This Article is From Oct 10, 2014

The Big Side-Effects of the Big Flipkart Sale

(M.K.Venu is Executive Editor of Amar Ujala publications group)

The mass consumer frenzy created by India's leading online retailer Flipkart, which logged a billion hits in a single day from potential buyers, has triggered multi-layered debates within and outside the retail industry.

First, Flipkart adopted a conscious strategy to offer massive discounts across various segments of branded products to test the market ahead of the Diwali festival season. It was an audacious even self-disruptive attempt by Flipkart to test the limits of online sales in a single day. It ended up selling 2 million items at the rate of 60 items per second. A television set sold per second, half a million mobiles and an equal number of garments in a day. So servers had to crash.

The online retailer sold goods worth Rs 1 crore every minute and finished all sales in just 10 hours, thus recording a turnover of Rs. 600 crore. Of course, there was a big downside to this bold experiment by Flipkart. Its CEO had to publicly apologise to millions of customers who were deeply disappointed they could not get a bargain buy on Flipkart. The customer experience was negative because Flipkart failed to deliver to them on the big day of mega discounts. Flipkart was ill prepared because its servers had crashed even after enhancing the capacity 20 times.

The CEO, Sachin Bansal, publicly apologised for Flipkart's failure to live upto the customers' expectation. Now there is some introspection within the company, and indeed industry, whether such disruptive online retail experiments are worth attempting at all. Other online players like Snapdeal have also claimed massive sales in response to special offers.

The whole episode has created some serious side effects which will have to be dealt with in the weeks and months ahead.

The sheer scale of online retail sales in just 10 hours has caused new fears and insecurity among traditional retail stores.

Politicians, both within and outside the government, want to examine whether such frenzied selling at heavy discounts needs to be regulated. Commerce Minister  Nirmala Sitharaman has said the government will examine whether the policy on e-commerce should be tweaked. Ms. Sitharaman admitted that the government had received "many inputs regarding the Flipkart episode". The inputs have presumably come from smaller, offline retailers who feel threatened by online competition.

The Confederation of All India Traders (CAIT) has protested that online retailers are indulging in monopolistic and unfair trade practices. The statement was issued by  CAIT's Secretary General, Praveen Khandelwal, who has a strong affiliation with the BJP. It may be recalled that Khandelwal had mobilised local traders countrywide to carry out a campaign against FDI in retail. So if CAIT launches a new campaign against online retail, it is likely  be taken seriously by the Modi government.

Of course, pure data suggests there should be no cause for alarm as the online retail sales in India is probably less than 2% of the total retail sector turnover of roughly $500 billion.

In the event the issue gets politicised, the online retail industry is likely to close ranks to prevent over-regulation of the fledgling sector which Indian consumers have just begun to savour.  

Online retail has the potential to grow exponentially from its present low base. Online players have a natural advantage over off line retailers because of much lower overhead expenses.

Some industry experts feel if  Flipkart's aggressive strategy is scaled up further, it would end up commoditising online retail brands. This means consumers will just rush for the lowest price point and will not care whether it is on Flipkart, Amazon or Snapdeal. Traditional and somewhat puritanical brand analysts believe this is bad for the industry.

However, there are many who believe that in the age of the internet, no durable emotional connect will be possible with any single brand. Internet commerce is generally characterised by lack of brand loyalty. All traditional notions of branding will get challenged in this space.

The online retail disruption has also alerted highly visible global brands in electronics such as LG, Samsung and Apple who have begun cautioning their loyal customers against buying their products  online at throwaway prices. They also fear such consistently low prices could erode the premium associated with their brands globally. Imagine a company like Apple suffering brand erosion due to cut throat competition among online retailers!

Overall, online retail will naturally cause upheavals and the regulators would commit a big mistake by preventing "creative destruction" at this stage. Don't forget Alibaba, China's mega online retail platform recently set a record of sorts with their recent public issue of shares, thus getting a valuation of over $230 billion for the homegrown company. Its valuation is bigger than Amazon and Ebay put together. Chinese entrepreneur Jack Ma has shown how scale can be built in a relatively short time. He started with just $60,000 in a one-room apartment 15 years ago.

India could possibly learn a few things from the Alibaba experience in China. The Modi government must let young entrepreneurs have enough freedom to create India's own digital success stories even if they cause some disruption in the old economy.

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