Traditionally the retail market had been dominated by the brick and mortar (B&M) stores for the past several years. This interaction with the regional and local customers has helped the offline retail industry to gain insights and build a repository of vast knowledge and customer understanding. However, with the introduction of multiple digital apps, there has been a significant impact of the digital transformation on the offline retail industry. Digital inclusion is disrupting the offline retail industry on a considerable scale.
Indian Retail Industry was approximated to be around US$950 billion in the year 2018 and represented about 10 percent of the Indian GDP. The Indian Retail Industry is expected to be worth US$1.3 trillion by the year 2020. The unorganized sector still makes up to 92 percent of the total retail industry. However, due to the digital disruption and increase in online retail sales, the impact on the unorganized sector will be inevitable.
It is expected that by 2020 the B2B e-commerce market will constitute about US$ 700 billion and the B2C e-commerce about US$102 billion. It is interesting to see that the online retail sales are expected to grow at 31 percent CAGR to US$ 32.7 billion. At the same time, offline retail is also projected to grow at US$ 1.39 to 2.77 billion reports Deloitte at 13 percent year on year growth rate.
FACTORS INFLUENCING OFFLINE RETAIL
EXTERNAL STIMULI – FOREIGN DIRECT INVESTMENT (FDI)
The Government of India has allowed 100 percent FDI in the single-brand retail under the automatic route. Also, up to 51 percent, FDI is permitted in the multi-brand retail. The online retail segment saw an FDI equity inflow that totaled cumulatively at around US$ 2 billion in the period April 2000 to December 2019 as reported by the Department for Promotion of Industry and Internal Trade (DPIIT).
As a result, of such heavy stimuli the Online Retail Industry is growing rapidly and at a much higher rate as compared to the Offline Retail Industry. This can have a significant impact on the reach of the offline retail industry as more and more people may switch to online platforms/apps. Another major impact of inflow of capitals is that it supports the online retail industry to give discounts and sales offers on the available products thus, attracting even more customers.
The Government of India is also contemplating to change FDI rules in the food processing segment to allow foreign online retailers and e-commerce companies to sell Made in India products. One of the cons of this is that it will affect the offline food retailers and allied industries by driving the customers from their offline retail stores to the online platform. However, this shift can also open new digital avenues for the offline retail to capitalize on and thus, increase sales such as by adopting new and emergent technologies and converging them with the traditional methods.
DIGITAL PENETRATION AND ITS IMPACT
INTERNET, SOCIAL MEDIA AND SMARTPHONE TECHNOLOGY
The increasing reach and availability of newer digital technology at a lower price than before has also led to an increase in the growth of the online retail segment vis-à-vis offline retail segment. Benefits like home delivery, larger and diverse product catalogue, transparency, digital currency and ease of ordering has led to an increase in the online retail segment.
As per a report by Deloitte Research there will be 650 million internet users in India by the year 2021 with 30 percent of Smartphone penetration among the Indian Populace. Also, a report by Tech-Insight shows that the Indian Smartphone users have crossed the 500 million users mark in the year 2019 and stands at 502.2 million users. Also, more than 77 percent of the Indians now have access to the internet. Factors like affordable technology, increase in the broadband and 4G/LTE network accessibility due to increased fibre-optic network, 4G and 5G spectrum distribution and the advent of ‘Jio’ has been the major cause.
Thus, more and more population is getting included into the digital stream. This will result in the shift from the offline to the online platform and thus, can lead to an increase in the available target market for the online retail industry and the digital propensity to consume. At present the Online Retail Industry spending amounts to US $50 billion from almost 150 million online retail customers. Also, it is expected to grow to US $250 billion of retail spend from 350 million digitally influenced customers by 2021.
With the increased internet penetration various social media platforms have come into light that also plays an important role in promoting and affecting the purchasing decisions of the customers. The Deloitte Research report shows that the digital influence is constant across the age groups of 18 to 54 years. Thus, significantly promoting the online purchase habits. Also, digital platform brings all the different factors at one place as compared to offline retails.
Another major impact on the offline retail industry is due to the fact that large number of formal and informal credit systems in the form of bank loans and discounts respectively are available to the customers. Various benefits on credit cards and on availing loan facilities are available to the online retail customers. Also, providing such facilities lessens the burden of outright payment to the seller by the buyer. Cash on delivery is another such mechanism to increase the confidence of the customers on the online retail platform.
Online Retailers and e-commerce platforms/apps provide massive discounts on the purchase of goods and products even when there is no sale season. Most of the online platforms/apps and e-commerce have a single vendor system or they directly purchase from the factory, thus, the cost of middleman, warehousing and other intermediate costs are reduced.
Thus, the higher margin on the product is used for providing a better discount. The FDI also plays an important role in channeling the funds in supporting the discounting mechanism. All these factors also impact the offline retail industry where the margins are comparatively lower due to the involvement of middleman and distributors.
SELLER – BUYER INTERACTION AND FEEDBACK MECHANISM
Online retail platforms/apps have significant advantage over offline retail stores in the way that they directly connect the buyer to the seller. Also, online retail platforms/apps provide feedback mechanism where all the purchasers or customers of the product can give reviews about the product. This mechanism help the customer have knowledge of the product without actually having to try it.
Such mechanisms even though affects the purchasing decision of the customers but also help in bringing more transparency in the process and thus help in increasing the trust factor on the online platforms vis-à-vis offline retail stores.
With the arrival of Industry 4.0 and related tech like AI, ML etc. processes are getting automated. Cloud Kitchens and Cloud Retails are already utilizing these technologies to provide the best customer purchasing experience and comfort.
Processes are getting more transparent with use of technologies like GPS tracking and webcams in cloud kitchen leading to an increase in customer trust. Companies are now focusing on targeting the customers by building algorithms utilizing the repositories of their past search history and preferences to increase the chances of sales through targeted marketing of similar products. All these have benefited the online retail platforms as compared to offline retails.
Rural society’s digital imprint, which is currently at 18 percent is increasing at a rapid rate and is expected to grow up to 45 percent by 2021. Availability of value based products and subsidies in the form of discount and sales are the major factors for rural growth. A survey by RedSeer Consulting shows that the rural population is increasingly willing to purchase branded products from digital apps provided they get adequate discounts, priced properly and are value for money.
Report suggests that about 50 percent of the rural respondents were willing to purchase from the digital platform provided that the above factors were met. The online retail platforms/apps and e-commerce industry are actively making inroads into the Tier-2 and 3 (rural sector) cities by providing heavy discounts on the products.
Online fashion retailer like LimeRoad is adopting omni-channel process and is planning to open 3,000 offline and physical retail stores in the tier-2 and tier-3 (rural areas) to increase the penetration. Rural Areas is expected to provide US$ 10 – 12 billion opportunity for the e-commerce sector. As such the online retail sector is also giving competition to the offline retail industry in this space.
COVID-19 had a significant impact on the offline retail sector, including the organized and un-organized ones. In order to curb the spread of COVID-19 Government in India and across the world have suggested social distancing and imposed lockdowns. As a result, many offline retail stores are transforming into online mode. Future Group has extended service of its 250 Big Bazaar retail chain through an online medium by launching the BigBazaar.com website. Big Bazaar has stated that online ordering through mobile phones has accounted for about 30 percent of the total sales.
Not only the offline retail industry but food aggregator businesses like Zomato and Swiggy are also capitalizing on serving the grocery due to the COVID-19 impact. Retail firm Spencer’s Retail has also partnered with various online platforms/apps like Swiggy, Uber, Flipkart and Rapido to deliver the product to its customers due to COVID-19 related lockdown. As a result, the offline retail industry is hedging against the COVID-19 pandemic by co-opting and collaborating with the e-commerce and online platforms/apps.
WAY FORWARD FOR OFFLINE RETAIL INDUSTRY
Offline Retail Industry is not going to fade away completely in future, but in order to remain relevant and scalable to the current market scenario, it must evolve and upgrade its existing business models from a purely offline retail-based platform to a hybrid model employing both the offline and online process.
Offline Retail firms also need to capitalize on emerging technologies like the Artificial Intelligence to strengthen their customer database repository and thus help in efficient and precise targeting of customers through the AI algorithm.
Digital space provides opportunities for a complete change and redesign of the value creation from the physical brick and mortar stores. The future physical store needs to be a blend of technology and conventionality which should be fully integrated with the digital space and tech such as the Internet of Things etc. However, it will require offline retailers to actively unlearn, merge and acquire new digital skills.
Customer-centric businesses should be the focal point of the offline business. If the offline business plans to go digital, then there will be a lot of avenues opening up for the offline business. However, the offline business needs to maintain a customer-centric approach, along with the need to focus on customer retention and operational efficiency.
E-commerce is expanding steadily in the country. Customers have the ever-increasing choice of products at the lowest rates. E-commerce is probably creating the biggest revolution in the retail industry Retailers should leverage the digital retail channels (e-commerce), which would enable them to spend less money on real estate while reaching out to more customers in tier-2 and tier-3 cities. It is projected that by 2021 traditional retail will hold a significant share of 75 per cent, organized retail stock will reach 18 per cent, and retail e-commerce share will reach 7 per cent of the total retail market. The long-term outlook for the industry is positive.
Prepared By- Vishal Sinha, IIM Nagpur
Tags: Brick and mortar, Digitization, ecommerce, Food Retailing, Offline retail, Retail Business, Retail Industry
