Startups go physical from digital as pandemic boom ends

• As pandemic craze settles down, several startups in the consumer tech space like Byju’s, Unacademy, Vedantu, Pepperfry, BlueStone and CaratLane are rushing to open offline.
• Brand creation, expansion and a huge offline market are some of the reasons behind growing offline models.
• Also, the fact that India online is still 10-12% of the total commerce and 85-90% is still offline, which is a much larger pie for grabs.

India has been registering almost 80 startups every day and the count has grown in the last couple of years. Pandemic saw every other startup investing and marketing their strong online presence thinking it will last forever.

Now that the pandemic boom has faded, edtech startups like Byju’s, Unacademy, Vedantu or furniture retailers like Pepperfry, Wakefit are working to expand their offline presence – into brick and mortar stores, or in some cases, launching their own stores.

Experts believe that brand creation, expansion and a huge offline market is why consumer startups should open offline stores as well.

“According to multiple industry reports, the Indian online market is still just around 10% of the total retail market of which about 90% is still offline, which is a much larger pie. Online businesses are therefore coming offline for multiple reasons -- brand creation, expansion. The market is much larger offline so they would want to have a share of the pie,” Amit Nawka, partner – deals and India startup leader at PwC India told Business Insider India.

The emerging hybrid model
After the pandemic consumers are looking for a personal touch and visiting stores, which is proving a challenge for such consumer startups. Most cash rich online companies are acquiring companies to help them build an offline presence, quickly. It’s already visible in the edtech space as students have developed screen fatigue during two years of the pandemic.

Experts say that Byju’s Akash acquisition was to make its mark offline. And Unacademy and others would have to follow suit.

In an emerging digital era, even offline stores are still a priority for many, online and offline models are supposed to work seamlessly with one another -- store for people to walk in and experience the brand and then also purchase online.

Offline play is now being called an ‘omni-channel approach’. FirstCry and Ratan Tata-backed retail jewelry companies like BlueStone and CaratLane which were predominantly online players have started going offline.

The costs, cannibalization - the Nykaa case study
Nykaa, which is more of an e-commerce company for beauty, wellness and fashion products, has been opening stores to let consumers recognize their brand in person.

Since 2014, Nykaa has turned omnichannel and opened physical retail stores to get closer to customers. Its retail store count has come up to 95 across 47 cities in the country and has declared plans to triple the store count to 300 across 100 cities.

“On the surface, this seems like a distraction from the digital-first, tech enabled positioning that the company continues to portray. However, it is important to understand the strategic reasons for the company to aggressively pursue store expansion,” said a report by JM Financial.

While it could be a long-term strategy, in the medium term however brokerages feel that going offline could be a stress on the balance sheets of companies – especially those which are on their path to profitability.

“Besides providing some brands (and within that only some SKUs) the route to market in the physical world in addition to the online realm, we do not see any rationale in entering this business. There will be significant overlap with other providers such as Jio
and Udaan, not to mention its own distribution in some cases,” said an IIFL report on Nykaa.

The report also says that physical stores might result in cannibalization of business for beauty and personal care products in Nykaa. It gets a lot of business from small towns which do not have retail presence and this business can be eaten away from its own physical business, according to IIFL.

Will buy online but want to ‘see’ offline
J M Financial however believes otherwise. In urban and rural areas both, a majority of the population still feels comfortable transacting on digital platforms when they can connect it to a physical presence as well.

“The retail footprint provides peace of mind to the customers and, hence, becomes a strong brand building factor as well,” said the J M Financial report.

Tech innovations such as virtual try-ons work to some extent for certain products but having the opportunity to access a store can be a game-changer. Purple too went for the Faces Canada acquisition, which was predominantly offline.

Quick commerce adding warehouses or dark store
Retail businesses are in need of brick and mortar presence, the most. Quick delivery platforms -- Zomato, Dunzo, Bigbasket -- are also expanding their warehouses as they promise to deliver groceries in 10-15 minutes.

A dark store is generally a large warehouse that can either be used to facilitate a ‘click-and-collect’ service, where a customer collects an item they have ordered online, or as an order fulfillment platform for online sales. These quick commerce platforms rely on these dark stores for quick deliveries.

During the pandemic, online businesses have expanded and thrived but as they tried to ‘take over’ from physical businesses, they saw something they never probably saw earlier – how close they can get to their customers and how many more they can reach physically. This is the starting point of the trend reversal in startups and new-age digital businesses.

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