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Business News/ Industry / In battle for top spot, e-tailers miss out on customer loyalty
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In battle for top spot, e-tailers miss out on customer loyalty

As online marketplaces woo customers with big discounts, buyers end up focusing on just the prices and not the seller

Flush with money raised from investors and infused by promoters, Indian online retailers are spending a lot of money on discounting and advertising and marketing to drive sales and grab market share. Photo: MintPremium
Flush with money raised from investors and infused by promoters, Indian online retailers are spending a lot of money on discounting and advertising and marketing to drive sales and grab market share. Photo: Mint

Mumbai: Jay Shroff, 17, recently bought a set of cricket stumps on Flipkart. Before placing the order on Flipkart, Shroff checked out the prices on Snapdeal and Amazon as well.

“I don’t really have a preference for any particular site and I chose Flipkart as it had the best price," said Shroff.

Shroff’s behaviour, typical of the millions of Indians who are shopping online (around 38 million expected by the end of 2015, according to a Bank of America Merrill Lynch November report), may be the real challenge for e-commerce marketplaces that are engaged in a fierce battle for supremacy. There’s no concept of brand loyalty.

And if there is, it is fleeting. Even when consumers start with a preference for one website, they will visit at least two others before placing an order.

In some ways, the companies have only themselves to blame: most retailers discount aggressively. While this is increasing their gross merchandise value (GMV) or value of goods sold (which, in turn, is increasing their valuations), it is also driving consumer behaviour.

“Between 2012 and 2014, India’s e-tail GMV increased 3.5x to $4 billion. By 2020, we expect online buyers to increase fivefold, annual user spends to double, and e-tail GMV to grow to $47 billion," said analysts Sandeep Muthangi, Nandish Dalal and Kunal Rathod of India Infoline Group (IIFL) in a September report.

GMV doesn’t mean revenue. While it refers to the value of goods sold on a site, it does not take into account the discounting and returns. The actual revenue of e-tailers, therefore, is a small fraction of GMV.

Flush with money raised from investors and infused by promoters, e-tailers are spending a lot of money on discounting and advertising and marketing to drive sales and win market share.

Discounting in calendar year 2014 accounted for approximately 25% of the overall GMV for e-tailers, according to Muthangi of IIFL.

The lack of loyalty is surprising given the huge amounts most e-tailers spend on marketing and advertising. Then, much of this goes towards promoting sales (and touting discounts).

E-tailers spent about 2,000 crore on advertising and marketing in 2015. Of this, the top four—Flipkart, Amazon, Snapdeal and Paytm (a payment wallet services firm that started e-commerce in 2014)—account for nearly 90% of the overall advertising spending in the sector, said Shashi Sinha, chief executive of IPG Mediabrands’ Indian business. IPG Mediabrands is part of the Interpublic Group of Companies.

For instance, Paytm, a One97 Communication Ltd company funded by Chinese e-commerce giant Alibaba Group and its affiliate Ant Financial Services Group, planned to spend in excess of 500 crore in the year to next March, said Nitin Misra, vice-president, products, Paytm.

Flipkart, Snapdeal (owned by Jasper Infotech Pvt. Ltd) and Amazon India did not reveal their advertising and marketing spending.

The large spending by these companies has helped them to corner a lion’s share of the market. But it has not helped them build customer loyalty.

That continues despite consolidation in the market.

“We are seeing three horizontal players—Amazon, Flipkart and Snapdeal—account for 80% of the overall e-tail sales. Even in niche categories like furniture and groceries, clear leaders are emerging in each of these verticals," analysts Gautam Chhaochharia and Shaleen Kumar of UBS Securities India Pvt. Ltd said in an email.

But within a category, consumers check across multiple sites before placing an order.

“The online space is still largely unbranded and orders are usually based on two facts: who is giving the best deal; and if prices are competitive, then on the basis of the consumer’s last experience," said Santosh Desai, CEO, Future Brands Ltd.

Consumers also look across multiple sites for variety. The leading categories online (the ones that account for the most sales) are clothing, accessories, fashion, shoes and small electronic items, said Shubhranshu Das, executive director, Ipsos Marketing, a global research agency.

To be fair to the e-tailers, the online sales channel is still nascent and every month there are new consumers being added.

In 2014, less than 15% of total Internet users in India purchased online. By 2020, the share of online buyers will increase to 32.5% of total Internet users. Additionally, the Internet user base itself will grow from 302 million in 2014 to 673 million by 2020, said IIFL in its September report.

The number of orders being placed online per user is much lower in India than other comparable markets.

“Industry reports and our channel checks indicate that online buyers placed about four orders a year or about an order every quarter; in comparison at Alibaba alone, Chinese online shoppers place about five orders a month," said the IIFL report.

Yet, e-tailers worry that all the money they spend isn’t translating into loyalty.

“Right now, most e-tailers are like commodities. What they offer, anyone else can also offer. Their focus is on adding consumers through discounting, but no brand has ever made a mark based on price. It’s not a sustainable strategy," said K.V. Sridhar, chief creative officer, SapientNitro, a digital agency.

E-tailers are also being pressured by investors to become profitable and are reducing discounts.

Discounts will moderate from 25% of GMV in 2014 to 15-20% in calendar year 2015 and further to 10-15% by calender year 2016, IIFL said in its report.

But more important for profitable growth is the necessity to differentiate, create a brand and have an emotional connect with the consumers.

“We are yet to see that happen," says Alpana Parida, president, DY Works, a brand strategy and design agency.

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Published: 21 Dec 2015, 12:26 AM IST
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