E-commerce - Threat to Traditional Retail?

Published by MBA Skool Team, Published on February 20, 2015

E-retail with its innovative business model is radically changing the way people traditionally shop. The demise of companies like Tower Records, Borders can be attributed to growing acceptance of e-retail. The extremely high growth rates are a cause of concern for traditional retail. However, despite glaring advantages, e-retail is only 5% of total retail sales. Traditional stores have inherent advantages in terms of experiential products and a huge supporting ecosystem. But, the market dynamics are changing and traditional stores can’t rely on the momentum barrier to keep out e-retail. The future lies in innovation and the ability to integrate channels to satisfy evolving customer needs.

Emergence of e-retail: How real is the threat for traditional retailers?

Ever since the launch of Amazon and eBay in 1995, E-Commerce has been periodically touted as the next big disruption with the power to drive traditional retail stores to extinction. Tower Records, a retail music chain went bankrupt in 2006. Musicland was sold in 2006. Borders, a bookstore went bankrupt in 2011. The common thread through all these failures is innovation pioneered through e-retailing by companies like Amazon, the Apple Store and Napster. A look at the growth rates in the past 5 years will indicate that we may possibly be headed in that direction. The growth in traditional retail has been 3.3% year on year compared to e-retail’s growth of 17.7% in the same time period.

A look at the overall market statistics, however, reveals a different story. E-retail, although it has been around for more than 2 decades, accounts for a mere 4.59% of total retail sales in the world. This inconsistency between the hype about e-retail and the actual adoption warrants a deeper understanding of the two channels which can also serve as a pointer to the future prospects of traditional and e-retail stores.

The effect of product category on consumer’s choice of retail channel

The consumer acceptance of e-retailing depends on product category, value addition by the seller and engagement required in the buying process. For high value purchases in categories like consumer electronics and consumer appliances, e-retailing has captured approximately 13% and 10%, respectively, of the total sales. The customers often resort to “showrooming” for these categories; experiencing the product in offline stores and then buying it online at lower prices. For experiential products like beauty and healthcare, a majority of the consumers still prefer offline stores but are turning online for repeat purchases for better prices.

Media products like music, movies and books where the physical store adds little value derive a sizeable portion of their overall sales from the online channel.

Online sales of apparel and footwear, primarily experiential purchases, has grown at a much faster rate than offline sales and accounts for approximately 7% of the total sales. One of the major reasons for this is free shipping and returns in e-retailing allowing customers to check fits and sizes.

What “clicks” for e-retail?

Traditionally, the distance between the customers and the retailers was an important determinant on the selection of the retailer and travelling entailed significant costs. With e-retail, physical distance has become almost irrelevant, except to the extent of shipping charges which are mostly waived off. It has also eliminated the problem of information asymmetry between the sellers and buyers with elaborate product information including price comparison across all available sellers, user reviews and opinion blogs.

The product range is a significant competitive advantage for the online stores as the physical stores have limitations on the product range that they can carry due to expensive retail space. The online stores, on the other hand, carry inventory in warehouses or function as intermediaries between buyers and sellers (marketplace model).

The asset light model of the online stores brings significant cost advantages which are passed to the consumers in the form of discounts and special deals. This has attracted price sensitive buyers. For many people, shopping is a necessary evil and the convenience provided by e-retail in terms of time, fuel and effort savings is alluring.

The experience of traditional retail

On the other hand, for many buyers, shopping is a rejuvenating and fulfilling experience which provides instant gratification. One of the major shortfalls of e-retail and strengths of traditional retail is the personal touch or interactive experience. Customer service or in-store assistance is still valued by these customers who are willing to pay a little extra for their purchases.

For most people, the ability to touch feel, try and test the products also contributes to the superior experience of traditional stores. This is one of the major sustainable advantages in favour of traditional retailers which can’t be mimicked by the online retailers without significant increase in costs which would blunt their competitive edge in terms of pricing.

Due to the lag between order and delivery for online purchases, traditional retail stores have a service advantage with respect to the immediate, necessary and emergency requirements of the customer.

Barriers to e-retailing:

One of the most significant barriers facing e-retailers today is the momentum barrier. 95% of total retail sales are still offline and it is going to take a substantial amount of time before e-retail is widely adopted.

One of the other major barriers to e-retail is the ecosystem barrier. With 60% of the population without internet and out of reach of the e-retailers, there is a long time before e-retail can be a realistic threat to the traditional retailers.

For e-retail to grow beyond customer segments who value price, convenience and product information, it has to recreate the experience of the offline stores with a high level of customer service, speedy delivery. Replicating the experience and reducing delivery time through try and buy, free returns, more number of facilities will entail significant costs which will erode the price advantage of e-retail. This business model barrier will need to be tackled for further growth.

What does the future hold?

It will be difficult to sustain customers with singular strategies in the future. Offline customers may gradually experience dissatisfaction due to higher prices. Online customers may gradually detest the disengaged shopping experience. Omnichannel retailing or integration of offline and online channels to provide customers the convenience of e-retail and personal touch of offline stores at competitive prices through economies of scale and wider reach with lesser investment would be an answer to customer needs of price, experience and information. Tesco is a successful example of omnichannel retailing. It installed digital screens in Seoul subway stations for ordering groceries and staples. Customers ordered through those screens and picked up their order through stores. This enabled Tesco to increase its online sales by 130%.

Currently, e-retail occupies a small proportion of total retail and must overcome significant barriers before it can become a real threat to traditional retail. However, it is definitely altering the stakes of the game, ensuring that pureplay strategies either in e-retail or traditional retail stores will have limited success potential.

This article has been authored by Devam Sardana from IIM Ahmedabad


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