If Digital Is Future, Why Do Online Brands Want Physical Stores?

When Priyanka Salot and her spouse Harshil Salot founded The Sleep Company in 2019, the couple envisioned a direct-to-consumer model that would bypass brick-and-mortar retailers, drawing tech-savvy consumers.Though the pandemic accelerated adoption and demand online, the startup soon discovered the old-school benefits of having a physical store. “Touch and feel are important aspects of retail business,” Priyanka told BQ Prime. The mattress company launched its first store in Bengaluru this year. It plans to add 25 outlets in Hyderabad, Kerala, Chennai, Maharashtra, and Gurugram in six months. And aims to hit a revenue of Rs 500 crore in two years.Growing online demand spawned new internet-first brands like The Sleep Company, creating a niche market comprising about 600 such small firms. According to Tracxn, 410 started out in the last two years during the pandemic amid elevated interest from venture capitalists. Management consultant Technopak estimates the market to grow from $1.9 billion to $22 billion by March 2025. The number of online shoppers in India is expected to surge twofold to 30 crore with penetration doubling in five years, according to Bernstein. But as the economy reopens, e-commerce has become increasingly competitive with digital-first firms seeing a slowdown in active users, said Bernstein analyst Rahul Malhotra in a note. "The recent customer metrics have been inconsistent with the strong growth expectations." Even a matured brand like Nykaa lost daily active users. There are limitations to digital growth. Of the 600 digital-first brands Technopak analysed, less than 5% has annual revenue of Rs 100 crore. About 2% clocks Rs 20-90 crore in annual turnover, while 75% is less than Rs 20 crore. "To grow beyond this level, the D2C players need to expand their market," the Technopak report said. Even large players like Nykaa, Licious and BoAT took about seven years to cross Rs 500 crore in revenue and that too with a mix of offline (30%), own channel (40-50%) and marketplace (30%). .Lifestyle company Madbow Ventures Ltd. launched its second StreetStyleStalk store in Gurugram earlier this month. It plans to add eight exclusive stores within six months, besides 40-50 multi-brand outlets in 12 months.“Shoppers are present both online and offline and ignoring one platform can result in losing out potential customers,” said Naveen Mahlawat, co-founder and chief executive of MadBow Ventures. “Post the pandemic, consumer behaviour has changed drastically."Digital-first mCaffeine, owned by Pep Technologies Pvt., began physical sales in August last year with a plan to have its products across 10,000 outlets. Its beauty market peer MyGlamm (Sanghvi Beauty & Technologies Pvt.) opened an experience centre in Mumbai in 2020, with products now reaching 30,000 outlets. Furniture retailer Wakefit.co aims to add 25 stores this year, targeting a revenue of Rs 1,000 crore.Others such as Plum (Pureplay Skin Sciences Pvt.); Sugar Cosmetics (Vellvette Lifestyle Pvt.); and The Man Company (Helios Lifestyle Pvt.) have also sensed the brick-and-mortar potential.It was always part of the plan, said Chaitanya Ramalingegowda, director and co-founder, Wakefit Innovations Pvt. "However, this came to being as we broadened our portfolio. We now have hundreds of stock-keeping units, so we believe the investment into offline at this time is justified."For beauty retailer Purplle, now among India's unicorns, sales at physical have seen a "revenge comeback".“While online [sales] have been impacted because of inflation, there are tailwinds offline," its founder and chief executive officer, Manish Taneja, told BQ Prime. Two of its private brands, Faces Canada and Good Vibes, are growing at “breakneck pace” as people return to physical stores.“We have grown 70% year-on-year because our brands benefited from stores reopening," Taneja said. "Else, it would have been slower in an inflationary environment when people cut budgets.”Brick-and-mortar companies that ramped up online during the pandemic, too, are taking new brands offline. Kalyan Jewellers is contemplating opening physical outlets for its digital-only brand Candere. The first one will be launched in the next quarter and the focus is on customer engagement.“What we understand is that certain customers prefer seeing the product physically,” Ramesh Kalyanaraman, executive director at the company, told BQ Prime. “We have been growing at an average CAGR growth of 80% since 2017 and hence there is no visible slowdown in online growth. But with physical stores, we are trying to improve the conversion rate.”.Offline outlets have high operating expenses including rent and employee costs. An advantage digital-native brands have is adequate consumer data to study demand, product development and costs. That helps select locations for stores where demand is.What also gives the brands confidence is that they have achieved a certain scale, according to Ankur Bisen, senior partner and head of retail at Technopak.Some are already backed by entrenched consumer goods makers. While Emami Ltd. purchased a majority stake in The Man Company (Helios Lifestyle Pvt.), Marico Ltd. acquired 60% in Apcos Naturals, the owner of ayurvedic brand 'Just Herbs'. ITC Ltd. invested in Mother Sparsh Baby Care Pvt.Mother Sparsh ploughed the funds into marketing, increasing the share of website sales in the online channel to 35-45%, according to Himanshu Gandhi, co-founder and chief executive officer.The company also eyes aggressive offline expansion, Gandhi said. “We are targeting the likes of A Plus supermarkets, hypermarkets to penetrate deeper,” he said. It aims to hit Rs 100 crore in sales this fiscal..Makers of cosmetics to shaving foams are betting on shoppers like Mansi Singhi and Meena Tiwari.The 35-year-old Singhi, a software engineer, visits shopping malls to sample jewellery, apparel, electronics and even coffee. But she buys them online as she doesn’t have to lug huge shopping bags home. “At times, prices are also cheaper online,” she said.Tiwari, 51, however, buys everything from physical outlets. She is simply “not satisfied” with online shopping. “I get a variety in stores.”The kind of customers the Salots' of The Sleep Company wouldn't want to miss.

If Digital Is Future, Why Do Online Brands Want Physical Stores?

There are limitations to digital growth, and online-only brands have realised that.

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