The e-commerce web portals are soon coming to an end with their attractive discounts and offers, the inflection point in online shopping that we mentioned earlier could be getting close in India soon. Reached to peak, convenience and cheap prices, and might now be entering a world of more targeted offerings, with less geographic coverage, variations in order turnaround and perhaps even higher prices – all of which will slow the growth curve.
Many people probably assume that online stores are making a fortune, without all the costly bricks and mortar. But the reality is rather different. Many e-commerce activities are, in fact, unprofitable; if people had to pay the true cost of what they bought online, they would probably buy less. In fact, we think there is an inflection point approaching, when consumers will either have to pay more for online purchases or end up with fewer products and services to choose from.
When it comes to cracking down on tech giants, India is on a roll. The country was the first to reject Facebook’s contentious plan to offer free internet access to parts of the developing world in 2016. Since December, Indian policymakers have taken a page from China’s playbook, enacting sweeping restrictions in an attempt to curtail the power of ecommerce behemoths like Amazon, and pushing proposals that would require internet companies to censor “unlawful” content, break user encryption, and forbid Indian data from being stored on foreign soil.
In the past week alone, Indian officials have demanded that Twitter CEO Jack Dorsey come before Parliament to answer accusations of bias, called for a ban on TikTok, and opened an investigation into claims that Google abused its Android mobile operating system to unfairly promote its own services.
For all its good intentions, India’s tech backlash could backfire, with potentially dire consequences for all tech companies—big and small—operating in India, not to mention free speech online. “There is an element of nationalism which is creeping into tech policy in India,” said Apar Gupta, executive director of the Internet Freedom Foundation, a digital-rights group.
Gupta says this has resulted in a number of India-First-style tech policies being rushed through the government using the much quicker executive notification process rather than seeking parliamentary approval, which could have resulted in laws that would be more comprehensive and enforceable.
Calling for the regulation of tech giants is easy, but actually developing reasonable, scalable policies with a feasible strategy for deployment is more difficult. In the case of India, Gupta added, “it wants to do a lot, but it all seems a bit clumsy.”
Let’s start with the online retail leviathan Amazon, which chalked up record profits and revenues in 2018. This is great news for Amazon shareholders, but deeper scrutiny reveals a different picture. To begin with, most of the profit was not from retail activities. Amazon Web Services, a cloud-hosting business unrelated to e-commerce, generated more operating income than the company’s entire North American retail operation – and with margins over five times higher.
Even then, this was a much better performance from the retail division than in 2017, when the North American operating income was completely offset by international retail losses. In that year, Amazon’s positive operating income was entirely thanks to the cloud-hosting business.
Profit push
Amazon’s retail improvement in 2018 came on the back of a profitability drive, much of which involved raising the consumer cost of e-commerce. For example, Amazon increased the annual membership cost of priority customer service Prime by 20% to US$119 (£94) in the US, along with comparable rises in other countries.
According to one estimate, this US hike accounted for nearly a third of Amazon North America’s operating margin in 2018. Yet not all of this extra profitability looks sustainable: Amazon is now seeing shrinking growth in Prime membership in North America and declines in some countries as customers at the margin decide to walk away.
Amazon has also been targeting its CRaP products, which stands for “cannot return a profit”. Product lines end up in this category because of small margins or logistical challenges such as their weight or size. Bottled water, fizzy drinks and snack foods are all examples.
Thursday marks the end of the counter-comment period for new proposed rules that could have a chilling effect on free expression and privacy online. The proposed changes would drastically weaken protections for internet “intermediaries” by amending Section 79 of the IT Act—the Indian equivalent of Section 230 of the Communications Decency Act in the US—effectively forcing platforms to censor user content deemed “unlawful” by the government, or be held liable for the postings. The rules would also require messaging services like WhatsApp to build a backdoor for Indian authorities, weakening end-to-end encryption. Prime minister Narendra Modi’s government could put the rules in effect as soon as Friday, as the change doesn’t require parliamentary approval.
The proposed rules were ostensibly created to check the power of tech giants, but they could end up helping the Facebooks, Twitters, and Googles of the world by holding newer, less-well-heeled rivals to the same strict censorship and filtering requirements. “It may have the unintended consequence of in fact benefiting [the tech giants],” says Gupta, “because only they would have the ability to actually comply with [these rules] to any feasible extent.”
On February 1, new rules aimed at limiting the influence of ecommerce giants such as Amazon and Walmart took effect. The new regulations ban many of the strategies that have contributed to Amazon’s dominance in the US and Europe, such as: promoting and selling your own products (or the products of a company you control), pushing other companies to sell products exclusively through your marketplace, giving certain sellers preferential treatment or placement, and abusing your market power to undercut your competitors by offering hard-to-beat discounts.
Initially, Amazon was forced to pull thousands of products from its digital shelves because they came from Amazon brands or from companies in which it had a large stake. For example, Amazon owned a 49 percent stake in Cloudtail India, the site’s biggest vendor, and in Appario Retail, another extremely popular seller for Amazon users in India. Both were prohibited under the new ecommerce rules.
Amazon has been pressuring the manufactures of these products to lower sales costs. It’s unlikely that this will succeed on the whole, since in many cases there’s little room for improvement. This will force Amazon to choose between charging more for these products or delisting them, which will translate into higher prices for consumers or a narrower selection on the site.
Not all of Amazon’s initiatives are at the expense of the consumer, it should be said. The company recently reported a 4% drop in the cost of fulfilling orders, mainly because it has been building fewer new warehouses and ramping up throughput at existing sites instead. This is a welcome development for the company, since the costs of both fulfilling orders and shipping increased as a percentage of sales each year between 2010 and 2017.
Within its warehouse network, Amazon handles own-brand goods and those of many of the other vendors who sell via the platform. These vendors have the choice between paying Amazon a premium to completely handle their distribution and pricing, giving them full access to the Prime customer base; or having a looser relationship that can involve paying Amazon or an independent logistics company to use the warehouse network instead.
Amazon has succeeded in growing these different types of looser relationships – they now make up over half of total retail sales. Developing the third-party logistics strand is creating a new revenue stream and lowering working capital, since it means that Amazon covers less of the cost of overall sales fulfilment. This resembles the business model of the Chinese e-commerce giant Alibaba. Yet saving on working capital doesn’t represent an inherent efficiency, since offloading some distribution expenses is likely to eventually be passed on to consumers as higher prices from costs incurred elsewhere.
Competitors
Major rival Walmart has its own techniques for trying to make online sales more profitable. Its new approach to CRaP products is to hide them from view in Walmart consumer search results, showing as out of stock alongside alternatives that are more profitable to the company.
Interestingly, Walmart is also piloting free next-day deliveries from its stores in the US without customers having to be members of any Prime-equivalent service. The wrinkle is that the offering is limited to only high-volume, higher margin products. In both examples, Walmart is therefore pruning consumer choice in its search for more profitability online.
Walmart is also one of numerous big retailers that offer same-day grocery delivery, but this too is not all it seems.
An experienced grocery retail manager has told us that online grocery is necessary as a marketing loss leader but “impossible” to make money from. Such delivery offers are only possible, he said, because online grocery is just 2% of the overall market, since most consumers don’t buy these products online. A recent study agreed with this thinking, finding that online grocery orders have a negative margin of about 15%. It is reminiscent of that old business joke about losing money on every sale but making it up in volume.
To understand the mindset of retailers like Walmart and other smaller rivals who are not purely online, a supply chain consultant told us last year that they are placing a priority on speed of change before profitability, amid pressure to stay competitive with the likes of Amazon. “It’s a logic of desperation as much as it is of strategy,” he said.
We can see the consequences in an interesting survey which found that in 2017, 61% of supply chain executives reported increasing product lines due to e-commerce, up from 55% in 2013. When asked about the impacts on distribution, 26% said they were implementing smaller, more localised warehouses, up from 20% in 2013. These changes inevitably lead to higher costs, which will again be passed on, at least in part, to the consumer.
However, less than a week later, Cloudtail was back on Amazon, with over 300,000 products listed for sale. The rules defined company-controlled vendors as sellers in which the marketplace owns at least a 25 percent stake, so Amazon cut its indirect holding of Cloudtail to 24 percent, according to Reuters. An early supporter of the ecommerce restrictions, the Confederation of All India Traders called Amazon’s move an attempt to circumvent the rules. Amazon appears to have used a similar strategy to get its Prime Pantry services back online and is reportedly now selling its own grocery products via an affiliate. On Thursday, Amazon slashed its commission fees for certain high-performing sellers in an attempt to boost the visibility of independent vendors on the platform.
“It’s a cat-and-mouse game to address harms such as anti-competitive effects and price gouging by using executive notifications rather than regulatory institutions such as a competition regulator,” says Gupta. He says tech giants like Amazon have a lengthy history of finding and exploiting loopholes in even the most stringent regulations, while smaller companies can feel the brunt of the rules. “Unless you specifically look at who is actually indulging in anti-competitive practices [and] levy a very tough penalty on them—which can only happen through institutional enforcement—these kinds of issues will linger,” he added.
Viewed as a whole, the inflection point in online shopping that we mentioned earlier could be getting close. We may have reached peak convenience and cheap prices, and might now be entering a world of more targeted offerings, with less geographic coverage, variations in order turnaround and perhaps even higher prices – all of which will slow the growth curve. At least for high street retailers who have been living with seemingly endless freefall, this may be the best news in a very long time. #KhabarLive
