Do not kill hybrid models of e-retail

Last year e-retail companies sold goods worth Rs 16k crore and incurred a loss of Rs 8k crore on these sales. They lost Rs 50 on every sale of Rs 100 made by them. E-retailers dip into their capital to provide deep discounts to lure the customer to their site. They hope that the customer will then return repeatedly to their site. Later, they would be able to sell large amounts of goods to him and recover the losses incurred in giving discounts.

These discounts had a hugely negative impact on the street corner shops. Customers were flocking the e-retail sites. Thus, the government imposed a ban earlier this year on the discounts given by e-retailers. They were prohibited from giving discounts from their own capital though they were allowed to pass on the discounts given by the manufacturers. Presumption was that manufacturers would give the discounts to the e-retailers as well as the street corner shops. Such discounts given by the manufacturers would not put the street corner shops at a disadvantage.

E-retailers have stopped giving deep discounts. They are not dipping into their capital anymore. It was hoped that they would cut their losses. Losses of the e-retailers have continued to mount nevertheless. Recently Askme.com has closed operations because of mounting losses. This continuation of losses shows that discounts are only one part of the e-retail model.

E-retailers spend huge amounts in advertising, data mining and software development. They also incur losses on goods returned. The continuation of these losses indicates that their grip on the market is not loosening. They are continuing to attract the customers even without giving the discounts. Thus, the ban on discounts will provide only a small relief to the street corner shops.

The main problem is that e-retailing has brought an entirely new technology of sale and distribution. It is something similar to the entry of photocopy machines. The jobs of large numbers of typists who were engaged typing were wiped out. Similarly, e-retailing has brought the comfort of buying from home, a much wider choice and more detailed disclosure of information. I had to buy a mobile phone. I went to a few shops.

They could not even tell me whether a particular phone had a torch or not. I went to the smartprix website, compared a few phones and placed an order. It was delivered in three days. Street corner shops cannot provide such services. The second reason for banning the discounts by e-retail companies was to protect the jobs of the street corner shops. However, E-retailers are only small part of the job-eating technologies. Harvesters have taken the livelihood of agricultural labour.

Metro has taken the job of auto rickshaws. Auto rickshaws have taken the jobs of rickshaw pullers. Photocopy machines have taken the jobs of typists. Power looms have taken the jobs of handloom weavers. The list can go on. The point is that large numbers of technologies have become outdated and inefficient. We simply cannot continue to protect these inefficient technologies in order to protect the jobs and impose huge costs on the consumer. The challenge is to protect the jobs at a least cost to the consumer.

Let us say the e-retailer is able to supply a kilo of refined oil at a discounted price of Rs 250 while the street corner store supplies the same at Rs 300. The government will be forcing the consumer to buy the oil at Rs 300 by preventing the e-retailer from offering the discount. The street corner store may survive but a cost of Rs 50 is imposed on the consumer. The government is justified in imposing such burden on the consumer. However, this may not be the best way to go about protecting the jobs.

The government must study various alternatives to protect jobs such as placing a ban on photocopy machines, on harvester and on discounts by e-retailers and prohibit such technologies that protect largest numbers of jobs at less cost. Let us say the cost incurred by a family is Rs 100 per year if power looms are prohibited. This prohibition will lead to the protection of jobs of one crore jobs. On the other hand, the cost incurred by a family will be Rs 200 per year if e-retail discounts are prohibited.

That too will lead to the protection of jobs of one crore street corner shop owners. In such a situation, the government should ban the use of power looms and allow e-retailers to give discounts. The same one crore jobs will be saved at lesser cost to the consumer. Another fallacy in imposing the ban on discount is the assumption that e-retailers and street corner stores stand against each other. Success of one necessarily means the failure of the other. The ground reality is quite different. Both e-retailers and street corner stores are in trouble and both are seeking help of the other.

Chinese e-retailer Alibaba works through street corner stores. On the other hand, Indian shopkeeper Big Bazaar is entering the e-space through Big Bazaar Direct. Others are trying to forge an alliance between the two platforms. US e-retailer Amazon has recently opened a bookshop in its hometown Seattle. Shops in the malls in Singapore are providing details of their prices and inventories online. That makes it possible for the customer to decide which shop to walk into. It appears that both e-retailers and street corner shops are not able to stand alone and both are trying to harness the strengths of the other in developing a hybrid model.

Discounts are one way in which the competition between e-retailers will play out and help them move to the hybrid model. This experimentation will be prevented by banning the discounts. None of the four major e-retailers has made a profit in India. It is better that they may be allowed to give discounts so that they incur more losses and move speedily towards the hybrid model. Prohibition of discounts will lock them into the present unsustainable model and will be bad for the country. Author was formerly Professor of Economics at IIM Bengaluru

By Dr Bharat Jhunjhunwala