With users not embracing online shopping wholeheartedly, e-commerce players have set up physical outlets to woo the next generation of customers. Mail order or catalogue shopping has been in existence in the US since 1980. This was the predecessor of online commerce, which started off in India post the dotcom bust in 2000.
After the initial hype, some e-commerce companies have established themselves as players that fuelled online activity for the first 100 million Internet users in India. Nasdaq-listed MakeMyTrip operates across 41 cities in India and interestingly has 63 physical outlets, where one could buy airline tickets or holiday packages from. Similarly, popular portals such as BharatMatrimony has 150 outlets and Yatra 40 outlets all over India. Why do these strong online players need to open physical outlets?
Going after the next million
According to IMRB and Internet and Mobile Association of India (IAMAI) data, there are 121 million internet users in India. This is set to reach 300 million by 2015, almost a three-fold growth. “Only 10 per cent of Indians conduct transactions online. Also, e-commerce companies are setting up outlets to acquire more customers and to cater to the ‘touch and feel’ consumer behaviour exhibited by Indian shoppers,” says Nishant Verman, Associate, Canaan Partners, a venture capital firm. E-commerce companies are targeting this 90 per cent of the population, which either prefers traditional modes of shopping or is not willing to purchase online.
It is interesting to note that from categories like baby products to fashion and jewellery, Indian consumers want to have an initial point of contact at a physical outlet since they still do not trust the online medium completely. “Many customers still do not trust and still prefer ‘touch and feel’, especially when it comes to expensive items,” says Praveen Bhadada, Director, Zinnov.
In line with this, some fashion retailers have opened ‘experience lounge’ areas for their customers to come and try out products. CaratLane.com, an online jewellery retailer opened such an outlet in New Delhi for customers to come and try out jewellery. “We found that since some jewellery items are priced Rs 15,000 onwards, a customer typically wants to try it out before buying it,” says Kalaivani Sadagopan, Senior Vice President, CaratLane.com. Agrees Verman,“In some categories such as baby products or lingerie, we increasingly see customers try it out in a physical shop and then place an order online,” he says.
In high value transactions such as jewellery, customer behaviour tends to be based on the physical experience. “Since a customer pays anywhere between Rs 15,000 – Rs 5 lakh for jewellery bought from our store, they want to try it out before placing their order,” says Sadagopan.
Online capability helps the company to showcase its catalogue which is not viable in an outlet, she adds. At the heart of it there is a need to acquire customers despite there being a relatively small number of users. “We need to get traction today with our customers and to achieve that we need to set up outlets if need be,” says Suraj Sharma, CEO, Rock.in, an Indian and western apparel retailer. He adds that in some cases, there is the issue of unfamiliarity with the brand and a physical outlet meets this need. Another retailer Yebhi.com has taken the franchisee route similar to online travel or ticket booking Web sites. While it did not disclose the number of franchisees, the company said that the economic viability for the franchisee to sell top brands and benefit of healthy margins were better. It is learnt that Yatra.com plans to add 100 franchises this year.
The business that happens out of physical outlets averages around 30-50 per cent, according to industry watchers. In 2009, physical stores accounted for 15 per cent of the total revenue and in 2012, about 30 per cent of its holiday sales revenues comes from outlets. According to analysts, it is eventually about convincing the customer to move online.
Some online retailers are of the view that setting up physical shops does not make business case for them. “Back in 2002, when the number of Internet users was about 3 million, we decided to open a physical store but soon we backed off from that since the costs of setting and managing it were not justified,” says K. Vaitheeswaran, Founder and CEO, Indiaplaza. For companies like Indiaplaza, who sell gadgets it does not make sense to have a physical presence. “Most portals leverage Search Engine Marketing or Facebook to acquire customers and it costs Rs 500-1,000 to acquire a customer. “E-tailers need to figure out profits per transaction and in some categories like gadgets, it may take up to six transactions to break even,” says Verman.
Some companies are helping physical shops put their catalogue online. “We have invested in helping offline sellers go online,” says Param Parameswaran, Chairman, Sulekha.com. “We believe in investing in increasing our transaction volumes through our Web site,” adds Satya Prabhakar, CEO, Sulekha.com.
Faballey, a fashion retailer prefers to stay online and according to Co-Founder Shivani Poddar, does not plan to expand into outlets any time soon. According to industry watchers, real estate is the single largest expense for a retailer and it ranges anywhere upwards of 20 per cent of the overall capex. “We strongly believe in the online model that can help consumers in tier II and III cities to buy fashion apparel at affordable costs,” says Poddar.
Some others insist that online and offline should be separate. “It is like chalk and cheese,” says Suchit Bachalli, Executive Vice-President, Unilog Content Solutions
It is interesting to note that Taobao that is owned by Alibaba, Mercado Libre, Buscape and Amazon have turned out to be multi-million dollar companies and have shown that they can make significant profits by having a pure online presence.
When compared to China, which has 480 million Internet users with 145 million transacting online, Indian e-commerce has a long way to go. Also, Indian e-commerce players have to present an alternative to English if they aspire for success in the online model. Whether the mix of physical and virtual will be the way of the future? Only time will tell.