Almost every day we read about how e-commerce companies in
India are growing. How valuations are increasing with millions & billions of
dollars being pumped in. How newer business models and e-commerce verticals are
starting every day and getting funded. And how India is today a hotbed of
e-commerce start ups and VC's.
We also read about questions being asked - are these valuations justified? Is it
another bubble? They are losing money on each sale so how long will they last?
I don't really think there is one answer for these and more
such questions. And I am not a retail business expert or a financial wizard.
What I do know is that finally - the success or failure of any business is also dependent to a large extent on the customer. Is it fulfilling a need? is it
solving customer problems ? & is it delivering value to the customer? And a
customer here is a buyer for some businesses and buyers and sellers for others (marketplaces).
Let's look at this - Flipkart is said to be currently
clocking $4.5 billion in GMV (inclusive of Myntra), Amazon is said to be closing
in on the $2 billion mark and Snapdeal is reported to have hit a sales run rate
of $3.5 billion this month. Yes it's all GMV - gross merchandise value in
e-commerce parlance. And yes they are making losses on every sale. But this
increasing GMV in billions of dollars also means - sales are happening, and increasing month on
month for all players.
The important thing to note here - People are buying online.
More and more people are buying more and more online and more and more people
are selling more and more online. THAT I think is the key.
Someone may say - Oh! But they are buying because of the
deep discounts. Yes that is also right. But that is just one of the reasons. The
sharp increase in numbers over multiple players and categories over a period of
time, does not happen just because of discounts. There is more to it.
When I ask people the fundamental question as to why they buy
online I get varied answers, but probe further and it fundamentally boils down
to 3 key reasons and they are
1) Price
2) Convenience
3) Choice
I say price because I see that people do factor in
everything - discounts, competitive offers for the same products by multiple
sellers, cost of commute, cost of time saved etc.
Convenience because people do value the ability to be able
to buy anything from anywhere anytime, as well as get it delivered to their
doorstep (and at times even on the day and time when they want it delivered).
And that too, after reading reviews, and taking the opinion of their friends,
family and then even sharing their choice with others after purchase. Then they
can also easily return the items and get a refund if the item is not up to
their expectation.
Choice because they can compare, items, features etc, and
get the latest model, design or even a vintage piece, at the best price, and
not be bothered if it is available in their vicinity, town or city or even
country at times.
Sellers too are benefiting from the increased reach leading
to a larger audience, and ease of collecting payments and delivering across the
country that e-commerce has enabled.
So the questions to ask are : if we temporarily remove the
price benefit to some extent (reduction in discounts), will people stop buying ?
I don't think so because the other benefits are enough to keep existing
customers online. Will a reduction in price benefit stop new customers from
transacting online? It will definitely slow down the pace, but the other
benefits are strong enough to keep customers coming.
Now assume there is a downturn tomorrow for whatever reason,
and money flow trickles down and valuations drop drastically. What will happen?
Customer acquisition due to discounts and price only benefits will reduce. Those businesses that are currently investing
in delighting the customer (choice & convenience) and not only in marketing
(price discounts and advertising) will be able to ride out this period and
still continue to grow. Some early stage companies at that point in time or
others who are only focusing on offering a price advantage may have to shut
shop.
Currently FlipKart, Snapdeal, Amazon, LocalBaniya,
BigBasket, UrbanLadder, and a lot of the others, be it a marketplace or an
e-retail business are using the discounting option to attract more and more new
customers. However a lot of the millions and billions we see being pumped in
these companies is being used for - Marketing, Price competitiveness,
Warehousing, delivery, returns and tracking, and merchandising and technology.
What is important is that how much is being spent for what and when. Finally
what will decide who survives and who does not, will be on the basis of who is acquiring
customers fast and also delighting them in all aspects, Price, Convenience
& Choice and that too consistently.
E-Commerce as a business model is definitely here to stay,
simply because of the benefits it brings to the customer . I don't think anyone
can argue that. And e-retail in India by various estimates is less than or
about 1% of the total retail business as of now meaning that there is still a
lot of growth potential. A downturn can happen anytime due to many reasons and
can't really be predicted. Valuations will grow in good conditions and shrink
at other times. In my view it makes sense to use the high valuation good period
to raise monies & use part of it to offer a price advantage and acquire
customers, and the rest to build other business essentials. In a lean period
the focus can be changed. In the long term, companies that focus on the customer
first will survive a downturn or a market blip as that too is temporary.
