In today's Finshots we see why so many digital first brands are switching back to physical stores.

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The Story

Blissclub is an online, direct-to-consumer (D2C) brand. It sells activewear to women — think sweatshirts, sports bras, and leggings. And it’s made quite a name for itself doing this digitally over the past 2 years. But this weekend, Blissclub broke the D2C norm. It launched a physical store in Bengaluru.

And here’s the thing. Blissclub isn’t the only D2C brand that’s pivoted from its online-only strategy.

The shift towards brick-and-mortar stores is in full swing. Just look at Mamaearth, the digital beauty and wellness company. As The Ken pointed out, its physical store sales are contributing big time to its topline. From just 9% in March 2020, it has soared to 35% by September 2022. Mamaearth is fast becoming a typical brick-and-mortar business.

Then there’s Pepperfry, Nykaa, Lenskart, Wakefit, Licious…I could go on and on listing out the brands that promised digital disruption but are going old school now. Back to physical stores.

And this is all quite confusing, no?

People claim the future is online. That consumers prefer convenience from the comfort of their homes. Also selling online is a gateway for data aggregation. You know how long your customers are hovering over a page. You know what items they’ve added to a cart. You know what they’re buying. And you can track it all in real-time and keep churning out the best sellers.

And not to forget, they don’t have to invest massive sums in setting up and running a retail store. There are no exorbitant rents. There are no wages for staff who otherwise have to handhold customers. And there’s little maintenance.

So, the big question is — Why?! Why are these digital brands going the brick-and-mortar route?

Well, maybe we were wrong when we assumed that being digital is simpler.

For starters, when a D2C company begins to make a name for itself, you get a lot of copycats jumping in too. Everyone wants a slice of the great Indian consumer market with 130 crore people. But it’s not really so many people. At best it’s around 4 crore people. Because as we’ve written earlier, “Some estimates suggest that only 3% of Indians take home an annual salary of more than ₹5 lakhs.”

They’re the ones who can afford these niche D2C products.

And with every D2C brand targeting the same set of people, you have to think about customer acquisition. The way everyone goes about this is by splashing ads on social media platforms. And if you’re a fledgling D2C brand that’s making waves, you also have to deal with competitors with more cash cannibalising your brand. Rivals will take out ads with keywords that might include your brand name. So when people search for your brand, they’ll probably see your competitor right at the top. It drives the marketing cost upwards.

It’s tough.

Now think about it, if you’re paying so much money to acquire customers, that’s kind of like paying rent for a store anyway.

Only now a physical store has been replaced by a digital storefront whose running costs include “ad spends” on Facebook and Google.

So if you’re sinking a lot of money in acquiring new customers online, why not just do it offline?

Because the truth is — maybe offline is simply worth it in the long run.

What do we mean?

Well, a few years ago, professors at Wharton and Harvard delved into this phenomenon and found something quite interesting. Customers who visit a physical store spend more money. In fact, they spend 60% more on average per order. They’re willing to splurge on higher-priced items. Instead of simply buying casual T-shirts, they might spend more on buying formal shirts. They’re expanding their shopping basket.

It’s not just that. These customers even frequent the store more often. And they’re not window shopping. They’re taking out their wallets — the time between purchases also dropped by 28% versus online shoppers.

The cherry on top? They also don’t return products as much. The sale is done and final.

All this leads to one thing — the cash register rings ka-ching at physical stores! And this is what the researchers called the ‘supercharged consumer.’

But why does this happen?

Well, look at your own behaviour. Haven’t you seen a product online and thought to yourself, “If only I could touch and feel this product? It would give me a sense of quality.” Or, “Damn, the sneaker I want is out of stock in my size. If only I could speak to a knowledgeable salesperson and get their suggestion on an alternative.”

One of the researchers even has an interesting parallel to show that a physical store deepens the relationship with the customer.

“If you start to connect with someone through Facebook [maybe Tinder?], first you chat, then you get a text message and eventually you make a phone call. … You get together for a coffee, and you see each other. … So all of this improves the relationship, making you closer to each other."

Maybe this explains why online D2C brands are now embracing old-school brick-and-mortar stores wholeheartedly.

What do you think?

Until then…

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PS: By the way, 10 years ago, famed tech VC investor Marc Andreessen said, “Retail guys are going to go out of business and ecommerce will become the place everyone buys. You are not going to have a choice. I’d bet on the pure plays in ecommerce. Software eats retail.”

Maybe VCs can’t always foretell the future?