How can organised retail benefit by addressing the limitations of e-commerce model?
Rapid transformation in the technology landscape is opening up new challenges to the existing retail business model worldwide. In India, it has been just about a decade now that pundits, extolling the scale advantages of organised retail, have started writing the epitaph for the kirana stores. Hardly has the story unfolded, and today we see these organised retailers facing the threat from e-commerce players like Flipkart, Amazon, Jabong and Snapdeal.
Retail in India is estimated to be US$ 450 billion a year and is projected to be one of the fastest growing retail markets in the world. Getting a large pie of any of the sub verticals – be it food and grocery, apparel, white goods or electronics – is every retailer’s dream. Significant investments have been made in modern retail for the last few years but speculations exist whether additional investments would generate a good ROI, especially given the recent boom of e-commerce.
To put things into perspective: according to a 2012 FICCI-PwC report, the Indian retail sector, which is currently pegged at US$ 27 billion, is expected to grow at a CAGR of 15 to 20 per cent. In 2013, it is reported that online retail in India grew by a whopping 67 per cent; and Forrester expects India’s online retail spending to grow at a CAGR of more than 50 per cent over the next five years. The consensus is that the Indian e-commerce industry is at an inflection point, with the burgeoning penetration of internet and mobile. The challenge for organised retailers is that majority of the e-commerce growth is projected to come from the same target segment of the urban, internet-connected market.
Let us take an example of a common episode from the electronics or white goods segment across towns and cities in India. A customer visits one of the retail outlets in his neighbourhood and experiences the product before deciding to make a purchase. Once the decision to buy the product is made, the customer does a price comparison between the retail outlet and online websites. More often than not, the online prices are cheaper and the retailer loses the sale to a Flipkart or an Amazon. In the grocery segment, a similar scenario is emerging with players like BigBasket and LocalBanya, etc., where convenience is emerging as a bigger factor than price. It is a no-brainer that high rentals of commercial retail, limited variety at physical stores, and inventory carrying costs make the offline-only model uncompetitive when compared with e-commerce players.
In this light, what can an organised retailer do to take on this e-commerce onslaught? The way for brick-and-mortar retailers to leverage is to take cognizance of the weakness of the e-commerce segment and build a strategy to exploit it to their own advantage.
Firstly, Indian e-commerce sites seldom build and gain loyalty amongst customers. That latter research products from multiple sources and then opt for the cheapest seller. In the electronics or white goods space, the brick-and-mortar location has the advantage of being the first customer touch-point. Being able to match online prices guarantees the sale.
Secondly, e-commerce players still struggle on the delivery aspect. They have a two-pronged problem of having to spend about 5–10 per cent of their revenue on last-mile delivery and also manage the unique Indian demand for cash on delivery and end up relying heavily on their logistics partner. The brick-and-mortar outlet, on the other hand, can provide a store pick-up feature or can fulfill the order from their nearest store with their own staff. This approach significantly reduces the cost of delivery and also ensures the cash is received immediately. Additionally, customers may prefer a store pick-up based on their convenience rather than waiting at home for the goods to be delivered.
Some of the key differentiated areas, like the first touch-point, product experience, availability of expert staff, good customer service, are ones where store retailers easily score over their e-commerce counterpart.
To exploit these unique advantages that a brick-and-mortar business has to offer, it first requires a change of strategy for the organised retailer. Fundamentally, the business has to realign itself to become an omni-channel player – leverage the store as an experience platform to drive more sales on the online platform; we have seen Apple execute this business model successfully.
A stand-alone e-commerce site is not enough; the online systems have to be integrated into the store systems including having real-time visibility into each location’s inventory and fulfillment capabilities. There has to be price parity between online–offline modes – customers should be able to order online and pick up at store or order at store and get it home delivered and return items at stores irrespective of delivery mode. This strategy requires us to think of a store as an investment to drive overall sales and hence the old paradigm of store-level profitability has to be abandoned.
The physical outlet could double up as a showroom, a location to place orders, collect deliveries and process returns. New investments in brick-and-mortar locations should be considered not just from a traditional store perspective, but as a node in the fulfillment network. Shoppers Stop and Future Group are leading the pack in challenging online retailers with their omni-channel strategies.This nascent industry of organised retail is already facing its existential challenge from e-commerce entrants. While in the short term, e-commerce players benefit out of the showrooming experience, and customers gain from brick-and-mortar outlets of established organised retailers, we should also not forget that these first movers in e-commerce are making huge investments by encouraging more and more people to transact online. There are enough examples in the world of business that show us that early movers may not necessarily dominate an industry.
They carry the burden of having to create the markets, whereas a late entrant with the right strategy can dominate the market, especially in this case where there is hardly any loyalty being built for e-commerce players.
Only time will tell, as to how many will adapt to the new rules of the click-and-collect model and transform themselves to take on the e-commerce opportunity. As the dust settles down, only the nimble will thrive.
