Indian E-Commerce - digging itself into a hole?

The whole Indian e-commerce industry in India best exemplifies the meaning of the phrase “digging itself into a hole”. In some other ways, it also typifies what we call “a zero sum game”, i.e. any which way you do the math, it just doesn’t add up - no one is the winner.

Now consider this - travel portals like Makemytrip, Yatra and many more provide a service very similar to on-line commerce. There are airlines and hotels, who are actually the service providers. Travel portals act like an aggregator who get all the service providers on one platform and thereby provide a tremendous level of convenience to the user. For certain products, like hotels, they may negotiate a bulk rate with the service provider in return for a certain number of nights committed and offer the cost benefits to the end consumer. It’s a win-win situation for everyone in the chain, the service provider, portal and the end consumer. And most importantly, they charge a convenience fee to the end consumer for the services that the portal offers. It makes sense to pay that extra fee per booking; as for the end consumer, the convenience of being able to plan the whole trip with a few key strokes is unparalleled. It is important to note that Makemytrip does not pay from its pocket, or from investor money, to provide deep discounts AND convenience to the user.

Let’s look at another scenario of booking movie tickets via a site like Bookmyshow. Gone are the days where planning to watch a movie at a theatre was a herculean task which required someone to go and book in advance or buy the tickets on the spot (in black)! The portal offers great benefit to the consumer albeit at the cost of paying an additional convenience fee. Doesn’t matter if you buy from the aggregator site or go to a PVR site directly. If you want the convenience of online, be ready to pay for the commodity AND a convenience fee.

Fast forward to the current e-commerce portals....someone at sometime had a million dollar idea that to get my customers to shop online on my portal, I must pay them from my pocket instead of charging them any additional fee for the convenience I bring...

This is what I call a truly disruptive & breakthrough idea except that it defies logic. Instead of building significant cost savings in the chain and passing the benefits to the consumer, you short-circuit and say “Hey, look, I am going to pay for your shopping. So please use my online portal”. Forget about cost savings, there are substantial overheads they incur to bring this new level of convenience, like COD, same day delivery, no-questions asked refund policy etc., but they obviously don’t want to charge the customer any convenience fee because they are getting a free ride on the back of a VC with deep pockets!

Now if you are going to tell me that the cash backs, deep discounts and freebies are a temporary phenomena done to build a customer loyalty until the volumes can be used to get better leverage from sellers, all of us know that “it ain’t working out.” They have already lost the customer loyalty because the on-line customer is not coming to them because of any product or service differentiation. The customer is there because they are being offered a “discounted” ride. If they stop offering it, someone else will and the customer will just move to the next upcoming portal offering deep discounts!

Talking about leveraging from sellers against volume business, the same seller is selling on ten different portals with same identity and also directly selling to the customer via his direct presence in a retail market. In a majority of the cases, this on-line seller is a trader and not the original manufacturer. So they have a marginal profit band to play within, from which they have to manage their high street rentals, other shop expenses and sales staff salaries. How much can you leverage from them against volume business? Why won’t he start selling more on the next “newbie” portal offering deep discounts to the buyer from VC money? I hope the readers recognize that in the marketplace model, to leverage price against volume is simple vapourware talk,like using GMV to measure the amount of business the portal might be doing.

Now, fast forward to the hyperlocal ventures which take this ‘zero sum ’ game to the next level. Here is a business case based on the assumption that consumers don’t even want to step-out to buy products from the shops in the vicinity. So build a catalogue for them, allow them to shop online and deliver the product from a shop which actually might be a stone’s throw away from the buyer. In case the consumer is really not looking for this “unwarranted convenience”, let’s throw in deep discounts from the investor money, to make it pseudo-convenient and possibly develop a habit.

Look my friend, shopping in the markets is the only source of entertainment for a majority of the Indian families (leaving apart the dual income no kids cases in the tech sector). People want to step out and explore options in the local market and then make a purchase, face-to-face, with a trusted retailer. I don’t think they are looking for this additional hyperlocal convenience and yes, they may use your portal temporarily till you offer them deep discounts but nothing beyond...When you stop offering discounts because you emptied the investor kitty, they will move to the next funded kid on the block offering discounts...and when all this ends, they will go back to the retailer as he will always offer a better price than on-line hyperlocal given that he has no overheads of on-line business. The retailer will simply keep a delivery boy who will get out on a two-wheeler; deliver the product to the buyer, without going into the hassles of an on-line transaction.

Am I correct in saying that the Indian online e-commerce industry, hyperlocal or not, is digging itself into a hole of a zero sum game? They have to move out of this discounting game and start charging a premium to the consumer for the convenience they bring.