The new trend of online retail players offering deep discounts cannot be sustained in the long term because many of the online retailers are subsidising these discounts. The practice of putting money from your own pocket and selling a product at a huge discount just to attract customers and gain marketshare and price some of the competitors out of the market is a detrimental step. It is like someone taking drugs and getting a high. One would feel good outwardly without realising that internally you are eating into your own system and destroying it. That is what these players are doing by subsidising these discounts from their own pockets without realising what they are doing to their companies.
When I was in LG and we were establishing the brand in India, another brand, Aiwa, resorted to such huge discounted sales and got a lot of attention from consumers. But we at LG decided not to follow that practice, take a stand and follow a policy of ‘No scheme, no scheming—great products, honest pricing”. We did not even offer an exchange scheme to our customers at that time. It worked wonders and LG stood out. See where LG is today and where Aiwa is—nowhere in the market.
These kinds of schemes can lead to winning just minor battles, they are not successful or beneficial in the long run. Such deep-pocketed competitors will always be around and try such gimmicks. Today, online companies are well-funded and their investors are so deeply entrenched into the business that they keep moving forward regardless of the reality. Currently, it is a valuations game and since some valuations and volumes have been promised, this game will continue for some time. But sooner or later, the investor will realise that is ultimately leading to value destruction rather than value creation.
Companies like Flipkart and Snapdeal have created great organisations. Their scales are too big to fail and, in the marketplace model, they do not need any huge investments. They, therefore, do not need to do such things. Also, consolidation in the market has already taken place and there are only a few big players now after the takeover of smaller players like Myntra. This situation will not change soon and is likely to continue for the next 3-4 years before further consolidation, if any, takes place. So what is the need for such practices?
Organised retail, especially in electronics, where the maximum action is, is being badly hit because of this discount play by online players. Thankfully, though, the biggest players in this arena—Tata and Reliance—have deep pockets. Currently, however, even they cannot compete with online players as their scales are limited compared to them given the limitation of space and the number of stores they can have in cities. They will have to rethink their business models. The game will change when the physical retail players like Tata and Reliance start going for an Omni model where they start online offerings along with offline presence as is the practice in several countries. Then online players like Flipkart and Snapdeal will start feeling the pressure.
Rajeev Karwal is former marketing head, LG, and founder-director Milagrow Robots; E-mail your columnist: karwal.rajeev [AT] milagrow [DOT] in
