FirstCry.com: Leveraging the power of offline

In my blog post last week, I wrote about how a hybrid online and offline strategy is useful for collecting small data. As a couple of my readers pointed out, what marketers and strategists call small data, ethnographers and sociologists call as thick data. Honestly, I had not heard of thick data. @fernandogaldino introduced thick data to me. I dug through the online references on thick data, and realized we are talking the same thing. Exactly the same thing. Thank you Fernando! So, I am going to continue using the term small data (that is what I have read academic articles about) with the caveat that small data is also thick data. Last week, I promised to delve deep into FirstCry.com and its online-offline strategy. Here it goes.

FirstCry.com

The firm was founded by Supam Maheshwari and Amitava Saha in 2010 as a pure online venture. By 2011, FirstCry.com opened its first offline stores. In an interview to TechCircle, co-founder Supam Maheshwari elucidated how a vertically focused ecommerce firm could survive and make money in a market dominated by horizontally spread competitors (you can read the interview here). He talked about replicating Quidsi’s business model in the Indian market, by owning a set of vertical markets like diapers.com and soap.com. In replication, firstcry.com has a sister website goodlife.com. The key difference, he said, between the Indian and the US market for baby care products was that, more than 95% of the products were imported. In fact, that was the seed for the enterprise – his own difficulty in finding good quality products for his child in India, whereas he could buy a lot of them during his international travels. That effectively makes this business inherently inventory-heavy. One needs to leverage economies of scale and scope in sourcing, hold inventory and invest in logistics to be able to service customers across the length and breadth of the country (read about firstcry.com inventory model here).

Omni-channel strategy

Here is where the omni-channel strategy helps. Instead of keeping inventory in dark warehouses, ready to be shipped, it was possible for firstcry.com to open retail outlets in tier II and tier III cities (where real estate was also likely to be cheaper), where ecommerce penetration was not as much as the tier I cities and the metros like Mumbai, Delhi, or Bangalore. The inventory holding was thus distributed across the various franchised retail outlets. The outlets also provided customers with the look and feel of the products before they bought them – you need to appreciate that baby apparel and shoes dominate the market, only to be followed by toys and diapers. Clothes and shoes … when was the last time you bought your own shoe purely online? Inventory provided increased footfalls to the store, created brand awareness, and inventory off-take. The decision to have the same prices between online and offline stores, coupled with large touch screen interfaces to shop online from within the offline store could have provided exponential growth in traffic and sales.

Promotion: The FirstCry Box

Firstcry.com began promoting using traditional mass media – television and online ads. They invested in Bollywood’s longest serving (possibly) celebrity, Mr. Amitabh Bachchan as their brand ambassador and launched a few television advertisements (see some of their ads on YouTube here). However, they soon realized that mass media advertising was highly expensive and yielded low returns for a niche range like baby care products. That is when the idea of the FirstCry Box was born. The FirstCry Box is a bundle of some essential products that the mother would need during the first few days of the baby and mother reaching home from the hospital. Firstcry.com has agreements with over 6000 hospitals, through which these FirstCry Boxes are gifted to the new mothers, congratulating them on the birth. These boxes also contained gift and discount coupons from major brands of baby products, that the parents could redeem at either online at firstcry.com or any of their retail outlets. This ‘welcome kit’ to parenting provided firstcry.com a significant opportunity to build brand equity and recall amongst the over 70000 mothers receiving these kits every month. Some marketers call this permission marketing (read about it here), or direct-to-parents strategy. For me, it is a wonderful platform, a two-sided platform mediated by firstcry.com. Parents, especially first-time mothers, are initiated into parenting with the help of these grooming products (basic diapers and lotions) and the gift coupons for free. The new mothers as a subsidy side is being financed by the brands that provide the products and coupons to be included in the box and act as the money side in the platform. For the brands, this is highly targeted sampling of their products, and most mothers would stay loyal to quality brands/ retail stores in baby products. In the entire transaction between the mothers and the brands, firstcry.com benefits significantly in three ways: (a) store loyalty resulting in increased sales, (b) small data about how these mothers use these products, the basket, frequency of purchase, and willingness-to-pay for quality; and (c) good quality prediction of demand in specific geographies, leading to efficiencies in inventory and supply chain management practices.

By the way, such welcome kits are not entirely new – a lot of employers have been on-boarding their employees with such welcome kits. I first heard/ saw such welcome kits when I was part of a team that delivered a customized training programme for the ITES service provider ADP India, a few years back. It was fascinating to see how the entire family was on-boarded into the firm! Not just ADP, a variety of other new age firms, I see have adopted this practice (read this article on how some Indian organizations welcome their employees). I wish I was welcomed like this by my employers!

Are hybrid models here to stay?

I would say, yes. We saw how Amazon was opening stores in our blog last week. We also discussed how Amazon.in was using firms like StoreKing to reach the Indian retail hinterland. I read last week that their Indian competitor, Flipkart.com was also opening offline store to reach users in small cities (Flipkart to open offline stores as well). And in vertical markets like baby products, it has become all the more important to target your promotion very narrowly, and focus on the backend (inventory, supply chain, and logistics) efficiencies, while at the same time achieve scale.

Is vertical ecommerce a winner-takes-all market?

Three industry conditions define a platform market as a winner-takes-all market: presence of strong cross-side network effects, high multi-homing costs for the users, and the absence of special requirements. The baby products retail market is dominated by imported brands, is a highly fragmented industry, and the brand owners are dependent on their retail partners to promote their brands. The demand for these products are relative price inelastic, and consumers would be willing to pay premiums for sustained quality and reliability. An aggregator platform like firstcry.com would significantly aid in establishing and reinforcing the cross-side network effects between the brands and consumers. Second condition – the quality and reliability concerns of the parents would ensure significant store loyalty and brand loyalty. As long as there are no serious concerns, consumers would be loath to switch; and when the fill rates are high (there are no stock-outs of items that they want to buy) in their preferred stores, would not multi-home. In other words, consumer switching costs for brands are high, and as long as these brands are available with their favorite retailer, they would not shop from multiple outlets. And most infants have the same needs – diapers, creams, lotions, oils, and basic toys. Special preferences begin showing up only when they ‘grow up’. Some of them don’t ever grow up, but that is a different matter!

Firstcry.com and BabyOye merger and further consolidation

Given the industry conditions of geographically distributed year-round demand, operational efficiency and leveraging economies of scale and scope become key success factors. Consolidation is inevitable to achieve both backend (sourcing, inventory, and supply chain/ logistics) efficiencies as well as frontend scale (online and offline stores distributed across the country). That is why we would see waves of consolidation in such strong vertical markets. Like how firstcry.com and BabyOye merged their operations, I agree with Supam that this market will see more and more such mergers (read his interview here).

Lessons for enterprises focused on vertical markets

Based on what we have discussed over the past few weeks, I would urge enterprises focused on vertical markets (like firstcry.com) to (a) seriously consider your business model to include online and offline consumer touchpoints … for instance, online furniture store, Urban ladder is ‘pivoting’ to offline stores (read the news here) and are positioning their offline stores as customer experience centers; (b) invest in collecting and analyzing small (or thick) data through these omni-channel (or hybrid) business models; and (c) critically evaluate if the market conditions favour winner-takes-all dynamics.

Hope my readers from India and the diaspora had a great deepavali festival! Greetings from Bangalore.

Disclaimer: I am in no way related to FirstCry.com, Goodlife.com, its investors, or its founders.

(C) 2016, R. Srinivasan

StoreKing: Taking ecommerce to rural India

Each of my visits to Europe has taught me something new over the past few years. My recent visit in April-May, I had to travel through three countries – Switzerland, Germany, and Italy. What struck me this time was how much the local language was used in a lot of business and commerce, with English being the common language. While looking for similarities between India and the European continent, I was amazed at how much they value their local languages. For instance, my colleagues in Germany did my hotel bookings for Nuremberg and Rome through Booking.com and HRS.com, and the entire communication cycle was in German language. Not surprising. But it triggered the thought about “why don’t we have websites and mobile apps in India’s languages?” What would be the impact of an ecommerce site in a local language like Kannada on a rural consumer in say, the Dakshin Kannada district?

I began my exploration and in a recent road trip to Tiruchchirappalli (Trichy for the phonetically challenged) in Tamil Nadu, I experienced the power of StoreKing. StoreKing is not a traditional retailer or an ecommerce firm. It leverages the power of ecommerce and solves the three major problems faced in rural penetration of ecommerce – language barriers, non-specific addresses, and trust. A detailed description of the StoreKing business model is available in a write-up on YourStory.in (read here), but for the sake of explanation, let me briefly introduce the same.

StoreKing approaches rural retailers (brick and mortar) and convinces them to install the StoreKing kiosk/ buy a StoreKing tablet in their shops. These kiosks or tablets are powered in the local language, and has a large variety of SKUs, ranging from electronics, appliances to digital goods like mobile/ DTH recharges. Customers walk in to the store, and with the help of their trusted retailer, browse and shop on the StoreKing kiosk. Once they have placed an order, they pay the retailer in full, StoreKing communicates with the customer through their mobile phones in their local language. The problem of poor (ill-specified) addresses is taken care of by dispatching the goods to the local retail shop (from their central warehouse in Bangalore) within 48 hours. The retailers receive a 6-10% commission on the sale proceeds. Though I am not sure how StoreKing sources the goods, it uses the standard FMCG distribution network to ship the products to the retailers.

StoreKing’s last-mile connectivity to its rural consumers addresses the three main problems faced by traditional ecommerce firms – lack of scale in rural markets to justify investments in delivery infrastructure, lack of sufficient data about rural consumer habits and preferences, and their (misplaced) perceptions about rural buying power. An older YourStory.in report talks about how StoreKing’s customers bought dishwashers (not one, but two for the same household) and iPhone 6s (read here). The lack of scale has been overcome by adopting a hub-and-spoke distribution system that piggy backs on the FMCG distribution network.

I am not sure this happens, but would it be possible for the customer to change the default language of communication? I appreciate that rural India would not have enough linguistic diversity to justify this, but if StoreKing were to penetrate into border towns like in Belagavi (nèe Belgaum) district, where multiple languages are used, it would definitely need customization.

StoreKing has partnered with Indian Oil petrol bunks (gas stations) as retailers (see here); as well as Amazon.in, presumably for expanding their breadth of products. The recent media reports talk about Amazon.in’s Udaan initiative to reach rural customers with limited internet connectivity, and the synergies Amazon.in will have through this partnership with StoreKing, but not the perspective of StoreKing. Amazon.in would leverage their deep local presence and established distribution network; and I would guess StoreKing would significantly benefit from Amazon.in’s breadth of products list.

StoreKing claims to be neither a discounter nor a premium seller of goods. The primary value proposition is the trust its customers have on the local retailer; and that has enabled them to even collect cash in advance, rather than cash-on-delivery that has become the dominant mode of ecommerce transactions in India. This trust placed by the retailers on StoreKing provides it with a significant first mover advantage. At over Rs.10,000 investment and significant local knowledge of the customers, the switching costs and multi-homing costs for the retailers are very high. Even when a competitor enters the market directly, it would be difficult to convince a retailer to shift out of the StoreKing kiosk/ tablet to another competing solution. It is here, that I believe StoreKing should follow the classic Wal-Mart strategy of “regional rural saturation”, and convince every retail shop/ kirana store in a particular geography to host a StoreKing kiosk.

Four questions pop up in my mind, for which I have no answers right now.

  1. Should StoreKing open its own exclusive stores, as they grow big? What are the costs of signing up with competing retail stores in the same village? Can these costs be overcome by stand-alone StoreKing kiosks?
  2. At the other extreme, should StoreKing allow for a tight integration of the brick-and-mortar retailers’ inventory and their inventory? For instance, if a customer ordered a Micromax mobile phone through the StoreKing kiosk, which was already available with the retail store in his physical inventory, should he fulfill it from his store (and forego the StoreKing sales commission) or block those items that he sells in his store?
  3. If these brick and mortar stores who are trusted by the local customers offer discounts and credit for their offline sales, how does that affect StoreKing operations and business model? Should StoreKing allow a retailer to extend the same credit terms he offers to his customers for ordering good through StoreKing?
  4. As StoreKing expands into more and more geographies (as of June 2016, they operate in the five South Indian States, plus Goa, Maharashtra, Gujarat, and Odisha), is this model scalable? What challenges would a market like Eastern Uttar Pradesh pose?

I am watching this firm and its growth trajectory from the outside. Any answers?

PS: I am nor in any way related to StoreKing or its investors/ founders.

100% FDI in e-commerce – will prices fall?

On the 29th March 2016, the Government of India allowed 100% FDI in Indian e-commerce firms. While there is reason to cheer about the fast-growing sector getting more access to much needed funds for fuelling growth, there are three interesting developments in the notification.

  1. The Government has explicitly defined what is a marketplace model, as different from an inventory model.
  2. The consequence of this definition means that marketplace ecommerce firms cannot have a single retailer selling more than 25% of the retailer’s sales.
  3. The definition also means that the retailer cannot provide discounts and promotional offers on their own, directly or indirectly.

The impact of these three definitional changes would in the short run, require marketplace e-commerce firms to discontinue price discounts they offer directly or indirectly. Amazon’s promotional funding to sellers, PayTM’s cash back offers, or Flipkart’s big billion sale have to end. Will this mean they would stop offering discounts? I do not believe they will. They will find other ingenious ways of providing the customer with discounts, given that they would have access to larger source of funding through the FDI investments. More on that below.

It’s the sellers that matter

This definition of the marketplace model would clearly lead to interesting dynamics on the seller side. For instance, an SMB seller who would otherwise be listing his goods across multiple e-commerce companies would now be wooed by more and more marketplaces, as they seek to expand their base of sellers. Do you realize that the firm that owns the site www.amazon.in is actually called Amazon Seller Services India Pvt. Ltd.? In order to expand and sustain their broad base of sellers, these marketplaces would now have to offer discounts and freebies to the seller side, rather than the buyer side as it was apparent in all these years of growth. These seller-side offers would eventually translate into lower prices for buyers in two ways.

One, in the traditional sense of the word, the seller bargaining power would go up; sellers’ multi-homing costs (costs of simultaneously offering their products and services across multiple marketplaces) would come down; and the volumes would go up. Larger sellers therefore, would invest in technology to manage their multi-homing costs, automate a lot of processes, outsource specialised functions like last-mile delivery to focused service providers, and would grow their own sourcing networks. Smaller sellers on these marketplaces would have no incentive to be remain small, and would either get gobbled up in a consolidation game or become second-tier sellers to the larger sellers operating on the marketplace e-commerce retail. This consolidation and growth of sellers on the marketplace would result in lower costs through economies of scale and scope, which the seller would eventually pass on to the buyers.

Two, the consolidation of the seller market would lead to fierce competition across sellers; and the basis of competition between the sellers is likely to be only price. Other differentiators like product variety/ features and brand are likely to be owned by manufacturers/ marketers (like Samsung), whereas service differentiators like distribution network, logistics and related customer service are likely to be managed by the marketplace. The only bases of competition for the sellers to compete would be (a) optimisation of inventory to reap appropriate economies of scale and scope, (b) managing distributed inventory through accurate prediction and forecasting of demand and supply, and (c) reducing costs through faster inventory turns as well as leveraging their bargaining power with manufacturers as well as retailers/ ecommerce firms.

Good times are here to stay (for the consumers)!

So, in effect these regulations do not necessarily mean that the prices in the ecommerce retail would rise and match the offline prices. There may be small adjustments; but in the long run, the discounting would shift from the retailer to the supplier. And the consumer would continue to enjoy lower prices (offered by the sellers) along with superior customer service (provided by the retailer, as this would be the only basis of competition across  marketplace e-commerce competitors).