It’s that time of the year again when it’s showering discounts across e-commerce companies ahead of the festive season. Major ecommerce players fight it out to attract most customers and garner most sales through massive discounts, cashbacks and offers.
Combined sales worth Rs 15,000 crore is expected to be generated over the next week. Flipkart is looking to triple is gross sales to $1.5 billion this year after having raised nearly $4 billion from investors such as Tencent and SoftBank.
Amazon is not far behind. With India being one of its largest markets, Amazon has also pumped in millions of dollars to keep the fight going.
Reports suggest that these e-commerce companies have spent over Rs 100 crore collectively in marketing ahead of the sales.
And why not. These sales are seen as major revenue generators for these companies that are still years away from profitability. For some of them, nearly 30% of their total revenue comes from just this one week.
But are these sales and discounts the only way for e-commerce companies to make money? There was a time when e-commerce players were talking about a focus on profitability when there was a lull in funding in India’s ecommerce market.
But in the light of fierce competition continuing has that focus shifted back to acquiring more customer by way of giving discounts?
K Vaitheeswaran, Author of Failing to Succeed and considered pioneer of ecommerce in India, says that discounts in the market have always been a function of funds available with them. “In recent times, there was a winter of funding and because there was no money available. We thought discounts will come down and they will concentrate on profitability. But that’s not entirely true. As we have seen in case of Flipkart, discounting has started as soon as funds have become available again.”
He adds that discounting will stop only when funding dries up and companies are forced to build their business and sustain on their own.
Another factor is also that players such as Flipkart and Paytm can reduce discounting once they are no longer under the pressure of showing consistent growth in gross merchandise value (GMV) to their large investors.
But Harminder Sahni, MD of Wazir Advisors argues that discounts are a reality not just in e-commerce but also in the offline world. “You can find the offers offline as well. There isn’t much difference in the price. E-commerce companies may be bundling a few things such as free delivery, but it’s the same otherwise.”
Sathish Babu, founder of UniverCell Telecommunications also says that unlike before, discounting has majorly come down, even from the brand’s side. There is not much of a difference between offline and online. Taking example of smartphones, he says that even the online only game of several smartphones is ending as they see that nearly 70% of sales come from offline channels.
Brands such as Xiaomi, OnePlus, Moto that started off as online-only brands are now going offline to drive sales.
“There is a lot of discipline that has come in as brands realise that offline sales are more important. Big difference in price too has come down. Price is almost the same everywhere,” he adds.
Sahni adds that brands today are selling at a discount both online and offline and questions if that really counts as a discount in that case. “It’s a discount only if it is less than offline. But its brands are offering similar discounts online and offline, then where is the discount? I don’t think brands will let there be much of a price differentiation,” he says.
But are they making money?
It depends on how you look at it, Vaitheeswaran says. “It makes no commercial sense. We have seen over the years that a customer that shops on a site because of discounts is not truly a customer but just a temporary transactor. They will go away as soon as discounts stop. But because large investors look at GMV growth as a way of staying competitive, they will continue till investors put their foot down and say show sustainability. Until then it makes no commercial sense at all,” he says.
Harminder also says that with costs so high given marketing costs, cash on delivery collections, reverse logistics, they are losing money. But these e-commerce sites are not interested in profitability because they are making a statement.
But he is quick to add that not every business starts making money immediately. “When did Reliance Retail first make money? It took them 7-8 years. When did Big Bazaar first make money? Even now they make very little money. Businesses take time to make money,” he says.
So why the sales?
It gives them temporary relief, Vaitheeswaran says, "They have made a habit of offering discounts to customers. If players like Flipkart and Paytm don’t spend that money and they stand to lose customers to cash-strapped global players like Amazon that are not going to stop spending money on gaining market share anytime soon. So other players are forced into continuing the bad habit that they created."
He adds that in building a venture, one has to show GMV growth and in the case of GMW growth, profit is not a concern, at least not in the near future.
Sathish is of the view that though they are bleeding, over time, volumes will take care of the bleeding. “If they continue to do big numbers, high volumes will take care of the bleeding,” he says.
The game is not likely to end anytime soon. Vaitheeswaran says, “Unless Indian companies decide that this is not my game and change rules and say that even if I lose GMV growth, I’m going to focus on profitability. But in my view that’s unlikely to happen.”
Here is the catch, he adds, "The problem with high volume low margin business is that you can either show growth, or you can show profits, but you can’t show both at the same time."