For Indian e-commerce, the choice is between discount and bleed or profit and die

For Indian e-commerce, the choice is between discount and bleed or profit and die

Last week, marketing professional Abhishek Bajaj decided to buy a refrigerator. An avid online shopper, he, along with his 33-year-old wife, who works with a Bengaluru startup, began exploring on Flipkart and Amazon. Like always, they decided to check the product out at a neighbourhood Reliance Retail store before ordering it online.

At the store, they found that the brand they were keen on cost the same online and offline. The decision thereafter was straightforward.

“The store is 100 meters from our house. I will get the delivery within a couple of hours of making the purchase,” Bajaj said. “If I had ordered online, it would have taken at least a couple of days for the product to get delivered. If I am getting it offline for the same price, why would I wait for two days?”

In short, online’s loss was offline’s gain.

What’s worse, Bajaj and his wife are not the only ones dumping online shopping and returning to good old retail stores. And this has been happening across several product categories.

For instance, smartphones—one of the most popular products on Indian e-commerce portals—have seen online sales fall since the beginning of this year as discounts disappeared.

Price-sensitive Indians love discounts.

Over the last decade or so, sales, coupons, and cash-backs have played acrucial role in attracting online shoppers. According to a 2015 report by Goldman Sachs, 30% of an Indian e-commerce company’s expenses aretowards discounts.

Besides daily deals, leading Indian online retailers have been hosting annual mega sale events such as Flipkart’s Big Billion Day (BBD), Amazon’s Great India Sale, and Google’s Online Shopping Festival, where discounts often ran as high as 80%. During BBD in 2014, Flipkart sold products worth $100 million (over Rs600 crore) within 10 hours.

“E-commerce websites will have to be cheaper than offline stores always, particularly for large items,” said Harish HV, partner at consulting firm Grant Thornton India. Customers may pay more online for small, everyday items, but most don’t mind taking out time to visit stores and compare prices when it comes to big-ticket purchases, Harish said.

At least 10 regular e-commerce customers told Quartz that they would return to local stores if they didn’t find the price advantage online.

Yet, continuing with discounts may not be easy for online players.

Discounting difficulty

Since the beginning of this year, the global investor sentiment towards Indian e-commerce has turned lukewarm. India’s largest online retailer, Flipkart, has been devalued by several investors since January.

In this environment, there is pressure on online retailers to reduce costs and improve margins. This, in turn, has led to a significant drop in discount sales.

Even the bonanza events during the recent holidays weren’t as attractive as in the past. While all leading players announced sales events ahead of the Independence Day holidays between Aug 13-15, they failed to impress buyers.

Besides the financial constraints, the Indian government’s revisedforeign direct investment policy may make it harder for these companies.

This new policy for e-commerce, announced in March, states that online marketplaces will only act as platforms where sellers can list goods without any interference in pricing by the hosting companies .

Flipkart, Amazon, and Snapdeal did not respond to emails from Quartz.

The approaching festival season in India could be the big test.

During October-December, retailers in India usually register about 40%of their annual sales of clothes, electronics, automobiles, and household items. For e-commerce players, it is going to be a tough trade-off: discounts or profits.

The new Indian millionaire is young, generous, and free from daddy’s influence

As a prodigious 15-year-old, Vijay Shekhar Sharma needed special permission to enroll in the Delhi College of Engineering (DCE). It is a pattern he would repeat often: Not to let age come in the way. He was rich way before he could get a drink at a bar.

At 19, Sharma, the founder of One97 Communications Ltd, which runs the company’s flagship e-commerce marketplace Paytm, graduated from the Delhi College of Engineering. It was 1998. It was an exciting time for India. The internet was expanding its grip as a business. Sharma decided to ditch the Rs1,600 ($24) a month job—the highest salary on the DCE campus that year —to work on the web portal and search engine he had started with his friend Harinder Pal Singh Takhar in their dorm room.

Barely twelve months later, Living Media India, owners of the India Today Group, acquired his start-up. Apart from a search engine and web-guided services, they had built an election tracking software. India Today bought it for half-a-million dollars. They used it to cover the general elections of 1999. It was the election in which the Bharatiya Janata Party-led National Democratic Alliance formed a stable government for the first time.

Thanks to the part-cash, part-contractual agreement—the start-up moved within the studios of the television network to manage their web operations—Sharma had, at the turn of the century, an annual personal income of Rs36 lakh ($54,000). Every fifteen days, there would be a deposit of Rs1.5 lakh ($2,250) in his bank account. It was life changing for a young man. “In many countries, you get voting rights only at twenty-one but by that age, I was earning more money than my father had earned in his lifetime,” Sharma says.
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New kids on the block

Sharma’s introduction and journey to wealth is cinematic: A rags-to-riches story, a genre made so popular and symbolic in the Hindi film industry of the 1980s. Yet, for someone like me, who has been writing about Indian entrepreneurial success stories for many years, Sharma’s trajectory from a lower-middle-class dreamer to a breakthrough business success story isn’t an aberration in India’s contemporary economic landscape.

India has witnessed an unprecedented phase of wealth creation over the past two decades, a trend that has sharply accelerated in the past ten years. India’s wealth increased by $2.284 trillion (Rs15,24,227 crore) between 2000 and 2015, making it one of the world’s fastest growing economies with a 211% increase in overall wealth, according to Credit Suisse.

A growing number of equity dilutions, stake sales and real estate deals have led to this never-before pace of wealth being created and unlocked in India; it has also given way to the emergence of a new group of the first-generation wealthy.

Be it cut-throat deals or generosity, it’s the new wealthy who are making waves.

Let’s take a look at Shanghai-based Hurun’s India Philanthropy List of 2014, for example. Seventy-three per cent of the people named on the list, on the criteria that they must give away Rs10 crore ($1.5 million) or more in philanthropy, were self-made.

India’s economic progress has provided the bedrock for this growth, expanding as it has from being a $1-trillion (Rs66,73,500 crore) economy in terms of its GDP in 2007 to double of that by 2015. To put it simply, it has taken India just seven years to add another
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Unlike the movers and shakers of yore, their money is also “cleaner"
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trillion dollars to its GDP compared to the nearly sixty it took us to accumulate the first trillion. This has spawned new businesses and industries, giving way to market opportunities for business owners and entrepreneurs to exploit.

In the past fifteen years itself, the size of the Indian economy has grown by more than four times.

These new wealthy fall into three broad categories.

First-generation entrepreneurs who either through equity dilutions or a constant expansion of their businesses have been able to amass wealth; second-generation entrepreneurs—or the mezzanine generation—where the business might have been started by the previous generation but the real scaling up happened only in the past decade or so; and an emergent cadre of rich professionals, mainly senior corporate executives in industries such as financial services, consulting, information technology and well-funded e-commerce and technology start-ups.

This expansion of wealth beyond the clutch of a small group of business families and industrial houses to successful first-generation entrepreneurs as well as a strongly emergent cadre of professionals/CXOs mirrors the changes in the entrepreneurship and corporate landscape in India in the past two decades.

Unlike the movers and shakers of yore, their money is also “cleaner.”

Excerpted with permission from The Wealth Wallahs published by Bloomsbury India. We welcome your comments at ideas.india@qz.com.