Author: Abhishek Sharma, Business
Analyst at Quadratyx
Are you accustomed to huge discounts, exclusive deals, cashback and flash sales? Then it might not be good news for you. The government in its new policy on FDI in E-commerce has made announcements which may provide relief to the competitors but may not be that beneficial for the consumers.
In the recent announcement dated 26.12.2018, the Ministry of Commerce and Industry has announced that E-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce. This means that going forward, the E-commerce platform will serve only as a platform between the buyer and the seller.
An E-commerce site works on two main models:
Now, some of you may be wondering why it is done. Is government discouraging purchases from E-Commerce? Certainly, the answer is ‘No’. The government is trying to level the field for all players in the playground and restricting the big players from gaining monopoly. So, those of you, who are wondering about the huge discounts and a low price compared to the physical market, certainly have a myopic view. If you look at the profitability analysis, then you must know that all these big players are yet to be profitable and are running for losses.
So, how are these players able to survive even with continuous losses? The answer lies in the FDI which acts as a backbone and prevents the players from phasing out from the market. I have deliberately taken a picture of 2013-2014 profitability analysis to emphasize on their past profitability and make you aware that they are still unprofitable. Now, two questions arise:(a) Why are these E-Commerce companies running in continuous losses and still surviving? and (2) Why are there FDI inflows by the investors, knowing this fact?
The answer to the first question is Predatory Pricing, which hinders the entrance of niche players in the market. So, they are operating from a long-term perspective, trying to achieve a monopolistic structure. Also, though their losses are increasing, their revenue from operations are also increasing. Also, there are no free lunches in economics and everything has a price. We don't even realize how habitual we have become of ordering things online and how difficult it would be for us to make offline purchases standing in long queues, visiting a physical store and spending a good amount of time.
To answer the second question, let us understand, what these companies have achieved through all the promotional cashback, flash sales, exclusive deals, etc. They have a huge customer base - with segmented customers with their preferences - which is growing day by day. In the modern-day data-generating era, it is like discovering a gold mine. Targeted advertisements alone can fetch millions of rupees or even more. And what is now seen as losses should be considered as the cost of customer acquisition. Amazon spends nearly Rs 1.90 on every rupee spent on its customer, whereas for Flipkart, it stands at Rs 2.23. Also, with a market like India where the population is comparatively young, and more than 13 crore (approx 10.1%) people have Internet connection, it is quite lustrous to invest in such a market.
The implementation of this policy will allow small retailers to exist and operate with these huge businesses, but the question still remains about their profitability. The policy may provide them with a level pitched but might not be able to provide them with equal conditions - early entrance, customer base, customer loyalty, customer service, etc. - all these require initial investments which reap benefits over time.
It would be interesting to note the changes that these E-commerce companies will bring to their revenue models, as a maximum limit of 25% is set on the inventory. Are they going to use advertising for revenue or are they going to cut down on their company costs with laying off employees?
Although, being the early entrants, they definitely have an upper edge over its competitors. We can also expect them to come up with some exciting feature which may give them advantage over others like, how Flipkart introduced the cash-on-delivery feature in India, realizing India as a cash economy. All this is much anticipated and whether these measures will achieve their intended objectives will show up in the long run.
Are you accustomed to huge discounts, exclusive deals, cashback and flash sales? Then it might not be good news for you. The government in its new policy on FDI in E-commerce has made announcements which may provide relief to the competitors but may not be that beneficial for the consumers.
In the recent announcement dated 26.12.2018, the Ministry of Commerce and Industry has announced that E-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce. This means that going forward, the E-commerce platform will serve only as a platform between the buyer and the seller.
An E-commerce site works on two main models:
- Inventory based model of e-commerce: An e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
- Marketplace based model of e-commerce: This model provides a platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.
Now, some of you may be wondering why it is done. Is government discouraging purchases from E-Commerce? Certainly, the answer is ‘No’. The government is trying to level the field for all players in the playground and restricting the big players from gaining monopoly. So, those of you, who are wondering about the huge discounts and a low price compared to the physical market, certainly have a myopic view. If you look at the profitability analysis, then you must know that all these big players are yet to be profitable and are running for losses.
The answer to the first question is Predatory Pricing, which hinders the entrance of niche players in the market. So, they are operating from a long-term perspective, trying to achieve a monopolistic structure. Also, though their losses are increasing, their revenue from operations are also increasing. Also, there are no free lunches in economics and everything has a price. We don't even realize how habitual we have become of ordering things online and how difficult it would be for us to make offline purchases standing in long queues, visiting a physical store and spending a good amount of time.
To answer the second question, let us understand, what these companies have achieved through all the promotional cashback, flash sales, exclusive deals, etc. They have a huge customer base - with segmented customers with their preferences - which is growing day by day. In the modern-day data-generating era, it is like discovering a gold mine. Targeted advertisements alone can fetch millions of rupees or even more. And what is now seen as losses should be considered as the cost of customer acquisition. Amazon spends nearly Rs 1.90 on every rupee spent on its customer, whereas for Flipkart, it stands at Rs 2.23. Also, with a market like India where the population is comparatively young, and more than 13 crore (approx 10.1%) people have Internet connection, it is quite lustrous to invest in such a market.
The implementation of this policy will allow small retailers to exist and operate with these huge businesses, but the question still remains about their profitability. The policy may provide them with a level pitched but might not be able to provide them with equal conditions - early entrance, customer base, customer loyalty, customer service, etc. - all these require initial investments which reap benefits over time.
It would be interesting to note the changes that these E-commerce companies will bring to their revenue models, as a maximum limit of 25% is set on the inventory. Are they going to use advertising for revenue or are they going to cut down on their company costs with laying off employees?
Although, being the early entrants, they definitely have an upper edge over its competitors. We can also expect them to come up with some exciting feature which may give them advantage over others like, how Flipkart introduced the cash-on-delivery feature in India, realizing India as a cash economy. All this is much anticipated and whether these measures will achieve their intended objectives will show up in the long run.
Great article. Good analogy.
ReplyDelete