The Discount Dilemma

As e-commerce continues to lure customers with big discounts, offline retailers are crying foul. Yet the price wars are here to stay for some time, so what is the way out?

The digital wave has created a new set of customers that is rewriting the fortunes of retailers. As e-commerce takes the market by storm, online and offline retailers are locking horns in their attempt to woo customers. With their heavy discounts and attractive offers, e-commerce players are pulling in millions of customers, registering growth the industry has never seen before.

Of all other things, it is quite apparent that the pricing strategy of the players is the key to their success. The e-commerce revolution at present largely thrives on ‘discounts’. This festive season we saw the prices of electronic products and consumer durables hitting new lows on online portals, much to the delight of customers. Flipkart’s Big Billion Day sale reportedly generated revenue of 100 million dollar in 10 hours. Close competitors like Snapdeal and Amazon also matched steps slashing prices on their sites. In many cases the prices were said to be below cost price and went to levels unthinkable for traditional retailers. Apart from the excitement created among shoppers, these online sales have also been drawing flak from different corners of the industry. Brick-and-mortar players, worried at their dwindling sales volumes, have also accused e-tailers of resorting to unfair competition in the form of predatory pricing. Many argue that as online retailers slash prices beyond the acceptable levels of traditional retailing, the market is heading into a state of imbalance.

On many products, prices were 15-20% lower as compared to retail stores, generating a mad rush of shoppers on online portals. For offline retailers there seems to be no way to match these prices, unless they are ready to bear huge amount of losses. The question that pops up here is how ecommerce companies fund for these massive discounts. It must be hitting them hard somewhere, considering that the margins are almost non-existent. In fact, industry experts indicate that most players are actually incurring losses on every sale. “None of the players are making profits,” says Ashok Deendayalu, an industry veteran who is currently Founder and Principal Consultant at Mithras Retail Services. Profitability is clearly not the agenda for e-commerce players as of now. Even globally this has been the trend for e-commerce. “This is a phase where everybody wants to be able to cut into each other’s margins and garner traffic. Eventually those who are able to sustain will survive, but that is going to be just a handful,” says, Sandeep Ladda, India Technology Leader, PwC.

Despite their unattractive profitability quotient, these players have roped in massive funds from Venture capitalists and Private equity investors who are keen to be part of the e-commerce growth story. Hence the companies have sufficient funds to invest on attractive marketing campaigns, promotional offers and technology innovations. But the pressure on the bottom line is very much there. Ladda, says, “The current e-commerce model would not have worked out from a profitability standpoint.” The objective now is to aggressively increase traffic to the website and attract more and more customers, tie up with more and more suppliers, eventually converting retail shoppers to e-tail shoppers. Experts indicate that the current e-commerce model can’t last very long. Eventually companies will have to start thinking about profitability if they want to sustain their businesses.

At present, e-commerce companies are operating as marketplaces, which means that they act as a link between buyers and sellers and do not have the right to exercise control over the product prices or discount offered on the sites. But there have been accusations that these companies do have a say in deciding prices. A website also went ahead stating that some online retailers decide product prices on their sites as they finance part and in some cases even full amount of the discounts offered by sellers, in an indirect manner. Though there seems to be no evidence to support this view. Industry analysts are of the opinion that there is nothing illegal or unethical with the ecommerce model. If there had been any such issues it would have certainly been thrown out in the open by now. “The legal angle is perfectly alright, yet as the retail framework and supply chains are getting disrupted there is a complete disequilibrium in the market. Therefore pulls and pushes will play out,” says Ladda.

Traditional retailers, including the large branded stores as well as the small-sized traders have been seeing their footfalls going down by huge numbers. Subsequently, these players are raising their voice against their online competitors. “Offline retailers are taken by surprise. This Diwali, stores dealing in consumer durables and some other product lines complained that they lost around 40% of sales volume,” says Deendayalu. Many are putting pressure on the brands insisting them to stop supplying their products online. Brands are also willing to take a stance as their existing distribution channel is getting hit. Something that they can’t allow as a major part of the business still happens offline. Some electronic brands like Lenovo and HP have come out with declarations stating that online portals like Flipkart and Snapdeal are not their authorized sellers and customers need to check for warranties while purchasing online.

At the same time, offline retailers are also coming up with their own defence mechanisms. “Many retailers are trying to play in the e-commerce space and are coming out with their own websites. Some might also tie up with e-tail players for a ‘store-in-store’ concept,” says Ladda. As customers get used to around the year sales, malls and retail stores will have to tighten their belts and come up with more attractive offers irrespective of seasons. Deendayalu believes that the emergence of e-commerce companies has been a big wake up call for the offline players. “Traditional retail needs to buck up its performance. The prices offered to different customers are at times different. A lot of improvement is needed in terms of the quality of service.” The whole shopping experience has to change a lot and to attract and retain today’s tech-savvy customers, offline players will have to think of innovative offers and ways to make the shopping experience enjoyable.

E-commerce has a different model that allows companies to save on overhead costs. Hence they are often able to sell on factory price. Offline players have to factor intermediary costs and profit margin within the MRP. So they can only cut down prices to a certain extent. Some retailers also argue that the e-tailers need to be brought under the VAT net, as currently they do not pay VAT on sales claiming that they are only shipping goods from source to the end user.

As product prices keep varying offline and online, there will be imbalance. Industry experts believe that predatory pricing is not an acceptable norm in the market place and will create problems. At the same time, it is yet to be clearly established whether e-commerce pricing can be categorized under predatory pricing or not.

As the fight for market share gets over, and some of the players get eliminated, pricing strategies will change in the long run. E-commerce players will also eventually look at making profits. As of now, the industry will have to adapt to the new market reality. For brands, the best way forward is to adopt omni-channel retailing to offer a uniform experience on all channels. Varied pricing across different channels can hurt the brand image. Companies should look at arrangements where both offline and online retailers are in a win-win situation and a healthy balance is maintained.

In the whole retail battle, customers would stand to gain, but only if they are careful. Ultimately it is a matter of choice. The choices will differ from product to product and consumer to consumer. Quality of products, after sales services, warranty are different aspects that need to be looked at depending on the products purchased. In the current discount driven market, customers will often be lured into impulsive purchases based solely on ‘prices’. But that is not all that matters. The war will go on for some time. You have to find your way through.