Brick and Mortal?

“Software is eating the world”

says Marc Andreessen the legendary founder of Netscape, and one of the most respected VCs and tech savants today. If you were living in India, however, you would believe that what is eating the world, or at least every single traditional business, is ecommerce.

The hype is resounding and all-pervading. The newspapers, both business and otherwise, seem to write about nothing else. There seems to be an exodus of star employees from companies and top business schools towards all things ecommerce. Billions of dollars are being thrown into its maw, to be swallowed and regurgitated as massive discounts for consumers, and full page ads for lucky newspapers. This one-horned beast seems to be galloping across the business landscape, leaving the traditional businesses floundering in its wake.

So, will ecommerce obliterate traditional business and retail? If I had a dollar for every time this question has been thrown at me, I would perhaps be as rich as one the billionaires that ecommerce has spawned.

The short answer is actually very simple, and short: “No”. The slightly longer answer is: “Both will coexist; however, traditional businesses will have to change their value propositions, and sometimes business models, to do so”.

Let us take case of books: the place where ecommerce came first, and a category which perpetuates perhaps its best known myth: how the traditional books retail business was wiped out by this beast. A few decades back, books used to be sold in neighborhood bookshops. These small shops had a limited selection, put together lovingly by the owner, fair pricing, and, usually, a great atmosphere and personal connect. The owner would know every regular customer and her tastes, would cater to them individually, and banter with them as he clocked in the purchase. Then 20-30 years ago, the big stores happened – the Barnes and Nobles, and the Borders of the world. These stores offered massive variety, much lower prices, huge selections and topics, and also free coffee and cookies on the side. Customers moved in droves attracted by the sheer numbers and varieties of books offered, at much lower prices. And the corner book shops slowly started to die…

And then Amazon happened. It offered the same customer promise as the big stores, just a quantum higher. The inventory, and therefore the range and variety, was infinite. The prices were unbelievably low. Delivery, with Kindle, was instantaneous and the prices, even better. The big stores struggled to compete, primarily on price and range, but they could not match Amazon on these two things – it just was not possible, given the completely different business models, technology and cost structures. And so, the big stores slowly started to die. Only Barnes & Nobles is left, but it is on its last legs. And so, as people would triumphantly claim, ecommerce killed traditional retail.

But if you look a little deeper, that is not true. What started happening, to everyone’s surprise, was that the corner book stores started coming back! Today, there are more corner book stores in the US then were there a decade back, and they are growing. Well, the reason is that what these corner stores offer you – camaraderie, warmth, a curated collection which you like; the Amazon’s and its ilk cannot. If you want cheap books go to Amazon; if it is human connection, toddle over to the corner store. So, the corner book stores offered a value proposition that Amazon could not, and thrive. While the big box physical retailers tried competing with online retail on price and variety, which the laws of economics, and physics, would not allow them to, and so they died.

You would argue that these corner book stores are closing down in India – there have been numerous reports of them shutting down in Delhi, Mumbai, even Bangalore, at the onslaught of ecommerce. Actually, if you peel the onion one more layer, in almost every instance you find that it is the rentals that have become unaffordable and forced them to shut. They have been crowded out, not by the Flipkarts and the Amazons, but by the Dominoes and the Benettons and the Samsungs, which want the same high street or mall space and can pay much higher

But, what about music, say the naysayers; has not ecommerce killed the record store. Well, yes, the record store is, sadly, dead. But it is not ecommerce which killed it: it was a superior technology and business model. Music became digital and therefore could be instantly transported and downloaded; and the iTunes and Spotifys of the world came and changed the way money was made in music – ad supported or pay-per-song, rather than paying for the entire analog record.

Hey, but what about fashion and gadgets and travel? Well, offline still rules the roost in fashion, not only in India but everywhere in the world. The world’s largest and most profitable company in fashion is Zara, and it opens a new store every few days. The Myntras and Asos of the world are great stores, and coexist happily with the physical showrooms; they have not and will not replace it. Ask Amazon, and its struggles in fashion etailing since it was born. Gadgets are interesting – they have a huge amount of online sales, and ecommerce is a credible threat. The Best Buys of the world are struggling, and gadgets may become the first category where e-tail dominates conventional retail. Travel is interesting too. Ecommerce has not replaced hotels, or homestays or guest houses; you cannot go and stay in a mobile app. However, it certainly has made the process of booking it, and getting there, easier.

One can go category to category, and business to business – the story is the same. For all the hype, ecommerce is 1% of total Indian retail; with all the momentum and funding that it has, it will triple or even quintuple – some at the cost of traditional retail, but more by expanding overall retail and consumption, as the economy grows, and ecom fuels this growth. In the US, the most mature Internet market, with the Amazons of the world, ecommerce is still less than 10%. China, with Alibaba, is somewhere around 6%.

What is indisputable, is the fact that ecommerce business model is here to stay and grow. It will help shape the economy, drive up consumption, create excitement and wealth, and make many entrepreneurs wealthy. Most importantly, what ecommerce is doing is that it is changing consumer consumption behavior. Buying something meant going to a few shops, physically feeling the goods, experiencing customer service – good or bad, paying at the cash counters and taking stuff back home. A whole industry was built around this shopping and consumption behavior: real estate, point of sale, store staffing, visual merchandising, etc.. That is changing – is now about sitting at home or anywhere else, getting recommendations thrown at you based on your shopping history, and buying something, with a few taps of your index finger. And, whole new industries are being created around that – logistics, payments, analytics, warehousing…

It is clear that traditional businesses will have to adapt and change their business models to capitalize own what they do best – experience, service, personalization, the touch-feel, etc., rather than compete on inventory and discounts. Many of them are successfully doing so; a few have started the journey. So, ecommerce is here to stay, and grow, and change the way your consumers think, evaluate and buy. But will it kill traditional business and retail.