Book Excerpt: The Myths Of E-Commerce Retail

Excerpted from ‘Saying No To Jugaad - The Making Of Bigbasket’, By TN Hari and MS Subramanian, with permission from Bloomsbury.

You can only make sense of the online world by going offline and by getting the wisdom and emotional clarity to know how to make the best use of the Internet.

- Pico Iyer

Amazon accounts for nearly half of all e-commerce sales in the U.S. The remaining 50 percent is accounted for by a long tail of large offline players like Apple, Walmart, Macy’s, Home Depot, Best Buy, Costco and the like. This piece of data often comes as a surprise to many people—that 50 percent of all e-commerce is controlled by predominantly offline companies. E-commerce comes in many hues and shades. When you buy a movie ticket online, you are engaging in e-commerce. You are also engaging in e-commerce when you order grocery on the Bigbasket app or book a taxi on the Uber app. And, you are also engaging in it when you place an order online on Lenskart and visit an offline Lenskart store to pick up your product. Let us start with the three most common myths about e-commerce.

Myth 1: E-Commerce Means Discounts And Cashbacks

When Uber and Ola started operations, both customers and drivers had a whale of a time. India was new to online commerce of any kind. Most people didn’t understand how these companies could offer such low fares and still make money.

It was about changing customer behaviour, getting them hooked to a great experience and gradually increasing the fares.

Right now, the good days are behind us. Consumer behaviour has undergone the change that these companies were hoping for. The taxi aggregation companies have now upped fares sharply, introduced charges for waiting time in traffic and created surge pricing during peak hours. The pricing is not transparent. Some customers have logged out and gone back to traditional means of public commute, but a good number of them have been hooked and continue to use their services despite the opacity in pricing.

So, cashbacks and discounts were a channel-switching strategy. It was backed by investors with deep pockets who were not willing to wait it out. They wanted to accelerate this switch and believed that any money spent in making this happen would only increase the overall returns.

Now let us move from taxi aggregation to retail e-commerce. Taxi aggregation was a green-field territory. There was no taxi service that existed prior to Uber or Ola in most Indian cities, including large metros like Bengaluru, Chennai, Hyderabad and Delhi. Kolkata and Mumbai had hail-a-taxi services, but the density of cabs on the road was so low that it was very difficult to get one. So taxi aggregators were not providing an alternative to an existing service. By eliminating the challenge of getting a cab reliably at a short notice at your doorstep, or wherever you wanted it, the new model was creating an on-demand taxi service. If taxi aggregators were a mere alternative to an existing service, consumers could go back to the other service if and when Ola chose to raise prices. But, there was no alternative to go back to.

In retail, the reality was different. There was a very strong network of modern retail and ʻkiranaʼ stores, which were doing a good job of fulfilling the customer’s needs. So, online retail would have to fight much harder. Attracting customers through discounts did not mean that customers would stick to online even after discounts were withdrawn; unlike in the case of Uber or Ola, they could easily go back to their earlier channels. The online value proposition was not strong enough without discounts.

The existing channels were no pushovers either. They would not capitulate without a fight. They would do everything within their power to thwart the online channel including mobilising political opinion against online businesses.

We believe there is an exception to this trade-off between ‘convenience’ and ‘touch and feel’. Grocery is a category where ‘touch and feel’ is not critical. So, migration to online is bound to happen sooner or later. Within the grocery segment, we have noticed that fruits and vegetables have an element of ‘touch and feel’ and hence has been the hardest category. Bigbasket has cracked this too, through better sourcing, innovation in cold chains and faster transit from farm to the customer’s home. We have discussed this in greater detail in the chapter—‘From Farm to Fork to Nirvana’.

Myth 2: E-Commerce Can Get You Super-Profits

The biggest problem with e-commerce has been that customers do not get a chance to touch and feel a product before purchase. A fraudulent customer could also claim that a wrong product was delivered and the supplier did not have a conclusive mechanism to settle this dispute. In a brick-and-mortar store when the customer walked out, it was implicit that she had seen and found the product satisfactory. The small print also said that ‘goods once sold cannot be returned’. E-commerce businesses, therefore, saw very high returns. To promote and create trust in this new channel, online companies had to have a very liberal return policy, and every return added to costs in a significant way.

The cost of customer acquisition is high. Unless it could be amortised over multiple purchases, it was not sustainable. And if there is no differentiation, there is no loyalty or repeat purchases. Further, creating an optimal logistics network with reasonable operating costs is not easy and it doesnʼt come cheap.

Myth 3: It Is Easy To Scale An Online Business

Investors poured money into e-commerce with the belief that new and yet unestablished brands could extend their reach exponentially with an online presence. In addition, they assumed that all costs related to inventory and store rentals, often at premium spots in the city, would vanish. All you needed, they thought, were a few strategically located warehouses in the country with customer orders being dispatched through a hub-and-spoke model or national shipping. Offline stores also had a discoverability problem, which they believed an online presence would address.

Many of the assumptions proved to be wrong. As always, reality dawned after the hype had died down. When an offline entity chose to list on a marketplace, the challenges related to scaling or geographical reach of offline stores did not automatically go away. In some cases, nothing changed; in some cases there was improvement and for others, things deteriorated.

For instance, the discoverability problem still remains when an offline entity makes a foray online via a marketplace. There were hundreds of sellers with similar or identical products and it was not easy for customers to discover you existed or what your reputation was. The problem of being lost in the crowd remained unresolved.

To enhance discoverability, those that came online had to start online advertising and pay the marketplace or Google for their name to bubble up on the top in a search. Search engine optimisation (SEO) and search engine marketing (SEM) became new sought-after skills. Even after all this, the discoverability may not improve significantly, and even if it does, customers may not trust you enough to transact online. A lot of the advertising metrics were fake. In October 2018, several advertisers filed a suit against Facebook for significant overstatements of the time users spent watching videos on their platform. It appeared only Google and Facebook were making money out of SEM with questionable outcomes for the advertisers trying to enhance visibility and discoverability.

TN Hari heads HR at Bigbasket and is an advisor and sounding board to numerous young start-ups and entrepreneurs. MS Subramanian currently heads the analytics function at Bigbasket.

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.