Online Retailing : The Price War which Online retailing is winning
(Reference: Jaideep Metha, vice-president & general manager, IDC South Asia)
Customers love online retailers. Accessible and hassle-free , they offer an attractive alternative to the crowded and parking-scarce malls of urban India. For those in villages and semi-urban areas, they are often the only channel through which to buy the latest gizmos. They sell electronic products cheaper. As it happens, usually significantly cheaper than the stores. And, yes, they allow cash on delivery.
The IT and mobile industry is in a fix. Dependent upon traditional brick-and-mortar trade for more than 80% of their volumes, original equipment manufacturers (OEMs) have no choice but to fight in their corner.
Here’s the rub: the traditional channels are simply not able to compete with the online channels on price. This is partly because of good old retail infrastructure costs as well as predatory pricing by the etailers . If that was not bad enough, the e-tailers fuelled by seemingly endless pots of venture capital have invested massive amounts of money in building both their brands and their customer service infrastructure , with a view to offering best-inclass experiences to their customers. As a result, they have gained share at a rapid rate in the consumer markets.
E-tail edges ahead
So, here we are. Bring on the battleaxes. In the red corner are well-oiled , well-known slick e – commerce machines. In the blue corner is the mom-and pop shop, the mobile store chain and the company-owned company-operated outlet. Let the first round begin. It’s a Mike-Tyson-in-his-prime 10-second knockout. The blues have no chance.
It is a unique twist to the incumbent’s dilemma. The vendors know that the traditional trade simply cannot win this war, but have to back them. They fear channel conflict, price erosion and brand dilution. They also watch, with trepidation, the rapidly increasing purchasing power of the large online retailers, some of whom are hurtling towards a $1-billion revenue milestone at warp speed.
So, what happens next? Some major OEMs, including Lenovo and Canon, have come out strongly against the e-tailers . “Online retailers are not our partners” ; “we’ll give you a longer warranty period if you buy through a traditional channel partner” . They are threatening legal action against some of the online retailers for selling below the minimum prices, even at a gross loss. Samsung, Nokia, Toshiba and Lenovo all have their own online retail outlets, though often prices of their own products on third-party retailers and marketplaces are lower.
To further complicate the landscape , e-tailers point out that just like online marketplaces around the world, they are just a selling platform with no control over prices. Various traders sell the same product through them, often at different prices.
Further, it cannot be ignored that these portals have contributed significantly to the growth of small businesses who leverage them for enhanced distribution. Anecdotal evidence suggests sales growth of 33% and beyond for small businesses as a direct result of leveraging online marketplaces.
Flipkart and Snapdeal have given out statements highlighting that they take “utmost care” to list products only by those sellers who have the necessary authorization to sell these products. They have assured customers that all the products including those of Lenovo and Toshiba which are available on their portals are genuine and eligible for warranty.
Are the customers listening? As you read this, Snapdeal is getting another Rs 830 crore (around $120 million ) of funding from its existing investors , including eBay.
Finding a win-win solution
A way forward is needed. Absolutely no one is going to win if the spat gets any uglier. The OEMs will be in a conflict with a channel which the customers love. The e-tailers are going to have to invest resources in conflict management too. And Joe Public will not quite know where to buy his next smartphone or printer from. As for traditional retail and channels, they are anyway going to have to raise their game to stay relevant.
The industry needs to sit down together and come to a resolution. As always in these situations, everyone will need to give a little. The online trade will need to resist the temptation of selling below minimum offer prices, and certainly eliminate predatory pricing. They not only risk alienating the OEMs but also government regulators like the competition commission. The OEMs need to understand the increasing importance of the online trade.
While not pandering to them, they do need to understand that they are here to stay. Like it or not, the OEMs will need to do business with them. And yes, many of them now have the scale which will command pricing way below the prices being paid by smaller distributors and standalone shops. The traditional retailers and channels have the real problem. In many countries, they overcome the online chaps through superior service levels and technical help. In India, the online companies have set the customer service bar so high, the traditional channels are struggling just to keep up. And a price conscious public does not pay a premium for technical help. Traditional trade needs to start innovating, and fast.
Time is of the essence. Tough macroeconomic conditions have anyway depressed markets across categories ; the last thing any of the three stakeholders need is another crimp in volumes.