Online Retailers in India Battle Devil They Spawned: Deep Discounts

Discounts and cashback offers helped India's top e-commerce companies from Flipkart to Snapdeal sell a record $11 billion (roughly Rs. 73,712 crores) of goods this year online. As the freebies start to hurt, they are questioning a strategy they now find too hard to dump.

"If you have to grow this business sustainably, you can't keep burning money," Ananth Narayanan, chief executive officer of Myntra.com, the nation's top apparel e-retailer and a unit of Flipkart Internet Services, said in an interview. "You have to figure out a way to make the economics work. One thing we are consistently trying to do over the next 12-18 months is to reduce the level of discounting."

While scrapping rebates may bring the focus back to profitability from valuations, it may be easier said than done for an industry built on a foundation of cut-price sales. The real dilemma faced by Narayanan and his peers is: Who will blink first? For investors including Softbank Group Corp. and Tiger Global Management that have plowed more than $10 billion (roughly Rs. 67,011 crores) in money-losing online ventures in India, the answer to the above question may define the success of their biggest Asian bets outside China and Japan.

Eliminating discounts could be risky for established companies wary of losing market share to smaller rivals and local conglomerates readying their own retailing portals, said Kirti Khosla, who runs a consulting firm advising overseas brands on their India entry strategy.

"Until some time ago, they were offering 80 percent and 90 percent discounts. That's been curtailed a bit now," said Khosla, who is based in Gurgaon near New Delhi.

The discounts are showing up on balance sheets. Losses for Snapdeal's parent Jasper Infotech grew fourfold to $206 million (roughly Rs. 1,380 crores) in the 12 months through March 31 from a year earlier, according to Hong Kong filings made by its investor Foxconn Technology Co. Jabong's losses rose to 2.3 billion rupees ($34 million) in the first six months of this year, compared to 1.55 billion rupees in the same period last year, parent Rocket Internet said.

The largest e-commerce portals in the South Asian country are losing an estimated $1.35 for every dollar of sales transaction on their platforms, Goldman Sachs said in a May report. That explains why having a deep-pocketed investor on board helps.

Softbank is Snapdeal's biggest backer with its $627 million investment last year. It boosted its investment this year in funding rounds led by Alibaba Group Holding and Foxconn Technology Group. Flipkart counts Tiger Global and South African media conglomerate Naspers among its backers.

Myntra's parent Flipkart is the leader with a 67 percent share of the apparel and footwear e-retailing market, almost four times that of No. 2 Snapdeal, data from Euromonitor International shows. Jabong is at third place with an 8 percent share.

Then there are at least 15 other companies including the likes of Shopclues.com, Fashionara.com, Koovs.com and FashionAndYou.com chasing the same customer, not to mention Amazon, which has been advertising heavily. All the companies are drawn to fashion because the category has among the highest margins in retailing, triple that of grocery and electronics.

Competition means brands such as Nike and Levi Strauss are spoiled for choice and can pick the web stores that can maximize sales and provide best consumer data. Browsing habits on the app can tell companies which products are getting the most attention and allow for real-time tweaking of content to draw consumers, said Sanjeev Mohanty, who took over as chief executive officer of Jabong last week.

In the early days of the country's e-commerce boom, brands had little control over the prices offered at online retailers. Now that relationship has changed "dramatically" and both parties work closely to frame pricing policies and ease the process for customers to find what they're looking for, said Mohanty, who was managing director of Benetton Group SpA's Indian business for 11 years before moving to Jabong.

Deep discounting by Jabong will "change quite dramatically in the next two-three years and if you go to our app and our site, you will see that less and less," he said. "There is a very clear dialogue between brands and platforms."

When asked whether Snapdeal is also planning to follow its rivals and limit deep discounting, co-founder and Chief Operating Officer Rohit Bansal said the company's existing strategy has worked well, without answering the question directly.

"We are doing everything we can to continue fueling the growth" in apparel, he said. "In no way are we trying to curtail the growth."

Myntra and Jabong say a wide assortment of brands, tie-ups with celebrities and apps customized with user data, can help make customers more loyal to the company, and consequently willing to pay full price for in-season products.

Myntra is also trying offbeat tactics to get Indians, especially those in their late twenties and thirties dress better. Last month it organized a makeover contest at software exporter Infosys Ltd.'s headquarters. Creative solutions are needed to solve the discount conundrum, Narayanan said.

"We, along with all the other e-commerce players, have trained consumers to look for discounts," he said. "And now we are slowly trying to get them off it."

© 2015 Bloomberg L.P.