Designing a Multichannel Retail Play in an Uncertain Environment

There is much discussion on slowdown in the global economy. Counter to popular perception, economic growth is also faster than ever before. Even after the financial crisis the global GDP grew 4.5 percent from USD 61.3 trillion to 70 trillion between 2008 and 2011. Asia has been driving this growth On a PPP basis Asia will contribute 50% to global GDP in 2050 (vs. only 20% in the year 2000). Asian economies like India, China, Indonesia, Myanmar and Vietnam are driving this growth engine.

India in particular is in a sweet spot. Indian Middle Income and Affluent households will grow from 48 mn in 2010 to 103 mn in 2020. While many think tanks have pegged Indian GDP growth between 5-6% for the next 2-3 years, the untapped potential of this vast consumer base is bound to drive long term growth momentum. According to “The 10 trillion $ prize” a book by The Boston Consulting Group, consumption in India will grow from about 900 mn $ in 2010 to about 3.6 trillion $ in 2020. Hence growth is a macro trend but the near term environment is uncertain with fluctuating inflation and erratic bursts of capital formation. Consumer and investment sentiment has been fluctuating as depicted by the volatile bullion prices and bellwether stock market indices.

At the same time, volatility is as much of an economic reality as long term growth. The inflationary environment continues to be unpredictable. Uncertainty on agricultural output and short term business performance is being reflected in volatile WPI and CPI figures. Global commodity prices including oil and bullion have also been showing high swings.

This tension between near term caution and long term potential is the challenge for Indian FMCG companies. They need to find a balance between pursuing growth and managing costs in an increasingly volatile environment. Retailers are also impacted by this conundrum. Additionally they have the complexity of finding the right mix between multiple channels (digital vs. brick & mortar, small vs. large format) in the backdrop of a nascent and fast growing organized retail environment.

The Indian consumer demands “more, better, now” and is increasingly “trading up”. Adding another dimension to this complexity is the diverse profile of the shoppers across the country. There is a strong need for retailers to provide a seamless, converged consumer experience across channels and leverage a multi channel proposition to drive profitable growth. A seamless consumer experience requires retailers to follow a coordinated approach across formats and functions.

Marketing needs to develop skills on social media, track consumer conversations seamlessly across channels and handle the complexity of maximizing RoMI (Return on Marketing Investment) across multiple consumer touch points. In-store and digital formats need to complement each other such that demand originating on one channel can be served seamlessly on the other.

Companies need to revamp the supply chain to handle higher complexity and merchandising teams need to dynamically optimize pricing and promotions across channels. Robust IT, strong data analytics and an organizational commitment are fundamental to success. But as hard as the journey maybe rewards are ample. Internationally companies that have provided seamless convergence across retail channels have yielded a 3X shareholder return vs. those who haven’t. Indian companies can leapfrog a generation by integrating this concept into their business models from the very beginning.

CII -BCG Report on Winning With Uncertainty will be released at the CII FMCG Summit 2013 on 12 June 2013, Mumbai: This report explores how FMCG companies and retailers can leverage uncertainty to their advantage. Along with global best practices culled out from BCG’s vast international experience, it also showcases the perspective of Indian industry leaders. The report details how FMCG companies must develop flexibility across the value chain while retailers must build agility within their DNA – to win in this uncertain business environment. 

Recommendations to Parliamentary Standing Committee on Finance

Competition Commission should consider Competition Compliance Programs before determining penalties 

There is a dire need for providing incentives to companies for instituting competition compliance programs within the Indian competition law framework. Elaborating on how the Competition Regulator could introduce certain incentives for enterprises to put in place competition compliance programmes, we have highlighted that a culture of embedding compliance with the requirements of the Competition law in business practices would also bring multiple benefits for companies.

This requires immediate attention so that Indian industry is assured that the Competition Commission of India will consider the competition compliance programs put in place by companies, before determining penalties, as is the practice in most countries

CII acknowledged the efforts of the Commission to promote and inculcate the culture of compliance among enterprises in India including by undertaking advocacy programs, interacting with industry associations and CEOs of top companies and also sharing information through the ‘Advocacy Booklet for Competition Compliance Program for Enterprises’. There are no provisions under the Competition Act, 2002 and its allied regulations which set out the criteria that are to be taken into consideration while deciding on the quantum of fines to be imposed on entities which have infringed competition law. While the Commission’s Advocacy Booklet for Competition Compliance indicates that compliance program may help enterprises mitigate the level of fine, the Competition Act is silent on how putting in place competition compliance programs may be a factor which could reduce the quantum of fines.

CII feels international jurisprudence to show how competition authorities across the world have promoted competition law compliance. International Competition Network countries consider existence of antitrust compliance programmes while fixing monetary penalty for violation of competition law. OECD participating authorities encourage companies to implement compliance programmes by granting a reduction in fines when there is a violation despite the existence of a bona fide programme. In Australia, courts have recognized that an effective compliance program may be a mitigating factor when assessing penalties in the event of breach of the Competition and Consumer Act. UK’s Office of Fair Trading considers existence or adoption of a compliance programme as a mitigating factor. Singapore has issued guidelines on what types of programs will be considered effective. United States Federal Sentencing Guidelines indicate that an effective compliance and ethics programme might reduce the fine that will be imposed. Italy and Canada also consider existence of effective programs as a mitigating factor.

Drawing from the experiences of competition authorities in established jurisdictions, the Commission may consider framing penalty guidelines which could include existence of a compliance program amongst the mitigating factors while calculating penalty on an infringing enterprise. The Commission should also consider providing clear guidelines on what would constitute an effective and credible competition compliance program. It could further consider indicating the factors that it would take into account while considering how much mitigating value to be accorded to the existence of any compliance programme.

The compliance system will provide enterprises the advantage of enabling early detection of violation and taking preventive steps; assist in enhancing their reputation and building goodwill; avoid fines or mitigate the level of fines; pre-empt the possibility of concluding potentially void agreements; avoid possible actions for compensation and obviate or reduce costs and negative effects of litigation and regulatory intervention.

CII has made a detailed recommendation on this to the Parliamentary Standing Committee on Finance, which is reviewing the Competition (Amendment) Bill, 2012. The issue is now being represented before the Competition Commission