Bhupesh Bhandari: E-retail: beyond discounts

Kishore Biyani, the retailer, said in a recent interview that the euphoria around e-retail has started to abate: month-on-month growth in sales has stalled, any reduction in discount causes volumes to plummet, and mega sales no longer generate buying frenzy. According to him, consumer fatigue has set into e-retail. The party is over.

Deep discounts of 70-80 per cent he sees as a sign of desperation. The rapid jumps of e-retailers from books to mobile phones, electronics, apparels, furniture and now grocery too underscore their desperation, Biyani said in the interview.

Some bits of this gloomy assessment can be discarded because Biyani is in the rival camp: the brick-and-mortar retailers. After all, e-retailers have snatched sizeable business from the likes of Biyani, and there is bound to be some heartburn over it.

But there is the need to evaluate the business model of e-retailers a little carefully. According to information culled from the Registrar of Companies by Business Standard, all the top three e-retailers made substantial losses in 2013-14: Flipkart (Rs 400 crore), Amazon India (Rs 321 crore) and Snapdeal (Rs 264 crore). The situation is unlikely to have improved in 2014-15.

E-retailers like to argue that they are all in growth mode and profits will come later, though nobody is prepared to say when. There is a rush to be on everybody's mobile phone and to report as much gross merchandise value as possible. That is understandable: a lot of companies book losses in the short term in order to gain market share. Once that is done, they recoup their losses. It doesn't work every time, but it is a well-accepted business practice.

What I find worrisome is the deep discounts offered by e-retailers. It is a trap they have fallen into, and it is of their own making. As Biyani said, the day you drop the discounts, your sales too drop sharply. And the e-retail space, though nascent, is very competitive: price wars have given way to discount wars. So, it's like riding a tiger. In most of the cases, the discount is absorbed fully by the e-retailer, and none of it is shared by the producer.

Let's look at the business in some detail. The biggest saving in e-retail is that you don't need a showroom, and the staff to run it. In the Indian context, where rents are sky high, this indeed is a substantial amount, a part of which can be used for discounts. But e-retailers have several other costs. For example, they need to pay for home delivery. Returns also need to be accounted for. That crimps their ability to write down their price tags.

If e-retailers are still offering deep discounts it is because they are all flush with private equity. So long as they are able to sell their story to investors abroad, the money will keep coming in. But the day the sentiment turns adverse, they will be in a spot of bother.

At the moment, the policy regime favours the e-retailers. While foreign investment in multi-brand retail comes with a host of restrictions, it is allowed freely into online marketplaces. It takes little jugglery for an e-retailer to become a marketplace and, in the process, gain open access to foreign capital. Sooner or later, this anomaly should go.

I know a lot of companies that do not want to be any part of these deep discounts because they fear it will affect their traditional retail channels. That they want to protect their brick-and-mortar retailers shows that they do not have full faith on e-retailers - at least not yet. Some of them want to do e-retail on their own but after giving it proper thought.

I have started to think that there will come, in the not-too-distant future, a second wave of e-retailers. They will have learnt from the mistakes of the current lot and will therefore be in a position to avoid them. It is accepted wisdom now that the real advantage lies not with the first mover but with the second, or even third, mover. They will be wiser and their business will be financially robust. They will not burn cash to entice customers.

There will emerge a stable business model for e-retail. The challenge will be to create a fulfilling shopping experience without discounts. Whatever discount is there will be provided by the producer, not the e-retailer. Discount cannot be the USP of e-retail. Discounts given by the e-retailers, and not the producers, are unsustainable and will therefore go away in the medium term.

At the end of the day, e-retail is convenient. This cannot be overlooked. By shopping at home, one as it is saves money - fuel, parking et cetera - and time. And it is targeted shopping: there is no urge to stop at the coffee shop near the exit for a quick cappuccino. Even without discounts, the savings are significant. Anything over and above that is bound to bleed the e-retailer and is not advisable.

In mature markets, e-commerce is just another channel for producers. There is no reason why it should be any different in India.