Alam Srinivas is a business journalist with nearly three decades behind him working for The Times of India, India Today, Outlook Financial Express and Business Today. He is the author of Cricket Czars: Two Men Who Changed the Gentleman’s Game
The FIFA World Cup 2018 threw surprises and shocks galore. Respected teams lost to the underdogs against all odds. Conventional strategies flopped. Renowned players burnt out like shooting stars. For most of them, including the likes of Lionel Messi (Argentina), Cristiano Ronaldo (Portugal), and Andres Iniesta (Spain), this was surely the last World Cup. Finally, a nation of just four million, Croatia, almost won the Cup.
Something akin is happening in the Indian e-commerce sector, albeit with several changes. Two of the world’s largest retailers, one online (Amazon) and the other physical (Walmart), will share the spoils, and profits, in the world’s second-largest potential market, after China. But their Indian strategies, as opposed to the global ones, will be vastly different. In fact, they will participate in a unique playing arena.
First, take a look at how the global giants took control of the online market. Even before the entry of the US’ Amazon a few years ago, there were strong and entrenched local players like Flipkart and Snapdeal, which had access to huge sums of money to grow and expand. However, the latter’s successes proved to be their nemesis. As they became larger, they lost track of crucial ingredients like logistics and consumer satisfaction. Japan’s SoftBank, a substantial shareholder in Snapdeal, tried to effect a merger with Flipkart to take on the emerging clout of Amazon. The act of snapping the deal flipped for various reasons. Initially, there were valuation issues over the nearly $1 billion M&A. Smaller shareholders, like Azim Premji of Wipro, in Snapdeal opposed the idea of differential, and higher, payments to the larger ‘private equity’ shareholders.
Then the shareholders of the Indian-owned Snapdeal realised that they could be saddled with huge tax burdens if their company became a part of the Singapore-domiciled Flipkart. The larger partner insisted on strict restrictions on the Snapdeal shareholders. One of them was the five-year non-solicit clause that barred them from approaching anyone connected with Flipkart, which was vehemently opposed.
Disgusted, SoftBank gave up, and purchased a stake in Flipkart, which was sold to America’s Walmart, the world’s largest brick-and-mortar retailer. The Japanese investor earned $4.7 billion, and one of the co-founders a billion dollars in a deal that put the company’s worth at $21 billion. It changed the rules of the game. Henceforth, Walmart will contest with Amazon for a larger slice of the Indian online retail pie.
Walmart’s entry into e-commerce was dictated by its failure in physical retail. Given the complex and restrictive laws in the retail sector, the American company had to partner with Bharti Group. While it controlled the back-end and logistics, and wholesale part of the trade, it couldn’t sell directly to the consumers. Hence, while Walmart managed the super stores, Bharti had to be in-charge of the smaller ones.
In a few years, the partnership was dissolved, and Walmart retained the super stores. Mihir Sharma wrote in a column, “In the 11 years that Walmart has operated in India, it has signally failed to build up its own business. That’s not entirely the company’s fault. In fact, it’s a reminder that India remains, in some ways, as inhospitable to foreign businesses as the People’s Republic of China.” The Indian rules acted as disruptions.
He added, “Walmart Inc might want to portray its... purchase... as a brilliant strategic move, long planned in secret that would allow the US retail giant to manage its transition away from the big-box stores globally. Yet the truth is that the deal represents a second-best outcome” to enter India indirectly, through e-commerce. Walmart hopes that its presence in wholesale and online retail will someday present another opportunity to get into a direct physical relationship with the consumers.
Amazon, ironically, hopes for a similar objective. Its entry was driven by its abject failure in China, the largest potential market. Alibaba emerged with the biggest market share in that country, and Amazon’s share is a mere 1-2 per cent. This was despite the fact that when it ventured into that market in 2004, it acquired the then-largest online retailer. Despite a change of name to Amazon China in 2014, failures followed it.
Critics contend that Amazon’s strategy was bogged down by two strategic blunders. One, it wasn’t as aggressive in China as it was in the US. Two, it didn’t invest as much in China as it did in its home country. It was too arrogant, with complete faith in its back-end technology, and failed to understand the hearts and minds of the Chinese consumers. It was too over-confident and didn’t read the writings on the ‘virtual’ wall, and couldn’t anticipate the inroads made by local players.
When it came to India, it decided to deliberately avoid such follies. From Day One, it committed huge sums, a few billion dollars. It has spent over $3 billion, and wishes to invest a cumulative $5.5 billion. At the same time, Amazon avoided the acquisition route. It decided to start from scratch, and set up its entire operations upwards from the grassroots level. It took a longer time, but it knew where it was going, and how.
The beauty of the presence of Amazon and Walmart in Indian e-commerce is that both had to completely transform and reboot their existing global business models. E-commerce, in its original form, i.e. B2C operations of buying in bulk at discounted prices, and passing on a part of discounts directly to the consumers, isn’t allowed in India. Only B2B, or back-end logistics and wholesale can be legally pursued.
Hence, Amazon and Walmart (through Flipkart) argued that they didn’t sell to the consumers. All that they did was to provide a robust, efficient, and perfectly legal online ‘marketplace’ or technology platform for the vendors to showcase their products, and buyers to source them directly from the former. The two e-tailers took care of the part of the complex logistics and technology involved in the sale and delivery.
In several interviews, Amazon explained how its people contacted tens of thousands of small, medium and large vendors across the country. They helped the sellers to display the products on the online platform in a seductive manner. Buyers were wooed through cheaper prices, and efficient delivery. For the last-mile connectivity, Amazon used its own network, private couriers, and state-owned postal service.
This model was unlike that in the US, where the retailer bought huge quantities in bulk at lower prices, stored them in self-owned mega warehouses, and shipped the products directly to the consumers. Technology allowed the company to cut costs and maximise efficiency despite offering cheaper-than-market prices. The ability lay in passing on the order to the nearest warehouse, source the specific product, and ship it within 24 hours to the customer’s house or office.
However, the Indian business model got Amazon, and several others, in trouble, Government agencies maintained that it was akin to B2C. The fact that Amazon India owned or leased a few warehouses, though not as large as in the US, at strategic locations implied that it sold directly to the consumers. Amazon India denied this. However, the model continues to be questioned on various grounds by the regulators.
Another critical difference in the Indian model was the payment means. In the US, and most of the developed and emerging markets, plastic and mobile payments are generic. In India, most consumers love to pay in cash, and only after delivery. This was initiated, perfected, and popularised by Flipkart years ago. CoD, or cash on delivery, became the norm in the Indian e-commerce space, as 70-80% buyers opted for it.
It created a new link in the logistics, or delivery-and-payment chain. Now, the last-mile connectivity also meant collection of the money and payment
of a portion of the amount to the original vendor. It led to additional costs, and extra time and effort. The efficiencies were curtailed, and so were the profits. The business model had to be tweaked more. What emerged was different from every other country in the world.
This scenario is unlikely to change in the near future, and this was evident in the post-demonetisation period. One of the reasons behind demonetisation, or the ban on old high denomination notes, in November 2016, was to transform India into a cashless, or less-cash, society. Indians love to transact in cash, and feel more comfortable about it. Demonetisation aimed to make it unattractive and impractical.
Just months after demonetisation, the usage of plastic and other online and mobile payment platforms, slumped. As more notes were pushed into the system, including a new Rs 2,000 note, ‘Cash became the King’ – again. Indians’ passion for notes continued, and the usage of cash reached almost the same levels as during the pre-demonetisation era. Hence, CoD is likely to remain the preferred mode for online retail.
Problems arose between the e-commerce players and tax authorities. Several states said that since the products were being shipped to consumers outside the state, either from the warehouses of the online retailers or the vendors, they were prone to be taxed as products distributed through vehicles, railways, and airlines were. This was partially resolved with the imposition of GST on e-commerce, but the old legal cases are still in the courts of law. And confusion still continues.
No one denies that Indian e-commerce has a huge potential. By 2026, it may become a $200 billion business, according to a few estimates. But a lot of policy and business changes need to accompany it. For example, it will take-off and zoom if B2C is allowed. But it requires political will more than economic understanding. Past attempts by the various governments to completely open up multi-brand retail in the physical or online formats have failed because of political pressures.
If the policy changes do happen, Amazon and Walmart will need to totally re-jig their existing business models, and begin to apply the global best practices. This implies another change that will increase the chaos, rather than reduce it. Tax clarifications are required as the online business becomes bigger. Consumers need to be willing to pay by modes other than cash. In essence, it requires a transformation in societal mindset.
Past experiences prove that both Amazon and Walmart are successful only in countries, which are nearer to the American policy regime and business environment. In cases, where there are differences, the two have failed to master the situations. Walmart didn’t do well in several nations, including Germany and India, in the brick-and-mortar retail. As mentioned earlier, Amazon was trounced in the biggest online retail market, China.
So, one cannot be assured of their successes in India. Until the policy regime changes, in the near future, the two giants need to grapple with complex issues. Walmart will need to figure out if it can legally marry its physical logistics operations with the virtual ones of Flipkart. Such a marriage may seem logical, but may become impractical. Flipkart has its own logistics and distribution arms.
Amazon will now have a new competitor, with both operational and financial clout. It will need to become more aggressive, pump in more money, in a bid to expand its market share, and not allow Walmart to become the leader. More importantly, it will need to think, and possibly rethink, its strategy carefully. The fact is that Amazon cannot afford to lose this race, as it did to Alibaba in China.
In the run up to the 2004 Lok Sabha election, then BJP general secretary Pramod Mahajan showed around a TV reporter around the ‘war room’ at 12, S...
The FIFA World Cup 2018 threw surprises and shocks galore. Respected teams lost to the underdogs against all odds. Conventional strategies flopped. Re...
The Indian wellness industry is in for a sea change with the line between conventional and complementary approach now blurring. Even as travel compani...
Who are Pablo Escobar, Ganesh Eknath Gaitonde or Sartaj Singh? Why are they coming into the conversations of Indian youth? Pablo Escobar, the protagon...
GT Deve Gowda was not a name known all over the country till recently. But the Karnataka Assembly elections made him a hero. He defeated the incumbent...
The leading ladies of Indian politics are apparently ahead of their male peers. Sonia Gandhi, president of the Indian National Congress, already has a...
Bhatta-Parsaul is a twin-hamlet at the other end of Greater Noida. It sprang up in the national media in May 2011 due to violent clashes between farme...
Varun Gandhi, son of Sanjay and Maneka Gandhi, is acutely aware that he has no entitlement that his cousins Rahul Gandhi and Priyanka Vadra have. He i...
Mother’s Day on Social Media: “Love my mother. She is the best. Thank you so much for everything.” And there goes ...
“Hello, Customer! Thank you for paying your due bill much in advance. As a thank you gesture, we offer you a 15% disco...
In a world dominated by television anchors and online trolls, the radio jockey is very nearly a media cipher, not just u...
Copyright 2014, Parliamentarian.in. All right reserved.