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The new game changer for Retail... - Views on News from Equitymaster
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  • Mar 1, 2012

    The new game changer for Retail...

    Major organized retail started in India in the 1990s. Along with the Indian economy, the retailing sector too is currently in an expansion phase. As disposable income increases, people shop more. Similarly, during boom times, the demand for retail outlets increases, and correspondingly store rentals also rise significantly. Rental costs account for approximately 8% of retailers' total sales, and this directly impacts earnings.

    In parallel, internet users in India are increasing, and they value the convenience of shopping from home. Essentially, internet usage, online shopping options and high outlet rental costs are factors which contribute to the rapid growth in online or e-tailing. There are also 'pure play' online e-commerce retailers (like flipkart, snapdeal) which only have online shopping, and no 'brick and mortar stores'. Let us discuss how are established retailers likely to benefit from the online retailing trend.

    E-tailing - Online Retailing

    E-tailing (electronic retailing) is selling of goods online through the web, and this mode of shopping has gained meaningful acceptance in India since the late 1990s. These companies display their product offerings on their websites, and allow consumers to browse and decide what to buy in the comfort of their homes, and at times that suit them.

    The online retail industry in India is currently a Rs. 36 bn business, and is poised to become Rs. 53 bn by 2015. Retailers are fast realising the importance of this new trade mantra, and are setting up their own online operations. The list of "brick and mortar" retailers adding online options includes Titan Industries, Bata India, Shoppers Stop and Future Bazaar (of Pantaloon Retail). In fact for Bata, 50% of the company's orders come through their online stores. And for Future Bazaar, online sales are expected to contribute 10-15% of overall sales in the next couple of years.

    Why E-tail?

    Online retail accounts for around 2.5% of total retail sales on a global basis. In the US, this proportion is high at 37.2%. In India, online retail contributes to 5% of overall sales for the retailing industry.

    For consumers online retailing means the convenience of shopping from their home.

    As mentioned above, this means shopping (browsing, selecting and paying) without dealing with the traffic, and when consumers have time at home or their office. This saves consumers time, money and effort. Instead of wandering form one shop to the other, they now just have to switch between websites.

    For Retailers the benefits of e-tailing are reduced inventory and no rental costs.

    • Reduced Inventories: Retailers have to ensure sufficient availability of their merchandise at all times to satisfy the demands from their customers. This means heavy investment in inventories, so blocking the use of funds for other purposes. Even the most efficient retailers have to contend with the issue of huge inventories piling up in their stores/ warehouses. Stocking inventory also requires additional space adding to the rental costs. With online retailing, the need for inventories is significantly reduced as goods as not needed for display, and the number of storage centers is reduced.

    • Avoiding high rentals rates: As mentioned earlier, with e-tailing retailers avoid needing more and larger stores to grow, and they also do not have any high rental costs.
    Challenges the Online Retailing Industry faces

    Consumers may still prefer to touch, feel, and in the case of apparel and accessories, try on the products. Also, for urgent needs, consumers may prefer visiting outlets rather than waiting to receive the products they have ordered online.

    Retailer Security Issues - People in India are slow to accept that online payment can be safe and secure. It will take a while before this mindset changes.

    Internet Infrastructure is a Major Roadblock - The backbone of online retailing is the internet connectivity and bandwidth. But, the internet infrastructure in India is still not adequately developed. Although India has a large number of internet users, these are mainly mobile internet users. Very few Indians access the internet due to the lack of connectivity and lower speeds.

    Competition from E-Commerce Companies - Retailing companies face direct competition from "pure play" e-commerce companies which are only online retailers with no "bricks and mortar" retail outlets. These e-commerce set ups have existed for quite some time, and they have dedicated logistics support in place. Online retail in India is presently 6% of total e commerce.

    Future of E-tailing in India

    Online retailing is here to stay, and it is an important component of the future of retailing. Bata and Future Bazaar are examples of companies that have successfully developed a strong online business. While online retailing involves investments initially, there are meaningful long term benefits. While all retailers may not be able to produce the same kind of performance as Bata and Future Bazaar, having an online presence is necessary to both enhance brand visibility and increase revenues. Customers may not always purchase goods online, but they would prefer to have a look online before buying from the stores. The convenience that online retailing provides serves as its biggest advantage.

    Online retailing will be an important strategy for retailers. While there are challenges to the growth of online retailing (internet infrastructure etc.), its advantages both to the consumer (convenience) and retailer (no rental costs and lower inventories) outweigh the difficulties faced by online retailers. Also, pure play e-commerce companies that pose challenge to the retailing industry can be turned into partners via tie-ups.



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