E-retailing: risks and beyondBY Sreedhar Prasad | comments ( 0 ) |
E-retailers are doing brisk business with rapid increase of the internet penetration. But, the process is not foolproof. A look at its stumbling blocks
When e-commerce first made its presence felt in India, it was the year 1999 and the internet was available to only about three million of our total population. Today, however, with a base of 70 million internet users, e-commerce could potentially become an important channel for retail. The market may still be concentrated in a few key pockets owing to the digital divide. Today, broadband and mobile penetration, 3G rollout, internet banking and increasing number of online players could lead to re-emergence of e-commerce in a big way. Increased disposable income and connectivity has ensured that the Indian youth is a viable market for e-retail. With advanced user interfaces, e-retailers are able to provide an easy to use platform which captures the “discount friendly” mind space of the current youth. Further, the new wave of e-retail is visible in the past two years where there has been significant private equity investments in India in this space, such as Indiaplaza.in, Fashion and You, Flipkart, Myntra to name a few. With many a new players coming in owing to low investment, high potential return on investment and ease of setting-up, the business environment of e-retailing is becoming very competitive today.
E-retailing – challenges & associated risks
Many of the new-generation e-retailing companies have deployed innovative business models to capture the Indian online retail space. Some of the players have branded products available for a specific period at a considerable discount, whereas some others have a larger variety with lesser attractive offers. Like any business, e-retailing also is exposed to many challenges and risks that are inherent to the business. With the business getting matured, these risks gain prominence as it could impact revenue generation potential, scalability, margins and customer loyalty.
One of the key risks from a sourcing perspective is the unavailability of suppliers or partners for the products. This is an ongoing requirement and becomes a concern when the company is scaling up – both in volumes and categories. Due to the heavy dependence on suppliers for timely delivery and quality of products, any misgivings on the part of the supplier are a significant risk for the e-retailer. Thus, dedicated in-house teams that scout for suppliers for existing and new product categories in various cities have become a common practice among these players. Further, many large players are trying to go the warehouse model to ensure uninterrupted supply of products for their key categories.
A key risk for distribution is when the strategic partner performing delivery is unable to service a particular geographic area or is not willing to deliver the product in a certain area. Even an international or a pan-India courier service may not be able to guarantee delivery to all areas within the desired time frame. This has led to some e-retailers opting to have an in-house courier or distribution service. This strategy, however, is wrought with its own set of risks. There is lesser benefit from economies of scale – even a single order has to be serviced at the earliest and the flexibility of clubbing multiple orders in a single delivery schedule may not be there. Further, setting up a distribution network in India has its own challenges from a staffing, routing and infrastructure perspective.
With no physical stores to stock their products at and a number of strategic partnerships to source the variety of products on offer, e-retailers typically enjoy minimal inventory levels. However, this is countered by the requirement for high service levels and product availability. Balancing the variability of demand against need for low inventory levels is a key risk that the e-retailers have to manage to sustain their competitive position. New entrants into the e-commerce space may also face the risk of established suppliers showing reluctance to partner with them, since the mantra of “low inventory levels” also means smaller order sizes to the supplier.
Risks to scalability
Two key risks to scalability of e-retailers are competition and inability to regularly increase variety/spread of products.
Any productive changes to the business model or operations in general can be easily adopted by a competitor, who then benefits at the expense of their research or ideation. Considering the similarity of their business operations, there are a lot of e-retailers who are offering the same range of services to the same set of customers. In such scenarios, it becomes exceedingly important to differentiate oneself from the competition. E-retailers have to be weary of the risk of becoming one of the many websites offering the same products or services, with no prominent differentiation from its competitors. This also leads to a “spiral down” effect in terms of freebies offered such as discounts, free shipping, etc in an attempt to woe the customer to one’s site, thereby leading to profit erosion and related risks.
E-retailers have to be ahead of the customers in bringing in a cultural change of what all can be bought through the web-site. With an ever increasing spread/ category set, e-retailers may enjoy having different sets of target customers. These become new revenue streams and could help in scaling up the business from a category perspective. With the Indian customers not being adverse to buy watches, designer wear, perfumes and cosmetics over the net, managing the risk of getting stagnated on the available brands/product category becomes a turnkey.
Quality of product/service
Quality control and timely delivery of products are some of the key challenges that e-commerce players in India face today. More often than not, online customers are spread across regions and are not concentrated to a particular geography. The service levels are promised to all customers and are to be upheld regardless of the customer’s location or proximity.
Since customers cannot evaluate the product physically before they order online, they trust the e-retailer to establish the authenticity and quality standards of the product, especially in the case of branded goods. The online retailer, in turn, has limited inventory and relies on the suppliers for quality products and on the courier company for undamaged and unchanged products. A lapse in the quality control in either of the processes can lead to customers’ dissatisfaction.
Given the time and effort of ensuring quality and authenticity, reverse logistics may not be the primary concern of e-retailers now. However, with the business scaling up, instances of wrong orders getting delivered may increase and the professionalism with which the e-retailer handles it would become important in retaining customers. Further, when the Indian e-retailers commence the offer of product return in case a customer is not satisfied, a flawless returns process becomes critical for businesses to sustain (one of the said reasons for the success of Amazon.com has been its good product returns system).
In a traditional retail channel, both the customer and retailer have the flexibility of an in-person interaction to understand and respond to any complaint that arises from a past or a current transaction. For e-retailers, however, delivery is the only physical touch-point between the customer and the retailer, who does not take responsibility of the quality of products. This makes timely and satisfactory resolution of complaints an important parameter, failing which there is a risk of not just losing the customer, but also of negative online reputation.
Risks in payment
A customer today has a variety of online payment options to choose from including credit cards, debit cards and net banking. The ever increasing popularity of alternate payment options like Paypal and m-commerce are only adding to the list. A successful e-commerce site has to incorporate the options for all of these while ensuring a seamless transaction experience. A single failed or incorrect financial transaction at the website can leave a lasting impact on a customer and can deter him or her from future purchases at the web portal. It is imperative, therefore, that all necessary steps are taken to ensure complete security of all transactions on the website through any of the available modes of payment.
Considering that the internet penetration has surpassed the reach of alternate payment options, most e-commerce purchases, especially in the rural areas, are closed via cash-on-delivery mode of payment. This adds a plethora of challenges to the daily operations with regard to cash-collection and management. There is increased exposure to risk, such as fraud, theft, misappropriation and others that lead to revenue leakage.
IT & information security risks
Other risks that e-retailers may face are website downtime, inability to quickly adapt to new technologies, security of personal information of customers stored on the website as well as the risk of unauthorised access to the website by hackers or staff with malicious intent. Thus, a well developed information security framework becomes a standard requirement for e-retailers.
Estimates about the actual e-commerce market vary, but experts agree that rapid growth beckons the online retail industry and the next few years will see a significant rise in the e-commerce market in India. Over the last decade, banks have actively pushed the use of internet for financial transactions