E-retail: Short-term valuation or long-term value creation?

E-commerce must focus on long-term value creation while racing for the bigger piece of the pie

The Indian e-commerce sector is expected to grow 70 per cent in 2015 and cross $6 billion to become one of the fastest-growing e-commerce markets in the Asia-Pacific region. Market players are providing various incentives to lure customers in order to gain market share. They have adopted a low margin and high customer acquisition cost business model. However, players must focus on long-term value creation while racing for the bigger piece of the pie.

The e-commerce companies are not focusing on certain operational essentials as their internal functions are not able to keep pace with the explosive growth.

Logistics anomalies: In instances where consumer experiences have been less than satisfactory, companies are facing challenges in maintaining the quality of services, leading to reduction in customer satisfaction. Listing sub-standard products on the website, delivering pieces of wood/soap/marble instead of the promised smartphones and listing faulty pricing strategies can create unwanted hassles for customers.

Customer security and safety issues: Rapid expansion of business operations have led to overlooking of critical business processes. Some recent unfortunate incidences related to individuals' security and safety issues have raised serious concerns related to background check of employees. Companies, as well as their manpower sourcing partners, should follow strict measures to check their employees' antecedents. While expanding their operations, the e-commerce players need to diligently fulfil the responsibility of ensuring security and privacy of their customers.

Compliance defaults: Since e-commerce is a nascent market in India, the regulatory system is not very developed. There are various conflicts between the e-commerce companies and government on interpretation of regulations. For instance, there is a debate regarding the liability of unpaid service tax on these companies. Although these companies claim to be facilitators between buyers and sellers, they are using warehouses to store fast-moving products to reduce their delivery time. Further clarity in regulations and diligent compliance by companies will ensure smooth operations.

Are deep discounts sustainable?
Despite concerns related to operations, the increase in velocity toward gaining scale is enthusiastically backed by multi-million fund injections of foreign investors. With significant funding backup, e-commerce companies are able to adopt strategy of providing considerable discounts while earning wafer-thin margins. This strategy of providing regular deep discounts to scale up is making the game difficult for e-commerce players and is becoming a tiger ride, which is difficult to dismount. The high growth expectation of PE investors in e-commerce is likely to suffer a setback when PE firms do not find it lucrative to fund consumer subsidies without an alternate differentiation strategy. The irony in the e-commerce space is that there is low brand loyalty.

As a profitable model is yet to evolve, less-than-expected performance on a "Big Sale Day" or accidental miscalculations in pricing should be seen as small hiccups in an attempt to attract consumers to the concept of online shopping.

There is a need to take a more patient approach towards e-commerce while players take the long road to create high brand value by providing reliable services along with differential offerings. To ensure smooth growth, companies should invest in optimisation of warehouse operations, loyalty management, robust recruitment process, stronger backend technology infrastructure, better digital store front and logistics management especially in rural areas where they rely on third party logistics. It will be interesting to see how this industry unfolds, as the players gain experience and serve the country with full sincerity.

By Devendra Parulekar, partner, Ernst & Young, and practice leader for cyber security in EY