O2O expansion: Opportunities and challenges for Indian Ecommerce in offline retail
The previous decade saw a significant transformation in Indian retail. From what was a largely offline unorganized market, today we have multiple vertical (single-category) and horizontal (multiple-category) players across the retail ecosystem. Bigger traditional players such as Big Bazaar have found an ally in online marketplaces such as Amazon.
As of FY20, India’s retail market is estimated to be worth $600 billion out of which Ecommerce comprises only 5% of the total. This is much lesser than the US market in which Ecommerce contributes almost 15% of all sales and has indicated significant headroom for growth. However, retail Ecommerce in India is expected to have a unique ‘offline-assisted trajectory’ compared to the US story.
Today, enthused by ‘online’ success in new-age customer segments, many players have tried to adapt their value proposition by picking up the best elements of offline experience. This has been increasingly facilitated by what Jack Ma famously coined as 'New Retail' in 2016, retail-driven by the integration of online, offline, logistics and data across a single value chain. In India, we see major companies, both product and service-oriented, in the industries of eyewear, clothing, home décor including others chalking out a strategy to truly deliver an integrated omnichannel experience to the customer.
In most cases, the goal of online-to-offline commerce is to leverage online product and service awareness for offline sales initially which shifts to an integrated brand offering in later stages, allowing potential customers to both buy and research different offerings and nudging them enough to visit the local brick-and-mortar store to make a purchase.
Apart from evident factors such as ‘large’ offline market size which is ready for ‘online-led disruption’, there are numerous other factors driving this shift:
- Increased engagement and personalization – In many categories, the physical presence of a salesperson and higher engagement through ‘product education’ helps personalization according to customer persona and ‘builds trust’. This has been evidenced by a leading ‘online-led’ eyewear player which has opened 150+ stores nationwide. Each of the company’s stores has an average turnover of INR 1M.
- Increased conversion rate – There is increasing evidence that a customer is more likely to buy and of higher value when shopping in an offline store vs offline. Many attribute this to shorter ‘online’ attention spans and the distraction of discounts across platforms. In FY20, a leading ‘online-born’ lingerie brand had 15% of all sales coming from offline channels. Offline-expansion has accelerated the company’s break-even and it plans to open 15 more exclusive stores by FY21.
- Increased credibility and faith – While India is getting online, multiple customer segments, especially females and rural customers experience friction and drop out of the purchase funnel due to complex user interfaces, non-comfort with digital transactions, etc.
- Touch and feel experience - Product categories like lingerie, perfumes, furniture and other products/services which have a possibility of customization and a purchase experience are usually tested and tried by consumers before buying. Personalized selling and resultant connect which comes with an offline store significantly enhances the customer experience.
- Savings on marketing and logistics – Offline stores bring in significant overhead and maintenance costs, but are not always higher than the recurring ad spends which comes with customer acquisition online. A hybrid model of O2O has often been seen to provide an optimum balance.
- Enables better capacity planning – Offline stores often act as ‘ears on the ground’ for online players. A leading online lingerie player has used its offline stores to monitor trends and predict demand. This has not only decreased inventory management costs but has also improved the top-line due to improved forecasting and trend-spotting.
Offline for online players: is there a playbook?
Like many things online, the hybrid strategy is being pioneered by the 2 giants: Amazon and Alibaba. Both have taken baby steps to expand businesses by opening brick and mortar outlets in a bid to chase increased revenues, visibility, and trust from their existing customers while reaching out to newer ones. Many of the mentioned benefits are hard to ignore and this has resulted in increased revenues for almost all online players venturing in the offline segment, barring a few. The ‘right’ O2O model is when the company treats both channels – offline and online as complementary rather than competitive. Successful online-to-offline players across categories tend to have the following strategies in common:
- Products chosen online could be picked up from offline stores; while in case of items chosen offline, customers could choose to get their product delivered ‘online’ (in a different location/later/different specification, etc.)
- In categories such as apparel, products purchased online could be returned at the physical store and return requests could be placed online
- Stores were heavily leveraging on ‘tech’ though offline across the customer journey (exploration, evaluation, purchase, final delivery)
- In pricing, successful companies ‘actively’ avoid channel conflicts – with streamlined execution of promotions, discounts, allowances both across its offline and online channels
- In ‘soft’ product attributes which define the customer experience; brand, people, processes tend to be uniform and the offering is ‘one brand’
Critical business strategy questions which online players exploring an offline expansion should ask themselves include:
- When do they expect to break even with the retail stores?
- To fully assess the stores’ scope and ask themselves why are they worth the investment?
- Would it be easy to compete with competitors? Would they be able to poach competition’s customers?
- Would their products/services have the same appeal offline?
- What will the hybrid model be like? How would you split between the volume and value across channels? Will pricing and promotion standards be uniform?
Having answered all these questions, for some types of consumer products/services such as groceries, detergents, etc. which are regular purchases (frequent and mostly inexpensive) customers are not too varied when buying online vs offline. But for specialty and unsought products, where the price is high, and the customer values the shopping experience and the ‘attention’ paid by the salesperson, offline retail stores tend to be necessary, do better and visibly complement online sales.
Many online firms tend to start with their retail stores in cities where online customer acquisition has stagnated or reached its ‘supposed saturation’. Companies need to find a strong footing in such markets by creating a holistic combination of a good product assortment, high-quality customer service, and a strong understanding of local taste. This has been done well by Amazon. As part of its India strategy, the company launched Project Udaan in 2015 to expand its reach in rural and semi-urban areas by tying up with offline partners such as Kirana, medical stores, and mobile shopping outlets so that local entrepreneurs could assist the uninitiated in shopping online. This also marked the beginning of what we know today as assisted e-commerce. From the beginning with 15 stores at two locations in Maharashtra and Rajasthan, Udaan now has 18 partners, 6,000 stores in 21 states and UTs.
While new-age players have expanded offline, traditional retailers such as Future Group have tried to leverage their offline presence for online play. Future Group today has an exclusive partnership with the marketplace for the retail of its FMCG products (part of the Future Consumer umbrella).
India retail is a unique playing field and the practices needed to be adopted to crack the Indian customer have always undergone continuous re-invention. Technology is accelerating the pace of innovation today and the evolution has branched off in multiple directions. Marketplaces are creating their own brands while displaying private labels. Predominantly offline businesses are making a foray into online and vice-versa. Some have chosen to pure-play online and some online-born businesses consider offline expansion as a core priority now. The winners of the next decade will be defined by a commitment to serve an integrated offering to the customer leveraging the company’s online/offline presence as necessary during the customer journey.
Authored by (at the time of writing):
Madhur Singhal, Leader, Consumer and Retail Practice
Sushman Das, Member, Consumer and Retail Practice
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