers have easy access to real-time information about products, pricing and quality, and social media enables them to amplify their options and complaints. Price transparency made available to consumers by online retailers maintains pressure on margins along the whole value chain. Additionally, margins are being squeezed by more frequent markdowns combined with constant discounts, as consumers expect year-round discounts. Consumer durable distributors and retailers´ business success and resilience increasingly depend on their ability to adopt new strategies.
However, this requires the willingness to change as well as major investments, a more difficult task in times of tight profit margins.
One thing coming out clearly is this. Brands and distributors would need to spend more on digitally influencing their sales. They should not get overly focused pushing more digital online sales through their own websites. Even in the next couple of years, the aggregate global digital online sales may not cross more than 25 percent of the aggregate overall global retail sales by value. For brands and distributors selling through their online sites, their strategic benchmark may need to be lower than this figure. Their focus would need to be on reducing or rationalizing their brick and mortar investments, and increasing their digital influencing costs.
The timing is just about appropriate. Strong distributors should ensure that they’re financially prepared to pounce on an M&A opportunity when it arises—specifically, by reducing debt and freeing up cash. In addition, they should evaluate their portfolios more than once a year, close deals quickly, and build robust integration capabilities.
