Impact of Online Stores on Store-Based Retail format

The objective of this blog is to analyze the future trends in Retail Industry in India in order to assess change in consumer behavior and study the impact of Internet Retail(Online Stores) on the Store Based Retail.

Industry Highlights:

Decline in the sales of Outlets:

Growth in the Internet Sale:

Indian Retail Industry

More than 98 % of retail industry in India is unorganized. The increasing penetration of Internet is affecting the traditional retail industry as more consumers are getting attracted towards this low cost channel. Also the penetration of mobile smart phones has made internet accessible to a larger consumer segments. About 50% of orders of internet retail giants like Flipkart and Snapdeal has come from online purchase through mobile phones. The future scenario looks hard for the shop based retailers unless they adapt to the changing industrial dynamics.

Indian Retail Industry Structure

Retail Industry Forecast:

Expected CAGR of Retail Industry: 2.7 %

• Store based retail CAGR: 2.6 %
• Non-store based retail CAGR: 13.3%.
  
• Source: Annual report on Indian retail, 2014 Euro monitor

  Store based Retailing forecast:

  A strong growth for Non-Grocery Retail Value is expected in forecast period with total growth of 31.1% against 4% of grocery retail value. Also the number of Grocery outlets is expected to register only a cumulative growth of 2 % during the period against 30% in Non-Grocery outlets.
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•  Source: Annual report on Indian retail, 2014 Euro monitor
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  Source: Annual report on Indian retail, 2014 Euro monitor
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  Source: Annual report on Indian retail, 2014 Euro monitor

• Expected cumulative growth in value over forecast period (Non Grocery Stores):

  • For health and beauty retail: 51.4%
  • For Apparel and footwear retail:  38.3%
  • For electronic appliance retail: 32.8%
  However, retail outlets are increasing at a faster rate for Apparel and footwear at cumulative growth rate of 53%, followed by Leisure and personal good retail units at 46% and Health and beauty retail units at 32%.
  The rising disposable income has increased the ability of Indian consumers to spend, thus leading to an increase in spending on non-essential (Non-Grocery) goods. Further the marginal decrease in unemployment rate with help of government schemes can help retail sector to register a healthy growth.

• Internet Retailing Growth Story

  • Internet retailing in India increased in current value by 20% in 2013. Much of this growth remained consistent with the higher number of players entering the channel, the wider availability of certain products and brands, the lower pricing of internet retailers and, last but not least, rising access to the internet across India.
  • Growth rate of Indian internet retailing for last five years: 21.7% y-o-y
  • Current value 170 billion INR – 3 Billion USD.
  • Consumer electronics was the single most contributors by revenue in internet retailing. Beauty and personal care internet retailing was the least popular internet retailing category in India in 2013.

  Future prospect of Internet Retailing:

  • Internet retailing is expected to emerge as the next major retailing channel in India over the forecast period. Internet retailing is expected to comprise 1.5 % of total retailing value sales in India by the end of 2018.
  • Much of this is set to be due to the low prices on offer online and the convenience of shopping from home and the availability of a high number of leading brands, all of which is set to combine to drive numerous consumers to shift away from store-based retailing towards internet retailing.
  • Rising per capita expenditure and increasing demand for high-end products such as smart phones, cameras and super premium fragrances, among others, led to a significant rise in value sales in internet retailing in 2014 and these trends are expected to continue developing throughout the forecast period.
  •  Expected CAGR of 12% over the 2013-2018 period
  • Size of internet retail by 2018: 305 billion INR – 6.5 billion
  • Much of this is set to be due to the anticipated increase in internet.

  Growth forecasts for Internet retailing:

  • Expected CAGR of 12% over the 2013-2018 period
  • Size of internet retail by 2018: 305 billion INR – 6.5 billion
  • Much of this is set to be due to the anticipated increase in internet.
    
  • Source: Annual report on Indian Internet retail, 2014 By Euro monitor

Most of this growth will through non-grocery retailing and increased internet penetration in India over the forecast period

The rising number of players operating in the channel will be the reason for exceptional growth in internet retailing.

• M-commerce remained a niche channel for internet retailing sales at the end of the review period, although rising Smartphone usage is expected to accelerate in India over the forecast period
• 23% of the Indian population is expected to be using the internet regularly by 2018. Considering the country’s extremely high population, this is set to represent a very substantial number of people gaining accesses to the internet. This is set to drive growth in internet retailing throughout the forecast period.
• Finally, the increasing levels of trust which many consumers place in the channel are likely to help internet retailing to reach its full potential before the end of the review period.
• All non-grocery categories are all expected to perform strongly in India over the forecast period. All of these categories were already performing very well in 2013 and for this reason it remains likely that similar growth patterns will remain in effect during the forecast period.
• Beauty and personal care, health care product is expected to perform exceptionally with CAGR of 25.8 and 24.9 percent respectively.
• The largest category – consumer electronics will remain largest category by revenue by wide margin but the growth will be slowing down with CAGR of just 11.5%. Another emerging category of shoes and apparel will continue to be major contributor to internet retailing sales.

Category wise Analysis:

• • All non-grocery categories are all expected to perform strongly in India over the forecast period. All of these categories were already performing very well in 2013 and for this reason it remains likely that similar growth patterns will remain in effect during the forecast period.
  • Beauty and personal care, health care product is expected to perform exceptionally with CAGR of 25.8 and 24.9 percent respectively.
  • The largest category – consumer electronics will remain largest category by revenue by wide margin but the growth will be slowing down with CAGR of just 11.5%. Another emerging category of shoes and apparel will continue to be major contributor to internet retailing sales.
    
  • Source: Annual Report on Internet retail in India, 2014 by Euro monitor
  • • Although most of most internet retail growth will come from non-grocery retailing, grocery retailers such as Bigbasket.com, Naturesbasket.com and Homeshop18.com, among others, have already begun to attract strong sales during 2013 and they are likely to continue doing so throughout the forecast period.

    Growth opportunities in 2nd and 3rd tier  cities:

    •  They (internet retailers) have realized that there is growing demand for certain products and brands in these remote locations and, moreover, that consumers are more than willing and able to pay for these products.
    • As a result of this, many companies are expanded their distribution networks and improving their delivery mechanism, delivery times, delivery conditions and packaging, not to mention the most important aspect of all: their returns policies.
    •  All of this is encouraging the residents of second-tier and third-tier cities to shop online.

    Evolving Competitive Landscape:

    • Flipkart, Myntra, snapdeal and Jabong are expected to continue performing strongly in India throughout the forecast period. The rising levels of investment in these companies from venture capitalist are set to help them to remain financially viable.
    • Both pure players and bricks-and-clicks internet retailers are set to focus more on reducing delivery times, offering cash on delivery as a payment option and stocking increasingly wide varieties of products, while strong branding and clear price positioning are also set to become increasingly important, placing those companies which ignore these aspects suffering over the forecast period.

    Challenges:

    • Major threat to growth in internet retailing over the forecast period is set to be the low penetration of computers and the low levels of internet access among India’s rural population, a group which constitutes the majority of the Indian population. Nevertheless, the Indian government continues to make efforts to make internet available to people living in all of India’s rural areas,
    • Although it will take a minimum of three years before substantial numbers of Indian consumers learn how to make best use of this new technology and finally adopt internet retailing as a regular activity.
    
    

    Analysis of impact of Internet Retail on Store based Retail

    Impact on Grocery Retail:

    The internet retailing of grocery products remained negligible in India so far. However, websites such as bigbasket.com and naturesbasket.com are becoming popular among India’s urban consumers, although they each have a very small consumer base. Growth in this area is being restricted primarily by the lack of trust that many Indian people have in these websites with regards the quality, authenticity and freshness of the food items on offer; secondly, there is a distinct lack of awareness about these websites among Indian people as they are not very well marketed, while another major reason for their limited success so far is the low levels of internet penetration in India.
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  •  Source: Annual report on Indian retail 2014 Euro monitor

  • Non-Grocery Retail: Emerging Trend of Show-rooming

    The growth of Non grocery Store based retail in terms of sales value and number of outlets has been backed by rising disposable income of Indian consumers. Share of non-store based retail by 2020 is expected to be 2 % of retail industry
    However with the increased penetration of internet retailers (especially pure play retailers) into the Tier-1 and Tier-2 cities, the growth rate is expected to decrease rapidly in the forecast period from 7% in 2014 to 4 % in 2018.
    The category most affected as seen from the line chart is Electronics and Appliance Specialist Retailers registering a 7 % dip in growth rate in the forecast period. The reason can be attributed to a new emerging trend called ‘show rooming’ where in the consumers gain a firsthand experience of the products and purchase it online for the best bargain especially in electronic appliances category.

    Reasons for slow growth in Non-Store based Retail:

    Internet retailing now poses huge competition to store-based retailing, especially apparel and footwear, electronics and appliance retailers, beauty and personal care among others.

    Conscious and value driven Indian buyers:

    • Many Indian consumers are set to become increasingly conscious of their expenditure and this is likely to motivate them to look for the best bargains, leading retailers to offer price discounts and special offers, with cheaper retail options likely to witness stronger growth than those channels, which makes store-based retail a costlier option to internet retail.
    • It has led many store-based retailers to launch their own websites to offer online shopping, including apparel and footwear specialist retailer Bata and electronics and appliance specialist retailer Croma, apparel retailer Aditya Birla Nuvo.
    • But internet retailing always offers consumers the advantage of competitive pricing since they operate only internet retailing.

    Convenience, huge variety, Open 24/7, 365 days:

    • The comfort of shopping from home and the increasing levels of trust which Indian people are prepared to place in online retailers has led the majority of Indian consumers to become more than happy to shop online as opposed to going to store-based retailers outlets, which is increasingly considered to be a bit of a waste of time.
    • Convenient payment option also makes it more preferable compared to traditional cash and carry option.
    • Internet retailing has also recently become one of the only retailing channels in India through which consumers can shop for a wide range of products and brands

    Predatory pricing:

    The biggest USP of e-tailers has been their prices, and their pricing policies have ranged from aggressive to predatory. While the general impression is that mostly large city-based retailers have been affected by online sellers, partners even in C-class cities said that online retail has affected their margins.

    According to CRN 2014 report,

    ‘The rapid growth of online retail over the past few quarters has worried the reseller community in the country. In the CRN Online Retail Threat Perception Survey 2013, which polled nearly 370 retailers and resellers across the country, 98 percent said that e-tailors have affected their market. About 28 percent said that their revenue has reduced by 40 percent, while 37 percent said that they may quit the retail business if the trend continues.’
    • The rapid growth of online retail is, in a sense, reflected in the deteriorating financials of physical retailers over the past 3 years. At an aggregate level, operating and net margins of companies such as Shoppers Stop, Provogue, and Trent have all shown a declining trend. Even operating parameters such as same-store sales growth, conversion ratio and sales per square feet have been on a decline.
    • By now it has been evident that, internet retail affected organized retail really badly but during the forecasted period it will affect the unorganized sector as well.

    How Store-based Retailers can survive?

    • Physical retailers in India will have to establish their presence online quickly. And, with the right strategies, they can even compete effectively.
    • India’s store-based retailers will need to understand that technology is set to be the key driver for sales in retailing in India during the forecast period.  They should concentrate on strengthening their internet retailing arm.

    ‘Going Multi Channel’ is future for store-based retailers:

    1. They need to learn new skills and develop new tools and fast. It is mostly about getting better and more responsive in marketing and merchandising, so that the landing pages of the web store can respond instantaneously to external events that might prompt a specific impulse purchase. Many of the more traditional retailers still have a lot to learn about customer relationship management and direct marketing, and could gain some useful insights from studying how the catalog operators exploit their customer data.
    2. Where and what to invest in:
       Money and resources are always going to be limited, but the new retail environment is throwing out so many new product and service propositions that it can be hard for even the most experienced and professional retailers to know what customers will really want, and what will genuinely create long-term value.
    3. The ‘dark channels’:
       These are called so because most retailers don’t understand what’s really going on there, but because they need to, if they’re to stay ahead of the curve in a multi-channel world. An enormous wealth of data can be harvested about how your customers behave online, how often they visit, what they look at, how long they’re there, and what they buy, or don’t buy.
  4. Develop a truly multi-channel business:
     Online operations need to be treated like any other part of the company, and not as some sort of incubator venture, or an offshoot of the marketing or IT departments. Business development has to become business as usual, which demands new business practices, new roles and responsibilities, and new approaches to incentives and remuneration. E-commerce has to move into the main organizational structure and be treated as an integral part of the brand proposition, rather than an independent business governed by its own rules.
  • By Tarun Gupta