Internet Retailing Industry in India - Deep Discounting and more

By Pranab On 16:25 In pricing strategies

1. Industry Structure – Online Retailing in India

By: Pranab Das, Divyanshu Chapia, Radhika Goyal and Sankalp Mehta

Reference: https://www.softwaresuggest.com/blog/ecommerce-in-india/

Online retailing industry in India took its baby steps closer to 2000. IRCTC and low-cost carriers gave a boost to online ticket booking – despite the painfully slow speed, people still preferred the model, as it helped them avoid long queues and commute to book tickets. But it was not until 2007, that the industry started taking concrete shape. Started as an online book portal, Flipkart made an instant mark, with extremely low prices and faster deliveries. Deliveries in cities like Bangalore were almost on the same day. The early incumbents in the market started fizzling out, as the deep discounting model of Flipkart started taking precedence. Venture capital money started flowing in; but only the ones like Snapdeal, Myntra, Jabong; with a mixture of deep discounting, easy returns and Cash On Delivery models could match up with Flipkart. The MNCs had a rather lean run in this phase – eBay seemed to lack focus on this geography; Walmart, Tesco and Target tasted waters, but did not take the plunge. Metro restricted itself to B2B Wholesale in brick and mortar mode. Some Indian ventures like Indiamart, tried out the B2B online space; while some others, like Justdial, Quikr and Olx started with online classifieds – evolved henceforth in C2C and Hyperlocal space. A lot of pureplay Hyperlocal players came into prominence, but none could survive beyond a couple of years – Zomato, Groffer are some of the ones who has withstood the tide; Swiggy is trying to replicate the same resilience. 2013 became a watershed year, with the emergence of Amazon. A lot of successful and failed acquisitions later, Myntra and Jabong got submerged into Flipkart; SnapDeal’s stakes started eroding fast. PayTm has been bellwether of the digital wallet revolution, but its Mall concept is yet to reap dividends.

The retail brick and mortar giant - Future Group, has failed on its multiple online forays; now, it seems headed towards some kind of offline integration with Amazon. TataCliq is trying to champion the cause of the brands.

To start with, the industry focused on B2C segment – staying put with the Metro and Tier 1 cities for quite long. But with the emergence of last mile players like Aramex, BlueDart, Delhivery etc.; along with the In-house captive capabilities built like eKart, Amazon Logistics etc., the industry started extending its reach, into Tier 2 and beyond, into the rurals.

Emergence of 4G by Jio and the new FDI modifications proposed by the government, might change the dynamics of the industry significantly.

The infographics below, captures most of the data and facts related to internet retailing industry.

Source: Euromonitor Passport

Currently the industry exhibits an Oligopolistic market structure, with Amazon and Flipkart being the major player, managing a concentration ratio of around 75%. The ‘% Market Share – Top 3 vs the Rest’ infographic, clearly shows how, over the years, incessant deep discounting, helped the major players, establish stranglehold over the market.

While the customers have benefitted in terms of price; the same could not necessarily be said about value, across other dimensions. Due to this, the price elasticity of demand is very high, as exhibited during Big Billion Dollar Day, Diwali Sales etc.

2. Pricing and Regulation

Pricing:

Till now, industry as a whole, have primarily focused on the B2C space; hence we will look at pricing from that perspective. Though Flipkart and Amazon, are apparently Marketplaces, none of them are really the ‘PurePlay’ ones. Debatably, both the players have one or more preferred/in-house sellers – WSRetail, Cloudtail. This makes it a Hybrid Marketplace, where the operator participates also as a retailer.

A PurePlay Marketplace is constituted of the Buyer and Seller, facilitated by the operator on its platform. In this case Amazon and Flipkart are the operators, who, apart from facilitating the sales transactions on their platform between the buyer and seller; also provides some or all of the below additional services, for a commission charged to the seller:

* Marketing and Promotions

* Warehousing and Logistics

* Last Mile Delivery

* Analytics and Seller Coaching

The independent sellers upload their product catalog along with their prices, through the Seller Centrals. Except in case of exclusive deals, the sellers can sell the same items on multiple platforms. But [s]he is obligated to quote the least price on Amazon and Flipkart. All the paybacks to the seller, post deduction of commissions and any appropriation against order cancellations and returns; are done based on this seller price. Also, the seller cannot quote these prices, above the MRPs, wherever applicable.

The net price, to be paid by the end customer, also depends on, any promotions being applicable at the product, bundle or cart level. Bundles are of hard and soft varieties, while the items in the soft bundle can be sold independently; hard bundles are coupled together always (sometimes GWP-Gift with purchases, are the bundles of hard variety). These promotions can be funded by the vendor (seller) or by the platform.

The price play by the marketplace operators starts here; following are some of the characteristics:

* Deep Discounting – On top of the seller price and vendor funded promotions; the operator applies a deeper discount. This discount comes out of the marketing budget for customer acquisition and retention. Biggies, with deep pockets, play a long-term game. The entire economic value is passed on to the consumer with the objective of weeding out smaller competitors; to reach a Winner’s Take All scenario by progressively acquiring more and more scale. They believe, that at a particular scale, they would be able to derive the necessary economies, to get profitable; in the process perpetuating the discounting model.

Initially, the sellers are enticed into the market, with low commission and faster payout structures. But as the scale of the platform increases, the operator power will far supersede the seller power and will be able to fund most of the discounting through vendor funding. The payout cycles will elongate, reducing their working capital requirements for the operator.

* Perception of low prices – It has become a norm, to show the original price and then the discount % to arrive at the actual price; on occasions, the original prices are manipulated to show a high %discount, to emotionally entice the consumer.

Also, low prices are generally maintained on commodity products or frequently purchased products; this is cross-subsidized with relatively higher prices on other items.

* In-house Sellers and Private Labels – There are sellers on the platforms, who are promoted by the operators – who have an ownership stake in them. These proxies, help control the prices of the online sellers and the overall retail market. Given the increasing oligopolistic nature of the industry, the sellers are bound to fall in place.

* Price Scraping and Dynamic Pricing – At a generic market level, prices are scraped from competitor sites; and price updates are made on the platform, multiple times a day. Prices can be scraped on individual browsers / mobiles and customized dynamic prices can be personalized for individual users. Prices can be skimmed, in cases where, demand urgencies are sensed.

While the above are some of the strategies employed by the marketplace operators, some of the below approaches are taken by the retailer /seller, to arrive at the price of the product:

Price Optimizer: There are price optimization software, that works closely with the Demand Forecasting and Replenishment, to base its judgement on historic demand – granularized to the level of region, store, seasonality, the stage in the product lifecycle etc. Any environment change is also keyed in. The suggested prices, that normally come out at a daily frequency; either gets directly propagated to Production; or else, gets further moderated to key in the human experience.

Regulatory Environment:

The regulations of imminence in this industry space, are those relating to FDI in Retail. The below table lists out the relevant regulations, and the modifications/clarifications provided in December 2018:

Prevailing Regulations	How the regulations were adhered / circumvented	Modifications / Clarifications provided on Dec 2018
100% FDI allowed in Wholesale	Walmart and Metro Wholesale are the primary FDI players through their Cash and Carry outlets. Reliance Retail is the other big player – not governed by the rules	No changes
100% FDI in food retailing including through eCommerce	Big Basket is the primary player; AmazonNow is trying out in pockets. DMart, Reliance Fresh – pureplay Indian players are trying to enter the online food space.	No changes
100% FDI in Marketplace model	* Amazon / Flipkart buys through their wholesale wings and sells it on marketplace, through preferred vendors / sellers * Amazon / Flipkart has ownership stakes in these preferred vendors / sellers * Sellers on the marketplace are treated separately based on the mutual nature of strategic relationship * Supposedly, employ predatory pricing through deep discounting using the above methodologies	New rules propounds / clarifies FDI participation in Marketplace as of ‘PurePlay’ nature. * Marketplace operator not allowed to hold ownership in any seller * All sellers to be treated equitably – no marketplace services can be denied to a seller (needs more clarification)
100% FDI in single brand retail	Online exclusives	Any seller who sells more than 25% of its inventory in one marketplace, will be considered as an inventory led model

Following are some of the arguments for and against the new modifications / clarifications:

For	Against
Eradication of Predatory Pricing – making it a level playing field for both offline and online players * generation of customer value – beyond just price – into convenience and experience dimensions * existing incumbents gets to focus on bottomline, rather than just topline GMV (General Merchandising Value)	Predatory pricing is not necessarily harmful, until and unless it helps expand the market.
Arrests oligopolistic nature of the online retailing industry and balances opportunities for online FDI players, India grown online players, Brick and Mortar Retail players and Unorganized retail sector – * synergize Omnichannel, O2O form of retailing * push for innovative startups – through easing of entry barriers	FDI should be allowed in B2C online space as well. Foreign deep pockets do not have infinite capital to burn – over a period of time, it will spur proper competition – as the market gets expanded, it will have increased pie for all to share.
Overall increase in job creation - as online retailing constitutes only around 3% of overall retail, hence the anticipated drop in online jobs will be compensated by better health of rest of retail
Reference: https://economictimes.indiatimes.com/news/economy/policy/ecommerce-fdi-rules-companies-seek-extension-of-deadline/articleshow/67374829.cms

3. New Entrant Strategy

Entry barrier is very high, on account of:

* Deep Discount

* High Concentration Ratio of Top 2 players

But there are opportunities unbound, that exists:

* The current online retailing industry accounts for only ~3% of the overall retail value chain; the rest of the space is still largely untapped. This space is largely fragmented and constitutes of multiple buyer and seller sets. If this space can be freed of intermediation and facilitated through buying and selling platform, there is a lot of value that remains to be appropriated.

But to reap the benefits of this space, it will require larger players with availability to necessary capital – likes of Reliance Retail, Future groups are aptly poised to benefit from this through Omnichannel O2O initiatives.

* The modifications / clarifications to the FDI rule provided by the government might force the top players to arrest rampant deep discounting; this might make the customer value proposition to shift from just price to convenience and additional value dimensions. This might auger well for vertical specialists – Limeroad, Nykaa and Purplle are examples

* Online retail consumers in India had just transcended the journey from basic benefits to a basic product to at max an enhanced product. With millennials tending towards being the bulk of customer base, a shift towards an experience economy is eminent – innovative startups can stage innovative niche boutique offerings, powered by the cutting edge of digital technologies.