Online Deals: Here to stay?
The e-commerce industry in India is booming like never before- words such as these have been written before. Things are a tad different now. With brands like Flipkart, Myntra, Snapdeal and many others launching their TV ad campaigns, raising VC funds and talking of 1000% topline growth Y-O-Y, things are changing faster than you can type in that url.
As always, the threat of global giants coming in to spoil the party hangs over their heads. Amazon has revolutionized the American market, and resulted in the closure of bookstore chains such as Borders. Barnes and Noble, another bookstore giant, is spending its energies in getting its e-book reader, Nook, in order. It’s only fair that Indian firms in the online business run as fast as they can before big brother comes knocking.
In order to quickly set up distribution channels, these brands are investing in owned courier channels; making investments in IT to ease customer’s online experience, and making inroads into the burgeoning middle class market, where brand conscious but value seeking consumers are looking for a deal everyday. An overview of these sites, and how the future looks for them is in order.
There are two major segments emerging now, one that offers deals on service experiences, and others that sell products at deep discounts, or offer unknown brands at 'great' prices. Both have been seeing growth like never before in the past couple of quarters. Snapdeal, a deals site, is looking at $1.5 billion in revenue this year. Flipkart, the book behemoth that's quickly adding product categories, is looking at $10 million in sales everyday. The math for the topline is anyone's guess- an expanding market, brand conscious customers and an affinity for a better lifestyle are all factors that look good on a VC spec sheet.
Deep Discounts on brands through Deals- sites like snapdeal.com, sosasta.com and a few others are offering daily deals. Among other things, most deals are for offered for service experiences- spas and hair salons, gift articles such as unbranded but premium chocolates, and some product deals too thrown in. Both the vendor and the site make healthy margins, given the low input costs for these services. These deals look like they may offer margins in the short term, but their success is pinned on finding newer customers each week. The frequency at which a given customer might want to get a Spa experience is something to grapple with. With India’s fast growing internet population, they feel they can crack the code. However, there are a few issues they may face.
Most internet users in India are functional users, whose use of the internet beyond Social networking and email is minimal. The most interaction they want to have is with news websites. They look at the internet as another way to spend their time, and Facebook acts like a hyper local newspaper that they choose to read. Though stickiness of these sites and average time spent on the internet is increasing, how many of this large base of customers would indulge in online shopping remains to be seen. This part of the target audience doesn’t have the affinity or the money to invest in such ‘paisa waste’ activities. The masses remain deeply value conscious, and the middle class remains just that. Aspiring but stingy, these masses want the best experience their rupee can offer. Spends in aspirational categories is a challenge these sites have to target, so its not just the online model that they are selling, lifestyle enhancing activities like massages also need to be sold as an experience.
Also, these deals are like MLM schemes in many ways. Their success lies in their ability to keep finding newer customers and generating additional revenues is the only way they can survive. Today, users are coming in thick and fast, to the few notable sites that are making the noise. As the market matures, with competition for the best deals, these sites would not be able to offer ‘even better’ deals, and consumers might eschew those sites, or the deal market itself.
The category has a paradox at its heart- it offers great deals and deep discounts, but mostly on categories that are indulgent in nature. With any economic upheavals, customers would flock to retailers that offer best deals, but overall consumption of such services and products would flounder. Their entire success hinges on the economic upsurge India has seen in the past decade. With mixed signals coming on the economic front, the future is bright for these sites in the near future, but their development as mature business models, without propping up by VC funds and the deep discounting that eats into its margins will have to be watched out for.
On the product sales front, sites such as flipkart have been achieving wild success. With just 50 crores in sales last year, the site today does Rs. 1 crore in sales per day today. The site’s offer is simple, deep discount on books, with free home delivery. The category, books, by itself offers up to 40% margins. With over 30% discount on the books, and almost Rs. 50 being spent on each delivery, the focus right now is on signing up customers. Topline growth, at the cost of margins, would soon start plaguing their operations. An expansion in business would have to be funded with more investments in warehousing, employees and brand building. Sustainability stays at the fringes of their business models, as the market seems endless.
The prime target for the category is the youth. But they are yet to reach categories that see maximum spends- groceries, foods and apparel. So while volumes of orders are huge, ticket size is miniscule. While apparel and footwear has some sites- Bestylish.com offers shoe deals; most such deals are either for unknown brands, or offer discounts that high end footwear brands now offer in their stores all year round. The physical market for sports footwear brands such as Reebok, Adidas and Nike has seen deep expansion- stores on highways, and non high street locations have all year round sales, or through what they call as Factory Seconds outlets. Customers in India still like to feel their product. While this is the very prejudice these sites are trying to overcome, their success in doing so would be interesting to look at.
With expanding product categories- Flipkart recently added computer and peripherals, and cameras to the endless variety of books they offer, an increasing number of customers would land on their sites. How many Indians would buy high ticket items online would be the big question. Ebay India, which has been championing online buying in India, has seen middling success, and has recently added daily deals to its portfolio of offerings. So the past seems like a distant thing. But it also offers history, which chronicles each failure as dismally as it scintillates with each success. Web companies are the first casualty with any dip in Investor confidence, and this category is highly dependent on funding for booking growth, since margins are something they do not worry about at the moment.
The PR machinery is at its work- the customer is being offered an experience that changes the way they shop, and how many sign up and continue to spend their rupees will be a mile marker in what is bound to be a long hard road. Throwing caution to the winds, the new czars of the online business are charting new roads, those lined with gold, and fraught with danger.
Update: Just as I finished this post, an sms came up- Last day to Use Code