Have you bought stuff online?

I wrote an article for my college magazine trying to explain the e-retailing phenomenon (the phenomenon and its impact on physical retailers) through the lens of the book business. I have decided to share it on my blog so that even people who do not have access to the magazine can read my article. It's not a piece of research as I do not have any significant data.  Comments and ideas are most welcome...

Have you bought stuff online?

My teacher seemed a little hesitant when I told him to buy “The Last Lecture” on Flipkart.com. If you are curious about what this last lecture is, well, it is a lecture no doubt. A lecture which has taken the shape of a book and which went on to be a New York Times bestseller and still remains one of the most popular and inspiring books amongst teachers and students alike. The maximum retail price of the book in the physical market (any book-store in the city) is Rs. 295 and you may get some discount if you happen to know the owner of the book-store. But I don’t think anyone would give a 32% discount and sell it to you at Rs. 201. Flipkart.com does. It’s nice, isn’t it? Then why the hesitance to buy the book when the book will be delivered at your door-step and you can pay cash on delivery. A piece of my teacher’s mind – “How can I just forget my favourite bookstore and buy books online? Going there just to browse through books and not buying anything from there seems unfair to my friend of many years. And I don’t even get to see the book while I order it online. It comes to my house wrapped in card-board, coated in plastic with a fancy-ish bookmark inside it. Well fine, what can I do? Everything else is getting so expensive. At least books are getting cheaper.” And finally he bought the book for Rs. 201. From Flipkart!

Seems fair enough. After all, that’s the way businesses and humans work. Cheaper the better. And for businessmen, there is nothing worse than not being in business and nothing better than being in the thick of the business. Because once you’re in business you’re making money and you’re happy. There is no doubt in anyone’s mind that online stores or e-retailers as they are called are in the thick of it all when it comes to selling books. At least in big cities, it seems that e-retailing is the norm amongst the consumer class. And not just books, slowly most of the things we need are being made available online. Except petrol! Not everything is sold at a discount though. Window-shopping through e-retailing shops like Flipkart, Infibeam, Junglee (an online product comparison and advertising site launched by Amazon.com) I discovered that electronics, furniture, jewellery, clothing is pretty much sold at prices same as those in physical retail shops. So, it’s predominantly books that are sold at high discount rates. How is it that books are sold at such high discount rates? And why books and why not other items? I do have my hypothesis and after talking to a few people in the business of selling books I scraped up some more soil to dig deeper. But I do not have a lot of data to make my claims stronger. But anyway, here I go.  

Mostly, it is the business model and the capital to go along with it that makes a difference and of course the execution of the model along with the desire to occupy as much market as possible. Firstly, it’s not fair to compare a local retailer with Flipkart. Just because of the style and size and capital involved in the operation. But still, I would like to explain what happens in there when it comes to offering discounted prices as I have some idea of how it all works. Flipkart.com is a start-up company started in 2007 which was given initial capital by a venture capital firm to start their operations in India. They had their first office in Bengaluru, which is their main office, before branching out to other big cities. Flipkart.com had initially decided to sell books online and had a business model in hand which would enable books to be sold at a lower cost, say a discount of 15% to 35% on the MRP. This did mean reduced profits for them. The math would work like this. Say, a book has a selling price of Rs. 100, which is decided by the publisher after doing all calculations so that they would make profit provided all the books they print are sold. The publisher normally gives the books at about 50% discount (Rs. 50) to the distributors. The distributor passes on the books at about 65-70 discount (Rs.65-70) on the selling price to the retailer. The retailer sells the book at Rs.100 and makes a profit of Rs.30-35 on every book. Flipkart is also a retailer. But with a difference. Flipkart would buy the books from the distributor at similar rates as the usual retailer but Flipkart could afford to reduce its profit margin by an amount which the physical retailer cannot even think of. Why? Because of the business model which is based on the capital they have. So Flipkart would sell the book at Rs.70-75 and hence earning very little profit if we add the cost of transportation. One would think – why would a retailer reduce its profit margin? Obviously, it’s a strategy. A strategy to capture the market. More customers would obviously be an asset. Flipkart has the capital to soak in the reduced profit. It’s right here to stay with all the initial capital. Once they have the trust of the people with the excellent customer satisfaction, they can slowly raise the rates and earn more profits and even branch out into other goods. And it is already happening. The Last Lecture of Rs.295 was priced at Rs.177 a year ago and now it is priced at Rs.201. And now they sell nearly everything. And now they have operations all over India. Nicely spread out with good contacts built with both distributors and publishers throughout the country and a very good transportation mechanism to back it all, Flipkart is eating into the market of the local retailer. Flipkart obviously would have to bear the additional cost of transporting the item to our house but it seems they have mastered the art of managing all the costs incurred by them to end up with a profit margin, however small it may be. Flipkart was making losses in the initial phases of their operations but slowly they broke even with the investment in 2010 and are now making profits by starting to sell other items like electronics, jewellery, furniture etc at the rates same as that of the local retailer. Another facet to the business is the added option of paying through credit cards. More credit card transactions would mean more business for banks. So, it all seems to make good business sense for different players in the business of selling. But all this means a huge change in the way urban middle-class, consumerist India shops.

Hardly anyone is seen at the local bookstores these days. I used to work part-time in Popular Book House near Deccan Gymkhana and when we had a monsoon sale there, it hardly seemed like a sale. From 4pm to 8:30 pm only a few dozen people would come in and actually buy books. Quite a few of the books had to be returned to the distributors and the owner had to be careful before ordering books from the distributor for he was very unsure of how many of the ordered book s would actually be sold. This does not mean that people are reading less. Hardly, I guess. People buy online or just read online. It’s much cheaper. With apps like Kindle, Aakash tablet coming in and giving us the options of carrying all our favourite books along with music in a small tablet there is going to be a change in the way we read and buy. And I guess it would be an interesting phenomenon to observe. Does the story look grim for our local retailers? Manney’s, a bookstore in Pune recently shut shop but after asking the owner about the reason for shutting shop his reason was not poor business, it was that he wanted to spend more time with his family after having run the shop non-stop for the past four decades. After talking to one of the employees at Popular Book House, he seemed to acknowledge the pretty big dip in business. Mostly of the English books. Marathi books’ sales have not dipped. Mr. Upendra Dixit of the International Book Service in Deccan Gymkhana acknowledged the dip in their business and seemed to say that they had no option but to cater to the demands of their loyal customers and try to squeeze in as much profit as they could. These local retailers do not have the capital, nor do they have hundreds of employees to manage the business and expand the business, but does that mean that they will not survive in the market? That should not be the case. We all love the feeling of having bought a book we needed after browsing through an entire section in a bookstore. It seems like there is a love story between us and the book as in we were bound to meet or something like that. Bookstores are not just a space to buy, but also like second homes where one could surround oneself with the smell and colour of books and spend a long time browsing. The internet experience is drier for sure.  At least for me. I would still prefer to go to the bookstore and browse through a few sections and choose which book I want. But there would be occasions when I would have to buy the book online due to unavailability or delays in procuring a book from the publisher. In such a case, the online system would be a nice back-up. These small businesses are going through a dynamic phase and so are the big businesses. With healthy competition, and more competitors joining the market and more consumers too, I hope the market share of every player would eventually be such that they would be happy that they got the profit they had envisioned for themselves. E-retailers like Flipkart have a market all over India whereas International Book Service caters only to people living in a particular part of Pune city. There is a huge difference in the size of the market and each would impact the other in some way or the other and eventually let’s hope that we tend to a sort of equilibrium when it comes to competition so that everyone survives, provided everyone makes the right moves. There is a limit to how much one retailer can capture. And thank god, Flipkart does not sell petrol!  

References used for the article :

11)    Deathknell for the bookstore? Vijay Nair, The Hindu April 1, 2012

22)    Flip side of Flipkart: Red Ink for e-tailers, RIP book shops. Binoo K John, Firstpost - Jan 17,2012

33)    Owners and employees at Popular Book House, International Book Service in Pune.

44)    Manney’s in pune to down shutters on March 31, DNA- Jan 17, 2012

55)    Flipkart.com, Infibeam, Wikipedia