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:
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
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