Be careful what you wish for’ is a phrase that comes to mind every year-end, as I dispose of yet another unwanted gift.
This time was different though: I thought only of the digital revolution that delivered the gifts to my door.
Shopping around the world has become both more convenient and cheap as online platforms powered with billions of dollars from global investors have targeted an industry ripe for change: Traditional brick-and-mortar retailing.
Protecting brick-and-mortar retailing may be one way of reading India’s latest set of new rules for e-commerce: A first step to stopping the contagion.
The measures seem designed to prevent foreign-owned e-commerce platforms, such as Amazon and Flipkart, from using aggressive discounting to drive out competition. Think of Amazon’s and Flipkart’s Great Indian Festival and Big Billion Days, respectively, and the stupendous spike in sales, and you’ll have a picture of what price competition is all about.
The blunt weapon of price discounting may be a short-term fillip for the consumer, but the resulting fallout is bad news for investors, shareholders, employees, communities and governments.
This past year, we may have seen the first signs of stress in the online retailing sector. ASOS, arguably Britain’s most successful online retailer, announced in December, “significant deterioration" in sales, crushing its market value by some 45% to ₹17,500 crore. ASOS was a pioneer in e-commerce when it started 18 years ago, spotting a trend to deliver fast fashion online at lower prices. As rivals emerged, pressure to attract customers with even more value intensified, driving margins lower. ASOS forecast that its profit margin would be halved from 4% to 2%, and capital expenditure would be cut as a result.
Online retailing bears the characteristics of a perfect market: Consumers have free access to perfect, or all, information to make informed choices—in this instance by easily browsing and clicking to buy what they believe is the best deal.
Brick-and-mortar relied on imperfect, or limited, information, but a positive shopping experience.
Online retailing can only compete on pricing, hoping to generate brand loyalty from consumers for whom loyalty is a secondary consideration.
Brick-and-mortar retailers are loss-making as a result of fierce online competition, yet online retailers grapple with low profit margins knowing they only remain competitive because of the preferential terms they receive from delivery partners: The reality of this ‘death spiral’ is evident in mature online markets.
The author is a serial tech entrepreneur, investor and board member based in London.