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12.20

Brick e-commerce: How Online-Retailers Develop Offline

The largest world e-commerce companies have been developing physical shops for years. Ukrainian online retailers have followed their example. Why do Rozetka, Makeup, Kasta, and other companies increase their presence offline?
 
Most traditional retailers, including Ukrainian ones, have long realized the importance of online presence, especially during the pandemic and the total closure of non-food stores. Many classic retailers have done well. Large fashion groups, networks of children’s and sporting goods, drogerie segment players, cosmetic, perfumery stores, and even DIY and FMCG networks increasingly launch their online stores or increase their virtual presence through the partner online platforms.
 
However, we’ve seen a lot of movement in the opposite direction abroad. Amazon is the most famous example. Apart from developing retail outlets without cash registers, Amazon Go, 4-Star markets, and Amazon Books, Bezos' company acquired a large American chain Whole Foods chain for $13.7 billion just a few years ago. It has also started developing its own retail outlet Amazon Fresh this year. 
 
The Eastern giants are also seeking omnicality. In November 2019, the largest JD.com Internet store in China opened a stationary 50,000 sq. m hypermarket. It contains more than 200,000 items of electronics, furniture, household appliances, goods for health and beauty, books, essential, etc. According to the company, it operates fantastic 2.5 million retail outlets (including partners). More recently, Xu Lei, CEO of JD Retail, has stated that the retailer expects to reach 5 million offline points by 2025 within the retail development strategy.
Alibaba also Invests in the offline presence. Recently, the company has announced the purchase of 500 Auchan and RT-Mart hypermarkets in China. All these examples illustrate not only the real benefits of presence in physical space but also the gradual boundaries’ removal between online and offline trade. Interestingly the current coronavirus pandemic is only accelerating these processes worldwide and in Ukraine.
 
Show the Stuff
 
The perfume and cosmetic retailer Makeup is the most recent example of an offline classic e-commerce player in Ukraine. The company recently opened its first physical shop in the shopping center Atmosphere in Kyiv. The total area of the shop is about 260 sq. m, and the retail floor space is over 230 sq. m. At the same time, the company claims that the facility is based on the concept of a showroom. Its primary purpose to present the products rather than to sell them.
 
As Lubov Kalyuzhnaya, the Marketing Director of Makeup explained to RAU that this project has been planned for a long time. It primarily provides clients with the opportunity to meet rare brands and products that are challenging to find in other offline shops. According to her, the company is now working on a similar project in the European Union and soon plans to open a showroom called Makeup in Warsaw, the capital of Poland. “However, we primarily develop our resources and capabilities as an online retailer. In the nearest future, we’ll launch the websites in other key countries of the European Union. So, we’ll continue active development as one of the leading players of European e-commerce,” Kalyuzhnaya emphasized.
Rozetka, the largest e-commerce retailer of Ukraine, also intensified its “brick” network’s development this year. The company has recently opened the fifth flagship store in the country. By the end of November, it had 75 stores and distribution points in 25 cities.
 
In 2020, Rozetka announced the launch of the franchise for retail markets. According to Vladyslav Chechyotkin, co-founder and CEO of Rozetka, the capacity of the Ukrainian market allows the company to expect the opening of about 1,000 physical sites. The retailer intends to continue the process of active offline expansion next year. In 2021, we plan to develop a flagship network in the cities with over a million people. Now we are looking for a suitable location to open the shop in Lviv,” Chechyotkin noted. 
 
The company’s press service notes that Rozetka has several obvious reasons for going offline. First, the customers always want to see, touch the product, and test it. Secondly, an offline retailer can ask a customer to unpack his purchase and make sure it fits. Thirdly, Rozetka’s offline stores have fittings to allow the client to try items on. In this way, the consumer will be satisfied with the purchase or immediately return it.
Faster delivery is another offline stores’ advantage. The buyer picks up the order or makes purchases locally, reducing the burden on the couriers. Besides, the client doesn’t have to wait for delivery at a specific time that increases the customers’ loyalty,” Rozetka’s management stresses.
 
Alternatives to the Store
 
Rozetka uses four formats at once for offline development: a delivery point, a mobile delivery point, a post office, and flagship store. Delivery points are small and versatile retail spaces with dispensing and fitting areas. Some of them have showcases with essential goods, accessories, related goods, most popular positions, and alcohol department. Mobile delivery points are presented as branded buses in the mall’s parking lots where you can pick up your order. The post offices are small self-service delivery points where customers can pick up small orders. They operate from 6 am to midnight, mostly located near subways.
As for flagships, they operate as full-fledged retail stores. As a rule, they have a large dispensing area, credit managers’ services, “Information” and “Service Department” stands, and many showcases with thousands of goods of different categories. At the same time, the companies tried to create a space that combines online and offline. People can get online orders via electronic queue or offline through the express cashiers.
 
Rozetka opened a two-story 5,000 sq. m trade exhibition center on Podil in early 2013. There were showcases with electronics and home appliances, sports accessories, travel gear, toys, etc. In 2017, the company presented a new flagship (6,000 sq. m) on Petrivka in Kyiv. The company says that these stores serve from 3,000 to 5,000 customers in working days. This number doubles and even triples on New Year’s Eve and other holidays.
 
Apart from Rozetka, another large online player – the Kasta marketplace – has been developing its offline presence for several years already. However, the company does not consider the possibility of opening full-fledged stores. It concentrates on the delivery points’ development. There, customers can not only pick up but also try on the items ordered on the marketplace. Other services aimed at increasing the convenience of online shopping are also available. In particular, contactless payment (Kasta ID), package quality control, the instant return of VA, and others. The company claims that this project has already proved its success. “The service is in demand because nearly 70% of Kasta orders pass through a relatively small number of departments (135 points in 75 cities),” the marketplace’s press service states.
Retail & Development Advisor Consulting Company believes that this format of offline presence helps eliminate some stop factors that potential online customers often face. For example, potential customers often refuse to buy online because they can’t touch, try on, or verify the product quality. Therefore, Alexander Krupka, RDA expert, says that the delivery points with dressing rooms and an opportunity to cancel the order are a great solution for online players.
 
Kasta notes that the strategy for opening new physical branches is now more based on co-branding with strong logistics players. “This strategy allows us to quickly scale up our business model. We monitor the services’ quality in these offices through training, testing, and testing. There are 135 full-fledged locations (40 of our stores and several dozens of co-branded ones) in our offline network now. However, we plan to open at least several hundred more similar offices next year,” Kasta’s press service adds.
According to Alexander Krupka, this approach is also reasonable. The ability to scale up offline delivery points rapidly and minimal investment are its main advantages. “On the other hand, it is challenging to control the quality of the service provided in partnership facilities,” the expert warns.
 
Lost in Translation
 
According to Krupka, the process of the online retailers switching to offline is still at an initial stage in Ukraine. “Since classic retailers have been selling online for a long time, they have gained some competitive advantage over classic e-commerce retailers. Accordingly, the latter needs to catch up, building their presence offline,” he believes.
According to the expert, system market players understand that online presence cannot completely replace offline experience. That’s why they appreciate the prospects of physical retail development. Apart from the new sales channel, offline can significantly improve brand awareness and expand the client base. Krupka believes that soon, it will be possible to see another, as long as not presented on the market, formats of e-commerce presence in Ukraine. 
 
“It comes to various collaborations, hybrid offline and online retailers’ formats, and various innovative formats. Developed countries have already opened full-fledged self-service shops without staff, fully automated and customized for purchases. There are many similar examples abroad. It is not unlikely that we’ll be able to see them in Ukraine soon,” the RDA expert adds.
At the same time, RAU’s interlocutors draw attention to the fact that it will be challenging for Internet retailers to play on their offline competitors’ field. At the IDNT Company, specialized in developing retail formats (including participating in Rozetka offline points’ launch), they previously highlighted several primary challenges that online players face when entering a traditional retail outlet.
The first difficulty is the lack of expertise offline. The second one is a completely different structure of expenses, including rent, utilities, personnel, logistics, etc. The third issue is another management. As physical space limits the shelf length, a different approach to the assortment formation is required,” Mykolai Chumak, the founder of IDNT, said to RAU.
 
Rozetka confirms that the company did have to develop its expertise during the offline release. “, There was no one to learn from at the initial stage. So, we have to dive into self-education, including navigation, showcases, equipment layouts, selection of goods and categories, check-in testing, and mobile queues formation. At first, the customers came with fear. They were surprised by the electronic queue on board, asked if they could see the goods before paying. Then, they have known that it is possible to choose the goods together with consultants right from the shelf. They could also make the order, having picked it up at the delivery point,” Rozetka says, adding that there were two other key difficulties except for the lack of experience.
 
The first problem was to find a room with enough space in a good place, with access roads, parking lots, and the possibility to make a ramp to unload goods. The second issue was a shortage of staff on the labor market, so the HR department of the company was constantly in the process of finding employees for offline points. 
However, all these hardships weren’t compelling. Online players worldwide have been able to increase sales significantly, receiving significant funding under coronavirus pandemic and quarantine restrictions. As the epidemic will be fading, they may be able to use these resources to increase physical space, especially considering the pandemic-weakened offline players.
 
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