Why physical retailing is here to stay

Introduction

For many decades Indian boys and girls were told the exact same thing, “Study hard, get into a good college, settle down in life”. The language used and tone may have varied from state to state, but the content has remained rather consistent. Most members of our parents’ generation too experienced these pressures firsthand. However, things have been changing, and changing fast. The last decade has quite transformational for our youth. Many young Indians have decided to take the entrepreneurial plunge and have begun something of their own. The result – thousands of startups dotting our map among which hundreds including Flipkart, Paytm, Ola and Zomato that have acquired the coveted ‘unicorn’ status. In this edition of the newsletter, we dive deep into one such unicorn, Boat Lifestyle.

Boat Lifestyle was founded by Aman Gupta and his friend Sameer Mehta. Boat Lifestyle, more accurately ‘boAt’ is India's fastest growing audio & wearables brand. They produce a wide range of products spanning wireless earphones, earbuds, headphones, smart watches, and home audio. (For a quick overview of Boat an d it’ financial success, please check out this article). If you have been anywhere close to a TV set or YouTube, you may be quick to recall Aman. Today, he has now become a household name thanks to hit TV program Shark Tank India (which once again points to the rise in entrepreneurial energies amongst the Indian public) and a poster child of the booming startup culture in our country. It is in this rich entrepreneurial backdrop that I wish to discuss our case - boAt Lifestyle by Dr. Rajiv Lal (from Harvard Business School) and Researcher Kairavi Dey.

In brief, the case beautifully summarises a boAt’s origin and expansion story. They also explain how the firm grapples with the decision to sell internationally. While these are interesting facts that students must be familiar with, I wish to use the case to illustrate a slightly different idea than what the case writers intend to discuss. That idea is the idea of leap frogging. Specifically, leapfrogging in the context of channel management.

Leapfrogging

In simple words, Leapfrogging refers to the process of skipping a traditional or intermediate step or technology and moving directly to a more advanced or innovative one. For instance, there are dozens of countries that did not invest in 3G mobile technology and directly moved to the 4G standard. Several industry experts feel that Africa has the potential to leapfrog directly into clearer energy production and skip entirely very polluting ways of producing power. Firms too may leapfrog over some important phases that their competitors may have undergone. For instance, most recent startups do not have to invest in creating costly physical supply chains and build trade relationships. Instead, they can move directly into setting up digital channels. For many firms, this has been most beneficial. For instance, many the American mattress maker started off selling mattresses exclusively on the internet. For years, they did not have an experience center or physical store. Closer to home in India, smart phone brands like Oneplus and Xiomi sold their wares exclusively through the internet.

The interesting idea was that these firms could leapfrog directly into selling through digital technologies and not incur the cost of setting up a physical distribution network. This made sense. Investors also loved it. Selling through stores was, is, and will continue to be a costly affair. It was also difficult to track and painful to manage with a small team of executives. Channel conflicts kept cropping up from time to time and a lot of energies had to be used in arresting pilferage, counterfeiting, product returns and damages. Online selling provided companies with the promise of easy tracking and direct firm to customer relationship management. A part of the savings in costs could also be passed to the customer. Theoretically, this could cost advantage could play a key role in reducing prices and capturing market share against the more established players. In summary, leapfrogging over physical retailing provided firms the ability to not make the same costly investments other firms did, but achieve similar sales outcomes.

Digging in

Despite the variety of pains points leapfrogging removes, we find that most firm that began selling through the internet also began to set up a physical presence. For instance, OnePlus today has a wide network of physical brand stores across the globe. Casper has also begun setting up stores. You might be surprised that Amazon too is is experimenting with physical store models. The question that we need to ask ourselves is ‘WHY?’. Why do firms bother investing in brick-and-mortar retailing, start building trade relationships, creating incentive structures, and manage large workforces? Why do firms that have a perfectly good chance of leapfrogging and leaving behind physical retailing take a U turn and set up a robust physical supply chain?

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The answer involves thinking using a political economy framework. Let me take a moment to explain. When boAt first made its retail foray, it partnered with Amazon to sell its wares. In simple terms, boAt made the product, Amazon distributed it, and they shared the revenue. This was an efficient arrangement. Except, this was never going to last. At some point in time in the future, depending on who had the upper hand in the relationship, either Amazon or boAt could demand that the terms of the agreement be changed. For instance, the executives at Amazon may think they could make products similar to boAt themselves and retail them or shift priorities to another national brand that offers then greater margins. Similarly, boAt too could want to de-risk itself from being a 100% dependent on Amazon. Therefore, it was only natural for boAt to reach out to others, including Amazon’s competitor, Flipkart. The exclusive arrangement between two organisations was bound to be short-lived. Amazon began building its private label (Amazon Basics) in the electronics space, while boAt forged relationships with Flipkart, and also started its own direct channel.

However, it needs to be asked if these action alone can truly de-risk boAt’s channel strategy? Considering Amazon and Flipkart provide it with a bulk of it’s sales, boAt may still be at a significant disadvantage. For instance, boAt may not be able to price their products as they want. Similarly, they may never be able to build a true customer connect thanks in large part to the ‘middleman’ in the equation. This disadvantage is something that the Sonys and Sennheisers of the world do not have. Why? The answer, may boil down to having a physical presence in the market.

Conclusion

Many startups start off my serving a small niche of consumers. Such small niches may prefer making use of one type of channels to make their purchases. However, when firms expand and become mainstream, it is very critical for them to start using a channel mix that services the main stream. More often than not, this includes the likes of physical retailing channels. This is perhaps the reason why so many firms that started off selling exclusively on the internet today have begun selling through offline routes too. Leapfrogging does not necessarily have to be beneficial across the board. With the wife variety of benefits that it can bring about, there are also a range of disadvantages that may be brought about. The most important limitation in my opinion is the learning that brands can have from retailing through physical channels. No amount of reading comments and reviews for feedback can make up for good old face to face communication that customers love to have in brick and mortar stores. For that reason, brick and mortar retailing is going to be around for a long time. If anything, brick and mortar selling is going to get very interesting in the years to come because brands will want to create really unique consumption experiences for their customers. It is ultimately these experiences that help forge great brands in the minds of consumers.