What’s your opinion about Indian e-commerce sector? Most of you will exude optimism and hope. But to your disappointment, the reality is not as rosy as you may think. The financials of all of these companies are not actually bad but worse. The losses have mounted at the faster rate than the sales growth and margins are not in sight.
Even they are not ready to accept that their business model lacks innovation and based mainly on deep discount. All of them are selling the same product at the same price from the same brand. There is no product differentiation at all. No doubt, there are exclusive deals on certain products in each online store, but that is not a powerful enough reason that will make them sustainable in the long run.
All of them are chasing growth or scale without caring for profitability. And the result of this strategy is an open secret. A lot of these online commerce startups have shut their operations in many cities and they are even firing employees.
I recently read three interesting sets of news items relating to the e-commerce scene in India. The bigger question is whether Flipkart, Snapdeal or Shopclues—biggest Indian e-commerce startups will able to beat Amazon? Another more important question is whether any of these companies will be able to earn profit?
No, not at all.
Amazon will always out fund them in deep discount and their services and supply chain can’t compete with Amazon. They won’t be able to pursue the policy of deep discount endlessly.
K Venktheswaran, FICCI and Tie member explains this scenario without mincing words, “ Lets consider the taxi cab market. Infinite supply of cheap capital does not give the competitive advantage. Over time, most riders, cars, drivers will start moving to one platform (say) Uber who will then dominate the market. This is the limited supply theory. This game will end when supply runs out.”
Now consider another scenario. There are niche sites that sell goggles, lingerie or medicines. Some of them are in much better financial size. However, they are constrained from the problem of scale. Eventually they will lose out on mass traffic from big giants. Since these sites operate on low margin, they will eventually lose out.
The performance of the hyperlocal space is very much obvious. All of the companies like Grofers, Big Basket and Peppertap are bleeding quite badly. They tie up with the local kirana stores and deliver from their own logistics service. Their margins will certainly go down as this entire hyperlocal space works on wafer thin margin.
Take example of IRCTC, Indian railway ticketing portal. You may thing it boring as it does not make headlines in newspaper, but it makes money. You may argue it has monopoly. It’s exactly where the success formula lies. Unless and until they don’t sell unique product that can’t be replicated or sold by anyone else, profitability will remain a pipe dream.
In case they are not able to offer product differential with monopolistic business model, they will have to offer a great customer experience. Amazon is doing exactly the same. I had purchased a book and it was delivered in just 24 hours! (I don’t think Flipkart or Snapdeal can emulate that efficiency).
The problem is that all of these Indian e-commerce startups fail to understand Indian consumers mindset. During the last year festive Snapdeal announced that they will process all refunds within one hour.
Good Idea. They really deserve a pat on the back.
But this assumes that consumers go in shops not to buy but to get refunds. Had they decided, instead, they will be delivered products within 24-hours of getting order, it would have helped them win more customers.
How long VCs will pump money
Flipkart CEO clarified few days ago that their business strategy of offering deep discounts will remain continued. They are chasing scale with blazing all guns. But the bigger question is will its investors keep pumping money indefinitely. They will mount their pressure to rationalize discounts and come up with more profitable business model. .
Lack of differentiation and poor service quality will only make the life of Indian e-commerce startups difficult. The only way to become profitable is to push up gross margins and reducing cost. To achieve the first goal they will have to manage inventories smartly. To reduce cost, they will have to focus on the quality of supply chain delivery and stop doing things like cash on delivery.
Apart from that, they will have to reduce the headcount by at least 60 percent from the current level and will have to stop wasting money on commercials as these don’t help in a wafer thin margin sector.
Omni-channel strategy is the future
Kishore Biyani, founder CEO, Future Group, one of the country’s largest brick-and-mortar retailers, says: “Online selling, the way venture funded start-ups are doing it, is a gross margin negative business and not sustainable. I don’t see ourselves competing with online sellers as both models — online and offline — will converge. Not everything will be sold only online or only offline.”
In Mumbai, Delhi and Bangalore buyers can shop on the Croma website and get products delivered the same day (if the order is placed before 2 pm). The price they pay is similar to what they would if they walked into a Croma outlet. Croma products also get sold on marketplaces like Amazon.in and eBay.in. Says Joshi: “We have an Omni channel strategy. Online is another arm of Croma. But the prices on our site and in our stores will be the same.”
They can take inspiration from Lalu and Nitish
Nitish Kumar to save his political existence met hands with his arch rival and political adversary Lalu Prasad Yadav. Snapdeal and Flipkart may take inspiration and form a mahagathbandhan. The fight in e-commerce will only get fiercer and bigger if they single-handedly fail to compete with Amazon.
Though it seems far-fetched but big bucket investors in Flipkart, Snapdeal and Paytm like Tiger, Alibaba, and Softbank can collaborate to act as a single entity.
This is something happening in taxi aggretaor space. Grab Taxi, Ola, Didi Kaudi and Lyft are coming together globally to fight with Uber.
But it’s doubtful they will have the same level of success of Mahagathbandhan. The gathbandhan will become only more vulnerable as Amazon will have to compete with one bigger rival compared to many. It will make the task of Amazon only easier as it will have to fight with just one competitor instead of many.
There are sourcing related issue with e-commerce. They are offering electronic goods at rock-bottom prices and that has fuelled the demand for such gizmos. It has left India’s trade balance only bloated by 30 billion dollars. This may invite regulation from authorities to procure certain type of products from local companies. This can happen in the budget 2016 or somewhere in a couple of years.
The future of Indian e-commerce startups will depend largely on how they play their act together. The going for them against the global e-commerce giant will only become tough if they don’t put their acts right.