New Economy: The Net's Real Winners

Fine, it's a futuristic picture we are presenting, but traditional companies really have what it takes to succeed in the new-e. And they know it. only, they're in no hurry to cut a wide swathe on-line.

A long time ago, in a galaxy far far away, a wise man (history is silent on whether his name was Obi Wan Kenobi) discovered that the internet rendered old world concepts such as size and distance irrelevant. Upstart start-ups, he predicted, would rise up and dethrone hoary brick-and-mortar companies. Luke Skywalker had his lightsaber (that's the correct term for those brightly coloured laser swords the jedi sport); these pretenders had the internet.

WHAT THEY ARE DOING...

HLL
The FMCG major has a three-pronged strategy for the Net: increasing business connectivity across the supply-chain and consumer connectivity across communities, and to gradually sell its range of products through the internet.

ITC
Using the Net across the board: for agri-exports with e-Choupal, welcomgroup.com for reservations at ITC hotels, and lifestyle retailing with willsport.com. The new greeting cards business plans to open a Net-cafe for a range of cards.

CITI BANK
e-banking facility for 'Suvidha' customers. Launched Citibank e-Cards for Net shopping. Launching 'CitiAlert', a mobile, e-mail and fax alert service available on your bank and credit card accounts. Aims to take service delivery on-line.

A.V. BIRLA GROUP
A cell set up for the e-initiatives. Madura Garments is already selling 300 shirts per month on Rediff and Sify. PwC is e-enabling Madura's supply-chain. Looking at AllenSolly.com. Will consider a multi-brand site after Jan-Feb, 2001.

LG ELECTRONICS
Has lgesource.com and lgedealernet.com, serving as info centers for dealers and vendors. It hopes to e-enable all its vendors by end 2000 and operational efficiency enhances for itself. Slow in B2C-waiting for e-commerce to grow.

SHOPPERS' STOP
Started shopperstop.com. The site will initially stock the 1,400-odd stock-keeping units that the physical store keeps. Advantage: it is operating on the infrastructure that Shopper's Stop already has, thus lowering distribution costs.

HDFC
Core-business-housing finance-is largely unaffected by the Net, but it is using the Web to exploit new opportunities. With HDFC Bank, it has set up a stock trading site and B2B venture. Has also set up propertymartindia.com.

ICICI
ICICI is racing ahead with its technology-based e-commerce strategy. Beyond, e-enablings, it is creating a common technological platform across the group aimed at a one-point contact with the customer for all the group's products.

As things panned out, those gleams of hope were merely specks of fools' gold. The empire, as Skywalker and his comrade-in-arms Hans Solo figured out, eventually strikes back. In layspeak, the internet has not rendered traditional sales and distribution models redundant; the equity of old economy brands has not disappeared in a puff of cyber-logic; and capital isn't as freely available as it was envisioned to be.

Net, net what started as a revolution, is increasingly being seen by most people as just another channel of distribution. And, as the small guys fall on the wayside, it is the big boys who seem to be having the last laugh. Says Amul Gogna, Executive Director, ICRA: "Consolidation has started happening. Within the next two years those start-ups that have to fail, will. Ultimately, it will be the brick players that have the advantage." A recent ICRA-report on the internet predicts that only 5-10 per cent of existing dotcoms are likely to survive in the next five years. Agrees Rajeev Gupta, Executive Director (Asia Pacific Investment Research), Goldman Sachs (Asia), "Start-ups will struggle to establish themselves and the one issue they will not be able to resolve is funding. Our view is that the incumbents will win hands down in the Indian context. The option the start-ups will consider is aligning with incumbents."

In some cases, this process has already begun: HDFC has picked up a strategic stake in Equitymaster.com and personalfn.com; NIIT, in classteacher.com; and the Brite group (a plastics heavy), in polymerupdate.com.

Slowly, but steadily, the old economy is moving in. There is not a single company in the higher reaches of the BT 500 that hasn't already laid out a plan for the Net; indeed, most of these companies are now in implementation-mode. A sampling: HLL is using the internet to iron out supply-chain inefficiencies, connect to consumers, and to move towards selling products on-line. Citibank is already migrating customers to the internet (it has a base of 1,00,000 already). And ITC has all its businesses sporting an 'e': from an 'e-choupal' (virtual marketplace) for Soya in Madhya Pradesh to a cyber fashion advisory on its lifestyle retailing business site, willsport.com. And eight auto-companies have forged an alliance to set up a B2B exchange.

If the west-side story is anything to go by, the big boys have the most to gain. UK-based food-retailer Tesco may have been slow to go on-line, but once it got its e-strategy in place, it broke even faster than you could say Webvan. And big guns like Sears, Ford Motor, and International Paper have joined hands with their competitors to build large on-line trading hubs.

Conservatism paid: rather then missing the boat, these companies just ended up missing the storm. That could explain why some of India's blue-blooded oldies are still content to wait and learn from other people's mistakes. Take the AV Birla Group company-Madura Garments. The company is using the internet to integrate its supply-chain, sells shirts through a few sites like Rediff, and is working on a site for the Allen Solly brand. Says Vikram Rao, Group Executive President (Garments), AV Birla Group: "At a later point, we could sell other brands on-line. But, today, if I have Rs 5 crore to burn, I'd rather create a new line of suits instead of a multi-brand website."

This attitude is not completely out of order. After all, the company manages to sell a mere 300 shirts a month on-line. Take a look at the numbers being thrown about: according to ICRA, the aggregate value of e-commerce activity in India is expected to grow from Rs 4.7 billion in 1999-2000 to Rs 252 billion in 2004-05, with the B2B component accounting for 90 per cent of this amount.

That could explain why most corporate activity is restricted to the B2B space. Take the case of LG Electronics. It has already set up lgesource.com and lgedealernet.com designed to serve as information centres for suppliers and dealers (other benefits: mass customisation options and lower inventory). Explains Ajay Kapila, Vice-President (Sales & Marketing), LG: "Ours is no revenue model site. It's a capability for us. A platform for us to work in future."

Remember everyone's favourite refrain about the internet: "The bigger they are, the harder they fall." Nimbleness was a word everyone loved to use when describing a start-up's competitive edge. It didn't take long for people like Jack Welch to sit up and order their corporations to get web-enabled. Microsoft was already a large company when Bill Gates announced that "if you're not working on something internet- related, stop what you're doing and re-orient your activities." And with that, the entire enterprise turned to embrace and extend the new economy. Avers Glover T. Ferguson, Chief Scientist, Andersen Consulting: "Size can definitely affect nimbleness, but leadership and culture have a critical role as well."

This is something Indian companies have realised. Says Ralph Heuwing, Managing Director, Boston Consulting Group, India: "As far as the brick world is concerned in India, businesses are discovering that having assets is something that can be a source of competitive advantage." Adds HLL's D. Sundaram (his card reads Director-Finance, but he's in charge of the company's Net-foray): "HLL has huge distribution strengths which are, for example, vital in consumer-commerce. Largeness does not necessarily affect nimbleness-our size gives us the scale to implement solutions which may not be available to a start-up."

The man may be right. Of the three things required to succeed on the internet, technology, an understanding of consumer behaviour, and efficient distribution systems, brick-and-mortar companies only tend to lack the first: they are clearly not technologists. But that isn't a major issue since they can forge partnerships to overcome tech-inadequacies.

In the battle between the 'bricks' and the 'clicks', the customer will clearly call the shots. Says Sriram Jagannathan, Head, e-Initiatives, Citibank: "The advantages possessed by existing brands backed by years of experience in understanding and fulfilling customer needs cannot be overcome by transient technological advances, which these brands will acquire or imbibe in any case." Maybe, but is it really time to write off the pure plays? Not quite, say people like K. Vaitheswaran, Vice-President (Marketing) of e-tailer Fabmart: "There are no clear answers yet. We can't say pure plays will not survive. What seems to be happening is that in all these analyses, we are forgetting the key person who will determine success-the customer."

Sure there may be some clicks that survive but many more will align themselves with the bricks and even more will die. And those, that do not survive, will be the ones without a significant competitive advantage. Says Narayan Seshadri, Head, Business Consulting, Arthur Andersen: "Internationally, the dotcoms that have succeeded are the ones with a new business model, or those acting as an intermediary." Ebay, for instance, has a model that will be difficult to replicate in the real world.

Pure play companies, consultants point out, aren't without their own advantages: tech-savviness, a better understanding of on-line consumer behaviour, lower overheads, and no transitory troubles (from brick to click). Besides, the B2C market in India is very different from that in the first world (organised retail is still in its infancy here). Broach this with G.B.S. Bindra, CEO Firstandsecond.com, a book e-tailer, and he sniggers: "What retailing alternatives are there as far as books are concerned?" But Bindra is also candid enough to admit funding is getting tighter. And if rumours are to be believed, a major (brick) corporate is said to be in the final stages of taking a stake in Bindra's baby.

Not many clicks, though, will find themselves at the receiving end of M&A activities. Says BCG's Heuwing: "In the west, there are large dotcoms with huge customer bases and huge transaction volumes but low profits. There, we will see M&A happen with incumbents picking up pure plays. Switch to India and not many dotcoms have reached that stage." Adds Binoy Choudhry, Regional Director, Rediff: "I believe the bricks will set up on their own and use the acquisition route only to access technology." And the bricks can afford to wait.

Take the case of Sharekhan.com, trading firm SSKI's on-line trading site, and Indiabulls.com, a pure play competitor. For SSKI, the internet is just another channel. As Sharekhan CEO Dhiraj Aggarwal puts it: "The Net is another channel that the investor may choose to use, and as a serious player in this space, we had to be there too." The channel accounts for a mere 5 per cent of the company's total trading. Yet SSKI has the time and resources to wait for e-broking to grow. Indiabulls, in comparison, may have reached a daily turnover of Rs 4 crore but it still has to rely on funding to slowly grow its off-line presence. Nor does it have a parent like SSKI to see it through the difficult years. Sameer Gehlaut, CEO, Indiabulls, however, insists that the amount of business that can be generated is not related to financial muscle: "Biggies have deep pockets. It helps to some extent but nothing beyond that.''

It's all very well to say brick companies have all it takes to become the major beneficiaries of the internet. But they have to get their e-strategy right first. Most corporations tend to use the Net at four different levels. The first involves using the Net as a new way to interact with the customer. In the second, they use it for sales. In the third, they use it for e-procurement. And, finally, they use it as an exchange or market place. The first and the third tend to be the things companies first use the internet for.

In many cases bricks find a champion within the company-somebody with an 'e'-enlightened nature-and make this person the head of a cell looking into 'e'-possibilities (Sundaram at HLL or Rao at the AV Birla Group). Then, e-initiatives are treated as a separate line of business, integrated within the divisions, or operated through a shared services model using an e-centre. Different models work (and have worked) in different cases. Says Glover of Andersen Consulting: "If you have a heavily entrenched culture antithetical to one where all participants share a common vision or if you have a leadership that doesn't fully embrace the new concepts, then you may be better off buying a new culture by creating a subsidiary. If the culture is otherwise, or the leadership is with it and is fully committed, then you may be better off transforming the company as a whole."

Things do seem to be stacked in favour of the bricks right now, but the question to ask (we did) is whether these companies are ready and willing to leverage the many advantages they will enjoy on-line, yet. Today, the refrain is all about treading carefully on thin ice. As Ajoy Krishnamurti, CEO, Shoppersstop.com, sums it up: "Contrary to common logic, setting up a web property that delivers is expensive and needs to be amortised over millions of transactions-which aren't forthcoming yet. And margins take a hit since on-line transaction costs are much higher today." Which is the same as saying, there is life beyond the wall, and we know it, but right now the economics don't favour a transition.