Illustration by Saahil
e-commerce
Wholesale War In The E-Tail
Brace up for an online war. The goldmine that is e-commerce is also a political landmine.
COMMENTS PRINT
Interview
The co-founder & CEO of Flipkart, took questions from Outlook
Outlook
Interview
Hours after Amazon’s $2 bn investment announcement, VP & country head, Amazon India, spoke to Outlook
Outlook
e-commerce
Can burgeoning e-retail stifle malls? Unlikely, say experts.
Pragya Singh
Opinion
A short history of e-tail: from Rediff’s earliest attempts to now
Ajit Balakrishnan

Flipkart Versus Amazon

Flipkart   Amazon

$7 bn Valuation   $148 bn global Valuation
$1 billion* Losses of over $30 mn* Turnover/Profits   NA But expected to reach $1 billion soon indian Turnover/ Profits
15 mn/70 no. of Products/Categories   17 mn/28 no. of Products/Categories
 
Launched in 2007
  • Strengths: Homegrown giant, huge goodwill, large product portfolio, owns payment gateway Payzippy. Cash-on-delivery options for most locations.
  • Reach: 13.09 million unique visitors in May, with 1.11 million daily visitors**
  • Weakness: Its foreign funding has raised questions
  Launched in 1994; in Jun 2013 in India
  • Strengths: Global brand equity, large product portfolio in just one year in India and expanding. Offers free one-day delivery, cash-on-delivery option
  • Reach: 18.02 million unique visitors in May, with 1.27 million daily visitors**
  • Weakness: Stymied by Indian laws on FDI, which restrict Indian ops

* Source: Company ** Source: Comscore

***

What’s At Stake Here

  • If government allows FDI, Amazon will shift to inventory model and play with prices. Other players, like Wal-Mart, likely to enter the ring.
  • Flipkart, armed with $1 billion investment, is also likely to indulge in price play to survive in the market
  • Consumers will gain the most as prices expected to fall significantly in the war between the giants to attract customers
  • The sector may see huge consolidation as smaller players would be wiped out or acquired by the big fish
  • Entry of large offline retail players could add financial muscle to Indian challenge in the sector

***

The battle between the homegrown Bansal boys and the global giant with the surname Bezos has been simmering for a while. Ever since Bezos’s Amazon started selling products in India last June, its dramatic growth had turned the small but booming Indian e-retail market into a pressure cooker. In April, Sachin Bansal tweeted: “Am I the only one who is sick of start-up gurus, Indian VCs and US internet firms telling Indian start-ups what we can and can’t do?” Three months later, Bansal got what he wanted–$1 billion in funding—crucial fuel for an Indian firm to go for the Holy Grail in the internet shopping space.

Within hours of Flipkart’s announcement, Amazon’s country head Amit Agarwal got off an airplane from the US with a message from his boss—“A big ‘thank you’ to our customers in India—we’ve never seen anything like this”—and $2 billion to take on Flipkart and other players. The swords have been drawn for a Flipkart versus Amazon showdown on battleground India. In the last few months, the two giants have matched each other’s move, to give customers a better deal. Better prices and free one-day delivery, to count a few. In fact, the joke on Twitter is that Flipkart and Amazon will soon start a price war “so huge that it will one day lead to the customer getting Cash on Delivery!” Sure, there’s no comparison between the two companies on a global scale—Amazon has a global valuation of $148 billion against Flipkart’s $7 billion. Even so, the latter has been quietly building up scale in India over the last 18 months. Foreign fund investors have been backing it religiously despite its losses. Its valuation has left even India’s retail king Kishore Biyani’s Future Group behind. Flipkart wants to be a $100-billion firm like its role model, Chinese e-commerce behemoth Alibaba. But e-commerce in China is highly regulated, and foreign players are not allowed in.

 
 
“eBay strongly believes in the need for a calibrated approach to opening up e-commerce in India to FDI.”Latif Nathani, MD, eBay India
 
 
Amazon’s growth in India has been exponential too. In just 13 months, it has built scale that matches Flipkart’s efforts of seven years. It has more products (though less categories) than Flipkart, more than twice the number of sellers and is expected to hit $1 billion in turnover soon, a figure Flipkart crossed only recently. Amazon’s success in India has obviously been because of the nascent state of Indian online retail. While organised retail, according to retail consultancy Technopak, accounts for only 8 per cent of total retail in India, e-retail is just a minuscule 0.4 per cent worth $2.3 billion.

On an encouraging note, there is a visible change in consumer behaviour here as Indians, led by the affluent younger generation, are finally going online to buy everything—from cellphones, cameras to clothes, furniture and even grocery, helping establish this mode of shopping. In the last couple of years, online retailers have moved from single-digit to double-digit growth. “Personally, I have been a loyal Amazon.com customer for ages and also have deep respect for what Flipkart has achie­ved in a relatively short span,” says Deep Kalra, founder and CEO, makemytrip.com. “The Ind­­ian e-commerce market is huge and I don’t think it’s a question of either/or between these two companies.”

Actually, everyone recognises e-retail is now officially a goldmine. It is also a political landmine. Amazon, along with other global e-retailers, is lobbying with the BJP government to allow FDI in e-commerce in India. This move has been opposed by Indian merchants as well as by firms like Flipkart. It is a powerful domestic lobby. Many Indian brick-and-mortar retailers like Reliance and the Aditya Birla Group are entering the e-retail fray while the Future Group is also making yet another attempt to tap the online retail pie.

It helps Flipkart that the incumbent government is not fav­o­urably inclined towards FDI in multi-brand retail. Concerns have been raised about Flipkart being eventually “gobbled up” by Amazon. The latest bit of muscle-flexing by Amazon has brought forward the question of the “survival of the Indian challenge in online retail” as Flipkart readies itself to fight a company that has successfully belittled local players via its fully controlled inventory model. The only exception, as mentioned earlier, has been in China where homegrown Ali­baba controls 80 per cent of the Chinese market.


Carton channel The Flipkart collection centre at Daryaganj in Delhi. (Photograph by Sanjay Rawat)

This remains, however, a fluid state of affairs. The UPA had last year floated a discussion paper on FDI in e-retail to garner public opinion. The issue has not died down even after the election thanks to hectic lobbying by global online retailers who have been applying cons­tant pressure on the government to open up this sector. That explains why PM Narendra Modi urged traders to “embrace technology”. Though opposed to FDI in retail, his government has been soft on the issue and is open to the idea in the “larger interest” as it is actively seeking FDI in other sectors. An inkling of its intentions showed in the budget when it allowed the manufacturing sector to sell its products on e-commerce platforms.

 
 
“Despite all the bells and whistles, most e-commerce websites are not much more than electronic catalogues.”Deep Kalra, Founder & CEO, Makemytrip
 
 
Sources reveal that an announcement on this was supposed to be made before the budget but the government pulled back at the last minute. Says a person close to the developments, “The government did not want to disturb its political flow by announcing something that many of its supporters are opposing, especially since the Delhi assembly elections are around the corner. Once that is done, it is possible that they will take a call on this.” The government, say sources, is also in the process of clearly defining e-commerce and its subset—e-retail—to prevent players from taking advantage of the ambiguities in the present laws.

This, say some analysts, stems from the funding of some e-retailers like Flipkart, which are almost entirely by foreign investment. According to reports, both Flipkart and Myn­tra have received notices from the enf­orcement directorate regarding this. This also probably explains why most e-retailers, inc­luding Flip­kart, follow a marketplace model where the company acts just as a platform for buyers and sellers, a model allowed for players with foreign investment. This is against an invent­ory-based model where the online players own the products and warehouses and sell them directly to buyers (here foreign investment is not allowed).

Most players in the Indian e-retail sector today operate on the former model, which Amazon follows in India, unlike in the US. Many of them, like Snap­deal, Jabong, Naaptol and Yebhi, have come to embrace the marketplace model. Flipkart too moved from a mass merchant model to a marketplace one in 2013, the year Amazon dropped anchor in India. The latter model accounts for 27 per cent of the US market, and over 90 per cent of China’s.

It’s an emotive issue with the BJP’s core constituency: the trader and shopkeeper community. Says Praveen Khandelwal, general secretary, Confederation of All-India Traders (CAIT), “If FDI is allowed, today it is just Amazon, tomorrow we will have others like Wal-Mart who will come in and capture the Indian market and consumers will move to these players at the cost of Indian traders.” As big Indian e-tailers will back these moves, it remains to be seen if the BJP will bite the bullet and open up the sector a few months down the line.

There’s the opposing view, of course. Some online players feel nothing is going to change. Says K. Vaitheeswaran, e-commerce consultant and founder, Indiaplaza, “It will make no difference in India as all the players are already here. It is not that if FDI is allowed, Amazon, Wal-Mart and eBay are going to take away 50 per cent of the retail market in India.” Retail analysts also feel the government’s stand on FDI is illogical. Says Arvind Singhal, head, Technopak, “The government’s stand on FDI is inexplicable. India needs capital and if foreign capital is allowed, it will create huge opportunity using e-commerce, front-end and benefit the entire ecosystem.”

So where does the Indian consumer stand in all this and what does she gain? For one, online retail has given her access to many products not available in smaller towns and a choice not readily available in physical retail. Most imp­ortantly, it has given her much better prices as e-retailers compete with each other to attract buyers. With two e-retail behemoths now fighting in the open, the deals and options will only get sweeter. As long as the fight lasts.

That is because Amazon India gets backing from Amazon Inc which has deep pockets and can sustain the fight longer. Though e-retail hasn’t tur­ned handsome profits even globally, Amazon Inc is supported by robust, profitable offline busines­ses. Flipkart, in contrast, has a presence only in online retail and depends entirely on foreign funds. Right now, it has investor confidence and the rope is being extended liberally, but at some point questions may be asked and the taps shut off.

 
 
“The money invested by Flipkart and Amazon shareholders will eventually wipe out the ‘me-too’ players.”Suchi Mukherjee, CEO & Founder, LimeRoad
 
 
The situation will also change if and when FDI is allowed and global e-retailers exercise their might and start working on an inventory model which gives them economies of scale and ability to play with prices, a strategy which always succeeds in a price-sensitive market like India. Big retailers like Amazon have also been known for predatory pricing where they discount prices to such an extent that the competition simply gives up and exits, leaving the field open for them to control prices. In a two-cornered fight in India, that is what most have to fear. Says Vaitheeswaran, “The deep discounting stops when one player wipes out others and starts raising prices.”

Globally, the silent arrival of Amazon with its range and reach can be a kiss of death. French Booksellers Union, which had been voicing concerns about Amazon’s practice of offering free shipping of discounted books, went to court and in 2007 got a verdict in their favour as the threshold of discounts is fixed under French law. Predatory pricing can only be proved post facto—if they kill competition and later jack up prices, says Prof Asis Zameer of the Fore School of Management. “I don’t think Amazon is a case of predatory pricing as it is more a case of volumes and more efficient supply chain management.”

Last month, German book publishers filed a complaint with the country’s anti-trust authority against Amazon, accusing it of violating competition laws. Amazon is in a similar tussle with Hachette Publishers in the US. As the German Publishers and Booksellers Association admitted in its complaint, it is “indispensable” for publishers to be listed on Amazon given its wide platform.

As of now, is bracing for a bruising battle that will shape the market of the future—the cont­estants will do everything to win, including gobbling up smaller pla­yers to build scale and size. Already, the ring has got concentrated to three or four players, including Amazon, Flipkart and Snapdeal where another global giant, eBay, has invested over `800 crore. One round of consolidation happened in 2013 when Snapdeal took over Shopo.in; Myntra, which was eventu­ally acquired by Flipkart, acquired Fitiquette; and Zovi, Inkfruit.

As we go forward, many of the single vertical e-retailers as well as cross-vertical players are expected to be on the sale block. Says Suchi Mukherjee, CEO and founder, LimeRoad.com, “The money inves­ted by Flipkart and Amazon shareholders will eventually wipe out ‘me-too’ smaller pla­yers and will help build-out the market for bigger players who offer the best platform experience.” But do Indian consumers have anything to complain in any of these developments? As long as the prices are lower and investors have faith in Flipkart’s long-term prospects, they’ll continue to gain. Until, that is, this David versus Goliath battle continues in India.

***

Don’t Flip That Kart Yet: Know Your E-Tailer
All what you wanted to know about e-shopping in India

Find Big e-shops... (Beyond Flipkart & Amazon)

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Apparel/fashion

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Furniture/home products

www.pepperfry.com
www.urbanladder.com

Offline players in online business

www.futurebazaar.com
www.cromaretail.com
www.shoppersstop.com

Check Before Hitting Buy

  • Does the company have a return policy?
  • What are the payment options? Is there a Cash On Delivery option?
  • Are there any hidden costs?
  • Is there a cost to delivery or is it free?
  • Does the website deliver at your destination? What’s the delivery time?

Check During Delivery

  • The price promised to you is what you are paying during delivery If package is open, seal broken or product damaged
  • If the product you receive is what you ordered
  • If product was delivered in one day if you paid extra for it

Outlook ordered a product each from Flipkart, Amazon and Snapdeal to get a first-hand feel of the entire experience of buying products online and their delivery. Here is what we found:

  Item ordered Payment Stated delivery time Discount: Delivery

Flipkart.com Three-fourth denims Cash on Delivery Next day*  None Delivered in 24 hours, *(Extra charge)
Amazon.in Baseball bat Cash on Delivery 2-4 days Yes Not delivered within stipulated time
Snapdeal.com Memory card Cash on Delivery 3-4 days Yes Not delivered within stipulated time

By Arindam Mukherjee with Lola Nayar

COMMENTS PRINT
Interview
The co-founder & CEO of Flipkart, took questions from Outlook
Outlook
Interview
Hours after Amazon’s $2 bn investment announcement, VP & country head, Amazon India, spoke to Outlook
Outlook
e-commerce
Can burgeoning e-retail stifle malls? Unlikely, say experts.
Pragya Singh
Opinion
A short history of e-tail: from Rediff’s earliest attempts to now
Ajit Balakrishnan

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