The rise of e-commerce giants such as Amazon and Flipkart, alongside the emergence of Direct-to-Consumer (D2C) brands, led many to believe that traditional brick-and-mortar companies were facing unprecedented challenges. The prevailing sentiment was that the future belonged exclusively to online platforms. However, a closer examination reveals a more nuanced reality.
In this article, we aim to explore whether the e-commerce revolution is genuinely disrupting traditional retail businesses and what implications this holds for investors.
What’s Happening?
A decade ago, tech VC investor Marc Andreessen boldly said, “Retail guys are going out of business, and e-commerce will become the place everyone buys. You are not going to have a choice. I’d bet on the pure plays in e-commerce. Software eats retail”. However, the current landscape presents a contradiction. Renowned D2C brands like Nykaa, MamaEarth, Lenskart, Pepperfry, and Wakefit, etc., are not only maintaining an online presence but are also establishing physical stores.
The Return to Physical Retail
While online channels provide easy access to India’s vast population of 1.44 billion, many brands are revisiting the traditional brick-and-mortar model. Several factors contribute to this shift. Firstly, the income distribution in India, as per a Goldman Sachs report titled ‘Affluent India’, indicates that only 6 crore Indians earn an annual income exceeding Rs 8.3 lakhs, making it crucial for brands to tap into the remaining population strategically.
Moreover, fierce competition results in higher Customer Acquisition Costs (CACs) for D2C brands, forcing them to explore alternative avenues. Studies from Wharton and Harvard Business Schools suggest that physical stores encourage customers to spend 60% more on average and reduce product returns, adding a unique dimension to the retail experience.
The company launched 13 new stores in Q2 FY24, taking the total count to 165.
The Resilience of Traditional Retail
Contrary to predictions, well-established brick-and-mortar stores like Zudio, Pantaloons, D-Mart, Reliance Trends, and others are not only surviving but thriving. Sales growth for these retail chains has been impressive in recent years, with expansion plans in full swing.
According to analysts at Motilal Oswal, Trent Limited, a Tata Group subsidiary that owns flagship stores like Zudio and Westside, is expected to surpass Rs 10,000 crore in sales within the next year, growing at a CAGR of approximately 31% for the foreseeable future. Similarly, Avenue Supermarts, the operator of the D-Mart chain, continues to attract investors due to its remarkable and consistent sales growth.
While these traditional brands have a limited online presence, it is noteworthy that this segment forms only a fraction of their total sales.
What’s in it for Investors?
The coexistence of online and traditional retail models implies that investors should not dismiss one in favour of the other. Moreover, it’s crucial to recognise that both goods and services fall within the purview of these businesses.
For investors eyeing online-only brands, the focus should be on their journey toward sustainable profitability. Metrics such as Average Order Values (AOVs), repeat customer visits, and Customer Acquisition Costs (CACs) are pivotal considerations.
On the other hand, traditional retail investments should be assessed based on the consistency of sales growth and industry-leading profit margins.
In conclusion, opportunities abound in both the evolving e-commerce landscape and the resilient traditional retail sector. Investors stand to gain by navigating the intricacies of these diverse business models.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The companies mentioned in the article are for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
