Store rentals a major factor in pushing retailers towards e-commerce

Key Highlights:

• E-tailers expected to reach 2% of retail segment in India in two years.
• Rental costs in Tier-I cities expected to shoot up further.
• Retail market estimated to grow to $1150 billion by 2020.

It is not the booming online market but a high and unaffordable rental spaces that may force retailers to look at e-commerce to increase sales. 

Currently, retailers selling goods via the internet is estimated to be just 1% of the total retail industry, Madan Sabnavis and Darshini Kansara, analysts from Care Ratings said in a report dated June 2, 2017.

This is expected to reach 2% of the retail industry segment in the next two years as offline retailing has become costlier, an industry expert told Zeebiz.

"Rental spaces have increased over 10-12% of lease rental costs in Tier-I cities in the past few years and is expected to increase further. It has become much more economical for retailers to focus on trade expanding trade in the online sphere," the expert said.

Care Ratings estimated that the retail market size to be $672 billion in 2016 and would grow 12-14% over the next four years and reach nearly $1.15 trillion by 2020.

“After conquering physical stores, retailers are now foraying into the domain of e-retailing to leverage the digital retail channels (e-commerce), which would enable them to spend less money on real estate while reaching out to more customers in tier-2 and tier-3 cities,” Care Ratings said.

Image Source: Care Ratings research/ Zeebiz.com

“Existing shops are highly unlikely to close however the retailers will not be venturing out to rent more spaces in these cities where the rent is very high,” the expert said.

Another reason for e-tail picking up is the omni-channel method by retailers, wherein a multichannel approach to sales is being adopted through enable shopping online from a desktop or mobile device, by telephone or in a brick and mortar store.

“According to ASSOCHAM, the value of online retail purchases made by consumers in India is projected to cross $100 million by 2017,” the Care Ratings report said. 

Care Ratings also listed out ‘drivers of e-tail in India’ as below:

1. Young population 

2. Promotional prices by online retailers 

3. Cash-on-delivery options, manufacturer’s warranty: - Cash-on-delivery is the most preferred payment option with about 45% of buyers opting for it in India  

4. Improved supply side - Discounts, promotions, product details, hassle free returns, cash on delivery options, etc.