Will E-Commerce Survive?

Times seem great for e-commerce, at least definitely great for the top three- Flipkart, Amazon and SnapDeal. Venture Capitalists seem to have found the sweet-spot on their bats -made of cash- tossing valuations out of the stadium for sixes. Customer awareness is at an all-time high and offline retailers can’t stop pacing to and fro. Revolutionary, indeed.

What is that smell, though? It reeks of the dot-com bubble burst of the late 90s. Insane valuations? Check. Revolutionary? Check. Screw ‘P/E’? Check.

Each one of these companies is loss-making and pleasure themselves in the myopic comfort of soaring GMVs. ‘You have any doubt?” (sic) was the reaction of Rakesh Jhunjhunwala on being asked if e-commerce firms were overvalued.

Prima facie everything looks hunky-dory. Let’s dig deeper. This article will look at the threats and reasons why Indian e-commerce may simply be another bubble in the making; and how a company can circumvent and survive this bubble.

Unarguably, the most important reason for e-commerce companies’ success so far has been the deep discounting of their product catalogues. They call it the ‘customer acquisition cost’, necessary to engender and segue to an online-shopping culture. Fair enough; but what they leave out is how their companies will make a change to profitability in future, once they have acquired their desired level of market share. Discounting is unsustainable and even contagious. It addicts the customer and the company.

I remember reading an article in the Mint a few weeks ago where the newly formed www.abof.com, the online fashion store of the Aditya Birla Group made amusing proclamations: “The new portal will be targeted at the young and have a curated collection focusing on quality and NOT GIVE DISCOUNTS, executives of the company said. ‘To get an analogy from the cellphone world, we would like to be the Apple of the industry,’ said Prashant Gupta, president and CEO of abof.com.” And soon enough, this is what I received in my email just yesterday:

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This just goes on to show the strength of the lure of discounting. It is an abyss which threatens to become the be-all and end-all of e-commerce. First, in terms of consumer behaviour, people tend to delay their purchases further and further, in the fear that they’ll get a less attractive deal than what they perhaps could have got by waiting for another day. On top of this, discounting seems to be mostly random: Flipkart will all of a sudden announce free shipping on all books or celebrate an electronics special weekend for instance. This further leads to unpredictability over what is the best time to buy and in the anxiety of missing out on the best deal, there is massive cognitive dissonance and instances of deferred purchases. Moreover, if they see the prices fall after they have made a purchase, they grow aversive of the company and assume even more inertia on their next purchase to be broken down only with the most excruciating of discounts. Bottom line: customers are addicted to discounts. The result: discounts are prevalent all the time. In fact, complete start-ups have emerged that simply track price changes on different websites and will notify you when prices fall significantly. Eg: compare.buyhatke.com and www.couponduniya.com. The bigger problem is not that discounting has become synonymous with e-commerce, it is that discounting is a one-way street. There is no going back to normal pricing. Let me illustrate:

As soon as one company starts trying to reduce discounts and shift to profitability, other companies are going to see it as an opportunity to rev up their sales promotion and take away market share from such a company. In the end, discounts will be sticky and price wars will be constant. This is further fuelled by the fact that customers of e-commerce aren’t brand loyal. Empirically, all of us will check the prices of the product we wish to buy, in at least the top 3 websites, and buy wherever we get the product at the cheapest. There are, mostly, no other considerations (Seldom do people care about the shipment time). Theoretically, apart from good service there is no differentiating factor amongst these companies. And the degree of ‘goodness of service’  and customer-perception about different companies may vary,  but ultimately these aren’t as strong motivators as is price competitiveness. Customer service across Flipkart, Amazon and SnapDeal are more or less the same.

Due to lower brand loyalty, pricing become the sole locus around which the different players are competing today. So discounting is a one way street. It’s difficult to turn back once you’ve started walking in that direction.

Second, discounting ‘to engender and segue to an online-shopping culture’ is a fallacious argument. While deep discounting is bringing more offline customers to shop online, they are not creating customer loyalty or keeping customers to themselves. They are creating demand for the industry not the company. It is akin to say a soap manufacturer advertising the importance of bathing. It might get more people to buy soap, but the manufacturer has done nothing to ensure that this added demand is directed towards him i.e. people aren’t just buying more soap, people are buying more of his soap. When Amazon entered India in 2013, it had to spend much less time and money in getting people to try out buying online, because Snapdeal and Flipkart had already perpetuated this trend. Anecdotically, by 2013 most of us had started buying books exclusively from the online medium. When Amazon came in, it benefitted from this culture and its book sales caught up easily. People shifted to Amazon as soon as it offered even a marginally lower price than Flipkart, that had worked all those years to get consumers to shift from brick & mortar stores to buying books online. Now, what happens when in this scenario, once e-commerce has adequately picked up pace, bigger enterprises like TATA and Reliance enter the market with their e-commerce portals? And guess what? Both these companies have already begun deliberating on these proposals. Aditya Birla Group has already launched www.abof.com and Kishore Biyani has openly claimed in tens of interviews that he plans to take the Future Group retail online. Once this happens, wouldn’t all the effort that Flipkart and the rest had put into creating this industry go in vane? All that TATA and Reliance would need to do, is discount their product lower than that of Flipkart and save itself the years of toil, money and time in creating this industry.

Though to be fair, customers have already tried the services of Flipkart etc. and are going to be more comfortable shopping from ‘trusted platforms’ than a new player. Though Amazon was also new, it was already a huge global brand. When new companies come in, they will take time to ensure awareness is generated and people’s inertia of trying something new is overcome. But then again, it might only be a matter of time before they invalidate this argumentation.

Unless, the existing companies can sufficiently differentiate themselves -a task more difficult than it sounds- this e-commerce bubble is bound to burst.

Know who is most likely to survive the E-commerce battle between Amazon and Flipkart: Who will survive the E-commerce Battle? Amazon or Flipkart?

Read up on how various companies have strived to one-up the rest, how they can differentiate themselves and what will drive profitability in a time when burning cash is the going catchphrase: Winning the E-Commerce Battle

To stay updated with what I write, follow my blog by tapping ‘follow’ at the right margin (for PC) or the bottom (for Smartphone). I’d love to hear your views and reviews on my article in the comments. Thank you for your time!

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10 thoughts on “Will E-Commerce Survive?

  1. In Kolkata,Ola started with giving Rs. 200 off on first ride and Uber gave Rs. 600 off on first ride and this was followed by various discounting schemes owing to which we,the users of smart phone,got so addicted to it that we completely forgot Yellow Taxi’s here.Also,there where new companies like Taxi For Sure,Mega Cabs who tried to bank on ready-to-serve customers but both turned up to be a huge failure.I generated brand loyalty for Ola personally.Now,Ola,a loss making company,started to increase its price per km. and also cut down on its discount schemes after assuring enough brand loyalty.As a matter of fact,Ola’s revenue increased by ten times in 2015 than in 2014(the year of sowing seeds).Also,now Ola has become increasingly expensive but still has become an integral part of our lives.So,on a macro level,is it a short run phenomena or a long run success?

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    1. 1) Ola did differentiate itself: Payments by cash (something Indians really love; also the reason for Flipkart’s initial success because of COD), a much easier UI than Uber etc.
      2) The number of Ola drivers are much higher than that of Uber which has ensured greater availibility of cars around which means cabs get to customers faster and there are a lot fewer instances of surge pricing.
      3) There have been regulatory problems with Uber and Ola both; but with the government clarifying rules governing cab aggregators, the situation has improved. However, Uber being non-Indian, and due to the infamous rape incident associated with the company, Uber has had a lot of regulatory trouble owing to which a lot of drivers are resistant of choosing Uber (also the reason for point 2).
      4) Again, the rape incident has created fear around Uber, and I have encountered many girls who would rather just take an Ola in that fear.

      5) More importantly, the kind of discounting that Flipkart et al and Ola do are very different. Ola runs a referral programme (pioneered by Peter Thiel during his times at PayPal) which ensures rapid growth of consumer base. The discounts offered thereon are sporadic and relatively paltry. As you mentioned, Ola has already started raising their tariffs and working towards profitability. Compare that with Flipkart. Ola boomed after Flipkart and has already started working towards profitability. Ola gives discounts either only on the first ride, or sporadically now and then. Flipkart has been in the game much longer, is no way near a stage where it can withdraw discounts and move towards profitability and discounts its products every single day.
      6) Flipkart has many: Snapdeal, Jabong, Amazon, now Abof, PayTM store, Koovs etc. There seem to be separate websites for most categories of products that Flipkart sells. This competition is monopolistic at best. Ola has primarily one competitor: Uber. This is an oligopoly. Prices tend to be sticky (compare the prices of Uber and Ola, they are the same). In my next article I was going to argue that E-retail will see a consolidation and such an oligopoly will arise there as well. But well, you already have a glance of what is to come in the next article 🙂

      Thanks for the question! I hope this answers it.
      (The observations made in the initial 4 points are as a result of my interactions with a lot of Ola/Uber drivers while travelling in their cabs and also some personal observations as a user of those services. There may be possibility of invalidity of a certain point from case to case)

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  2. As far as deferred purchases go there are times when companies across industries give a greater discount for purchasing early or as they are called “early bird offers”.
    Secondly wouldn’t you say that more the competition more the price goes down and level of quuality is maintained. Isn’t that a good thing that is one of the great things about capitalism.
    Thirdly I recently read that the CEO of zomato has said that they wouldn’t offer discounts any more because in the food industry their margin is already very small.

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    1. Yes, early bird discounts and also limited period offers do incite the customers to shop as early as they can, but if you notice on say Flipkart, such limited period discounts are run almost every single day. In that scenario, how many of us really care about these discounts? We’ll only visit the websites when we want something specifically. I’m pretty sure there would have been a limited period sale on Flipkart today as well; did you care to check out the product listing and benefit from the discount? I’m guessing no, because if you discount everyday, it isn’t discounting anymore- they simply are your normal prices.

      Well definitely, this competition and improvement in service quality is fantastic for the customer. But I was looking at it from the companies’ point of view. In any business competition, the customer always tends to be the winner.

      Lastly, Zomato might cut down on its discounts now that FoodPanda has cooled down its aggressive marketing. But considering the number of food delivery and listing start-ups that have come up of late, I don’t think Deepinder Goyal can afford to shy away from sales promotions completely, any time soon.

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  3. Hi
    I chanced upon your blog from quora and love how clearly you’ve explained and analysed, at the same time kept things very interesting. I plan to read your write ups regularly now. Thanks!!

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    1. Hey, thank you! You can ‘follow’ the blog from your email ID if you’d like to receive an email alert whenever I post something! You can also follow it directly if you have a WordPress account 🙂

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