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September 5, 2011, 6:28 pm UTC
Around two weeks back I wrote in response to some articles which were claiming accounting frauds in E-com firms(and the bubble) in India. My key assertion there was that E-com transactions are real and growing in India. Another assertion was that valuations may be a little higher but they are realistic to some degree with VCs betting on solid growth in terms of GMV and transactions.
In this blog, I will actually point out the areas of concern in Indian E-com space. But that does not mean I am contradicting my earlier view. In my view these are the real challenges for E-com industry in India rather than it being a bubble. The growth is solid and real but there are areas of concern which need to be considered:
1. MOP (Market operating price) management for brands and threat to E-com portals: Beyond MRP, there is a concept of MOP which is the least price (set by brands) at which dealer or retailer can sell the product. To maintain robust margins and consistent pricing all brands try to operate on having consistent MOPs in the market. They keep putting pressure on dealers/retailers who are cutting down prices under decided MOPs to maintain them. But the online e-commerce portals have become a headache for most brands in India now as a lot of products are getting sold under MOPs. Big brands are really upset on this and their trade channels are putting lot of pressure on them as they are losing sales. Brands are feeling frustrated as lot of grey market items are getting sold on which they have no control. I have discussed this matter with senior executives of leading brands and here is the response:
a. A Japanese Electronics Giant: “Our core strategy is to maintain a certain profitability which is through maintaining MOPs, we are very strict about it in the market. The Internet marketplace has disturbed the same, we are looking at a serious legal recourse for the same”
b. A Korean Electronics Giant: “MOPs is the key to our pricing strategy and online retailers are undercutting and pricing equilibrium is disturbed. Right now the impact is low but signs are not good if this increases, we will take help of the Indian government as a lot of goods sold are not excise paid. That is the way the prices are lower, as these goods are smuggled without excise being paid.”
c. A Leading Mobile Phone Manufacturer: “One of the portals was undercutting a lot and disturbing our MOP, we told them not to – but they did not agree. Then we clearly told them that our service centers will not give the warranties if the bill is from their company. They started behaving after that.”
So there is a clear threat from big brands to crack down on E-com portals to protect their MOP and sales through their distribution channels. Also they hate the grey market goods getting sold without any excise being paid; it just kills their pricing strategy in a country. They are considering legal actions, and this can be a big threat to e-com portals that are engaging in these practices.
2. The coupon game: Instead of giving out direct discounts, some portals are floating coupons in the market. These are available directly and indirectly to the users. There are sites like coupondunia.in, retailmenot.com etc where you can find these coupons. So what is wrong about giving out coupons? It is essentially selling at a loss to increase number of transactions and GMV to impress upon investors. There is no accounting fraud here, and only some portals are doing this. But the key problem here is creation of fake demand cycles and then to maintain these cycles one has to keep increasing the bleed. From a business planning perspective this is a move which takes the PnL away from the break even rather towards the break even. Technically it makes operating leverage negative (or more negative), which is a bad sign for any firm.
3. The product quality and customer reviews: In order to increase transactions and sell more, E-com portals are competing to provide best deals. Some of the best deals which are available are on smuggled items or old items (last generation electronics etc), which are not moving in the market. The quality of these products is not great. The focus is to give out a great price and dump it on the user. The big missing link to identify and warn customers of these items is “customer reviews”. Customer reviews are a fundamental part of most of E-com sites in the west, and Amazon.com is the Mecca for reviews. In India at most you see 4-5 reviews on any product on the portals, on majority of products there are no reviews. Indian portals are not even encouraging users to post reviews after purchase, which is a standard practice for sites like Amazon.com. Amazon.com even has a vine programme in which regular reviewers are given free products to give their honest opinion to help other users.
4. Did you just buy a real Gucci?: The apparel, shoes and accessory portals may not be selling genuine products. This is especially true for international brands, the fakes are getting sold and it is very difficult to point out the differences. There are international hubs where these fakes are available especially from South East Asia, China and some places in Middle East. An executive who sources shoes told me that these items are available for as less as Rs. 200, for which MRP is put up at Rs.5000 and post heavy discount they are sold at Rs. 1000. I am not sure how widespread is this, but I got this point from a solid industry source.
5. High Growth High Competition Low (No) Profitability: This is the state of the star segment in the BCG matrix. This segment is characterized by high growth and high market share. The general assertion is that since competition in this segment is high, even if your market share is high your profitability will be low. So the bigger players may survive with bleed – since they will get funded for a long time as they will show scale. Lot of the smaller players will get wiped out, as without scale funding will not come (and not everyone can show scale).
6. Offline sales shown as online sales: Some of the online retailers in India were actually offline retailers before they started E-commerce. They are distributors/wholesalers/middlemen of the products which they sell online as well. They are showing a lot of their offline transactions as online transactions. They are showing their regular offline sales as online COD(cash on delivery) sales to show higher transactions. This is completely misleading the investors and VCs must conduct solid due diligence on this. Another interesting practice is that some of these online retailers are vendors to marketplace E-com portals like ebay. So for example I run a portal xyz.com and I also sell on ebay as a seller, and the sales I get from ebay, I show them as online sales for xyz.com. This is not correct representation as valuation and vintage is for sales on your portal and not from other portals or offline sales.
I think these are some of the key challenges for the E-com industry. You can take point number 4 with a pinch of salt, although sourcing executives confirmed this to me but it may still be wrong.
Sandeep Amar is a & is an esteemed guest author for iMedia Connection.
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