1. E-commerce: Festive season sales a success; here are the key takeaways

E-commerce: Festive season sales a success; here are the key takeaways

The success of festive season sales has set in motion the initial momentum for consumer spending

By: | Updated: October 26, 2016 6:59 AM
The first thought that strikes us is that such an upsurge in spending is a manifestation of the consumer-demand cycle starting off on the third gear, with various incentives being thrown in. The first thought that strikes us is that such an upsurge in spending is a manifestation of the consumer-demand cycle starting off on the third gear, with various incentives being thrown in.

We have entered the critical and exciting period of the festival season which is also the beginning of the harvest season. In monetary parlance, this is the start of the busy season when demand for credit typically picks up. The entire consumerism story, i.e., to reach the climax and provide a thrust to GDP-growth is based on the edifice that households will spend more after two years of subdued spending. In FY14 and FY15, consumer goods production grew at negative rates and increased by just 2.9% in FY16. The third quarter of this fiscal has been made symbolic of the expected great turnaround. October has started off on a very bright note, with three leading retail portals Amazon, Flipkart and Snapdeal having their discount sales which have been roaring successes. What are we to make of it?

Let us look at some facts. Each sale has claimed to have generated as many as 15 million units of purchases and while competitors have disparaged others’ claims as being overstatements as they involve sales of the humble packets of spices, the fact remains that there have been several transactions all through this period, which started with Amazon’s sale, followed by the those of the other two. While the precise numbers will never be known, the market guesses that the total sales together could go towards the R15,000-crore mark in these pockets of 5-day sales. The focus has been on electronic and consumer goods, including mobile handsets and spread to garments, perfumes, leather products, etc. The discounts varied and went up to 70%, though the numbers available at these super-discounted prices were limited. The fine-print of ‘terms and conditions apply’ kicked in with only the first few to log-in being entitled to the same.

The first thought that strikes us is that such an upsurge in spending is a manifestation of the consumer-demand cycle starting off on the third gear, with various incentives being thrown in. This cannot be disputed as these volumes are really amazing and, if this is a trend, there could be further momentum once Christmas and New Year’s are factored in.

Second, it is not clear whether these sales were exogenous ones, where demand was created by these aggregators and not just cases of substitution from the conventional channels of bricks-and-mortar stores. There is an argument that given discounts offered were much higher than what any shop has offered, the sales could have been substitutions. But this argument will hold only to a limited extent. It would be more of a 80-20 distribution in favour of fresh demand as, typically, deep discounts generate a new consumer class. The low prices offered would have been a good incentive for households to go in for unplanned purchases.

Third, while sales on these websites have been reckoned from across the country, this demand cannot be directly linked with advance purchases in anticipation of higher income either on account of the kharif harvest or the Pay Commission calculations. There could have been some use of bank loans and credit cards for this purpose though information is not yet available for October—it could be more credit cards than loans, given the timelines involved. The other way of advance purchase could be dipping into savings, which looks unlikely given bank deposits growth has been sharp till end-September. Hence, it is possible to again conclude that these purchases were exogenous and added the delta to the spending cycle. With the fresh flow of farm and salary income coming in, one could expect demand to increase though a part could have been reckoned in advance.

Fourth, it is uncertain again about what quantum of these sales has come from inventories and fresh production. Normally, when there are end of season sales, they are based on the assumption that fresh stock would be coming in leading to inventories getting out-dated. Hence, there is incentive to sell at lower prices. But there is reason to believe that a large part would have been fresh stocks as the growth in production of consumer durable goods has been impressive, with growth being at above 6% till August.

Fifth, a pertinent question to ask is that if companies have been selling goods at discounts, then are the mark-ups very high in normal course? As mentioned earlier, not all the sales were at the highly discounted prices advertised and they were virtually ‘limited edition’ offers where the fastest fingers got access to such deals. Further, dealers have been disposing off old stock where the cost of holding them is high given the interest payment on loans. Therefore, such high sales may not necessarily mean that corporate profitability will be better. In fact, irrespective of whether they are fresh sales or a part of the process of inventory reduction, lower realisations are more likely to affect profit margins of this segment.

Sixth, will this be sustained? Consumer demand should continue to be buoyant even though the intensity will be lower. There would be some bit of satiation of demand in the next two months or so as there will be limited new entrants in the market. Such entry is more likely from the rural areas. However, if similar discount sales are announced, demand will increase as several consumers wait for such offers to place their orders.

Therefore, this episode of e-commerce success is encouraging as it has set in motion the initial momentum for consumer spending. But it does appear that consumers are more receptive to such discounts as almost-forced replacement-demand sets in when consumers buy new goods to replace old models which would not have been considered in the absence of discounts. This may be the new way forward where companies have to make such offers to claim a higher share of the consumer wallet.

The author is chief economist,

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