A lot in the online cart

Anurag Chakraborty

"Those in power prefer to stay in power. They feel threatened by the free markets."

— Saving Capitalism from the Capitalists by Raghuram Rajan and Luigi Zingales

It was in the offing for a while but the cracks started to appear last year. A group of companies rose up some time in 2014 and said warranties of their expensive products — cameras, laptops, and appliances — were not applicable if they were bought online. Almost simultaneously, a group of other companies raised their voice and said thou shalt not sell our produce online at a cheaper rate than us because it hurts.

These strange diktats by companies Nikon, Dell, HP, Sony and then Allen Solly, Crocs, Nautica underscored the unease that offline players or the incumbents of India's gigantic retail industry were feeling with the advent of disruptive online companies like Flipkart, Snapdeal and Amazon.

Gradually taking business away from slow, lumbering models of offline retail, these online enterprises started out by offering deep discounts to lure away the consumer. Whether they have figured out a way to get around the inefficiencies of the brick-and-mortar retailing or whether it is an unsustainable gimmick only time will tell, but for now and for one of those rare moments in India's business history, the consumer is winning.

Margins

"Basically these kind of margins are built up because some of our retail chain are inefficient. Think about the amount of inventory that is being held in the Indian apparel business. It is humongous. Stores are full of inventory and most of them don't even know how much inventory they are holding. All that stuff is being reflected in the prices that we pay," said Professor Rajiv Lal of Harvard Business School in a media interview.

Companies which exist on the web and are founded on data don't have this predicament. With an efficient supply-chain network, they can just flow out the things that sell and not stock things which don't. Large warehouses and transport networks are in. Bloated inventories are out.

Neither do online sellers have to establish and maintain glittering outlets at expensive locations. All that real-estate which lies empty half the time adds the buck to things we buy. With just a few warehouses and well-planned logistics chain, all that fat is just sliced right off. Often, online retailers sell you things straight from the manufacturer. Without an elaborate chain of middlemen, this means more bang for our buck.

Avenues

These are among the reasons why an increasing number of people are buying everything from spectacles to pet food online — things hat very few people thought would ever be sold online. The biggest draw here is an attractive price. As Lal puts it "Even situations that we think that it doesn't make sense for people to buy things on the internet because of the inefficiencies in the Indian retail system, the price is so appealing that people are willing to compromise on other things."

Then there are other reasons as well which take care of a buyer's convenience. Online sellers often allow buyers to return the product within a certain period. This gives people a lot of confidence to make dicey purchases like clothes and shoes online. For men (and women!) dragged to store after store by their significant other in search of the most fantabulous footwear, this has been a boom.

This, of course, puts old-school retailers in a tough space. With the consuming class in India generally coming from the age group of 18-30, which also happens to be the biggest demographic that is taking to online transactions, this is alarmingly eating into the customer base of the offline players. Of course, this has drawn them to question the basic business model of ecommerce companies.

Lobbies of the retailers have already knocked at the doors of the government, trying to chip the wings of the online sellers. “We do not understand how online retailers gave 60-70 per cent discounts. The prices at which they sold merchandise are lower than our purchase prices. This is a clear case of predatory pricing,” says an official at the Confederation of All India Traders.

Discounts

Of course, not all products sold by online retailers are sold at 60-70 per cent discounts. These cases grab the most headlines especially during special sales - which are often a subject of controversy themselves. In Flipkart's recent disastrous, "The Big Billion Day" sale, products were sold at throwaway prices when the sale opened at 8 am. But the website ran out of these products very soon. Others retailers also tried their hand at such bonanzas and thankfully it seems at least they are learning from past mistakes.

Naturally, the offline retailers are reacting in a way that existing businesses react whenever their business model is threatened by a new business model or innovation.

The biggest example in our hands today of what happens when a sector is left to men with dangerously prehistoric ideas is real estate. This month, RBI Governor Raghuram Rajan himself took to imploring builders and agents to bring down bloated property prices that have caused realty everywhere to lie unsold. According to builders, while everything else is flying off the shelves and India is witnessing a spending boom like never before, 'the economy is lull' because property with inflated price tags have no takers.

Left to their own devices, offline retailers will only be happy to do the same.

While there will always be a debate of how much discount is the right discount, the fact is in a free market these terms need not be dictated by interest groups and lobbies. If a seller is funding discounts from their own pocket to build a customer base how is that wrong? Couldn't it be argued that the discount is just a service just like the banter we are so very interested to hear from our neighbourhood grocer?

Consumer first

A popular idea, and on which even elections are fought, is that it should be ensured that small and medium retailers, all branded as mom-and-pop and embellished as vegetarian, hardworking, honest neighbourhood a family whose only son has died at war, need to be protected from the carnivorous sharks of online retail.

That is an unintelligent argument, if you ask one Charles Darwin. And even if we don't go to the extent of heartlessly chiming 'evolution or extinction', the question then comes is how is it fair to the consumer?

Undeniably, the consumer is getting a better deal. Doesn't that amount to something? She has more choice now when it comes to spending her money. If she saves a buck on a discount, chances are she will spend it on something else. And that money will go in the pockets of another business. Protectionism is out, evolution is in.

And online retail is here to stay. Because I hate misogynistic chats with my kiranewala and you hate being told by the showroom salesman “Yeh size toh nahi milenga behenji. Aap kal aaiye.”

Perhaps if left to the logic of offline retailers, we would also have to ban taxis because they hurt auto-rickshaws because they provide better comfort. And then we should ban auto-rickshaws because they provide faster travel but hurt cycle-rickshaws. And then we should ban cycle-rickshaws…well because it hurts the pedestrian billboard industry!