Small Towns, Big Trade
Explaining why the future of brick-andmortar stores lies in tier 2 and tier 3 towns of India
The past two years have fundamentally altered India’s retail landscape. Starting with the single most impactful event in the recent history of Indian consumers, and the national economic policy - demonetisation. The aftermath of this reform drastically shook up the consumers’ mindset, consumers who were faced with the challenge of surviving a loss in cash liquidity unlike anything they had ever experienced before. The expected consequences to consumer-spending were observed well into the first quarter of 2017 as the USD 750 billion merchandising retail sector began to feel the pain, especially so the second largest contributor to Indian retail - apparel and fashion.
The subsequent GST reform period that followed, gave little confidence to consumers due to the early implementation issues. But the silver lining was clear - digital payments, e-commerce, and efficient systems were the future and the net benefits would more than make up for any short term inconveniences. However, as is the case with most complex systems, predicting consumer preferences and behaviour, is easier said than done. The reality of the digital Indian consumer and India’s e-retailing space is a promising one, but it’s true growth in the brick-and-mortar segment is far from complete, and even more so when it comes to something as personal as apparel and fashion sales.
The bulk of fashion and apparel e-commerce in India has been built by startups that have gone on to become major players. Home grown brands such as Flipkart have already attracted the attention of global giants (as the recent Walmart-Flipkart deal has proven) for acquisition or collaborative partnerships. There is little doubt that the future of Indian retail is a lucrative opportunity for players, local and international. But in the context of digital sales there have been new learning by all stakeholders that is demonstrating that a pure digital sales system isn’t sustainable, especially for a country as diverse as India.
The number of digital shoppers in India is feared to have reached its saturation point. According to comments from Darshan Mehta, Reliance Brand CEO, there are only 40 million Indians who have made online purchases but more than 60 per cent have only done it once. This kind of stagnated growth in consumer behaviour trends is worrying for many retailers as their investment in the digital is struggling to find returns at rates that they had expected. And while Indian consumers have leapfrogged technological barriers with the roll-out of affordable Internet connectivity to become prime digital customers, this isn’t true across all segments.
In the fashion and apparel segment, they still remain true to the touch and experience behaviour model. In practice, most Indian consumers are digitally savvy while investigating and researching products online but more often than not, they end up buying from stores. According to research reports from Ernst & Young, and Ace Turtle, Internet-influenced product sales are around 34 per cent which is much higher than Europe with 10 per cent and the US with six per cent. This has not gone unnoticed by retailers who have employed an omni-channel shopping experience that seeks to
IN PRACTICE, MOST INDIAN CONSUMERS ARE DIGITALLY SAVVY WHILE INVESTIGATING AND RESEARCHING PRODUCTS ONLINE BUT MORE OFTEN THAN NOT, THEY END UP BUYING FROM STORES.
service customers across the physical and digital channels. This simple and proactive step by retailers has shown great rewards as customers who move beyond just the physical or digital channel tend to increase their shopping by a factor of three to five times. They way forward is most assuredly a hybrid model of physical and digital - a scenario where the distribution of investment between the two can redefine success and failure for many brands in the coming years.
BRICK-AND-MORTAR IN METROS
According to a 2017 report from Morgan Stanley, the Indian online retail space is projected to grow at the rate of 1200 per cent. This means that it will rise from USD 15 billion in 2016 to USD 200
billion by 2026. However, this only includes a rise from two per cent to 12 per cent when it comes to digital retail sales. In contrast, the brick-andmortar physical retail segment is expected to rise from USD 680 billion to reach USD 1.1 trillion by 2020. It is also worth noting that ASSOCHAM estimates that the organised retail segment will grow at 20 per cent annually during this same time. Given these trends, it is not surprising that more and more fashion and apparel brands in India are investing in brick-and-mortar outlets. But what is truly interesting is where these stores are located.
Tier II and tier III cities such as Bhubaneshwar, Chandigarh, Indore, Jaipur, Kochi, Lucknow, Nagpur, and Patna are now some of the biggest retail store investment destinations in the country, according to a JLL India report. This is congruent with the investment these cities have witnessed with regards to retail over the last ten plus years. Since 2006, the investment in these cities has been over USD 6.1 billion, while it has only been about USD 1.3 billion for tier I cities. With increasing consumer spending rising in across nations, and the changing demographic trends, the future of fashion and apparel retail is clearly just blossoming.
To service these growing needs, some market leaders have already begun investing in this rising consumer base to capture a market share. Major Indian brand Raymonds, for example, has identified the gap in these markets and is actively working at spreading its reach over the next year by 10 per cent. In fact, Raymond is setting up mini-shops in tier IV, V and VI towns as well to get ahead of the competitive curve. In just the first quarter of 2018, Raymonds has set up over 40 such outlets and has plans of 60 more by then end of the year. Similarly, digital-only start-up companies have realised the need to expand their reach through non-digital channels and are taking similar steps. And given the high cost of establishing a brick-and-mortar setup in metros, are spreading out their investment in these rising non-metro markets.
Startup lingerie brand PrettySecrets is one such company which is starting to expand beyond its digital origins to establish 60 exclusive stores and
connect with 600 retail counters in 2018. Also, joining in this trend is Flipkart owned fashion e-commerce brand Myntra which is developing 15 Esprit stores across the country, while Zivame, the lingerie brand, is planning on increasing its store count across cities from 26 to 100 by the end of the year. Among the big players, international brands such as Zara is increasing its store distribution from its current 21, by up to eight more in the coming year. Similarly, H&M has already established stores in cities like Raipur, Mohali, Hyderabad, and Indore, and is now adding cities like Mysore and Ahmedabad to its ever increasing chain of stores. This isn’t surprising since H&M India CEO Janne Einola has stated that in the company’s experience the offline channel is still a majority sales driver.
THE FUTURE IS EVERYWHERE
It has become abundantly clear that digital or physical alone can’t win the market for fashion and apparel retail. However, the struggle to expand beyond the metro markets is no longer the biggest challenge that brands face. With the advent of digitalisation and improvements in demographics, there are more consumers than ever, outside of metros. Online retailing has shown that people outside of metros are making the same purchasing decisions as those in the metros. From affordable clothing to luxury and sports brands, the increase in product differentiation is allowing people everywhere to desire more. Major retailers are now strategically looking at spending patterns and consumer behaviour to determine where and how many stores will be the right move for them to ensure their growth trajectory. In the end, we can rest assured that global brands will find their way into the most local parts of India.
ONLINE RETAILING HAS SHOWN THAT PEOPLE OUTSIDE OF METROS ARE MAKING THE SAME PURCHASE DECISIONS AS THOSE IN THE METROS.