Saturday, November 8, 2014
Why do big online retailers like Flipkart, Jabong, Snapdeal continue to offer huge discounts and attractive offers despite of making huge losses?
It was a week before Diwali; I was helping my dad decorate our house. For my overseas readers, Diwali is the biggest Indian festival and just like any big festivities around the world, it comes with loads of shopping. Retailer offers discounts and schemes to boost sales and to cash in the festive spirit. One of my neighbors, who happen to be a retailer of electronic goods, started chatting with us. He explained how it’s been very busy for him due to the holiday season and that he wants to rush to open his shop. I asked him if online sales caused any impact to his business. He immediately replied; yes. I fired another question, how can they sell it so cheap? He paused for a while and then went on with his response; these websites are selling goods at cost price or even lower. He added further; they don’t want to make profits, they are only here to destroy shop owners and real retailers. They are there are here to increase valuation of their online ventures and then sell it off to the highest bidder. Before I could ask anything else, he left. I & my dad chatted about this topic for few more minutes where he gave me an example how he had seen a similar strategy by a company when he was young. Having written my last post on success of online retailers, I thought it’s fair to warn everyone on its sustainability.
Let me take you back to early 1900. This was the time when a trading company changed the way we start our day even today. This also happens to be the company which helped British, rule India for several decades. So, what change am I referring to? It is about the way we welcome guests in our homes, it is about the way we wake up, it is about the way we socialize. I’m taking about TEA, sounds familiar? Off course it will. Tea is now a part of India tradition. This has not been the case always. According to the historian Ville Melgén, the taste for tea was developed in India through a dedicated punch in the face of the producers of tea. Initially, free samples of tea were offered from horse-drawn carts. As early as 1907, Brooke Bond, an English tea company started experimenting with a fleet of horse-drawn vans for distributing teas. This is exactly what my dad told me. He told me how tea was distributed free along with a small pack of biscuits (small cookies/ crackers). My dad was born in the year 1948, which means this company distributed free samples for over 50 years. Give it for free unless it becomes an addition. That’s exactly what East India Company did, and this is exactly what online retailers are doing. They are making us habitual of free home delivery, huge discounts, luxury of ordering two sizes and returning other one, same day delivery, free returns if you don’t like the product. All of this was important to change behavior of Indian buyers, who wanted to touch everything, bargain hard before buying.
Now consider this; India's largest online player Flipkart continues to be in the red (in losses) after more than six years of operations. The fact is; no online retailer in India is currently making profits. Think about it. Why would they sell products for almost no margin? Why would they invest so heavily on advertising? Answer lies in East India Companies strategy. They are acquiring customers. They are destroying real traders. They are increasing their base and brand loyalty. You would have noticed how some of these companies have started additional features through membership programs. All of this is aimed at increasing customer base. In fact, companies like WhatsApp are doing the same thing. They started offering free messages, free media transfer, even free call (by some). All of these services were earlier charged by mobile companies. Sooner or later, WhatsApp will also charge for its services. For now, they are making us addicted to their features & cost free operations.
Make best use of online shopping features till they remain cost effective, history tells us they won’t remain cheap forever. Share & comment if you like this post. Feel free to criticize.