The online retail space in India is bubbling with activity at the moment. Predictions about a growth rate in excess of 20% in the coming few years go on to suggest that things couldn’t get better for those selling their wares online.
Though the sales are multiplying, so are the losses being incurred by the leading online retailers. Look at the poster boy of Indian eCommere industry Flipkart for example; While its revenue for the year ended 2013-14 (Rs 1,180 cr) grew by 476% from Rs 204.8 cr over the previous year, its losses also grew by 156%. (having increased from Rs. 109.9 cr to Rs 281.7 cr).
It is important here to keep in mind that a greater part of their losses is due to the discount led model they have all adopted. Most of them are trying to entrench themselves in the market by creating a loyal customer base by offering them goods and products at heavily discounted prices. Well, since 74% Indian buyers turn to online stores because they want discounts, according to a survey made by CouponRani in 2013, that does make some sense.
Because of this reason, the big boys on the Indian scene have been happy with their turnover even while incurring losses by lowering the prices of goods being sold by them. The question however is – how long can they sustain themselves on the investors’ money without showing them some results? How long can they afford to incur losses?
Not too long, it seems. They are now shifting their focus and beginning to think in terms of profitability instead of simply acquiring more customers. The etailers who had been trying to capture the market by undercutting their rivals (and also the overall retail industry) only to build up scale have already started cutting down on huge daily or weekly discounts on a wide range of products. Gone are the days when you would wake up to un-turn-down-able deals every day!
Ganesh Subramaniam, the CEO of the leading online fashion etailer Myntra.com, agrees and admits to his company having brought down the coupon levels from 40% mark to near the 30% mark over the last six months and hopes to be able to cut down the discounts to 20% by the end of this year. Admitting that the company had paid the price for lowering the discounts by getting “up to 20% fewer newer customers transacting in the last six months,” he hoped taking the harsh step would ultimately help the company come out of the red.
Apart from the buyers who end up saving some cool bucks, no one seems to be happy about the arrangement either: Not the manufacturers, not the brand owners whose products are sold over these platforms, not the offline retailers!
Manufacturers – With the etailers burning a greater part of their inflows by funding the discounts which they use as baits to lure customers, they ultimately have to work out strategies to break even. Unable to bear the entire financial burden of such hugely discounted prices all by themselves, they seek discounts from their suppliers.
Myntra, the biggest name in fashion etailing has already begun to pressurize suppliers to give them discounts to the tune of 36-38%. Weaker players might have to offer upto 40% discounts. Having come under the Flipkart flagship, it is now the undisputed king of fashion etailing in India and they are taking full advantage of their hold over the market to wheedle better deals from their suppliers- much in the same fashion as Amazon does to book publishers.
This is what an apparel manufacturer and Myntra supplier said:
“A lot of manufacturers are hooked to the volume drug. Now, Myntra is saying give us bigger discounts otherwise we won’t do volumes from you or even block your products. For more and more companies, their businesses are dependent on them. It earlier happened to small electronic manufacturers from e-commerce companies. Now, fashion apparel companies are getting hammered.”
Even a brand like Being Human which is owned and endorsed by bollywood celebrity Salman Khan can not afford to be ignored by e-commerce sites. Mitul Mandhana, the joint MD of Mandhana Industries which markets Being Human, had earlier mentioned that nearly 15% of their sales come from online retailers, half of them from Myntra alone.
So while some brands cannot think of being left out by leading online retailers, they are beginning to feel the brunt of heavy discounts as well.
Brand owners: Move over the electronics brands which are under immense pressure because of the tussle between online retailers and brick-and-mortar stores. The battlefield is now getting bigger and beginning to affect other segments of online retail as well.
Expansion plans of leading apparel manufacturers like Calvin Klein, Wrangler, Adidas, US Polo, Lee, Tommy Hilfiger, Benetton and Puma have been put on hold for the moment because of the impact of the heavy discounting policies of online retailers. With the same products being offered at lower prices online, franchisee holders are beginning to complain. The online prices, say some of them, are lower than the wholesale prices in many cases.
Abhishek Ganguly, Managing Director of Puma India, said that most discounted items sold online are not the latest products in the market. Most of the products sold online are part of the old stock which is also available at factory outlets at huge rebates, but franchisee holders refuse to buy this argument. Coupons and discount schemes often convert into the latest collections being sold for a much lesser price over e-commerce sites.
To counter this policy of deeper discounts by online sellers, many fashion brands like US Polo, Puma and Benetton are already thinking of segregating online and offline products – a part of their efforts to save the skins of store owners who have huge real estate and overhead costs not associated with online players.
Hidesign, an extremely popular manufacturer of leather goods, has already put in place strict selling guidelines for major shopping portals to deal with the problems posed by heavy online discounts. It allows the etailers to allow rebates on products priced below Rs 3,000 but discourages them from selling its latest or high-end products for lower prices. Fair enough!
Dilip Kapur, president, Hidesign, clearly understands the importance of keeping a careful watch over the performance of his brand across e-commerce platforms.
For the time being, Indian online retailers are somehow managing to stay afloat in spite of the huge losses but the question is- how long can they go on like this?
See the quantum of losses being borne by the leading online retailers in India to see how their $1 billion plus worth of funding are going down the drain:
(The revenue figures above are not the price of products sold (GMV), as these e-commerce sites operate on the marketplace model and their revenues come from commissions they get from sellers or listing fees that they charge to list the products on their site)
Keen to turn around a new leaf after having evolved over time, the online etailers have already begun to cut down on discounts. Even Jabong has reduced the price cutbacks to their online buyers by as much as 8-10% over the last few months.
This is also in keeping with the global trend. E-commerce experts say this is a reflection of the practices being adopted by leading online players elsewhere in the world, including China.
“This is a fairly consistent e-commerce maturity cycle that we’ve been seeing across different markets globally,” said Stephen Mader, ecommerce and retail analyst at Kantar Retail, a London-based consultancy.
While none of the online sellers reveal what part of their funds get squandered on subsidizing the products being offered by them, seeing the online Mogul Flipkart on its knees for three times during the year just ended clearly points to the sorry state they have landed themselves in by functioning o the discount led model.
It is high time the online retailers start giving their investors good (or, at least, some) returns on their investment by creating efficiencies in their supply chain, cutting down staff costs and improving the overall profitability.
The buyer psyche has undergone sea change. I personally decided to leave one of the best web hosting companies in spite of their very competitive prices because their Live Chat waiting time would invariably exceed 25 minutes whenever a problem did arise.
The customers having evolved, they look for much more than beyond discounts now. They are now willing to shell out a little extra for better customer service, better after sales services and shorter delivery periods. In fact, 78% buyers in the country already admit to having paid extra for better customer service already. A whoppingly huge 86% said they were willing to pay upto 23% extra if they were promised better services in the future.
The etailers need to win over the customers’ trust and wow them by providing better tracking facilities as well. Over the last two days only, there were two cases of wrong delivery.
In one case, Snapdeal delivered a used phone to Gautam Sachdeva from New Delhi. Not only was the phone a second hand device, it was not even the model or manufacturer he had chosen. Luckily for him, he checked the package before paying the cash to the delivery boy and refused to accept it, taking advantage of the Cash on Delivery mode of payment opted by him.
In another instance, Nitin Chhabria of Mumbai, who ordered a Macbook Pro worth Rs 84,000 ($1,400) was delivered a heater costing Rs 600 ($10) instead! He too got lucky as Snapdeal which has come under a lot of flak recently quickly apologized and promised to deliver him the right product within a day.
All the discounts, all the ground work, all the infrastructural work goes for a toss every time one such complaint goes viral over the social media these days.
THIS is the area the online retailers will have to focus on, instead of wiping out investors’ funds and eroding buyers’ confidence.
