Couple of months back, when the season of discount sales was in full swing, the news of unfair discounts by online retailers and squeezed vendor margins made headlines. There was much discontent, informal chatter and even accusations of unfair trade practice levied on online retailers. Even a major offline retailer entered the fray and expressed his discontent about high volume discounting by e-Commerce companies.
After reading all of this, I had a sense of déjà vu. This news took me back a few years, when many vendors had to declare bankruptcy owing to no business or lack of business. Vendors who had supplied to supermarket chains/offline retailers, formed a majority of those declaring bankruptcy.
In early-2000's when the mall culture made its entry in India, brands such as Big Bazaar, Reliance Retail, Food Bazaar, etc setup outlets across the length and breadth of the country. This gave rise to much consumerism, which in-turn fuelled demand, and needed more suppliers to fulfill the demand. Brands went out in search of vendors who could help satiate their growing appetite for products. Deals were struck, partnerships made and the bull-run started.
Seeing the success and disproportionate returns that early vendors got, a new rung of vendors entered the business -- who were ready to accommodate more demands of retailers. These new vendors supplied much of the same things that original vendors had agreed upon, but at a lower cost and lesser margins. It also resulted in significant increase of SKUs at the retailer level, and in-turn resulted in bad payment cycles by retailers.
Retailers were happy with these new vendors, they had tasted blood through them. Retailers realised they could pit new comers against the oldies. Original vendors protested, cried foul, but decided to play along because of the volumes these retailers gave them each month.
So discounting continued, margins got squeezed, new vendors entered the space, and retailers and customers were very happy. Retailers were not making money either, because they were spending dearly on customer acquisition, via schemes and discounts. When Big Bazaar had its first Republic Day sale, reports of them doing Rs 26 crore worth of sales in that three-day period made news. Since then Big Bazaar and other offline retailers have regularly created various occasions for sales to bring those spikes in business. Vendors sold bulk volumes, customers got heaped with discounts and it was a fantasy world -- while it lasted. Offline retailers were surviving on borrowed capital and expanding their business. Things continued pretty much the same way, until e-Commerce companies came along.
Somewhere in 2008, Big Bazaar crossed horns with Cadbury over sale margins, all their retail outlets stopped selling Cabdury products. The same issue cropped up with Kellogg’s in 2009, and Big Bazaar started exploring the option of having its own private label in breakfast cereals and other product categories. Sure enough, we saw new brands like Tasty Treat, Fresh n Pure in FMCG, John Miller, D&G, Bare etc in apparel and Sensei and Koryo in consumer durables being sold on Big Bazaar shelves.
Big Bazaar managed to convince manufacturers to setup capacities to supply these private labels at margins that was convenient to them. Names and packaging of these private label products was very similar to well-known MNC brands in the space. They were also placed on the same shelf as MNC brands. So it may not be wrong to assume that some customers mistook them to be MNC brands while shopping.
An estimated 12-15 such private labels were launched by Big Bazaar alone. Such private labels were also launched by Reliance Retail, More, Spencers and other offline retail stores. These private label manufacturers were those who got excited at the promise of helping create a captive market, by exploiting a food habit that MNC brands had built. Infrastructure was setup, investments made and there was a lot of optimism in the entire effort.
Nobody thought much about e-Commerce, which was a new beast making its entry second time round in India. It's initial outing had left too many people scarred and disgruntled. Investors were sceptical, customers were sceptical and it was a wait and watch scene. As Indians continued their weekly outings to malls and super-markets, the head honchos at big offline retailers were not too bothered. After all e-Commerce was not anything important, leave alone a threat.
Then 2008 happened, Lehman Brothers happened, Euro zone crisis happened, US was in trouble, and the entire world was in deep recession. India was among the few countries who ducked the trend. It was also the time, when starting-up culture was taking shape in our country. Some NRIs who returned home during this tough period thought it could be a good idea to start-up. A country such as ours has always presented umpteen opportunities for those who want to do business. Slowly but surely the startup fever spread, and investors who were looking at new investment opportunities turned to India.
e-Commerce became their early favourite investment avenue, and many e-Commerce ventures received foreign investments. Flipkart which launched in 2007, got investment from Tiger Global in 2010, and since then many foreign investors have invested large sums at regular intervals in the venture. Snapdeal launched in 2010, raised its first round of financing in 2011, and has constantly received many ‘shots’ in its arm overtime from Indian and foreign investors.
The money received from investors was mostly invested in marketing, brand building, to add more SKUs, private labels and nurture new vendors. Extensive ad campaigns lured customers to explore this whole new online world of discounts and great deals. As customers started taking notice, e-Commerce players realised they needed to bring more variety, brands, private labels and essentially stock more. So they took the same route as super markets did couple of years back -- went out in search of vendors, struck deals, made partnerships and the online bull-run thus started.
Companies are not worried, as long as investors continue to show faith and infuse fresh capital. Customers were always happy. But the first section of people to be effected by any change is the vendors. These vendors have also taken capital from the market to setup / increase capacities to meet the demand surge. Few vendors who are majorly dependent on one or two e-tailers have installed capacities, large infrastructure and done working capital investment to service the growing demand by online brands. So when a brand suddenly decides to squeeze its margins, the vendors have no choice but to agree in a hope that volumes will ultimately make up for the loss of margins.
As we have seen in the case of vendors who got into bed with super-markets and offline retailers, the honeymoon doesn't last too long. The first one to shut shop is the vendor – who is alone, has no foreign investor backing, and has stocked up too much in the hope of a better tomorrow. I hope things are better this time, the stress still exists as there is no organised equity or debt funding for these vendor groups. One can only hope that overtime, these offline/online retailers stand up for the entire value chain rather than purely looking at their own interests.
The thought therefore voiced in the news article is a valid one, how fair is it to other businesses (online/offline) and its vendors when online retailers squeeze sales margins? Why are online businesses so high-handed in its dealings? Should the government step in to protect the right of these small businessmen or let water find its own level?
I am not a great proponent of government intervention into trade practices, but surely better governance practices implemented at the grass root can do the entire industry a lot of good.
I am often asked what next from here? Is the e-Commerce journey over in India? How will investors get an exit? Can there be an IPO of Flipkart in India or any of its peer group? Will e-Commerce be further regulated? How many players can India accommodate? When is consolidation expected? What will happen to so many horizontals and verticals that have mushroomed over the last 3 years?
I wish I had a crystal ball. I am sure consolidation is not too far. Myntra’s acquisition by Flipkart, and Softbank’s entry in India are just some of the early indicators.