Why ecommerce firms buying stake in offline retailers is a marriage of convenience

moneycontrol (source) :

E-commerce players and retailers are joining hands as both parties have realised that a war between the two players is turning out to be costly.

Why ecommerce firms buying stake in offline retailers is a marriage of convenience
Shishir AsthanaMoneycontrol ResearchThe fiercely fought battle between e-commerce companies and brick-and-mortar retailers appears to be heading for a stalemate. Both parties seem to have realized that there will be no clear winners in a war that is turning out to be costly for both sides.

E-commerce players backed by private equity funds announced themselves in grand style. They went all out to capture market share and started selling goods way below showroom prices of the retailers. There have cases been recorded where some e-commerce players were selling their goods below their cost price to drive up sales. No wonder then that many e-commerce companies had to eventually down shutters.

The retailers, who were at the receiving end, had to either take on debts on their books or slow down their expansion plans to absorb the losses caused by e-commerce companies’ aggressive selling.

Badly bruised, both the factions are now calling a truce and embracing what is being termed as omnichannel.

In less than a month of Amazon picking up a 5 percent stake in retailer Shopper’s Stop, there is news of Flipkart looking eyeing a stake in Future Retail. For Future Retail, the development comes soon after its acquisition of retailer Hypercity. For a sector swamped with gloomy news, things appear to be turning around.

E-commerce companies joining hands with the retailers is a marriage of convenience for both the players. The move has largely been necessitated by the  fastest growing and biggest sector for both the players being common–garments.

Though the sale of garments has soared for e-commerce companies, the number of rejections too were high. For a business that still operates in the cash burn model cutting down losses on account of rejections is important. Having a brick and mortar frontend helps the customer getting a ‘feel’ of the product. For the retailer, the e-commerce companies help push their brand to a wider audience.

This trend of a joint venture between retailers and e-commerce companies is not restricted to India. Online company Amazon recently acquired a grocery store Whole Foods for $13.7 billion. Earlier it had picked up Westland, the publishing unit of Tata group. In China, Alibaba and JD.com are hunting for retailers in which to either buy a stake or the entire company.

While the marriage looks like one made in heaven, both the players are likely to encounter teething problems. Logistical coordination of managing two sets of inventories is just one of the problems. The two players will need to integrate their software and hardware.

More importantly, pricing the same product at both the front-ends will be an issue and might lead to conflicts going forward. E-commerce players thrive on discount sales and if there is too much of a differential in the prices, offline retailers will only be an outlet for window shopping with customers coming to the store only to test the garment.

The real cost benefit of an omnichannel from the retailer’s point of view is not yet clear. Retailers will need to allocate counters for picking up garments and specialized space and staff to handle rejections.

For the e-commerce companies adding a retailer is like adding another seller on their platform. However, what an e-commerce company will miss is getting into the psyche of a client. E-commerce companies do a lot of data analytics to understand the customer’s preference. This will not be possible when they visit the retail outlet.

Both e-commerce and retailers have been testing various growth models in search of profits. Jointly working together is another experiment that the two players are working on. Irrespective of the outcome, the very fact that they are working together rather against them improves their chance of success.


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