Sans deep discounts, dilemma of profit vs buyer loyalty surfaces
Big online retailers like Flipkart, Myntra, Jabong and Shopclues, among others, are waking up to the harsh realities of business. Offering deep and competitive discounts for the past few years might have got them loyal customers, but the mounting losses are now too big to ignore, not to mention the heat from investors breathing down their necks.
Discounts of 50% and above — a norm sometime back — are now a thing of the past, and the magical number can be found only on stock clearance sales today. Hot-selling items like women’s apparel and footwear have taken the worst hit, with discounts dropping to 30-35% from above 50%. Discounts on smartphones, another bestselling item, are down a clean 10%, to 20-25%. Furniture discounts have moved down to 10-15%. There’s more bad news for the consumers, as discount levels are expected to fall further.
While Flipkart and Amazon declined to comment on an email query sent to them by FE, Sanjeev Mohanty, chief executive officer of online fashion retailer Jabong, said, “Given the current environment, in the last couple of quarters, online retailers have been focusing on bringing down discount levels as there is pressure from investors to turn businesses profitable. In January-March, we have reduced our discount levels by 10% to 15% and in the
October-December quarter, we had reduced discount levels by around 6%. Women and footwear categories
discount levels have declined sharply.”
Nitin Agarwal, AVP, marketing, Shopclues, told FE, “We have reduced discounts in most categories and are also focusing on introducing products at lower price points to attract customers. The main categories with slashed discounts are apparel, home and kitchen and lifestyle products,” adding that the focus is on how to be profitable and retain customers at the same time.
This trend is a direct result of private equity players tightening the screws on investment, making raising funds difficult for online retailers.
According to PWC data, private equity deals have dropped 119% in the second half of financial year 2015-16, compared to the first half. In between April 2015 and September 2015, there were 118 private equity deals in the e-commerce space amounting to $273.41 billion. From October 2015 to March 2016, there were 108 private equity deals in the space, amounting to $124.83 billion.
There is also a lot of pressure from investors on e-tailers, as they have started to evaluate their return on investments. Sanjay Gupta, chief marketing officer, Urban Ladder, said it is difficult to run businesses at a loss for too long. “From the launch itself, our focus was on profitability. We believe in honest pricing and we try not to sell products below the cost price, while trying to remain competitive at the same time. Having said that, we have also seen discounts dropping in the past one year as online retailers have realised it is impossible to run businesses on loss for too long.”
All big retailers, including Snapdeal, Flipkart and Amazon India have reported losses in financial year 2014-15. Snapdeal’s financial report revealed a loss of Rs 1,328.01 crore. Amazon India’s FY15 losses grew fivefold to Rs 1,723.6 crore. The highest loss reported last financial year was by Flipkart at Rs 2,000 crore.
Xerion Retail, which runs Jabong, posted a loss of Rs 43.6 crore on sales of Rs 1,082.9 crore, according to a Registrar of Companies filing. A year ago, it had sales of Rs 527 crore with a net loss of Rs 16.6 crore. Anurag Mathur, partner, Price Waterhouse Cooper, said, “Discount levels have declined and the trend is prominent post-Diwali. All big players, including Flipkart and Amazon, among others, have reduced discounts. While margins of e-tailers are expected to improve with this, it is still a long way for them to become profitable, as cost of infrastructure and delivery continues to remain high. To become profitable, they will have to bring down discounts further and focus on profitability.”