Online Shopping – Boon or Bane

Over the last few days there have been hundreds of articles across newspapers and on the web about the various On-line Shopping Deals going in India. The articles look mostly one sided showing the On-line Stores as the “villains” in the entire discussion and how these stores are trying to crush local businesses popularly known as brick and mortar stores. Well like every coin has two sides, this story should also have two sides and you should consider both positives and negatives before jumping to conclusions.

On-line stores are selling products at cheaper prices

This is the most common argument being discussed all across. If you see on-line stores work on scale. They do not have additional costs like real estate costs, staff costs, property taxes, electricity charges and similar overheads. Given this as they have scale they sell in hundreds and thousands instead of a few pieces each month. They work on high volume low margin game. Yet with these low margins you might earn higher profits and revenues given the scale and the low overheads they have to bear.

Products are also cheaper because of the high volumes on-line stores can achieve. A retailer might purchase say ten units of a product and wait for it to get sold. He also takes into account the interest loss due to investment in the inventory, the time and energy wasted each time a customer visits but does not purchase a product and other costs discussed above.

The on-line store on the other hand does volume business, does not hold on to the inventory, no premium real estate costs (because they can have their delivery hubs at any remote location) and also do not usually have bad-debts. For example at a local store if a customer walks, takes the product and does not pay its difficult to recover the money. Further, in many cases the customer may ask for credit for a month or so within which they make the payment. This blocks a sellers capital and there is interest loss on that amount.In-case of on-line stores usually payment is done in advance via credit / debit cards, on-line banking or cash on delivery. Hence, even losses on those are limited.

Thus given all of that, its cheaper for on-line stores to save their overheads and thus reduce prices.

On-line stores use predatory pricing

Who does not use Predatory pricing (read more on wikipedia). Remember potatoes and onions being sold for Re 1 / kg by some leading super stores when they started operations? Each one has their own marketing strategies and try to gain as much foot fall or in this case hits on their site as possible. So if they offer a few products at a discounted price what is wrong in that. If a consumer is interested in making a purchase, its his or her own decision whether to purchase at that price or not.

Predatory Pricing does hurt overall economics of an industry and is not welcome. A company must lay restrictions and should prove that its paying from its own pockets for some products hoping that other products are sold out when a consumer enters the store / on-line shop to make a purchase.

For example : if offered potatoes for Re 1 / kg a consumer goes to a store and also makes other purchases. Post that purchases even after giving the potatoes at Re 1/kg the business makes a profit of say Rs 100 on that consumer, then its healthy for a business. Then I don’t see how anyone should have an issue.

Yes there are also arguments on the other side that as these on-line stores have received Venture / PE or other forms of (easy money) funding, they don’t care for profits and their only outlook is revenues. Yes, this is a dangerous situation because if the store sells most products at a loss, then once the cash empties, the business shuts down. This is unhealthy for the market because not only is such a company hurting itself, but also results in close down of other brick and mortar stores that might otherwise have survived. If such charges are proved then such businesses need to be severely punished.

As a consumer, I am quite happy. Let this continue

Well, yes and no. A yes, because you get the same product at cheaper prices. A no, because this should not be at the cost of thousands of stores across the country and should not be done by selling things at a loss.

Lets take a small example. A laptop has a MRP of Rs 30000. Now the company offers the dealer say 10% margin on it. So the dealer has an option to sell it anywhere from say 27000 to 30000 depending on the location, consumer and the kind of personal service they provide. So if the same is being done by on-line stores then there is no issue. Say they get additional 5% considering the volume. So say if the on-line store sells anywhere from 25500 to 30000 one should not have an issue. Most complaints are that the on-line  stores are selling even below this rate. So this is totally unethical, wrong and hurts overall business in the long run. These on-line stores have received billions in funding and have deep pockets. So they are able to survive even at a loss for some years. This cannot be said about your neighbourhood store. They are people like you and me who have invested their hard earned money into this with an aim to run their home and their livelihood. Such people can never survive if everyone makes their purchase on-line because its available at unbelievable prices.

 

Brands / Companies are now saying they  will not service products purchased on-line

Yes, that’s right. Many corporates have now put up notices on their site that any product purchased on-line (except their own on-line store / tie-up store) will not be serviced and no warranty claims will be entertained. I think its totally illegal to do this. I am not sure how these companies can make such claims. What is wrong if someone is purchasing the product on-line which is a genuine product and has been purchased from legal channels within the country after paying all taxes. A company can refuse to service / provide warranty if the product has been imported directly (not covered under global warranty). But what if its the same product that is available from their Indian subsidiary and its the same product version. In that case I am not sure how a company can refuse to entertain warranty / service claims on such products.

To this some users might point out : then how is it that the same product can be sold on-line for less than what they sell locally. Some points have been covered earlier in the discussion above. The other reason might be that these companies dump products on their dealers. Like they say this month you have to purchase X number of products. Now if a new version comes up in the market then the dealer is left with stock of the previous version. So at times, the dealer might find it easier to sell the product at some loss rather than carrying the inventory as it costs him storage space and their capital is blocked resulting in interest loss and the product depreciates over time. So I doubt if a company can refuse warranty because its a product purchased with bill in the country so this would need some legal expert to understand the issue and suggest if its legally right to do this.

Why is everyone against on-line stores?

I think its just that people are trying to understand how the business model works. Most people don’t understand that if there is healthy competition then it with expand the market. On-line sales still do not constitute a great deal. But what it has done is shown customers a wider choice, a wider product range and a wider amount of price points where a customer can make a purchase. If you go to any regular store, they will have a limited choice and that too of a couple of brands.

Thus from a customers point of view the benefits of on-line store are

  • It provides wider choice
  • It provides more options with different brands under a single platform
  • Better prices
  • Convenience – this is the most important point everyone forgets in the discussion. If one wants to purchase a product one can simply do it at home. If it is a regular shop then one needs to to there, look at different places, and finally settle with what is available at the stores one visits. This is one of the major factors driving customers to on-line shops. it saves a customer loads of time, fuel and helps them relax.
  • Returns : Usually each shop has their own policies.
  • Payment Options : On-line stores usually offer multiple payment options which may or may not be available at the local shop.

What are your thoughts? Do share in your experiences with a recent purchase that you did on-line or at a brick and mortar store and what you feel about this entire discussion.

Thank you for taking time out to read through the entire post.

 

 

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