India's ecommerce sector shrouded with controversy over the alleged practice of offering steep discounts on products sold online has become an accepted practice for everyone who shops online.
For the last couple of years, domestic online majors such as Flipkart, Amazon India and Snapdeal, armed with billion of dollars of funding from deep-pocketed overseas investors, are engaged in a huge discount game to woo customers and capture market share.
Several industry experts assert that the online business model seems to be flawed and these players would soon run out of cash to carry out such discount offers for a longer time.
For a sustainable business model, it's necessary that the incentive and discount wars be done away with soon. The question is: When will India's ecommerce companies end the discount game and focus on becoming profitable?
Experts feel it will take another 2-3 years before online companies give up on discounts and focus on business viability. This is because, India's internet users continue to be attracted by pricing against the convenience factor, said a Economic Times report.
Maturity among the current internet users is poor due to lower internet penetration, which currently stands at 25 percent. With an internet user base likely to exceed 40 percent by 2019, matured internet users would rather prefer convenience over pricing, the report said.
"Generally, for users who have been on the internet for less than five years, pricing is an attraction to come online. [After that] convenience starts outstripping attractive pricing. Based on our research we see that happening by (in India) by 2019 when over 40 percent of India's total internet users would have matured. Today that number is about 25 percent," the ET report said quoting Parag Gupta, the executive director who leads the technology, internet and media practice for Morgan Stanley India.
According to Gupta, India's ecommerce firms can focus on turning profitable and shouldn't be dependent on overseas funds to carry out their discount schemes.
"It's important to always think about unit economics because funding can close and start at different points as it is governed by global events," added Gupta.
In the past, Flipkart, the country's number one home-grown ecommerce company, was marred by frequent markdowns by several of its key investors due to its lack of focus on profitability. A host of its investors had marked down their valuation estimates by up to 39 percent in the recent past.
In May, Morgan Stanley Mutual Fund Trust, an investor in the company, lowered its estimate of the valuation of the Bengaluru-based e-commerce company by 15.5 percent to $9.39 billion. At its peak, Flipkart was valued at over $15 billion. Besides this, Fidelity Rutland Square Trust II, Valic Co., and T. Rowe Price also each lowered the value once.
In last month's big festive online shopping war, the top three ecommerce companies claimed to have registered record sales mainly on the back of steep discounts being offered on electronics and several other products.
Earlier this week, the Indian arm of US ecommerce giant Amazon said its total sales in October were three times more than sales seen in the same month of festival sale in the previous year.
The Bengaluru-headquartered Flipkart also countered by claiming that the company sold 70 percent to 80 percent more than Amazon (India) by value in the festive month of October. These numbers also include sales by its subsidiaries Myntra and Jabong.
During the Diwali offer sale, Flipkart said it sold about 15.5 million units while Amazon India sold about 15 million units.
According to research firm RedSeer, e-commerce companies are expected to register transactions worth Rs 11,000-13,000 crore ($1.7-1.9 billion) in October, driven by festive offers and discounts on their platforms.
Although, the top three etailers attracted millions of customers to transact products online over last 24 months, challenges continue at their end.
With discount war raging, brick-and-mortar retail players are complaining that online players are breaking the FDI rules by offering huge discounts on products sold online.
However, ecommerce players maintain that they are not violating FDI rules and instead are putting out a disclaimer in newspapers suggesting that discounts are being extended by the sellers, who use their marketplace model to sell products.
The government, too, has lend their support to the online players, indicating that FDI rules are not flouted by them.
“We had a meeting with e-commerce companies following complaints made by brick-and-mortar retailers on the discounts being offered online as FDI rules do not allow this. We told them that if indeed the discount is being offered by the vendors and not them, it should be spelt out in their advertisements. Now they have started doing so,” a recent BusinessLine report said quoting an official from the Department of Industrial Policy and Promotion.
Even as the online and offline tussle will not end in a hurry, India's ecommerce sector would continue to run the discount game to ratchet up their valuation and attract more funds.
Updated Date: Nov 03, 2016 07:46 AM