Are Physical Retail Stores Still Relevant?
THE ENDURING SIGNIFICANCE OF PHYSICAL STORES IN A DIGITAL WORLD
The retail markets around the world are experiencing transformational changes and the retail ecosystem today has become more complex than ever. The advent of cash and carry, the on-going e-commerce revolution, and the growth of new-age B2B providers have all been contributing factors to the evolving retail landscape. These emerging trends and tectonic shifts have been forcing consumer brands to re-think and re-imagine their sales and distribution strategies in pursuit of increased popularity and profitability.
While it is important for consumer brands to recognize and act on the rising demand for online shopping, it is equally critical to note that the physical retail stores continue to dominate the retail industry.
Of the 836-billion-dollar retail industry, physical retail - including traditional retail and organized brick-and-mortar stores - accounts for a staggering 93.5 percent!
Online retail makes up only 6.5 percent of the total retail industry today1. But of course, multiple research reports show that the growth rate of online retail has been higher than the brick-and-mortar retail over the past few years. Nevertheless, the brick-and-mortar sales have also continued to rise and CRISIL projected a revenue growth rate of 23-25% for organized B&M retail in FY222- largely driven by waning of the pandemic-driven decline in demand.
Various top retailers including D-Mart, Titan, V-Mart, Aditya Birla Fashion and others have laid out plans to add significant numbers of stores across the country. The TATA-owned BigBasket - India’s largest online supermarket - has also recently announced their intent to set up over 400 physical stores across India! Many retailers are also planning small format stores in tier 2, 3 and 4 cities. CRISIL estimates that these store additions will drive the revenue growth further.
These facts and numbers demonstrate that physical retail stores very much remain deep-rooted in the Indian retail landscape and is most likely to remain relevant in the foreseeable future. Underscoring this argument are the results from a recent study conducted by CBRE3 which reveals that store-based retailing continues to be preferred by over 80 percent of the shoppers in India!
Therefore, the Indian retail market scenario today necessitates laying adequate focus on physical retail stores and associated sales and distribution strategies.
However, the online channels cannot be negated !
India’s e-retail market is estimated to increase to $150–$170 billion by 2027 -implying a 25%–30% annual growth and doubling of market penetration to 9%–10% over the next four years according to Bain & Company (2022).
India also has strong fundamentals supporting a massive boom in e-retail with increasing internet penetration, low data prices and increasing income levels in Tier I and Tier II cities. But again, dissecting this data further would reveal that while increasing levels of internet penetration has caused the urban as well as the rural India to be at par with respect to categories like social networking, video calling, consumption of OTT platforms etc., adoption of online shopping remains limited among the rural population in comparison to urban.
In fact, only about 12% of rural users with access to the internet use online shopping platforms (Nielsen).
This data indicates that a significantly large proportion of the population continues to shop offline and thus, the presence of physical retail stores remains as relevant as ever.
Nonetheless, joining the on-going e-commerce revolution, numerous consumer brands recently ramped up their e-commerce operations – either by partnering with retailers or through their own Direct-To-Consumer (DTC) channels. However, the fact is that they are struggling to attain profitability. McKinsey points out that the high advertising costs coupled with order fulfilment costs that range from 12 to 20 percent of e-commerce revenues, are limiting the margins, thus making profitability a mirage. E-commerce historically has been less profitable than brick-and-mortar sales for consumer brands4. While some brands may see an increase in volume traded on e-commerce platforms, generating profitability can remain tricky as pointed out by Accenture. Such unprofitable growth can impact business continuity.
Therefore, to capture a larger market share, to gain healthy profitability and develop a solid market presence, a robust sales and distribution strategy to cater to the large portion of the population through offline retail channels is not to be ignored. While e-commerce may be the future, physical retail is the present and the future.
1 https://retail.economictimes.indiatimes.com/files/cp/1294/cdoc-1661333692-ECOM_july_7_5in%20x%208in_Correction.pdf
2 https://www.livemint.com/industry/retail/organized-retailers-revenues-to-touch-pre-pandemic-levels-by-fy22-report-11613626355563.html
3 https://www.cbre.co.in/insights/reports/india-report-the-retail-perspective-on-experience-and-its-impact-on-real-estate
4 https://www.forbes.com/sites/kirimasters/2021/07/23/the-dirty-little-secrets-of-profitability-in-ecommerce/?sh=5e58d02065b7