A few weeks ago I was looking for a CD of nursery rhymes for my three year old granddaughter. Since I live in south Delhi, I thought of a leading consumer electronic store in South Extension – I have known its owner for the past 40 odd years. However, I was taken aback by its barren look as soon as I made an entry. This visit was after a lapse of over a year. Once famous for its merchandise of leading consumer electronic brands, excellent demonstration and display, choicest of music albums and accessories, now the store wore a stark, deserted look… with hardly any footfall and activity that one got to see during weekends in a popular shop. What had changed suddenly? Upon enquiry, I was told that it was due to the advent of e-commerce that this age old business model had transformed completely. The convenience of on-line purchase rendered the fate of this brick and mortar store of consumer electronics goods vulnerable.
Today customers go to Croma or other similar stores, choose the model and their price and later order online at Flipkart and other e-commerce sites. The product gets delivered at the doorsteps, and on top of it, it comes with at a hefty discount. Music albums are downloaded online, said the owner. The e-commerce giants are targeting the comfort and convenience of the buyers in the marketplace and digging a deep hole in the pockets of the brick and mortar retailers.
The only choice now for the brick and mortar stores is to take their products to customers via online portals and remain relevant to the market place in order to survive. But it results in thin operating margins. A small back office is enough to maintain the level of such operations. Therefore, the stores like this brick and mortar consumer electronics items which have existed since long, have to meet high overhead expenses and bear the burden of maintaining loyal employees who have served them for 40 years or more. Several of these stores are looking for other ways to get out of their core businesses and investing in other areas of business where online retail is unable to make any impact. These could be the niche areas such as designer clothing, expensive jewellery and watches outlets or even food joints. In the event of all such brick and mortar stores divert their attention, how would a customer ever get to physically see, touch, have a feel and view performances of items before buying, especially when the product is not a commodity? Will it be like having a shower with a shower cap on? Or what happens when a customer who wishes to replace an old refrigerator? Does he first sell the old one on OLX and then order a new one on Fliipkart? Perhaps that is the way today.
The concept of e-commerce or retail commerce is a new business model. It creates customers for the future, keeping in mind the sale and profit of distant future- and their reason to exist is the valuation enhancement model for the business. They are driving the retail commerce to an unimaginable level and serving a wide array of manufacturers as well as offline distributors across a host of categories. Foreign investors are looking more for the profit of exposure in the market place than immediate financial gain as they see a huge potential in the e-commerce industry. Surely a time will come when the e-commerce industry will transcend from the introduction to growth stage when a major equity stake will be backed by venture capital firms. Its measure of performance is GMV (Gross Merchandise Volume) – a term used in online retailing to indicate total sales dollar value for merchandise sold in a particular market place over a certain time frame. Over the past one year Wall Street hedge funds and big internet investors have pumped in billions of dollars into India’s consumer internet story. Flipkart and Snapdeal raised about $3 bn. Indian consumers are being subsidized by investors.
They could end up spending close to a billion dollar (Rs.6,000 crore) on offering discounted pricing. The success of e-commerce will continue uninhibited as long as investors chip in money. Consider this: a one page advertisement of popular online portals in the mainstream newspaper that one gets to see today almost at regular intervals costs between Rs.60 lakh to Rs.1 crore. Add to that a sum of $1mn (Rs.6.2 crore) salary with stock options of $3- $6 millon paid to the top software engineers of these portals which are amongst the highest paid to any non board executives. Few Indian companies pay their division heads so much. Only the pay packets of CEOs of other IT industries are comparable to this salary. Even the most famous Amazon.com that maximised the internet’s ability to provide a superior selection of products as compared to those of traditional retail stores had lost hundreds of million dollars in the beginning. Their first profit was registered 10 years after start of operation in 1995 with operating margins averaging 3% to 4%. So the question remains, will the e-commerce story be a sustainable model?
The best strategy for the brick and mortar retailers to sustain their market share is to break away from their established business models, fight back through strategic alliances and try to survive for a longer period of time. When you do not know your competitor, it is difficult to perform and win the race. In this transition phase it is better to reinvent the value proposition for customers by offering a charter of exceptional customer service. They will need to innovate. Take the example of the Kirana stores. One can order groceries from the comforts of one’s home online. Yet these stores continue to thrive. It is because of their ability to provide customized and personalized services with unmatched flexibility.
If the brick and mortar retailers are early adopters then they cannot be ignored by the e-commerce players in the market place. Conventional stores are not easily replaceable. They can re-emerge in some other form. In the US, top 20 retailers who also sell on-line have developed omni-channel capabilities. Walmart survives despite Amazon. 24 hours news channels have not moved out the newspaper. T20 and Test cricket have co-existed, so will perhaps the brick n mortar and e-commerce. Only time will tell.