What will happen when the discounts are gone

E-commerce in India has just reached < 1/10 th of its potential. Out of 120 Crore Indians, not more than 1.5 crore Indians use E-commerce frequently. Although a small percentage of the overall retail market this sector is growing rapidly due to ever increasing internet penetration and availability of cheaper smart phones. 

Have you ever wondered why is it so that online marketplaces offer you a better bang for your buck as compared to your traditional retail store across the street from your home?

How is it that famous online stores such as Snapdeal, Flipkart and Amazon are able to offer their products at such amazingly low prices?

Those discount schemes keep hitting us irrespective of whether it is Christmas, New year or Diwali?

How come your city retailer tells you point blank on your face that they CANNOT offer a better price than online merchants?

Whats the missing part in the puzzle... Common sense of an average buyer takes the back seat because it is blinded by the awesome glare of discounts and we end up fooling our intellect with logic such as the following:

• online stores have a lower cost of operations since they dont have to maintain a shop in prime location,
• they have bigger turnovers and therefore able to survive in the marketplace with lower margins.
• they can procure products from far off places where the prices are still low,
• they are technology driven and therefore more efficient with lower cost of operations.

All very valid reasons I must say... now, lets check out the statistics below.... dont be surprised if you are seeing this for the first time and yes these are real and actual numbers.

[Data Source: Techcircle] Note: All figures are in INR Crore

Please Note: Marketplaces cannot drive product prices. The figures provided above are the income/ loss that marketplaces get out of operating a marketplace.. viz: Commissions, Listing Fees, Adverts, Shipping Fees, Payment Gateways, Penalty/ Late Fee or some other type of fee that they charge from their sellers.

You must be wondering by now that with such great losses how are these companies keeping afloat? Why are they in a loss making business? Are they doing this for charity? offering such great products, service at such amazingly low prices? Whats up with them.. whats happening?

You may also think that Oh! I get the point they are offering such discounts to increase sales and user-base and ultimately people will start loving them and continue to avail their service even when the discounts are long gone. Hmm... true but only half true. You may say that people in India are not so stupid.. they wont stick around if the discounts are gone.. they will go back to the brick and mortar retailers when that happens....

BUT

wait a minute if these Ecommerce Giants keep pulling business from the traditional retailers hands for a long enough time more and more people will be purchasing online then that would mean that local retailer will start incurring losses on account of fewer walk-in customers/ higher churn and ultimately go out of business. 

When the discounts are gone AND the local retailers are kicked out of business the buyers (customers) will have no other choice but to place their orders online.

This is the situation that the online marketplaces are wanting to create. They are incurring losses (short term pain for them) they are backed by people with very deep pockets so it doesnt hurt very much, make the traditional retailers go out of business, then start enjoying absolute power over prices.

Traditionally, businesses talked about margin of profit but today's dot com ecommerce giants are talking about margin of loss. They are not looking at short term pain of losses.. they are actually looking at long term happiness of enjoying absolute power in the marketplace. Looking at the graph above you can easily tell that all the players are incurring heavy losses with Flipkart leading the the race with net revenue of 179 crore followed by Amazon at 168.9 crore and Snapdeal at 154.11 crore. However, when it comes to losses, its the same Flipkart leading in losses by a much bigger margin and their loss for 2013-14 stands at Rs. 400 Crore.Comparatively, Amazon losses are pegged at Rs. 321.3 crore and Snapdeal had least losses of 3 with 264.6 crore

Now, you have to decide who is the ultimate winner in this story:

1. Is it the customer who is enjoying the convenience of buying from home, lower rates, deep discounts .

2. Is it the traditional retailer who is being lured by Flipkart and Snapdeals to start selling online with advertisements which show how a small shop owner in North India is able to get orders from far off places with Flipkart/Snapdeals online selling platform.

3. Is it the Online marketplaces which are offering great service and products at deep discount,increasing userbase, killing their competition (traditional retailers with price wars).

Here is one more perspective to look at:

When people in Villages didnt have jobs they migrated to Cities... but when the people in cities will go out of business where would they go?

Retailers dont have any specific skills. They are in the trading business for a long time and continue to use the same old methods and network to survive in business. When these traditional retailers will go out of business.... the local economy will be compromised, it will bring down the quality of living in that region and ultimately hurt the overall economic prosperity of that region. Its time to wake up to this trend and take corrective action.

If you have read this article so far then I request you to please pour your thoughts, ideas and suggestions in the comments section below. 

Thanks!