E-commerce is a unique business. Among all the internet-based business models — content, community and commerce — e-commerce has the highest offline component because merchandise has to be transported and delivered to customers physically, unlike other businesses, where end-to-end transactions can get completed over the internet.
E-commerce has always been just another retail channel like offline stores, phone ordering, mail ordering. Unfortunately, because of the strong technology layer, it has been cleverly positioned as a technology business.
American e-commerce giant Amazon drove this tech narrative strongly in the early years because it created a moat, which their competitors — primarily offline retailers — could not cross since they were weaker on the tech front. Amazon, along with other pure-play e-commerce companies, also created an impression that offline properties like stores, warehouses, offices, which had been assets so far, were now liabilities.
It took offline retailers over a decade to realise that offline assets were really valuable and consumers were looking for seamless experiences across mediums, which can best be delivered by tight digital integration of offline assets. So, they started on the omni-channel journey. However, by this time Amazon had gone very far ahead in e-commerce.
As offline retailers scrambled to execute their digital strategy, Amazon took steps to make sure they were not left behind in this omni-channel game, hence their recent efforts globally in the offline space — bookstores, no-people grocery stores, and Whole Foods. Taking a leaf out of Amazon’s book, many online retailers in other parts of the world have started to adopt a similar strategy, as they cannot afford to be left behind in the race.
Clearly, hybrid is the future — close integration of offline and online assets, and the fight between Amazons of the world and offline giants are only going to be intense.
The e-commerce business, which has been growing world over, captures just small percentage of the business. With time, each e-commerce company is gaining experience and access to customers. While they are catering to online customers, they are missing on offline ones, which is a big chunk of the market.
With their experience and better insight on customer behaviour, online players are better placed to also play in offline space, hence it is natural for them to explore brick-and-mortar space allowing them to scale and growth.
More importantly, a hybrid model helps online retailers gain credibility (as it provides an opportunity for them to reinforce the online brand), win a huge consumer base, as well as to gauge the market.
As for customers, they can browse online retail inventories while on-the-go using their smartphones or tablets. In this context, choosing a product online and checking it out at the physical store can give the much-needed reassurance to consumers about a brand’s credibility.
In Asia, e-commerce is still unknown to a vast majority. So going hybrid is the best option. Having an offline presence will always help them find their product-market fit with a minimum burn, although it takes some time.
The shift is already visible. Many e-commerce companies in this part of the geography have already started working on an omni-channel strategy. For instance, in India, the second fastest-growing e-commerce market in the world, giants like Flipkart and Snapdeal have already initiated to set up offline stores in different cities. Smaller players are not far behind; women fashion e-tailer Voonik is also mulling to open physical offices in Bangalore, and furniture e-tailer Pepperfry is also setting up their offline retail stores at various shopping malls of late.
According to experts, this is just a beginning and this trend is going to become more intense in future.
The key advantages of hybrid model
An offline strategy offers quite of a few advantages to e-commerce companies. Below are some:
1. Reduced marketing spend and increased sales
In a dog-eat-dog market , e-commerce companies are leaving no stones unturned to capture market share. This often leads them to make insensible spending on different forms of marketing techniques, which lead to huge cash burn. Advertisements and events are where thee firms spend a large chunk of there money. This has caused the customer acquisition cost to go through the roof and this has severe effect on their revenues; no wonder majority e-commerce companies in the world are not even breakeven, let alone profitable.
On the other hand, opening a physical store is far more cost-efficient. Although the overhead and maintenance cost are high, they are much lesser than the recurring ad spending cost an e-commerce company incurs. Combining both online and offline store inventories can provide the optimum balance to a retail business.
2. A touch-and-feel experience for customers
Online retails have long realised that providing a ‘touch and feel’ shopping experience to consumers is all the more important. In order to provide a virtual ‘touch and feel’, companies are heavily investing on virtual reality technology but it has failed to achieve the desired results. In Asia, customers still prefer shopping offline to get this experience.
Keeping this in mind leading online retailers are opening offline stores.
3. Enables better capacity planning
Customers these days demand a wide range of products to choose from. Disliking products result in large volumes of returns. In this scenario, retailers need to carefully build, buy or acquire new distribution centres to meet customers’ demand. Retailers should also assess the overall labour impacts and analyse their historical sales data to create the right capacity
Managing inventory properly is an ongoing challenging task. Hybrid model enables companies to expand their customer reach and better control on inventory. The hybrid model certainly allows them to explore economy of scale and better reach to customer
A threat to traditional retailers
Opening of brick-and-mortar stores will definitely grow the competition, as e-commerce companies will be in position to operate large scale. This certainly impact the modern format stores but not much impact to mom & pop store as they will keep serving the hyper local needs of the consumer.
But can e-commerce still survive without an offline strategy? The answer to this question is a resounding ‘yes’. However, going hybrid provides them better handle on the business and economy of scale.
(K Vaitheeswaran, Indian e-commerce veteran and author of ‘Failing to Succeed – the story of India’s first e-commerce company’; Sujayath Ali, Co-founder and CEO of Voonik; Ankiti Bose, Co-founder and CEO of Zilingo; Anil Joshi, Managing Partner, Unicorn India Ventures; and Anup Mohan, a former executive at Voonik, contributed to this story)