By Mr. Rahul Sinha
As a part of Armed Forces Programme at IIM Ahmedabad I was part of a group presenting on D-Mart – a retail chain from Avenue Supermarts. The company is bullish and growing exponentially over the past few years, building Brick and Mortar store at a time when the world is shifting online. An interesting debate thus ensued – Brick and Mortar (physical) Store vs the online retail platforms (Online store).
In simple terms, key differences between the two models are in the value additions that they provide to the customer. These value additions also drive different cost structures of the two models. Therefore, let us dive right into the debate by comparing the two models based on parameters and relevant costs implications to the customers and the businesses.
Customer can buy items by visiting a store (almost instantly if a store is conveniently located) and at a time of his or her choosing. At the same time, however, the customer needs to actually spend time and money to travel to the physical store. As opposed to this, E-commerce platforms may have a longer lead time for delivery, trading this inconvenience with, eliminating the time required by the customer to physically go to the store.
Is the particular product readily available at the nearby store? Is it a special item which is available only at a suburb on the other side of the city or is the store yet to come to the city itself? How much would a customer need to travel to reach the retail store? Time, as a criterion, will thus remain a critical decision factor driving customer preference. Each company will need to identify the customer segment that will prefer the buying experience aligned to company's retail strategy.
Cost of Delivery
In a typical retail format, the effort and cost of coming to the store, selecting the item, taking the item to the counter for billing and taking the item home is done by the customers themselves. However, this entire cost, is an operational cost for the e-commerce business. While the cost of physical delivery of the ordered good is easily apparent, the cost of actually picking, packing and dispatch of individual item out of an extremely large inventory is not always apparent. At times, if the inventory or Stock Keeping Units (SKUs) is very diverse, items are picked, packed and dispatched from different locations, even if they forms a part of the same order basket!
One criterion where online businesses really scores above retail store is in providing a service without geographical limitation. A much wider area can be covered by these businesses as long as the customer is willing to pay a price for the delivery. Delivery operations are at the core of E-commerce business with a need to balance resource optimization with adequate slack to cater for fluctuations in the demand. A strong, reliable and effective distribution network therefore provides credibility among customers, consequential business and wider reach.
On the other hand, brick and motor stores can service clients within a given radius only. Radius of influence of the store depend on the exclusivity, urgency and perishability of the products on offer. As the radius of influence is a critical factor in the success or failure of the physical store business, store location is a crucial decision and invariably well strategized.
Store area is a premium commodity when it comes to physical retail store and therefore the number of Stock Keeping Units (SKUs) is greatly restricted by the store size. These SKUs are thus greatly optimized to include both fast moving and profitable items. For example, from among many package weights of the same item, a physical store may keep an inventory of one or two fast moving package sizes.
Since warehousing costs are relatively lower for the online retailer, he may extend the available package sizes to include the entire range. Moreover, the online platform can aggregate a large number of (supplier) players and thus include exotic slow-moving items as long as one of the players is willing to stock and trade on the item. It would even be correct to say that low quantity high value items would best be sold online if the quality can be standardized!
Speaking of quality, for certain products consumers would prefer to physically see, try, touch and feel the product to assess its quality. Clothing and shoes are excellent examples of such product types. Such products may sell better in a physical store, which provide this buying experience, rather than online.
Pricing strategy is too sensitive to be type casted based on online vs offline retail strategy. There are enough examples of businesses using physical retail and online models while following different strategies i.e. competing on price or other differentiators. However, between the two models it may be more logical to expect that online business models will compete on price unless the product is exclusively sold on one platform. This may be because, both, search cost (to compare the product on different platforms) and switching cost (to switch from one platform to another) are low when buying online.
Conversely, once the customer has reached a store, he or she may not want to shift from one store to another and therefore the communicating a low-price strategy would be an important one for a physical store. Typical discount stores would have consistency in their price strategy messaging so that the customer would have clarity of what to expect from the store. The full price retail stores too would need to promote a ‘discount sale' for ensuring footfall in line with the change in pricing strategy.
For companies whose products are on both retail formats, a good strategy would be to ensure that the online and retail prices are equal. Thus, those visiting the stores would be better off buying at the store than postponing the decision based on lower online prices.
Here too the online businesses are at a disadvantage with high cost of acquisition of customers till they become established names and command consumer loyalty. Easy availability of information on available products and prices and low switching cost is again to blame for this. On the other hand, brick and motor stores need to focus on the radius of influence from where it receives its customers.
Online businesses take a serious negative beating here. The basket size in online stores are much smaller in comparison to brick and mortar stores. This is because while buying from the physical store, the customer needs to make a large investment in terms of going to the store and picking up the items. He or she would therefore be inclined to reduce the time, effort and number of trips by picking all the required items in one go. The convenience during search, order and delivery of online platforms naturally promotes the customer to make small orders thereby considerably reducing basket size.
The advent of online retail platforms would obviously lead to some of the consumers shifting online. Here too, the younger consumers and people more conversant with technology will have an inclination towards online retail.
In my opinion, there is another dimension which is significant to the Indian context. That is people who live very confined lives would like to go and buy in a retail outlet - just for an outing. This is true especially for cities where entertainment infrastructure is inadequate. A large section of people visiting malls, do so as an outing and not with purchase intentions. It is thus no wonder that the food courts in malls do brisk business on weekends. All the window shoppers are prospective customers and some simple arrangements (such as re-imbursement of parking charges for purchase over a certain value) could be used to enhance the conversion rate.
This also brings to fore customer experience factors, since a large number of customers are free on weekends only there may be considerable rush. This will drive some of the customers to online platforms.
Cost of Procurement of Goods
Considering that both large retailer and e-commerce businesses would be able to source their goods using the same supply chain, the cost of procurements of goods may be same for both the models. There might however be a little advantage to the e-commerce businesses in reducing the levels of intermediaries owing to its operational focus on the distribution mechanism.
Gathering from the above it is evident that the two models may serve different customers in different categories of products. It may thus be advantageous for most businesses to carefully choose both or either retail formats based on its business context and target customers.