Will the Growing E-Commerce Bring an End to the Offline Retail?
These days my husband doesn’t want to go to the grocery store for buying vegetables instead, he gets it ordered from Big Basket. He has even started buying toys for our kid from online marketplaces because of the better deals and discounts. Being a busy mother of a small kid, I too find myself empowered to shop, with a smartphone in my hand. I even secured my handset with a metal cover from StyleBaby so that it does not get damaged and I can use it without any interruption. I think most of us have purchased something or the other from the big bonanza Diwali sale on the e-commerce sites. You just name the thing and it will be available online in some form or the other, and the best part is the company will be more than ready to deliver it within a day or two at your address also. So convenient! isn’t it? In this backdrop of getting everything you want at a discounted price that too without taking the pain of going out, it definitely throws a question –Will the Growing E-Commerce Bring an end to the Offline Retail?
To answer this question we need to understand- what are the two types of business models, their challenges, and advantages. So that we can analyze the situation and draw some conclusion at the end.
Online retail is still a smaller pie, valued $ 6 billion of the bigger pie of Organized Indian retail Industry, worth $ 48 billion. As we all know, retail stores in India are highly fragmented and the greater chunk of business comes from them, if we include it the total, the Retail Industry is pegged at $ 539 billion. Thus, a cursory look at this pie gives us the overall standings of the two sectors.
(Values in $ billion)
Just like offline retail, big e-commerce players like Flipkart and Snapdeal are actually not making anything of their own rather, they are just marketplaces which facilitate the transaction between the buyer and the seller. These marketplaces earn a commission or brokerage for facilitating the purchase. Hence, there is a limitation of what these marketplaces can charge to the seller and earn a commission. So, they both are doing the same thing the only difference being former is physically present and later is online.
Challenges in e-commerce automatically become the advantages of the mom-and-pop store and vice versa. So let us evaluated both then it would be easy to comprehend who is winning.
Advantages of e-commerce industry
Shopping has always been fun to me and I suppose all the women enjoy shopping. We touch the fabric, prick the vegetable, understand the functions of electronic equipment at the shop, smell the fruit and blah blah. This is how we all shop. Now as we all have started shopping online we often miss the company of our friends and relatives who helps us in making the right choices. We also miss the touch & feel factor and bargaining with the retailer.
E-commerce companies are definitely doing a lot of value addition to their offering which is making us change our shopping behavior. Below is the list of some major points.
We need to accept this ugly side of us that we are lazy and all the startups are exploiting this very behaviour, be it hyperlocal companies, to food delivery apps to the most recent one “nikki” which says brother, you don’t even have to open various apps to book taxi or recharge your phone, just type in me and I will fetch you best deal.
We give a damn from where these companies are giving discounts. If it is a huge discount it is a deal done! Oh my God Cash backs are the return gifts these companies are giving, one more icing on the cake, who will not grab it? (See “How and why are companies giving cash back?“)
3. Home delivery:
I know I was being biased when I say we all enjoy shopping. “We” certainly does not include all the men and a good chunk of women also. So, home delivery is the easy way out for the tired husbands who want Sunday to be a fun day.
Apart from the benefits they extend, online companies do enjoy some advantages:
1. Huge market:
With increasing mobile penetration and popularity of shopping online concept, sky is the limit for these companies. They have the huge country as their market.
2. More Choice:
Millions of merchants are registered with these companies selling their products online. As they are increasing their reach and market size, customers are getting more choices from sellers across the country.
3. Big War Chests:
E-commerce has been the most attractive destination of all the investors. 36% of the total B2C funding received in 2015 is in e-commerce sector, enabling the companies build their huge war chests, to run not yet profit making companies and also enabling them offer deep discounts. see “What investors look for in s business before investing”
Checkout the “Challenges in Online Grocery Business in India” for a more detailed and specific view.
1. Disloyal Customers:
Since the switching cost is zero, customers are not loyal to any one company. The moment they get a good deal from other company it will not even take a minute for them to ditch the other one.
2. Difficult to change customer behaviour:
So, when the customers are ditching them so often, why are these companies spending so much to build so-called “customer base”? To change the customer behaviour. Which is a process and will surely take years to happen.
3. Heavy Discounts:
They are spending a hefty amount of funds on marketing, promotions, discounts and operations, which currently leaves these companies in losses. It is only the future scale of business that these companies and their investors are banking on. With all these discounting and customer acquisition these online marketplaces are just increasing their losses. Flipkart in last financial year has reported losses of Rs. 2000 Cr. Flipkart’s revenue has tripled but their losses have doubled in contrast to the previous financial year. What does that mean..?? More customers means more losses? This is definitely not sustainable and I think these companies should better behave like enterprises and set their house in order towards more innovation and unit economics.
4. Cut throat Competition:
Another major challenge in their business is the cutthroat competition among the top companies. Once they start feeling their leadership position that a new entrant like Paytm emerges to disturb the dynamics of the industry.
5. Disturbance at every point:
- Fake products: On top of all these issues another thorn in the way is the rising cases of fake products, which are getting delivered to the buyers. Transactions of fake products are on the rise and customers are losing the trust which these marketplaces have built over the years by spending hundreds of million dollars.
- Delivery Boys Stealing: As published in Economic Times, once a customer received stone in place of smart phone which he had ordered from an online company.
- Malpractices by Merchants: Practices like buying their own product (pocketing the discounts), purchasing rival’s product in huge quantity and returning back on delivery (since it costs double the delivery charges to the merchant if someone returns the order).
Advantages of Offline stores
1. Loyal Customers:
Take for an example there is a retailer in your neighbourhood who is selling electrical equipment’s and you have seen this guys sitting at the place from years. Now you made your mind to purchase a food processor so you enter his shop and start asking for various model and prices. Based on you requirement he guides you to purchase the right unit and explains all the functions at the store, he also assure you about the warranty from the company. Suddenly you remembered that you are short of an electrical connection in your kitchen to use the food processor. The retailer sends a technician with you who can fix the issue and get the food processor running. Sometimes while passing in front of that shop the retailer greets you and ask you how your machine is working and assures to help you again in case of any issues. NOW!! My point in telling the entire story is that I will not mind paying Rs. 250-300 extra compared to online sites for this kind of a service. Offline retails can offer the touch and feel experience, which is not possible on online marketplaces.
2. The real shopping experience:
We are human and we need touch points to understand things and put forth our concerns. Whereas online marketplaces have spent millions in acquiring customers but little they have done to retain them by improving customer loyalty.
3. Lesser delivery time:
Since the shop is right close to you as against miles away seller of an online company, you may expect instant delivery of your product.
4. Easy return option:
I instantly opened the packet out of curiosity, in front of the delivery boy, to see how my new suit looks. Disappointed, I wanted to return the packet back there itself, but he told me that there is a separate process to do that. Lazy as we animals are, that packet is still lying in my cupboard waiting for the right occasion to be gifted to somebody.
1. Overhead Cost:
With fixed cost like rentals of the real estate, and some times the warehouse and its operation cost makes the offline model a very lean business. Although these stores have also started practicing predatory pricing (selling products at a very thin margin/no margin, to weed out the competition) but still is much higher as compared to the online store who enjoy two advantages on costs:
- Online companies claim that since they are simply delivering the goods from the seller to the customers they do not need to pay VAT. (This attracts a lot of criticism from offline stores).
- The big war chests of the online companies allows them to give away huge discounts and cash back.
2. Limited reach:
Limited reach is the biggest limitation. As against online which has the whole country as the market (although companies are active in Tier 1 cities and Tier 2, 3 are still untapped) offline stores have a very limited reach generally not more than the radius of 20 kms.
So, who shall be the final winner??
Customers are very smart these days. They not only browse on the net for the best deal available online, but they also club the advantages of the two models to get everything under the sun possible. They would browse product at the physical store, understand how it looks, feel, works, its features, models available etc and go home order it online. So now, they know what they have ordered, at a much-discounted price, get it delivered at their doorsteps.
A study conducted by PwC reveals that out of around 20,000 people 77% would browse product offline and purchase online. The biggest reasons being:
|Best prices online||86%|
|I wanted to see/ touch/try the merchandise||72%|
|It is more convenient to have the item delivered||59%|
|The item was not in stock in store||53%|
|I wanted advice from the staff||51%|
Lets, envisage the future
Now let us discuss what are the factors that go in favour of each. As most of the experts have said that the funding game will get over soon, and the real game will start from there. As soon as the funding dries up and companies stop giving discount, cash back and charging delivery cost, the balance will automatically shift towards the mom and pop store. The PwC Global report on multichannel retailing points out that the physical stores have a potential of a comeback. The advantages of offline stores are unique to them and the biggest ones according to PwC are:
Why do you buy products in store instead of online?
|I am able to see, try, and touch merchandise||47%|
|To get the product immediately||43%|
|I am more certain about the fit/ suitability of the product||25%|
The above are the figures for 2014 which have seen an increase over last year. Thus, although online is becoming favourite of all, people are also increasingly realizing the benefits of local mom and pop stores.
As we can see, a lot of shuffling is happening. A lot many retailers and wholesales are registering on various online marketplaces and, on the other hand, online companies are giving themselves a physical appearance. With all the above analysis, in my opinion the ultimate winner will be the hyperlocal segment, which will leverage the presence of local stores and scale of online availability. This is what many of them are trying to achieve like Grofers, Peppertap, Zopper etc. They are bridging the gap between offline and online and using the best of both. Offline retailers have to focus more on their customer service part because this is their biggest strength and this will help them in fighting with the billion dollar marketplaces. It will soon become imperative for mom and pop stores to go online in order to increase sales either by collaborating with various online companies or hyper-local ones.
On the other hand, I believe e-commerce companies have already realized this fact and they have started venturing in offline retail stores. Flipkart, Zivame, Pepperfry, Firstcry, and Lenskart have already started their offline stores to promote their brands and improve customer experience.
Firstcry.com has around 130 offline stores and it plans to take the count to 150 by the end of this year. Pepperfry has opened 6 online stores and plans to open 4 new stores in next couple of months. Flipkart has launched 20 offline stores and plans to take this to 100 odd stores by March next year.
These stores will help in improving the brand presence of the respective companies and also differentiate them with their rivals. Companies can also use their stores as delivery collection centers, which will help companies in two fronts
1) Reducing the courier delivery cost and
2) Touch points to the end customer for increasing brand loyalty.
Offline retailers who were sitting on the fence and watching the decline in customers foot fall on Diwali holidays due to mega sales on marketplaces are now feeling confident about the potential and future of their business. But the gold mine lies in the combination of online and offline business and this is why hyper local is such a hot topic these days among the investors. Offline retailers in your vicinity cannot be underestimated as they provide better customer experience.