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Hybrid Model: A Fad or Market Reality

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Retailing in India is not just about offline (brick-and-mortar) model or online (e-commerce). There is a huge gap between these two models that online retailers are trying to bridge by going hybrid – a fusion of online and offline retailing.

Hybrid model is the future

A Study estimates that currently only 0.2 per cent of US$ 490bn Indian retail market (market size for 2012) is online, which is expected to grow to 5 per cent by year 2021.

Given the challenges of trust, touch and feel factor, transacting online, product quality, Internet penetration and adoption, it will require quite an effort for online players to change their mindset and get the offline junta to join the online shopping bandwagon. Consumers today research about products online but shop offline.

Most e-tailers, who have adopted hybrid offline retailing, today are looking at the opportunity to build and grow the market fast along with bridging the consumer gap in understanding online retail. Keeping all these factors in mind, many e-tailers believe that this is not a fad but an evolutionary step for modern retail.

Talking about the same, , CEO & Founder, Lenskart.com, said: “Even if we look at the eyewear industry for a Rs.-20,000 crore market, we would estimate the organised players would be close to odd Rs. 1,000 crore. The remaining Rs. 19,000 crore is unorganised and is thriving as your next-door optician. We are used to buying spectacles from these stores in a certain way since childhood and if I want to suddenly go and shop online on Lenskart.com, it would require me to change my mindset and behaviour. This is a considerable effort on the consumer’s part contrary to what they have done until now.”

Online is just one of the channels of reaching out to the consumer. Hence, it becomes imperative for brands that are established in either channels to leverage the reach and advantage of the other channel. Looking at offline or online as silos will not be beneficial for any progressive looking brand. There are many synergies possible in the offline and online channels.

Sharing his views on the topic, Berry Singh, COO, Ace Turtle Services said: “As mentioned earlier, these aren’t water-tight compartments. In fact, a judicious mix of these will enable the brand to service the exiting customers better, increase their chances of interacting with the brand, and add new customers in their fold. These channels draw from the same brand lineage, inventory and many other common assets. Hence, it is only a question of when and not if, that the existing brand owners would like to maximise the brand’s reach potential through these channels.” Ace Turtle Services helps a brand to unlock the potential offered by omni-channel retailing.

In the past, the trend for showrooming where customers browse and ‘try out’ the product in a physical store and then go on to purchase the product online was gaining popularity. This was seen as a huge threat to the brick-and-mortar formats. The e-commerce model offered convenience of delivery, promotions and discounts round the year and the ease of transaction. However, in the end, shopping has and will always be a tactile experience where all our senses have to be involved. The issue with e-commerce in its current avatar is that it only depends on the sensation of sight while the offline format, if done properly, can involve the sense of sight, smell and, most importantly, touch, which is unbeatable.

Customers still like to ‘feel’ a fabric, try on outfits, and enjoy a well-merchandised store that can give them ideas of how to wear a certain style or ‘add on’ something like a piece of jewellery to make it interesting. In fact, in the US where the e-commerce industry is more established, a reverse showrooming or webrooming has begun where people browse online but buy in stores. This is especially important and relevant for products that the customer is purchasing for the first time, such as electronic goods, or when there is a necessity to try the product on, such as in the case of cosmetics, etc. Online players looking at adding a more holistic approach to their shopping experience are considering offline so that customers can ‘try and buy’ within a more physical setting.

Giving her opinion on the topic, Sonali Lalvani, CEO of toniQ accessories said: “The success of any retail format is increased accessibility of a brand and product. In today’s retail scenario, with so much time spent on mobile and web applications, the need is definitely a combination of an online and offline presence reaching out to both kinds of customers – those who are comfortable with technology and are short of time, and those who still prefer the tactile impact of a physical store. However, in both formats, a brand must reflect the same brand philosophy and experience. Even in the offline model, there is a greater technology involved today with stores using tablets as registers, GPS trackers to provide store maps and identify product in aisles and in store sales and discounts popping up on your tablets or smart phone while you are shopping in the store.”

According to Hitendra Chaturvedi, Founder & CEO, GreenDust: “In India, going multi-channel makes perfect sense. We at GreenDust were the first successful integrated online-offline hybrid models and we did it because in majority of India going out with family for shopping is a social event. Homemakers sit at home all day waiting for their husbands. In the evening, they prefer going out with their family and would not want to sit at home buying groceries and appliances online. Moreover, we Indians like to haggle, negotiate, touch and feel before we buy larger products. Pure online does not allow that and it is geared more towards convenience rather than experience. Thus, the online-offline model works for India well and is not a fad.”

, CEO & Co-Founder, FREECULTR, opined: “I believe it’s a market reality where brands and retailers are recognising that they have to be where their customers are. Customers today are switching between channels in completing their purchase – they may start online and end up buying offline or start with offline research and end up buying online. To be accessible to the full set of your target segment, one needs to be present in all channels.”

Some retailers have also opened up to the hybrid model just to improve brand presence and experiment with customer experience like in the case of tele-shopping e-commerce company Homeshop18, who last year launched a ‘Virtual shopping wall’ at the Delhi International Airport’s domestic terminal to bring a different user experience to the offline model.

Economics of going offline

The economics of going offline is not simple; it involves maintaining a well-stocked brick and mortar store with rental overhead costs, inventory and other legal and commercial procedures.

“The economics of retail – both online and offline – are equally sustainable if done properly. The omni-channel retail model is a further economic improvement in the model. It enhances the ROI of both the store and the e-commerce site. A store’s ROI increases since a customer walking into the store can now buy from a much larger selection that may be available online. Hence, a retailer can operate smaller stores with less inventory; and e-commerce players can enhance economics by using stores as points for local pickup of delivery, thereby saving time to serve the consumer as well as costs. This is a real value creating business model,” shared , MD & Co-Founder, .com.

Although many online retailers find it feasible to open their offline stores also, not all the online retailers find it viable to have the brick and mortar model, as in large format brick and mortar chains face the trouble of expansion. When it comes to real estate, there are legal issues as well as higher costs that come into play. It doesn’t serve the purpose for many online retailers, but there are others who think that hybrid retailing is the only way forward.

Giving one of such not-so-pro-hybrid-retailing views, , Co-Founder, Stalkbuylove.com said: “Not all e-commerce players are going offline. A few are doing it but different players are using different strategies. In the segment of online private labels, like ours, I don’t think it makes sense to go offline just yet. Why? Well, most of the online brands have not created enough awareness for taking the risk of expensive retail rents. What’s clear is that offline does not make it necessarily ‘cheaper’ for you to build a brand or drive sales (acquisition costs are much cheaper online; if your acquisition costs are not cheaper online, then you have a problem with your product). It makes sense to go offline to provide more convenience to the end consumer as part of your CRM or branding efforts, but not for increasing your business. The online market is big enough for most online private labels to expand without hitting a barrier for a long time.”

Giving his opinion on the topic, Chaturvedi stated: “Neither online nor offline can remain isolated as increased synergy between different channels, including mobile, online and offline, is the way ahead for retail growth in India. Having physical presence will work well for categories in which there is a need for customer interaction and some level of customisation. However, keeping offline ventures capital-light should be the strategy to be adopted by the e-tailers. This can be achieved by implementing and creating business models that are specific to the needs of Indian users.”

Hybrid is a stepping-stone model. Once e-commerce gains, you can disband your physical store just as fast as you put it up. Some of the online stores that have gone offline have adopted the franchise model, thereby offloading a lot of the economics onto the offline store owners.

Summing up this entire issue, , brand expert and CEO, Consults said: “E-commerce and commerce on the web can really have many avatars. The first is pure-play e-commerce; the second is a cusp of e-commerce on the web and the same offering being made on tele-shopping networks (a la HomeShop18), a cusp of home shopping, catalogue stores and e-commerce, and of course a hybrid of the physical store and the e-store. There are many hybrid possibilities. Each of these models has a role to play at different points of time in the life of an e-commerce player. Hybrid is surely a fad as of now. What it does is that it offers a physicality to the brand and its offerings. This helps focus business onto the portal as well, and vice versa. Consumers are still physical. For such customers, it helps. While this is an early-state entry strategy, it is not cost positive.”

Analysing these points, we can draw the conclusion that both (online and offline) channels have huge pluses and a brand will only benefit by playing to the advantage of each channel.

Offline and online synergy

Foreseeing the future of retail, one can witness the clear synergy between online and offline retail. Both models will coexist as well as the third hybrid model of ‘omnichannel’ where brands will have an online, offline presence and hybrid model where each of the model having had borrowed from the other. There will be options where customers can buy online but can go to their closest store to collect the package (and avoid shipping charges) or get it gift wrapped while they pick it up. Physical stores will get more technology enabled and online stores will continue to push the virtual experience with live fashion shows, style videos, try-and-buy options, pop-up stores in customers’ homes, etc.

Explaining this further, Singh of Ace Turtle said: “India has a large pool of customers in both online and offline world, which is yet to be tapped. An over-proliferation is never a good strategy but a relative healthy mix of both can be extremely advantageous. If calibrated well, the online and offline channels offer a huge potential of omni-channel retail. It is a new opportunity being created, which is not just an incremental benefit but could also prove to be decisive.”

Adding to it, he said: “The brand should clearly outlay the reasons for foraying into the brick and mortar space backed by its offering and potential consumers. This would also be dependent on the quality of retail real estate that is available and its business goals. This should then be the basis for bringing a business viability of opening in smaller towns versus metros.”

Giving an all together different perspective to the entire debate, Ahluwalia of Stalkbuylove.com said: “In the long term, I am talking 10–20 years from now, lines between offline and online will definitely be blurred. Considering that mobile is growing so strongly, we will first see a shift from ‘e-commerce’ to ‘m-commerce’ and then slowly, considering the power of mobile, retailers will come up with interesting ideas to combine online, offline and mobile experience. Right now, some online players are going offline as a reflex to a suicidal business mission. If you do not know what to do and have tried everything, then you put your hopes even into the least likely remedies. That, of course, only applies to some. As already discussed, there can be mainly two reasons for an online player to go: a) increase sales or have cheaper acquisition cost, b) build brand experience and provide customer convenience. I don’t think going offline for point a) really makes sense. Let’s face it: online is difficult but offline is 10x of that.”

Bansal of Lenskart.com, talking from the perspective of his business model, stated: “Sometimes even the most digitally savvy online shoppers want to physically experience products and brands in real time. They want it now; they want to try it; smell it; taste it; or all of the above. For categories like us, where close to 95 percent of the market is unorganised, opportunities to create value for consumers are immense. We can certainly say that there is a huge untapped potential in offline retail for sure! However, sustainability is dependent on various factors like product offering, acceptability by consumer, retail environment, stocking or ability to service, and profitability.”

Offline businesses are complementary to the online business. They help in giving more customised service and support to the users, and add to the touch factor of buying decision. They help in building the brand and reinforcing the trust factor among the customers. Where e-commerce cannot reach and users face trust factors with their money, they can visit offline stores to avail the services.

Concluding this topic, Pragya Singh, Associate Vice President – Retail, Technopak said: “Increasingly e-tailers are using offline activation in one way or the other. Some e-tailers are opening stores to induce brand trial in a ‘touch and feel’ environment. Others have used marketing kiosks in malls and office spaces. Yet others have incorporated some form of ‘try at home’ for consumers before making purchase decisions. The key reasons are: Experience: By coming closer to physical store experience, e-tailers are trying to make decision-making as easy as possible for the consumers. Awareness: Going offline is also to create awareness about their portal and proposition. Credibility and Trust: Being present offline gives not only credibility to players (specially the smaller ones) but also establishes credibility for their products. There are some categories where technology is yet to bridge the gap of trust or product experience, e.g. non-standardised big ticket size categories such as fine jewellery, furniture, etc.”

She further added: “ We will increasingly find players adopting hybrid models because shoppers too are ‘hybrid’ in their shopping patterns (they are not limited to only online or brick and mortar retailers). They engage with retail in both spaces and hence brick and mortar players are increasingly eyeing the online space while web-only players are eyeing the brick and mortar space to complement their online ventures.”

Setting up a physical store

When an online player is making its debut in brick and mortar format, should they start their offline retail journey through metropolitans (where there is an existing client base) or from the smaller towns? Can it be easy for a new brand to establish its foothold in such an under-penetrated market?

Answering this question, Singh of Ace Turtle said: “The brand should clearly outlay the reasons for foraying into the brick and mortar space backed by its offering and potential consumer. This would also be dependent on the quality of retail real estate that is available and its business goals. This should then be the basis for bringing a business viability of opening in smaller towns versus metros. Again, there are no fixed set of rules. A brand will have to map its own territory depending on its brand and business goals. It can never be a one-size-fits-all.”

Talking on the same topic, Chaturvedi of GreenDust opined: “As people in metropolitan cities are more tech savvy and prefer online shopping, retailers should look at having offline stores in smaller towns and can continue to cater metropolitans and Tier-I cities through the e-commerce website.”

Talking from Lenskart.com’s business model, Bansal said: “Although smaller towns lack good infrastructure for broadband, which handicaps online purchases, we feel the need for a good hybrid model is equally required in smaller towns provided we have a good partner, the costs under control, and the scope for making profits. Our recent opening of a Lenskart store in Agartala is testimony to the same.”

How viable is hybrid-retailing model for horizontal e-tailers

Most stores that go offline tend to be operating on a particular niche vertical market. It is not practical for online stores that operate on a horizontal space to go offline. For horizontal e-commerce, given the number of categories and depth, going offline would be a very expensive route unless they want to work on experiential selling or focus on a specific vertical example: jewellery, electronics, and apparels.

According to Singh: “E-tailers working in the horizontal space can also go for a hybrid retailing model. The omni-channel opportunities are equally true for horizontal players as well as the existing large format store (LFS) players.”

Tandon of Healthkart.com, however, is not very optimistic about the future of e-tailers operating in the horizontal space to make it big in hybrid retailing. According to him: “The core issue is related to retail space requirement; a horizontal would need a lot of space just to include a basic set from each category. That would require a huge upfront investment commitment (compared to a vertical that can get the model right with a 300–500 sq.ft. store). The question is of investment and bandwidth to manage additional complexity across categories. Offline retail requires very category-specific fine tuning. I do not see many horizontals finding value in a big offline play.”

Sharing her opinion on the topic, Singh of Technopak said: “It is infeasible to take an entire horizontal portfolio offline. However, it may be possible for them to do so for select categories or range. For instance, a private label range.

On the other hand, Sandeep Singh of FREECULTR feels: “Surely. They can open small guide shops in order to expand their customer base. This shall also help more and more customers get comfortable with shopping online. I don’t think opening large format stores will be suitable to their business model.”

Analysing from the plethora of different reasonings, one can conclude that it is possible for a horizontal e-tailer to have their offline store as long as they have a unique proposition and have identified the correct spaces. On the other hand, one also needs to understand that although everything is possible, is it viable? So depending on the viability and profitability scope, a retailer needs to take the decision of to be or not to be in the hybrid retailing space.

Box: Offline Model:

Pros:

  • It aids trust and brand visibility
  • Consumers can touch and feel a product before actually buying it

Cons:

  •  Very high costs are involved
  •  Footprint is limited to select geographies
  •  Pushy salespersons with factually incorrect product knowledge or information


Online Model:

A. Offline/Pros:

  1. It is a familiar format of retail
  2. There’s better impact dues to higher visibility on street
  3. More personal touch or experience perceived
  4. Touch and feel as also trial for specific categories is a perceived advantage

Offline/Cons:

  1. There are higher operational expenses, especially the rentals
  2. There is paucity of better or prime retail avenues
  3. Opportunity to change, innovate, etc. is limited and it also involves a higher cost
  4. Limited physical space leads to limited merchandise
  5. Stores are largely restricted by limited catchment

Online/Pros:

  1. There is no limitation of scale and reach. Almost unlimited merchandise can be featured
  2. There are no time restrictions
  3. Technology can ensure better customer interface
  4. Access to the most desirable product description or knowledge is possible
  5. Opportunities to innovate and excite the customers are huge, with relatively lesser time and cost implications
  6. Customer convenience is at its best. Home delivery is provided for the most desired merchandise
  7. More structured inventory control is possible
  8. Access through many devices makes the reach of online retail huge
  9. Understanding of the consumer backed by analytics makes it more scientific and data driven

Online/Cons:

  1. Familiarity with this channel is growing now. However, this remains less familiar than the brick and mortar format
  2. For a certain set of customers, touch and feel while buying remains a constraint in the online medium
  3. If the brand doesn’t keep pace with changing technology, it can lead to a quick obsolescence
  4. Lack of human interface leads to trust issues for some customers, especially while making a transaction

(Provided by Ace Turtle)