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Why should physical stores be the next phase for e-commerce giants?

06 February 2019

The rise of e-commerce has brought an end to retail giants likes Toys R Us and closure of numerous stores for Best Buy, Kmart, Gymboree, Abercrombie etc. With more physical stores shutting down and downsizing, e-commerce is expected to grow further. According to Euromonitor research, e-commerce will account for 14 per cent of retail sales in 2021, making it the largest retail channel in the world.

E-commerce will account for 14 percent of retail sales in 2021

E-commerce adoption, however, varies greatly across the globe. In Asia Pacific, it is already the largest channel with a 13 per cent penetration rate. The latter is primarily due to its’ significant growth in China and Korea. China alone had e-commerce sales of USD 354 billion in 2016, making it the largest e-commerce market in the world.

E-commerce adoption, however, varies greatly across the globe Click To Tweet

China alone has e-commerce sales of USD 354 billion

In South East Asia (SEA), online retail is expected to rise from its current USD 19 billion to more than USD 53 billion in 2023, when it will account for 6.5% of all retail sales, according Forrester. With Indonesia accounting for 40% of the SEA online retail market and attracting 34% of the retail investment in the region. Chinese digital giants including Alibaba, Baidu and DiDi have invested over USD 8 billion in mergers in acquisitions in South East Asia. The firms have their sights set on India and Africa after this. Global expansion is on the rise for large players in the market – with Walmart acquiring Flipkart and Amazon Prime launching in Singapore.

In South East Asia (SEA), online retail is expected to rise from its current USD 19 billion to more than USD 53 billion in 2023 Click To Tweet

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Expected rise in online retail in south east asia in 5 yearsChinese digital giants including Alibaba, Baidu and DiDi have invested over USD 8 billion in mergers in acquisitions in South East AsiaDigital buyers world wide

E-commerce in the U.S. and Canada, combined, will be the largest channel in 2020, accounting for 16% of retail sales—not too far behind Asia-Pacific. Amazon is driving the online retail penetration in North America as it is set to clear US 258.22 billion in US retail sales in 2018, according to eMarketer’s figures, which will work out to 49.1 percent of all online retail spend in the country, and 5 percent of all retail sales.

Amazon is driving the online retail penetration in North America as it is set to clear US 258.22 billion in US retail sales in 2018 Click To Tweet

E-commerce in the U.S. and Canada, combined, will be the largest channel in 2020, accounting for 16% of retail sales

Amazon is driving the online retail penetration in North America top 10 US companies based on % of e-commerce sales

Online retail a booming market in GCC countries

Research from Bain and Company indicates that the MENA e-commerce market is valued at USD 8.3 billion. KSA and UAE account for 60 per cent of the figure. A majority of the online products in the region fall into the categories of electronics, fashion, lifestyle and beauty. The UAE’s internet penetration rate currently stands at 90 per cent; which is higher than the US’ 85 per cent figure.

MENA e-commerce market is valued at USD 8.3 billionUAE’s internet penetration rate currently stands at 90 per cent

According to Garter, only 15 per cent of businesses in the Middle East are present online and 90 per cent of the region’s online purchases are conducted internationally. Furthermore, Forbes research suggests that only 2 per cent of sales in the Middle East are carried out online – a low number compared to the 15 per cent figure of international markets, thereby suggesting significant potential.

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15 per cent of businesses in the Middle East are present online only 2 per cent of sales in the Middle East are carried out online internet penetration

Key industry players are gradually taking note of the potential of online retail and slowly going online. The latter has led to a consistent increase in revenue over the years. The market is expected to reach USD 48.8 billion in 2021, at a CAGR of 16.9 per cent between 2016 and 2021. UAE is expected to lead the way, followed by KSA and Qatar. The success of Noon, Souq.com, Wadi.com and Namshi all indicate rising interest in the sector.

UAE is expected to lead the way, followed by KSA and Qatare-commerce market size by country

This boom in the ecommerce sector is aided by government initiatives, digital adoption by the region’s customers, high social media penetration, digitization by local retailers, mobile payment options and cross border transactions.

Shoppers in the MENA like to touch and feel products before making a purchase decision as they find the returns process to be frustrating. As a result, many brands are working to create synergies between their online and offline presence. For instance, “click and collect” allows shoppers to purchase items online and collect them instore. Luxury Closet, a website selling pre-owned designer items, makes 30 per cent of sales using this model.Shoppers in the MENA like to touch and feel products

 

Online players going offline

Amazon has aggressively been making its place in physical retail spaces. In addition to opening more Whole Foods locations, the company is also focusing on expanding its check-out-free Amazon Go convenience stores and its new 4-Star retail locations. Amazon has introduced Whole Foods discounts for Prime members – creating a synergy between different Amazon-owned entities.

When Amazon acquired Whole Foods in 2017, their intention to focus on physical stores was made clear. The acquisition has since led to USD 4 billion in physical store revenue for Amazon, as of September 2018. The latter adds to Amazon’s online sales of USD 29 billion over the same period. With more physical Whole Foods stores set to be added, the company’s revenue is set to grow further.

The acquisition has since led to USD 4 billion in physical store revenue for Amazon

Amazon recently opened five Amazon Go stores in Seattle, Chicago, and San Francisco, bringing its total Amazon Go locations to six. In early November, Amazon opened its third chain of brick-and-mortar shops for high-end shopping centres — stores in which it sells a curated selection of products with ratings of four stars or better.

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In addition to retail stores in the US, Amazon is looking to enter the brick-and-mortar retail space in India. The country is known to prefer shopping in physical stores, encouraging online retailers to enter the offline space. Amazon is said to be considering investing in Mumbai-based Future Retail, which owns over 1,000 shops across India. Industry experts in India see this as a sign of maintained confidence in physical retail, at a time where everything is going digital.

Amazon is looking to enter the brick-and-mortar retail space in India

Although India is considered to have one of the fastest growing e-commerce markets in the world, Morgan Stanley research indicates that online sales accounted for only 2 per cent of the country’s retail sales last year. Over the next 10 years, however, it is estimated that online sales will account for 12 per cent of the retail market. International market players including Amazon and Walmart that are entering the Indian retail market will have to compete with local players like Flipkart.

online sales accounted for only 2 per cent of the country’s retail sales last year

Why ecommerce players need to venture into offline retail?

The fast-growing trend of online retailers going offline has been termed “clicks to bricks”. Online start-ups like Warby Parker and Everlane have been working on expanding their physical presence to gain greater exposure and boost sales. Warby Parker, initially an online-only eyeglasses retailer opened their first store in 2013 after online success. A year later, they had 8 successful retail stores. 74 per cent of online retailers that intend to open physical stores fall into apparel and accessories categories. The latter is because customers often like to try these items before buying. Furniture and home goods are also high-involvement popular and therefore likely to go from online to offline.

fast-growing trend of online retailers going offline has been termed “clicks to bricks”. 74 per cent of online retailers that intend to open physical stores

A key reason behind the popularity of clicks-to-bricks is that online customer acquisition costs are steadily increasing. Store opening costs, on the other hand, have decreased due to greater mall vacancies. Experts suggest that it is 10 times more expensive to acquire customers online, as compared to physical stores.

10 times more expensive to acquire customers online, as compared to physical stores

Amazon has recognized the benefits of brick and mortar retail, expanding their physical presence from bookstores to department stores to grocery stores – each following a different concept. The e-commerce powerhouse’s recent acquisition of Whole Foods provides them with significant physical presence, while simultaneously allowing them to deliver fresh produce on Amazon Prime.

Physical stores also allow a more immersive customer experience. They allow brands to form stronger connections with customers by creating a memorable physical experience. Eventually, offline and online channels play complimentary roles by creating various touch points for consumers. At select Saks Fifth Avenue stores, product displays are inspired by websites to encourage customers to browse products the way they would on a website. Certain products in the store are laid flat to mimic online presentation.

offline and online channels play complimentary roles by creating various touch points for consumers

Other retailers allow customers to start shopping online and then make an appointment with in-store sales associates to continue the process. Customers may then continue to interact with the same associate online and offline. Ralph Lauren has also been innovating to connect online with offline. They have introduced smart mirrors that recommend items to customers based on what they have tried on. These mirrors then send links to products via text message, allowing customers to buy online. Even when a sale occurs online, the physical store still has a highly relevant presence. Brick and mortar locations have the potential to drive online sales, and online channels have the potential to drive in-person sales. If a retailer can creatively combine these channels, the customer’s experience is dramatically improved, helping to build deeper connections and brand loyalty.

Customers are also increasingly using smartphones to engage with physical stores Click To Tweet

Customers are also increasingly using smartphones to engage with physical stores. They reserve products online to try on in store and they also browse retailers’ websites while in store to ensure they don’t miss out on any items. The former and the latter suggest that offline and online retail serve complementary roles.

Customers are also increasingly using smartphones to engage with physical stores

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