Monday, March 18, 2013

Store Vs. Website. Where are retailers putting their money?

If you spend even some time watching TV, there are two kinds of adverts you are not going to miss. The first one would guarantee 800 or 1000 sprays of underarm deodorant and the second one would be the online stores like Jabong, Myntra, Flipkart and many others. While real estate consultants like us are grinding our noses to the stone, trying to get retailers to open new stores, online stores are doing brisk business and laughing all the way to the bank!

flipkart alexa traffic ranking
Flipkart has a traffic ranking of 12 in India!
We often wondered whether people were really spending time and money on these websites. This prompted us to check Alexa, the global website traffic watchdog and we found out that Flipkart has a global traffic ranking of 210 and an India traffic rank of 12! Now that is serious.

Is online shopping really happening in India?

But what are the real reasons for these online shopping portals doing brisk business? Apart from the pricing, easy layout and selection experience, there are some more concrete reasons.

#1. Impulse buying with cash on delivery: We asked the youngsters around about why they were buying stuff online? Most said that when a new fashion arrived or something new just had to be bought, it was best to go online and make the purchase. That, because there was no money to be paid! The pocket money could be coming in a day later or even a week later. The company delivering the goods calls in and confirms the time of delivery with the purchaser and this is when, online shoppers call for delivery when they know the money would be ready. The delivery guys even wait for a week or more if needed. When a lot of retail depends on impulse buying, the online shopping experience takes this to the hilt! Period.

#2. Freebies: A young man we interviewed said that when you pick up stuff worth INR 3 thousand on a popular web portal, you get a coupon worth 1500 bucks! The next time you buy stuff worth INR 3 thousand from the portal again, you can encash the coupon you received earlier with some conditions attached. In reality, it does translate into heavy savings. And add to that the convenience of #1 above and you have a winning business model.

Some serious data for you to ponder over:

Browsing through some data of new store openings globally, we came across some interesting info from Kohl's Departmental stores. The headline from the retailer's press release read: "Kohl’s Department Stores Opens Nine New Stores." That could be the high water mark in terms of store openings as the department store chain has just three more stores scheduled to open this year.

Those numbers are down sharply from years past. Last year, Kohl’s opened 20 new stores and a new 951,000 square foot e-commerce distribution center. In 2011, it opened 39 new stores. In 2007, it had opened a record 112 new stores!

The days of heady rapid expansion and real estate spending may be all but over for Kohl’s and many other retailers with established national platforms. Already reeling from growing competition online, with the 2008 recession retailers’ real estate departments had to change how they did business on a day-to-day basis. And that meant maximizing sales in their existing portfolios instead of opening new store locations.

All across India, we seem to seeing the effect of this first hand. TD (Trading density, which would roughly mean sales per Sq ft for a retailer) has become a key factor in the retail world today, when it comes to opening new stores. The business development wings of most retailers are busy trying to justify how the stores they opened in the past are right expansion decisions. As more and more newly opened stores fail to reach revenue expectations, opening even newer stores become an impossibility. This could somehow explain the article we had written in the past called the ghost demand for retail space in India

So is it really Store Vs. Website for the retailer? Yes! Read on..

Kohl's again proivdes a case in point. In 2011, Kohl's created a sub-department within its real estate department that's primary focus was on managing and maximizing the value of its existing portfolio. The unit was charged with disposing of excess space, renegotiating leases, rightsizing store size initiatives, and working with third-party business partners to aid in solving real estate-related issues.

“As Kohl’s continues to grow, investing in our stores remains a priority,” Kevin Mansell, Kohl’s chairman, president and CEO, said in the company’s new store opening press release. “We are pleased to open nine new locations today and have plans to remodel 30 locations this year.”

But now in 2013, even the capital expenditure outlays for remodelings and renovations are being cut. Last year, Kohl’s remodeled 50 stores. And that money is going to technology.

“Our capex expenditures were $785 million for 2012, $142 million lower than 2011,” Wesley S. McDonald, Kohl’s CFO, told analysts in February. “The change reflects changes in our capital expenditure mix, including fewer remodels and new stores, partially offset by higher IT spending... Our projected capex for 2013 is $700 million.”

“We're spending a lot, a hell of a lot of money on IT,” McDonald added.

McDonald readily aknowledges that the slowdown in new store openings is a function of the performance of its new stores over the last few years.

"As we've grown our e-commerce business, some of (the cost) comes out of the stores,” McDonald said. “By our best estimates, about one-third of the e-commerce growth has come out of the stores, and we're not getting the same kind of returns on our new stores like we used to."

The writing is on the er, web?

Cutting back spending on real estate in favor of e-commerce is a growing trend among major retailers. According to a new survey of 100 retail chief financial officers by BDO USA, LLP, retailers’ investment expectations clearly point to an “omni-channel” push.

When asked where they plan to invest the most capital this year, CFOs were split. Thirty-two percent said overall advertising and promotions would be their biggest investment, indicating they would be looking to entice consumers both online and in-stores. Twenty-nine percent of CFOs said they would invest the most capital in their e-commerce channel, and just about only one in four said redesigning/remodeling stores would be their top investment.

The next time you are about to call your boss to tell him how you expect that retailer to surely sign up for the space that you just showed him, hold on and give it some time. They could use that money to set up an e-commerce ecology. And why not? Every business would want to survive and flourish. The internet could be on the way to being the long term answer to the survival and growth question.
Cheers? We don't know. 

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