Five key challenges for physical retailers as they compete with e-retailers

It was in the year 2007 that Flipkart, the poster boy of Indian e-commerce, started operations in India as an online bookstore. As Flipkart expanded into other product categories, many other e-retailers also entered the fray for India’s promising e-commerce scene such as Snapdeal in 2010 and the global e-commerce behemoth Amazon in 2013. All of these e-commerce players entered with the aim of capturing the maximum possible market share. This meant predatory pricing based on heavily-discounted pricing models became the de-facto sales model that was adopted by all the e-commerce players. This wave of lower pricing fuelled the disproportionate growth of e-tailers vis-a-vis their rivals – the brick-and-mortar store model based physical retailers. While the overall retail industry grew at 12% per annum between 2010-2015, e-retailers quadrupled their revenues in the same time span.
The future predictions, till the year 2019-20, are equally grim for the Indian physical retail space as their growth has been forecasted to remain stagnant at the same ~12% mark while their online rivals will grow at a CAGR of 30-34%. If the physical retailers want to ward off this impending competition from e-retailers then they will have to overcome certain key challenges which are confronting them in the face. Let us take a look at five key challenges that physical retailers are facing from their online counterparts i.e. e-retailers or e-commerce.

Challenge 1. High Real Estate Costs

Indian retailers are facing a significant cash burn due to high real estate costs for lease and rental. While the Indian real estate industry has picked up its momentum as it gears up to cater to an ever-increasing demand for retail space, the demand has far outpaced the supply. As a result, the rentals for commercial real estate have been increasing at a face pace. At the same time their revenue growth of physical retailers is not catching up with the rise in rentals, decreasing their effective profitability. E-retailers generally have their godowns located at lower cost suburbs of the city from where their efficiently managed supply chain distributes the purchased items inside the city. Thus e-retailers are insulated from rental related price shocks.

Challenge 2. Having an omnichannel shopping experience

With the growth in mobile-based internet access, consumers have become much more price-conscious. Consumers can quickly compare the prices offered by various stores online and pick the cheapest one. This presents significant challenges to the physical retail store as customers are quick-footed

However, the mobile challenge posed by online retailers can effectively be met by the physical stores by themselves having a mobile presence which acts complementary to their physical stores. Customers nowadays compare prices across retailers, traditional and online, before they even set foot outside their houses.

Challenge 3. Higher priced goods and services – the MRP effect

The average physical retailer does not have the massive sales volumes which are required to offer deep discounts which their online counterparts, e-retailers, usually have on offer. The resulting difficulty in lowering prices is further compounded by price rigidity which they face from suppliers. Suppliers are less willing to give deep discounts to traditional physical retailers due to their lower bargaining capacity on account of their lower purchase volumes. The net effect is that the physical retailers end up selling the products at near the MRP (Maximum Retail Prices) of the products.
On the other hand, online retailers have both the sales volumes and the deep pockets (which includes funding from venture capital funds) to offer discounts which are simply not tenable for the physical retail stores. The organized physical retail sector can however counter this challenge effectively in the coming years by consolidating their supply chain and entering into bulk deals with the suppliers.

Challenge 4. Efficient Supply-Chain and Distribution Infrastructure

Indian brick-and-mortar retailers face significant cost escalations due to inefficiently managed supply chains and low quality distribution channels. There is often a long chain of middlemen involved in the distribution chain which lead to the price increasing significantly by the time products reach the shelves of physical retailers.

At the same time, distribution infrastructure needs to meet international quality standards to bring the distribution losses to a minimum. In addition, the lead time involved in replenishing supplies of fast-selling items is significantly more for physical retailers which leads to significant opportunity cost losses. Customers have become nimble-footed and a retailer who is slow in stock replenishment of fast moving products will see its customers moving to a retailer (typically an e-retailer) which has real-time monitoring of stocks and good inventory management.
Until and unless the physical retailers invest in these key aspects of distribution, they will not be able to complete with the online retailers in pricing. This is because the e-retailers have all entered the market recently with their logistics and distribution based on international standards along with top-of-the-class real-time monitoring capabilities which reduce their overall distribution costs.

Challenge 5. Talent Management

As the physical retail industry tries to expand at breakneck pace to respond to the threat posed by e-retailers capturing their share of the market, talent acquisition and retention has emerged as a significant challenge for them. With a greater number of physical retailers opening outlets in a short period of time, front-end executives are seen frequently job-hopping as the demand of such talent is far exceeding supply. The lack of depth of experience and specialized training among middle and top management employees in the physical retail industry has compounded the talent shortage.
The physical retail industry is facing significant challenges from online retail. And these challenges are set to increase in the coming years. The only way physical retailers can catch-up with e-retailers in growth momentum is by addressing these challenges with a modern approach. This will involve significant BPR (Business Process Re-engineering) efforts from the bottom-up. The sooner the physical retailers gear up and start meeting these challenges, the earlier they can think of competing with their online peers. Till then they have to be content with playing a catch-up game in terms of market growth.