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BW Businessworld

Booming Or Busting

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The family, fed up with instant coffee and yearning for that addictive aroma of pure, ground coffee at the breakfast table, decided to buy a coffee machine. The young ones did their search and investigation; and one day a Flipkart delivery boy trundled up to the doorstep with a sleek looking ‘Oster’ machine for Rs 10,000. It was a steal! The machine carried a MRP of Rs 15,000, and the best high street retailers like Vijay Sales wouldn’t part with a similar piece for less than Rs 13,000.

This coffee machine buy is a small part of the big eTailing success story. Millions of urbanites buy their day-to-day products via these online sites. The eTailing giants — Flipkart, Snapdeal and Amazon — in a short span have ballooned into a huge Rs 40,000-crore industry, weaning away customers from traditional retailers like Big Bazaar, and the mom-and-pop kirana shops.

Their mantra is simple and logical — they deliver goods at 20-30 per cent cheaper than their high street counterparts. The eTailers, on the other hand, save on expensive rentals. The model is built on an ‘endless’ and galloping acquisition of the ‘consumer’ as real estate. Discounted pricing brings in waves of new converts, and the investors queue up to pump in money at mind-boggling valuations. These investments are based not on current P&L figures, but on the customer base of these companies. The game, therefore, is to acquire customers at any cost.

Yes, it’s all about cash burn, and investors are willing to back them up to burn more to acquire more customers and to build an ecosystem that someday they hope will make profits. But when will that day come? Will the desi eTailers be able to pull out of discounting as long as Amazon with its deep pockets hounds them with better discounts? How long will the investors continue to support this model? Or, will they sell to another set of investors, who are willing to take longer bets, and who will then become victims of a Ponzi cycle? Organised retail had burnt its fingers in the last decade, pumping in over Rs 30,000 crore and chasing the chimera of the 400-million middle-class market. We have short memories — those 400-million purchasers never existed!

We must make a distinction. E-commerce, or electronic trading of which eTailing is a small part, is here to stay. It is a $22 billion booming structure and galloping at over 30 per cent every year. The principles of e-commerce — first hooking the customer with great prices and the ease of trading and then slowly upping the prices to ensure decent margins — have been working well. MakeMyTrip for travel and BookMyShow for cinema and entertainment have done well to bring in their commissions once the customer is ensnared. Significantly, the barriers are breaking down too. Brick-and-mortar retailers are creating e-commerce models, while the e-commerce guys are tying up to create touch-and-feel stores.

It’s all evolving. But for the eTailers, the last leg of the marathon has gone wrong. Read all about where they are all headed in our cover story authored by senior writers Vishal Krishna and Abraham C. Mathews, who worked over a month searching the marketplace and the lawyers’ corridors.

There is interesting variety too in the issue. India has also suffered a long, hot summer and hopefully now the rains will bring some respite. It was a summer that saw for the first time consumption of power go down in rural India, and tractor and FMCG sales fall in villages. Well known writer Paranjoy Guha Thakurta analyses what the crisis of falling purchasing power of agricultural India means for the country’s economy.

(This story was published in BW | Businessworld Issue Dated 13-07-2015)