The Covid-19 pandemic has created an unprecedented situation across the world by disrupting economies and affecting people and their livelihoods. The lockdown may have helped to contain the spread of the virus to some extent but it has disrupted many businesses, especially offline retail stores, and kiranas. The physical retail shops are under pressure as consumers are avoiding crowded places like markets, shopping malls, and departmental stores.
India’s lockdown made customers order everything from groceries to electronics online. This saw new users come into the fold and helped sellers and consumers from India’s small towns to get online. A survey by the Boston Consulting Group estimated that over the three to four months of lockdown, about 20% new users were added to the universe of online shoppers - leading to a faster acceleration of categories such as foods and staples as India's lockdown put restrictions on movement and retail stores were closed.
Unicommerce estimates that the share of online sales as a contribution to overall retail sales increased in the first six months of the current year - growing to 4.5% from 3% in 2019. However, the pandemic-induced surge in online retail sales is beginning to level off, according to Adobe's latest Digital Economy Index. Latest data shows that online shopping activity declined in August as more physical stores opened up across the markets.
Online retail gained at the cost of the offline segment during the lockdown and now as the lockdown is withdrawn, the offline retail is cutting into the online trade. Hence, physical retailers and mall operators have even greater incentive to cultivate online channels that can compensate for losses at physical stores and vice versa.
According to a survey by Statista in 2018, about 40% of marketers claim that offline marketing strategies are important to their overall marketing efforts while nearly 78% of responders opted for online promotions. These numbers don’t mean that the two approaches are mutually exclusive. Actually, the offline customer journey can significantly benefit from digital marketing and vice versa – online marketing strategies are strengthened with traditional offline channels.
This probably centres on the concept of integrating online and offline business, which has been gaining momentum in recent years. Connecting the online and offline elements of the business will give a retailer a greater insight into customer behaviours and will give him better understanding of customers’ choices.
What is an online-to offline business?
Online-to-offline (O2O) commerce is the marketing strategy that draws potential customers from online channels to make purchases in physical stores. Online-to-offline commerce identifies customers in the online space, such as through emails and internet advertising, and then uses a variety of tools and approaches to persuade the customers to leave the online space for offline stores. This type of strategy incorporates techniques used in online marketing with those used in brick-and-mortar marketing.
Techniques that O2O commerce companies generally employ include in-store pick-up of items purchased online, allowing items purchased online to be returned at a physical store and allowing customers to place orders online while at a physical store.
Companies that have both an online presence and an offline presence treat the two different channels as complements rather than competitors. The goal of O2O commerce is to create product and service awareness online, allowing potential customers to explore different offerings and then visit the local brick-and-mortar store to make a purchase. Amazon's purchase of Whole Foods Markets and Walmart's acquisition of Jet.com are two examples of O2O commerce.
Physical stores in the past fretted that they would not be able to compete with e-commerce companies that sold goods online, especially in terms of price and selection. Physical stores required to invest in high fixed assets and needed many employees to run the stores. Because of limited space, they were also unable to offer a wide a selection of goods. Online retailers could offer a vast selection without having to pay for as many employees and only needed access to shipping companies in order to sell their goods. The integration with online marketers is expected to solve these problems of the offline retailers.
Some companies that have both an online presence and an offline presence (physical stores) treat the two different channels as complements rather than competitors. The goal of online-to-offline commerce is to create product and service awareness online, allowing potential customers to research different offerings and then visit the local brick-and-mortar store to make a purchase.
The rise of online-to-offline commerce would, however, not eliminate the advantages that e-commerce companies enjoy. Companies with brick-and-mortar stores too will still have customers who visit physical stores in order to see how an item fits or looks, or to compare pricing. The goal, therefore, is to attract customers who are open to walking or driving to a local store rather than waiting for a package to arrive in the mail.
The outbreak of Covid-19 has forced retail properties and brands to accelerate their adoption of integrated online and offline sales channels. The integration trend has its roots in the booming e-commerce market. Online brands have tried to convert online traffic to offline sales while brick-and-mortar retailers strived to enhance their online presence to maintain competitiveness. Now, physical retail shops are under strong pressure as consumers are avoiding crowded places. Hence, physical retailers and mall operators have even greater incentive to cultivate online channels that can compensate for losses at physical stores.
Amidst the outbreak, it was observed that several brands and landlords expanded online channels through e-commerce platforms. Although e-commerce platforms have already matured, the outbreak has created new opportunities. More retailers and landlords realised their online sales channels could go beyond simply complementing offline retail to also serve as contingency plans in extreme circumstances. Increasing numbers of retailers – F&B brands in particular – have started to collaborate with online delivery platforms. Malls have also begun creating their own online platforms through apps and official websites, besides collaborating with existing online platforms to sell their tenants’ products via home delivery.
Advantages of O2O integration
According to the Journal of Retailing, online-offline integration means providing access to and knowledge about the physical store at the internet store. The research conducted by the authors of the concept confirms that connecting e-commerce and retail stores results in the increase of competitive advantage and causes no conflict between online and physical stores’ business interests.
The combination of digitalisation and e-commerce has exerted significant influence over the retail landscape, with online-only dealers rising in prominence and traditionally offline outlets working hard to compete in the online space. Despite this online explosion, McKinsey & Company estimates that in 2020, about 80% of US retail sales will still happen in brick-and-mortar stores.
The potential lure of offline sales is so strong that, as competition stiffens and retailers seek new avenues of growth, more retailers are realizing the benefits of having a physical store and are making moves to head in this direction.
The experience of the global market is no different. According to Statista, a German company specialising in market and consumer data, the share of e-commerce in total global retail sales was less than 14% in 2019. That is about 86% of retail sales that were transacted through physical stores despite a huge rise in internet connections and a shift in consumers’ marketing aptitude.
E-commerce share of
total global retail sales
The data clearly show the predominance of physical retail and make it clear that for further head-way, online commerce needs to integrate with offline channels. Amazon, the American multinational technology company is probably the best example of online-offline integration. Amazon controls about half of the US e-commerce market. However, while Amazon’s online presence dominates headlines, it is the company’s offline activity that may ushered in the most seismic changes. Just as Amazon created a new normal in e-commerce, it is positioned to do the same in offline retail as well.
Given its dominance, Amazon’s shifts toward online-to-offline (O2O) commerce serves as an exemplary illustration of how to begin making this transition yourself. Amazon’s 2017 acquisition of Whole Foods paved the way of its big entry into O2O commerce. The purchase immediately added 464 brick and mortar locations to the company, which meant that the online giant could now integrate these stores with its e-commerce presence and use them for click-and-collect pick up and as warehouses for inventory.
The result is a combination of online and in-store goods where customers can come into local Whole Foods to pick up their Amazon order - whether it be food, books, electronics, home goods and the list goes on.
Back in India, Mukesh Ambani’s Reliance is leveraging the O2O business model by creating a marketplace where the local businesses can connect and market their products. Unlike most of the e-commerce marketplaces, Reliance adapted the O2O business model used by Alibaba earlier. This model connects the small offline retailers with the customers through digital mediums.
As per the set eligibility criteria, one can find his eligibility and list the offerings on the marketplace. The interested customers can check the product listings, make inquiries, book orders and collect orders offline. RIL leveraged their telecom network and contacts via Reliance retail stores to invite local traders to register on the platform and sell via their platform.
RIL’s entry to O2O commerce is not surprising as India has seen a significant transformation in retail trade in recent years. From what was a largely an offline unorganised market, today India has multiple vertical (single-category) and horizontal (multiple-category) players across the retail ecosystem.
As of FY20, India’s retail market is estimated to be worth $600 billion out of which e-commerce comprises of only 5% of the total. This is much lesser than the global market where e-commerce contributes almost 14% of all sales and has indicated significant headroom for growth. What is significant, however, is that the e-commerce revenue has been increasing steadily over the years backed by the growing number of online shoppers. According to Statista, India’s e-commerce revenue has gone up by nearly five times in the last five years -from $13 billion in 2015 to an estimated $60 billion in 2020.
No of online buyers in India
Source: RedSeer *: Forecast
Rising internet penetration is expected to lead to growth in e-commerce. With growing internet penetration, internet users in India are estimated at 650 million in 2020 – up by 62.5% from 400 million in 2015. This growth was largely driven by sharp increase in smartphone users during this period.
Internet and smartphone users in India (million)
Source: RedSeer *: Forecast
The rising number of internet users have led to a sharp rise in the e-commerce market. From $21 billion in 2014, the e-commerce market is expected to cross $100 billion-mark in 2020.
India's e-commerce market
Source: RedSeer *: Forecast
Besides, retail e-commerce in India is expected to have a unique ‘offline-assisted trajectory’ compared to the global story. Today, enthused by ‘online’ success in new-age customer segments, many players have tried to adapt their value proposition by picking up the best elements of offline experience. This has been increasingly facilitated by the integration of online, offline, logistics and data across a single value chain. A number of companies in India, dealing with products including eyewear, clothing, electronics, and home décor are chalking out strategies to deliver an integrated omnichannel experience to the customers.
Apart from evident factors such as ‘large’ offline market size which is ready for ‘online-led disruption’, there are numerous other factors driving this shift. Increased engagement and personalisation with product, increased conversion rate or increased credibility and faith for example are driving this trend.
In many product categories, the physical presence of a salesperson and higher engagement through ‘product education’ helps personalisation according to the customer persona and builds trust. This has been evidenced by a leading ‘online-led’ eyewear player which has opened 150+ stores nationwide.
The coronavirus pandemic has dealt a blow to India’s retail business but the strategy to integrate online and offline retail shows that the new-age players are seizing opportunities amid challenges. With customers actively accepting these new trends, mall operators and departmental stores are continuing to explore new online channels for customers’ engagement and sales to compensate for losses from physical stores which are contributing to the development of online communities and more sales channels. This gives them a better source of customer data, as well as improved capabilities to track sales and compete in an online space that has been dominated by e-commerce firms till date. The impact of Covid-19 on businesses will fade away sooner or later but the online to offline integration strategies adopted now are likely to flourish and power India’s retail market in the times to come.