• Indian ecommerce players brace for Alibaba’s onset, keep an eye out on Amazon

    Ensconced in his red chair, it has been a hectic Wednesday afternoon for 49-year-old Rajat Sethi. His small, three-room office in Delhi’s cramped Karol Bagh market is swamped with pressure cookers, sandwich makers, hand blenders, air fryers and rice cookers. There is hardly any place for chairs. Sethi, a small electronics dealer, has been busy wiping sweat off his forehead from Delhi’s dry summer; but he is also feeling the heat as his small enterprise seeks to keep pace with orders from some of the biggest names in India’s ecommerce industry.

    As a small but important cog in the ecommerce gravy train, his business has worked with both Flipkart and Amazon in the past, and is now being wooed by Snapdeal. With Chinese ecommerce giant Alibaba too on the way, business sentiment hasn’t felt better for sellers like Sethi. From a time when ecommerce companies had the upper hand, cherry-picking sellers, life has come full circle for people like this electronics vendor. Now, his business is being courted by a raft of incentives.

    “I would have never imagined such a thing some three years ago. But cut-throat competition means ecommerce players are going all out to woo sellers,” he says. “Consumer loyalty would be hard to achieve, so they are trying their luck with sellers.”

    Even as he decides how to deal with Snapdeal’s overtures (for the present, not too favourably, given his perception that Amazon and Flipkart are larger in electronics), sellers like Sethi are acutely aware that the industry they form the bedrock of ecommerce, specifically marketplace ecommerce could be set for a tectonic shift. That’s because Alibaba, the Chinese internet giant, is set to make its entry into India and with it change the rules of the game, forever.

    The ecommerce industry’s metamorphosis may have got a firm shove with recent guidelines from the Department of Industrial Policy and Promotion (DIPP) permitting foreign direct investment (FDI) in marketplace businesses (and not business models based on holding inventory). But, more painfully for this industry, it slammed the door on discounts of any sort. While this move came on the back of intense lobbying by the old guard in an effort to win back business, ecommerce companies’ arms have been twisted to fall in line and they are scrambling to find a way out.

    Omni-channel Marketplaces “DIPP’s move will help clear the ambiguity in the (retailing) market and level the playing field (between offline and online retailers),” says Kumar Rajagopalan, chief executive of industry lobby Retailers Association of India. “Marketplaces, like malls, should have no role in dealing directly with consumers and influencing prices.” While he accepts that ecommerce companies may find loopholes to keep business going as usual, he predicts that both sides may want to collaborate with each other and build omni-channel marketplaces, rather than extend this feud. “In a world of discounts, several owners are worried about their brand’s reputation,” he adds. “This may change that perception.”

    A key part of this policy is the move to break the sway large sellers had over business from ecommerce companies; in turn, this will benefit smaller enterprises looking to cash in from this ecommerce boom.

    Darshan Mehta, a Mumbai-based fashion apparel seller, is listed on Flipkart and Snapdeal and has a turnover of over Rs 60 lakh per month on Flipkart and `80 lakh on Snapdeal. Over the past month, he has been aggressively wooed by the former to exclusively sell on its marketplace, with a complete waiver of shipping charges and 100% reimbursement on returned damaged products. With the online battle only expected to intensify and regulation shifting, sellers like Mehta may cash in on this generosity. “It’s the sellers and the consumers who stand to benefit most from the dogfight between the ecommerce players,” he says. “It’s not that ecommerce players have become generous to sellers. They are being forced to do so because of the threat from Alibaba.”

    For India’s ecommerce sector, then, Alibaba’s much spoken-of India launch is one challenge facing the industry in the midst of a painful transition.

    While local players prepare to deal with not just Amazon, but Alibaba too, their onset may be a good reason for an industry in some strife to fix itself. Ecommerce executives may promise the moon to consumers, but, internally, they have struggled to convert this promise to profits.

    Pampered by almost a decade of generous risk capital backing, these companies have thrived on selling heavily discounted products to eager consumers. The good times may now end. As funding dries up, dozens of companies may find themselves run into the ground, heralding a clear-out for this industry.

    “The industry is poised for consolidation and a series of mergers and acquisitions,” says Harish HV, partner at Grand Thornton’s India Leadership Team. “Deep discounting is putting massive pressure on these businesses and, for many, these massive losses will be impossible to sustain.”

    For many industry watchers, however, the next significant milestone is Alibaba’s India entry. “Alibaba coming to India can do exactly what Amazon did a couple of years ago,” says Arvind Singhal, chairman of retail consultancy Technopak. “They don’t have to worry about raising funds, they are not obliged to show their books to anybody but their investors.”

    Alibaba’s Magic Moves This means the Chinese giant will bring the entire weight of its technology platform, supply-chain management capabilities and financial muscle to the Indian market. Having made its name in the Chinese market, Alibaba knows a thing or two about large scale its Single’s Day holiday sale turned into a $14.3 billion windfall for the firm last November, outdoing the much-hyped Black Friday sale in the US.

    What differentiates Alibaba from other global ecommerce networks is an assemblage of subsidiaries that straddles the entire purchase cycle: consumer-to-consumer (Taobao, which is similar to eBay), business-to-consumer (Tmall, like Amazon), and business-to-business (Alibaba, a wholesaler-like model). And it provides all this for free. This, perhaps, explains why Alibaba does a higher sales volume than Amazon and eBay combined (see How They Stack Up).

    Industry observers see Alibaba’s India play as a pivotal moment for both the company and the country’s ecommerce industry. While Alibaba has spent much of the last decade building up its B2B business (both sales and sourcing), its B2C launch could help the company boost its global image. According to estimates, Alibaba gets under a fifth of its business from outside its home base of China. India then could be the stepping stone to it becoming a truly global entity.

    Alibaba, according to industry sources, is expected to leverage its 40% stake in Paytm, the payments company-turnedmobile commerce company, which it bought for $680 million, via the subsidiary Ant Financial, to enter India. While regulatory compliances are being sorted out, the idea is to have some 100 million stock keeping units (SKUs) on Paytm. The company declined to comment.

    For homegrown enterprises, Alibaba’s advent couldn’t be more ill-timed. While Amazon is already on the prowl, with a $5 billion war chest for the Indian market, companies such as Flipkart, Snapdeal and dozens of other smaller players are operating in a market in flux.

    Spendthrift investors have turned wary, losses have only piled up and consumers too may be showing signs of tiring of this erevolution. In this mix, the recent news notifying FDI in marketplaces, with some tricky norms, like setting a ceiling for sales from a single seller, has only roiled top companies some more. (Flipkart, Snapdeal and Amazon ducked questions for this story.)

    As money dries up, companies are having to reduce discounts previously offered to reel in price-conscious consumers. Tanvi Malik, a cofounder of FabAlley, an online fashion portal, believes that discounting across the board has hurt the industry and it will take a cartel-like move to end this initiative. “The ecommerce customer is so attuned to deep discounting that brand stickiness barely exists,” she says. “Discounts which offer a certain perceived ‘value for money’ are the prime buying impetus.”

    Need for Transformations Industry experts say the time may have come for ecommerce companies to differentiate themselves and look beyond discounts. “These companies will need to focus on customer experience rather than deep discounts,” says Ashish Jhalani, chief executive of eTailing India, an ecommerce advisory. “If your company survived purely on discounts thus far, this is the end of the road.”

    As the clamour for exits (and profits) grows from investors, ecommerce company executives will now need to recast their businesses and look to new ways of gaining customers and not haemorrhage money. “As the industry moves away from discounts, other metrics will become key for these platforms. Product availability, convenience, customer service and payments will all begin to count,” adds Jhalani.

    With sharp discounts declining, some customers are likely to desert ecommerce and hunt for the best deals elsewhere, he reckons. But as the sector’s altered business model finds its feet, growth will quickly return. “The long-term attraction of ecommerce in India is undiminished,” he contends.

    Brands too are hedging their bets, as they wait for the ecommerce industry to settle. Intex, which claims to be among the top two mobile phone vendors in India (a high-volume, low-margin category in ecommerce), is cautious. “In the mobile category, it will be interesting to see how brands that are online only or online heavy will fare,” says Keshav Bansal, director, Intex Technologies. “We have always focused equally on our offline and online business models, and ensured that consumers get the best prices and discounts regardless of the buying platform.”

    Then, a brand like adventure gear maker Woodland is balancing the pressure ecommerce companies place on its physical stores, with the compulsion to follow consumers’ changing shopping methods. “Discounts throughout the year rarely lead to brand loyalty,” reckons Harkirant Singh, managing director, Woodlands. “Retailers should focus efforts on sales that complement long-term strategies.” However, it may be difficult for ecommerce companies to bin discounts. “Special offers and discounts are an unavoidable part of modern retail,” he adds. “Curtailing them will only lose you customers.”

    Despite the brouhaha over discounts, there’s plenty of evidence that ecommerce has redefined the reach for several segments. For example, according to a Counter Point Research note, one of three phones was sold online and Amazon, Flipkart and Snapdeal accounted for 90% of this online business.

    Other sectors too have benefited from the ecommerce wave. The reach of the industry has helped apparel companies find customers deep in the hinterland (where limited business opportunity might make a physical store unviable). For instance, online lingerie sellers discreetly reach their products to distant towns, which otherwise don’t have access to their wares.

    “Brick-and-mortar businesses have always faced challenges in reaching these places,” says Amarjeet Singh, a partner with management consultancy KPMG. “Ecommerce has filled this gap and what began as a business centred around discounts has become a lifestyle choice.” With real estate accounting for 12.5%-plus of overall costs on average (compared with a global metric of 7.5%), ecommerce’s value proposition stands, despite the flux the industry finds itself in currently.

    According to Abheek Singhi, senior partner at the Boston Consulting Group, the ecommerce sector needs to fundamentally restructure itself to survive in these tough times. “If you look at ecommerce, the largest category of sales consumer electronics provides mostly low or negative margins for etailers,” he says. “While there is massive scale in this space, ecommerce companies need to strike a balance between the hyper growth that they have previously witnessed and a new push for profitability.”

    A Chock-a-block Domain Amazon in the US has been able to slip out of the discount noose by being the dominant player; the Indian market is more complex, with three or four large, horizontal players and several vertical specialists all offering a variety of sops to consumers. “We have seen this happen with books, perhaps the first category to go online with scale,” says Singhi. “Discounts were as high as 35% on average three years ago and today that is down to 20% and falling.”

    As the industry braces to hit the reset button, companies are aware that Amazon and Alibaba are not the only threats they have to reckon with. Eyeing the potential, Japanese ecommerce giant Rakuten has been quietly scoping the market, considering an India entry, even as online specialists such as Newegg (an American online consumer electronics marketplace ) too eye this market. “The price and discounts story for ecommerce is coming to an end,” says Jhalani of eTaling India. “Indian companies will need to chart a fresh course to profits.”

    As the Delhi heat grows, Sethi, the Delhi seller of consumer electronics, is preparing for the ride of his life. “Till now, consumers were king. Now sellers will be the emperor,” he declares, adjusting his suspenders. “AC badha de”. 

    Share This