Search for profit prompts e-tailers to prune sellers

Amazon may just have timed it right. Days after Flipkart, its local rival, upped commissions and told its sellers that it would charge for goods returned on the platform, Amazon slashed commissions on the fastest moving category in India’s e-commerce industry: electronics goods and smartphones.

It added fuel to fire. Sellers across India mobilised themselves on an online forum, eSellerSuraksha, to protest the move by Flipkart, the country’s largest e-commerce player. They ran a social media campaign and got its members to stop selling on Flipkart for a day.

Flipkart stuck to its stand, saying that the protests were by a minority and most of its 90,000 sellers were actively hawking their wares on the platform. In fact, it said business actually grew on the protest day.

Sanjay Thakur, the president of eSellerSuraksha, says the protest was to make the point to Flipkart that the sellers are crucial for any e-commerce business.

“Any increase in the cost means a seller has to pass on the costs to the consumer,” says Thakur, a Jaipur-based computer peripherals merchant. “In India, consumers look at value buying. They research four or five portals before choosing the best deal”.

India’s modern online commerce industry is nearly a decade old. The entry of Flipkart, which started as an online book seller and morphed into a horizontal e-commerce company, changed the game, which traditionally had firms selling products but with bad customer service.

Soon, Flipkart and rival Snapdeal, backed by hundreds of millions of dollars of private equity, began offering massive discounts to lure consumers to buy online. The entry of Amazon, which dominates the US market, added to the clamour for customers and vendors to sell goods on these platforms.

Over  the past two years, as India began to define that online e-commerce businesses should adopt the marketplace model, these e-commerce firms began adding small vendors across the country to sell on their platforms.

Flipkart claims 90,000 sellers, while Snapdeal has nearly 300,000 on its platform. Amazon, which has a joint venture with N R Narayana Murthy’s Catamaran Ventures for building a seller base in India, has 85,000 sellers. Many sellers are on multiple platforms and frequently shift loyalty from one to another.

Yet, Flipkart is the largest marketplace for these sellers. Flipkart claims it has over 75 million buyers on its platform, including over 50 million users on its smartphone app.

“Flipkart has more sellers getting up to 50 orders per month than the competitors,” says researcher Redseer Consulting. It also has more sellers with less than 26 stock keeping units (SKU) compared to others such as Snapdeal and Amazon. So any change in rules by Flipkart impacts more sellers than any other platform.

Analysts say the protests would be a temporary blip on Flipkart and would not have a significant impact on its business.

But why the change? Flipkart, backed by billion dollar investments by global private equity firms such as Tiger Global, began on an aggressive spending binge. In the last two years, it rented new offices and began hiring indiscriminately, even paying $1 million salary to engineers from Google.  

Soon, India also began to see the impact of the global weakness in investor sentiment, where private equity firms started to hold back additional funding.  Flipkart was also impacted as it struggled to raise fresh funds.

Change of plan

Binny Bansal, the co-founder who took charge as the chief executive officer in January, has since focused on cutting costs, improving efficiency and looking at new avenues for revenue such as increasing commission from sellers, charging them for returns and making them advertise on the platform.

“Last year, when they were burning money and competing with each other, e-commerce companies were focused on acquiring sellers. Now it is consolidation time,” says Anil Kumar, chief executive officer of RedSeer Consulting. “It is across companies. Not just Flipkart or Amazon, even in Snapdeal, the focus is on quality of sellers than quantity.”

Flipkart had said that the changes it has made to its seller policy will make it easier for sellers to keep track of inventories. Further, the passing on of return shipping costs to sellers is a way of incentivising them to improve customer service such as better packaging and selling goods of better quality.

In this, sellers who belong to the long tail or smaller vendors are hurt the most. Amazon reducing commission by a third in electronics has added to the confusion. “Flipkart has not been able to tell us even one benefit of the new policy to sellers. The only thing it is saying is it has been running on loss so far and now it is focusing on profitability,” says Thakur.

India’s norms for foreign direct investment in e-commerce restrict control of business by a single vendor to 25 per cent of the total sales. This also means e-commerce portals will begin to push non-performers outside their system and focus on a select few who they can promote and also comply with the FDI norms.

Globally, e-commerce firms own the entire customer experience, right from vendor management to billing the customer. Amazon in the US has a tight control over its sellers. In India as well non FBA sellers (whose products Amazon doesn’t pack and ship) appear way down the pages.

“Flipkart or any other company does not want the long tail of sellers on their platform. They want to focus on customer service and build those sellers who offer them. They will promote them,” says Kumar of Redseer Consulting.