07 Jun 2016 20:58 IST

The future of commerce without a handshake

Is there a pot of gold at the end of the rainbow for e-commerce players, though profitability eludes them now?

Indira Nagar in South Chennai is one of those planned neighbourhoods where designated areas for parks and children’s recreational facilities have not yet been encroached upon by vested interests. The place boasts of one such facility that is a big draw among the elderly and those fast getting there, doing their very best to cross the hurdle of an annual medical check-up that is just round the corner.

On Sunday mornings, they are treated to the spectacle of a man hauling a tricycle with a woman and a small boy in tow, carrying a large framed picture of the saint Saibaba of Shirdi. Somewhere inside the vehicle, a music system belts out a bhajan extolling the many attributes of the sage of Shirdi.

On most weeks, a lady emerges from one of the houses facing the park and the man dutifully stops the tricycle; lights a piece of camphor on a plate and performs an aarati before the picture of Saibaba. The lady of the house stands with her eyes closed and palms joined together in traditional worship. After the aarati is performed, the plate with burning camphor is held in front of her. She lightly touches the leaping flames with her palms and hold them close to her eyes; this is followed by a cash offering on the plate.

Sustainable model

It is, of course, a bit crass to call the tricycle a Temple on Wheels or to describe the lady’s ritual act of worship as nothing more than a commercial transaction of door-delivery of a service (temple worship), for a fee. For the man hauling the tricycle, it could very well be an act of penance and the cash offering merely incidental. For the lady of the house, too, this isn’t exactly a labour-saving substitute for visiting a temple. Nevertheless, the event has all the ingredients of a transaction in e-commerce comprising a product; a customer, door delivery and a third party facilitating the commerce without a handshake.

The analogy to e-commerce is relevant from another perspective as well. The phenomenon of someone hauling an idol or a picture of a saint or the image of some god across the streets of a town is a tradition with a hoary past, difficult to date. Equally, Hindu religious customs are so eclectic that the lady’s piety, far from being a form of surrogate worship, is tantamount to the real thing.

In the event, it is fair to say that the kind of practice described above isn’t going to disappear any time soon. In business management speak, one could say it is a ‘sustainable model’. But the same cannot be said about the more traditional ventures in e-commerce, despite the enthusiasm of the current crop of private-equity investors about their prospects.

E-commerce losses

Take the case of Zomato, the company which allows its registered users to order food online and have it delivered. For the year 2014-15, the company generated a gross income of roughly ₹115 crore but ended up posting a loss of ₹147 crore. While official figures are not available for the bigger outfits, such as Flipkart, Snapdeal and Amazon, news reports put the aggregate figure of loss at anything close to ₹5,000 crore.

Flipkart’s decision to defer the joining dates for students of IIM- Ahmedabad, recruited on campus earlier, is further confirmation that the financial prospects for e-commerce enterprises are hazy, at least in the near to medium term.

But what of the future? Is there a pot of gold at the end of the rainbow for players in this space? It is worth noting that even Amazon, which has been around for long in the US, registered only in the first quarter of 2016 one full year of profitable operations since it started out as an online seller of books over two decades ago. Even that was achieved on the back of its ‘cloud computing’ service to all manner of enterprises (a spin-off business) rather than its plain vanilla e-commerce operations. That should tell us something.

Value propositions

Traditional wisdom has it that e-commerce ventures would be able to generate a surplus from the huge volumes of sale in goods and services that they could notch up by offering customers two critical value propositions.

One, they could buy in bulk and thereby persuade producers to part with their goods at a discount, a portion of which they could pass on to the end consumers. The basic flaw in the above reasoning is that if such discounts are to be passed on to customers in the form of lower prices in the name of ramping up the customer base, there is nothing left with which the e-tailers can defray their investments and ongoing operating costs. The notion that somewhere along the way profits will happen is a facile view, at best.

Second, while it is true that you could buy things at a lower price when bought in bulk rather than as a solitary piece, it is no means certain that the volume of discount will continuously expand with increases in the volume of purchases. The quantum of discount is not a continuous variable with values on the y–axis for every unit increase in the quantity purchased, as measured on the x-axis.

That is where e-commerce ventures run into a problem when competing with brick and mortar wholesalers and retailers. The latter too buy in bulk and enjoy the same privileges of lower unit prices as giant e-commerce operators. There is no differentiation in the value of services offered by the two.

Ease and convenience

That brings us to the second proposition: that e-commerce ventures offer their customers the extra value of ease of buying. If there is an element of ‘convenience’ then it stands to reason that consumers must be willing to pay a premium for the same. But the e-commerce business model doesn’t depend on the customer paying a premium for such a ‘convenience’. The average customer isn’t going to pay extra for buying a refrigerator online compared to the catalogue price because he is saved the bother of visiting the showroom.

The fact of the matter is that a typical customer has time hanging on his hands. The marginal cost of a unit of his/her time is close to zero. While the ‘convenience’ factor is welcome in itself, an enterprise can’t really leverage it to earn a profit. All this, of course, is without even going into the nitty-gritty of the challenges facing individual types of e-commerce, such as food and grocery, real estate and apparel.

There is, without doubt, scope for ample business volumes to be recorded in such ventures. It is just hard to see, at this juncture, where the money is going to come from.

Recommended for you