6 Factors Retail Giants Must Consider Before Diving Into Online Shopping

Posted on October 19, 2016 in Business and Economy

By Pratik Arte:

The Indian e-commerce industry is one of the fastest growing in the world. The world average for growth in e-commerce is 16% whereas Indian e-commerce has grown by a whopping 68% in the last three years. A Morgan Stanley estimate shows that the Indian e-commerce market size will be worth $ 119 billion by the year 2020. Analysts are optimistic that the increase in the internet penetration from 32% in 2015 to 59% by 2020 will also double the number of online shoppers. The rise of e-commerce has changed the way how people shop.  But the question is whether retail giants should invest heavily in the e-commerce business or not?

At a time when many retailers are expanding into e-commerce, these players should consider the following factors:

1. Market

The organised retail industry is just 7% of the entire retail sector in India. The current retail industry is poised at $600 billion and is expected to double and reach $1.3 trillion by 2020. The share of organised retail is also pegged to reach 24% by then. This will be due to the increase in the spending capacity of the middle class people living in Tier 2 and Tier 3 cities. The table below shows a brief comparison of e-commerce and the offline retail industry in India:

The standard of living of people in tier 2 and tier 3 cities is increasing exponentially. People are becoming increasingly brand conscious and they also attach aspirational sentiments to high value products. They aspire for the same kind of experience as people in metropolitan cities. Hence the market for organised retail is still in a nascent stage and will continue to grow further.

2. Business And Valuation Model

Another aspect of uncertainty with the consumer e-commerce industry is the business model and valuation model that the online players are following. Most of the e-commerce retailers make use of concept of GMV (gross merchandise value) and not GMROI (gross merchandise return on investment) to justify their valuation. GMV is the total value of merchandise sold by e-tailers and is calculated based on the MRP of the products. It does not factor in the heavy discounts given by these players. GMROI, on the other hand, factors the actual return on investment that a retail organisation receives.

The business models of most of the major players in India like Amazon, Flipkart and Snapdeal are not yet self-sustainable even after years of existence. It is just a battle of market dominance and cash burn rate for them. If we follow the global cue also, the e-commerce industry has only been able to account for 10% of the retail sales even after 25 years of Amazon’s inception in the US.

3. What People Are Buying

Consumers generally purchase books and electronics online. This forms only 16% of the total retail purchase. However, books and electronics form a majority of online purchases. Moreover, the biggest share of Indian consumers’ purchase is food, grocery and clothing which they still prefer buying offline.

4. Distribution System

Considering a futuristic outlook while devising a growth strategy, retail giants like Future Group, Reliance Retail, D-Mart must look into building a strong network of distribution systems. Having an enhanced supply and distribution system will be a competitive advantage for Indian retailers. The e-commerce industry beats the retail industry in this aspect as they have a well-established distribution system as well as reach. When a consumer orders products online, it is delivered to him within a week’s time. But when a customer visits a store, he/she expects to buy the product at that moment. Retailers providing services like ‘shop-in-shop’ and ‘order online, collect offline’ with the backup of a strong distribution system will create a disruption in the retail scenario in India.

The implementation of GST will also make movement of goods less cumbersome. The need for a warehouse in every state will reduce. With the implementation of GST, organised retailers should opt for centralized warehousing system as it will help reduce the overall warehouse renting costs. There would also be a considerable reduction of paper work at state borders which will bring down the transportation cost. GST would also enable retailers to procure materials for their private label brands at a lower cost. Hence for growth, organised retail players must focus on first developing an integrated distribution system that can help to build their retail business into an omnichannel approach.

5. Private Label Growth:

Instead of investing heavily in e-commerce, players should focus on developing their own private label brands. Be it fashion, lifestyle or food and grocery, people are moving towards branded products. Retailers like Future Group (Big Bazaar and Fashion Big Bazaar), Reliance etc. should develop and market their private labels as strong brands. As private labels give higher revenues to retail business, this would help them increase their top line as well as bottom line. Retail giants can also use available e-commerce platforms to push the sales of their private labels. Doing this would help them increase sales while not bearing the costs and losses of building and maintaining e-commerce channels. Companies should focus on developing private labels in food and grocery and personal care products as Indian customers spend approximately 62% on these categories.

6. Omni Channel The Way Ahead?

The Indian offline retail industry in the recent future does not face any imminent threat from the e-commerce industry as the Indian market is not mature enough and we have enough cues from the international market that a sudden shift in the consumers is not imminent. This doesn’t mean that offline retail players should not do anything about it. Retail players can take advantage of digitisation in the form of omni channel retail. Retailers can look at following two options for Omni Channel trade.

Store within a store format:

Retail companies can rewrite the rules of traditional retailing by initiating a ‘store within a store’ format of business in metro cities. A ‘store within a store’ format is an amalgamation of traditional retailing with an addition of digital element. In this format, the stores contain an interactive touch screen display where customers can look for more products available with the stores, it can also be used for ordering the size of a particular garment if it is unavailable currently in the store. This will help stores display more items by going digital and will in turn increase the sales. This model has been successfully implemented by Lloyds Pharmacy in England, JC Penny and many more organised retailers. Store in store format can also give customers and additional level of customer service if kiosks are set from which customers can just relax and shop without the hassle of looking for each and every item in the store (can be implemented in Big Bazaar, D Mart). Initially they can start this in a few of their stores to run a pilot and bring about a revolution in the Indian retail industry gradually.

Order online get offline:

The lifestyles of people today have become very fast paced. People want convenience and high level of customer service. Supermarkets can change the norms of traditional retailing by integrating it with online channels. Customers who are in a hurry can order online/pre-order for products which can be later collected by them from the stores (like take away). The payment for this can be done through online portals/apps. For organised players, this will give them operational efficiency as they will know the products needed by consumers in advance.

The omni channel approach will bring about a change in the way in which consumers in India shop. Any player that takes the lead and focuses on out of the box strategies will create a disruption in the market. Focusing on the above mentioned aspects of distribution system, private labels and especially omni channel approaches would help them continue on this path of revolutionising the industry.