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E-tailing in India has seen a rapid growth in the recent past. Various estimates suggest India's retail market at $500 bn, with the share of the organised sector being 8 per cent. While the share of organised retail is expected to increase to 13 per cent by 2018, what is causing excitement in the marketplace is the growth of the online e-tailing sector, which has virtually grown from an insignificant presence five years ago to account for 1 per cent of the retail market. Recent reports suggest, Flipkart has achieved an annual run-rate of $3 billion and Snapdeal is close to achieving an annual run-rate of $2 billion.
The growth of online e-tailing while driven by a wider choice, availability and convenience, is also being fuelled by aggressive pricing strategies adopted by the online e-tailers. This aggressive pricing is largely targeted towards driving consumer traffic from offline channels to online, and further within online to the specific e-tailer offering such discounts. While this may appear to many as being a risky, high-cost bet, there are sub-categories within this that seem to be a 'win-win' for both the brand and the e-tailer: Welcome to exclusive tie-ups.
Exclusive deals, of course, are those in which the product being promoted is available only with a particular e-tailer and cannot be bought through any other offline or online channel. Some recent examples include Flipkart's exclusive tie-ups with Motorola for the Moto E, Moto G and Moto X and with Xiaomi for its Mi3 and Redmi 1S handsets. Microsoft's Xbox console games are exclusively sold by Amazon in India.
These exclusive products are heavily advertised on social and traditional media. Some etailers even call upon the consumer to pre-register in order to participate in 'flash sales' for some of these products (Xiaomi, for example). The excitement builds up during the flash sale's 'countdown' and often, the product being advertised goes out of stock within a matter of seconds. This in itself creates more buzz and hype in time for the next 'flash sale'.
What are the economics behind these exclusive deals and why are they a win-win for both the brand and the e-tailer? Firstly, advertising & promotion spends is a significantly large expense for any e-tailer as most are in the stage of trying to shift the market from offline to online.
In exclusive deals, the advertising spends are largely split between the brand and the e-tailer. Secondly, a newer brand gains instant access to the distribution and fulfilment capabilities of a large e-tailer, resulting in enriched customer experience.
In some cases, the brand can also overcome buyer hesitance on trying out of a new brand or product by its association with a renowned e-tailer and its customer-friendly policies of 'Cash on Delivery', 'One-Day Delivery' and 'Return within 30 days, no questions asked'. Well-established brands launching a new variant, too, have gone exclusively online, such as Britannia selling its new chocolate chip cookie, Good Day Chunkies or Coca-Cola launching its sugar-free soft drink Coke Zero, both solely on Amazon for a fortnight before their offline distribution.
Thirdly, like any other offline retailer, an e-tailer (other than a marketplace) has to maintain an optimum inventory at various warehouses across the country and that entails both inventory and logistics costs. However, in the case of exclusive tie-ups, these arrangements are largely borne by the brand and therefore, it is a more efficient allocation of capital for the e-tailer.
Lastly, product returns, when a customer decides to return the product after testing it for a few days, are a serious challenge for e-tailers. In some high-value categories like consumer electronics, such returns can be as high as double-digits.
Not only does the e-tailer have to incur reverse logistics costs, it has to bear the decrease in the value of the returned product, now that it is a used one. In the absence of a highly evolved market for refurbished or returned goods, the cost mark-down on these products goes against the thin margins of the original sale, often resulting in a negative margin for the category as a whole. Exclusive tie-up agreements between brands and e-tailers often eliminate these issues.
While the product gains comfort from the e-tailer's brand equity and customer fulfillment propositions in exclusive deals, the e-tailer gains from lower ad spends and better utilisation of capital.
Going forward, one will witness more brands, especially those marking a first-time entry into a market, tying up with leading e-tailers to optimise their channel distribution spends.
The author is managing director of Ambit Corporate Finance
