Bricks vs Clicks: Why physical retail isn't going away anytime soon

In emerging markets, the growth of online sales has not led to a decline in the number of physical stores. Indian retail chains, after two years of the pandemic, made a spectacular comeback in 2022. One of India's largest retailers, D-Mart, added 50 new stores and planned to add another 135 in FY 2023-24

By Storyboard18

Published: Jan 9, 2024 02:21:17 PM IST

Updated: Jan 9, 2024 03:05:18 PM IST

By Devendra Chawla and Nirmalya Kumar

In the US, physical stores have been challenged by the growth of ecommerce and the impact of the pandemic, which changed consumer preferences. Several major brick-and-mortar retailers in the country have undergone restructuring to adapt to evolving market conditions. Notable examples include the erstwhile retail giant Sears filing for bankruptcy in 2018, JC Penney in 2020, while Macy's has been closing underperforming stores. Toys "R" Us, after bankruptcy in 2017, has made attempts to revive its brand with smaller, experiential stores. Even successful chains like Zara have slowed down opening new stores in developed markets in favour of greater focus on ecommerce.

In contrast, in emerging markets, the growth of online sales has not led to a decline in the number of physical stores. Indian retail chains, after two years of the pandemic, made a spectacular comeback in 2022. One of India’s largest retailers, D-Mart, added 50 new stores and planned to add another 135 in FY 2023-24. Other Indian retail chains like Aditya Birla Fashion & Retail, Titan, Tanishq, V-Mart, Westside, etc., have aggressive store rollout plans. Avenue Supermarts, the fourth-largest chain of convenience stores in India, is also looking to scale up the retail chain from 284 to 1,500 stores.

Reliance Retail, the country’s largest retail player with 22 sub-brands in a variety of formats and domains, such as consumer electronics, grocery, fashion, and lifestyle, saw a 30 percent growth in both retail revenues (about $21 billion) and profits in FY23-24.

For some retailers, the strategy is to enter a new sector in a big way with lots of capital, and then tweak the business model or format to get it right. In contrast, the Tata group starts a new format with a few stores, and perfects the model before scaling up. This approach is best seen with the Zudio stores it launched in 2016.

Most retailers have concentrated on the tier 1 and tier 2 cities of India, ignoring the rest as they lack adequate purchasing power. In contrast, Zudio also focuses on towns such as Imphal, Gorakhpur, Pathankot, Ujjain, etc., that lack modern retail — reminiscent of Walmart’s early years in the US.

Zudio concentrates on selling fast-moving apparel that’s affordable yet aspirational for its target group, the youth. The chain has approximately 500 stores across the country and reportedly generates revenues of around $300 million. Realising that the cost of delivery and returns would be formidable and unsustainable for such a model, the chain ignores ecommerce. Like UK’s successful low-price chain Aldi, Zudio largely avoids malls and instead selects cheaper locations for its standalone stores. Despite economising on fit-out costs, it offers a premium retail experience.

As the most populated country in the world with an average age of 28 (relative to 48, 38, and 37 in Japan, US, and China, respectively), India is primed for growth in shopping in physical stores.

Yes, online sales are exploding in India and will continue to grow, but this does not mean that physical stores are declining as the examples of D-Mart, Reliance, Zudio, etc., demonstrate. It’s not a win-lose scenario of ecommerce versus offline stores, rather, both have growth trajectories.

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The story of India — low per capita income, large young population, lower internet penetration, and smaller presence of modern physical store chains — is also true for other emerging markets, like Indonesia, Vietnam, and Bangladesh, and the growth of physical stores is also driven by the preferences of Asian consumers.

In Indonesia, Eyvette Tung, the Head of Offline Business at JD.ID, a retail chain, said, “It’s a service culture. Indonesian shoppers are not independent and prefer not to be. In places like China people are moving online quickly, but Indonesians want the interaction (of in-person shopping), and they like to be served. That is a big reason why we’re ramping up offline, even as we build out our online infrastructure.” In Malaysia, a survey by KPMG found that three out of four Malaysian shoppers believe that online shopping is for convenience, while shopping at physical stores is for pleasure.

In-person shopping is also closely associated with Indian consumers, who prefer the multi-sensory aspect of physical stores. The value of touch and feel is more pronounced in categories like fashion, jewellery, and cosmetics, as it facilitates trying out products before purchase. Face-to-face interactions in physical stores also foster a personal rapport with the service personnel, which helps matters in India, where building trust is paramount for generating sales. For many Indians, ecommerce still suffers from a trust deficit. Furthermore, negotiation is deeply ingrained among the people — Indian consumers derive pleasure from negotiating prices, and feel that they obtained a bargain through their skills — a phenomenon not replicable in online shopping.

Stores are evolving to meet the challenge from online retail. They understand their unique selling proposition is “physical,” and need to leverage this aspect by becoming central to shoppers’ lives. Malls are turning into social experiential centres, combining shopping, dining, hotels, beauty salons, gyms, as well as community centres holding yoga classes. Some even incorporate residential and office complexes.

Stores are also learning from their ecommerce counterparts to leverage the virality of social media. For example, consumers in Indonesia broke McDonald’s soft serve ice-creams (served in a cone) on a plate to combine the creaminess with crunchiness in each spoonful. As TikTok videos of this went viral in neighbouring countries and even Australia, consumers at McDonald’s stores are now adding their own twist by combining ingredients like fudge and caramel.

It is too early to write the obituary of physical retail.

(Views are personal)

Devendra Chawla is the CEO of Greencell Mobility, and has previously held leadership positions at Walmart India, Future Group, Coca Cola, Nature’s Basket, and Asian Paints.

Nirmalya Kumar is the Lee Kong Chian Professor of Marketing at Singapore Management University, and the author of the forthcoming book, Clash: Amazon versus Walmart.