Are E-commerce Players in India riding a sinking ship?
Lower prices and better deals than the physical stores are among the top reasons for people to shop online, followed by 24X7 shopping experience, said the report based on a global survey of 19 countries on shopping behaviour. The fact though is, price is the single biggest reason for consumers to choose shopping with a retailer, whether online or offline, said the report.
Online shopping growth is projected to increase by 350% during peak festival seasons resulting in plummeting footfalls in brick-and-mortar retail shops, according to an October 2014 survey by Associated Chambers of Commerce and Industry (Assocham). The report had estimated Diwali sales online to be over Rs.10,000 crore in 2015, and this is likely to increase to Rs.1 trillion in the next four years.Likewise, online events like the “Great Online Shopping Festival” and Flipkart’s “Big Billion Day” have generated huge sales. For instance, the “Big Billion Day” sale crossed revenue of $100 million in 10 hours, Flipkart claimed, according to the report.
Selling for a Loss
While the top three e-commerce players, Flipkart, Snapdeal and Amazon, posted a massive combined loss of Rs 4,984 crore, their revenue growth outpaced the growth in losses. These companies, which are often seen as the torchbearers of India’s start-up sector, seem to moving slowly towards building sustainable businesses, but seem to be collecting mounting losses quarter by quarter every year.
Alibaba-backed digital payments and commerce platform Paytm posted a loss of Rs. 372 crore in the fiscal ended March 2015, compared to a profit of over Rs 5 crore the year before.The loss was on account of the Noida-based company’s entry into the e-commerce business, where intense competition with Flipkart, Amazon and Snapdeal has forced it to spend huge sums on marketing and customer acquisition.
What contributes to Losses
Market report reveal that Flipkart seems to have lost market share in FY15 and FY16, as Amazon and Snapdeal ramped up sales. We believe recent initiatives of the company such as adding sellers aggressively, greater focus on its logistics business and opening it for third-party business, and the introduction of new categories (Flipkart Nearby, second-hand goods) is intended to help it maintain its lead over its peers, as well as add new revenue streams,” wrote KawaljeetSaluja and Garima Mishra in their report. But the recent reports indicate that most of these initiatives have received huge setbacks and Flipkart has withdrawn these new initiatives.
The report suggests that the massive rise in losses despite lack of revenue growth in the classifieds sector was because of high investment in employees, technology, as well as on advertising.
Unsustainable business model
All leading Indian e-commerce sites sell the same products and often from the same merchants to the same set of customers at the same price levels.
With no difference in merchandise, companies resort to varying the prices through discounting to attract shoppers, thus making the business unsustainable. Unless e-commerce firms start to differentiate their offerings significantly from each other, I do not see things improving.
The law of diminishing margin
At the other end of the spectrum are vertical speciality websites that sell only furniture, books, spectacles /sunglasses or women’s lingerie, but achieving scale is a problem. These could be good niche profitable opportunities. Though once the horizontal sites make a play for this business, pressure on margins will mount and vertical sites will always lose out on mass traffic.
All large e-retailers offer unbelievable high discounts, free delivery, COD facility and easy return options which contribute their respective share on mounting losses of these e-retailers. High discounts are a sort of subsidy by these e-retailers which induces customers to buy online with them. As a result, every transaction done on their web-portals result in incremental loss for them.
The path to profitability
Before we look at these steps, let me first clarify what I mean by profitability. Profits mean net profits. After covering all costs,Not before anything. There is nothing called operational breakeven. Profitability is like pregnancy. Either you are. Or you are not. There is nothing in between.
“Operational breakeven” is just a euphemism for losses.
Loss making e-commerce businesses can drive towards profitability by either
- pushing up gross margins or
- reducing costs.
Given the frightening state of affairs (In 2014-15 ,e-commerce losses seem to be in excess of Rs. 8,000 crores), these e-commerce players have to follow both strategy simultaneously to give themselves some chance of becoming profitable.
The path to generate profits for the company, is as follows:
- Push up gross margins:The formula for generating gross margins is simple and straight, as –
(Post discount sale price – purchase price – shipping – packaging – payment gateway/CoD charges = Net profit)
Companies using any other method to calculate gross margins are only fooling themselves. Smart category teams must extract every single per cent available in the supply chain to meet this goal of improving gross margins. As a follow-through, discounts must be drastically reduced to the realistic level and no item should sell at negative gross margins.
- Reduce or preferably stop Cash on Delivery (CoD):CoD is not only a pain to manage but also quite expensive for merchants and it eats away the profitability of the transaction. Though the convenience factor for customers with CoD option is greater for online shopping. In fact, e-commerce sites have only succeeded in moving millions of credit/debit card users who would have otherwise paid online,to pay by CoD mode. CoDpayment option was an innovation by Indian e-commerce players to give comfort to customers to pay after receipt of products and gain confidence for online transactions. The market has now matured to a great extent and pre-paid orders have gained greater acceptability, and CoD option is best discontinued if online businesses have to improve their profitability.
- Slash headcount:A simple rule when you decide to let go of people is to cut deep. Small cuts never help. If you cut workforce by 10 per cent, the remaining 90 per cent is insecure, worried, unproductive, and typically another cut of 25 per cent will shortly follow making things worse. Given the high manpower costs at some of these e-comm players, I foresee a cut in their workforce atleastby 50 per cent in short term. This is inevitable and looks certain. If you are not sure which 50 per cent to remove, just let go of the other half. You don’t need them. The remaining team will deliver much better financial results.
- Advertising, especially mass mediaexpenses:Advertisement and Publicity expenses are one of the major factors affecting heavily on their profitability. It makes no sense to hire Bollywood celebrities to peddle deeply discounted, me-too, no/low-margin items through front page print ads and TV commercials. We see quite often one or two full page classified advertisement on Daily Newspapers, which must have cost a bomb. I often wonder oif such huge costs are sustainable. Instead, it would be prudent to continue to invest significantlyin digital advertising.
- Rationalize Logistics expenses: An e-commerce player is heavily dependent on Logistics service providers for timely delivery and cost-effectivesolution for them. They need to be dependent greatly on logistic service providers. The performance of Logistics service provider will determine the goodwill they create with their customer. Mostly, the charges payable to these Logistics players are much higher than an e-commerce player recovers from the customer. Many players follow Free Logistics and absorb the costs and thus this becomes a greater burden on the business model rendering the business model unsustainable. Efforts must be made to achieve cost neutral so far as logistics charrges are concerned.