On its home turf, the US, Amazon over the last few days has emailed an unknown number of Prime subscribers offering them $10 to retrieve an order of $25 or more at company pickup points at locations such as Whole Foods, Amazon Fresh or Kohl's stores. Simultaneously, the ecommerce major has started charging customers a $1 fee if they return packages via a United Parcel Service store when there is an Amazon pickup/return location closer to their delivery address.
Amazon late last year hiked the price of its annual Prime subscription that includes free shipping benefits by $20 to $139. It also has raised minimum order thresholds for free grocery delivery, encouraged customers to have all of their packages delivered on a designated day of the week, and expanded speedier same-day parcel delivery with a fee for orders under $25.
We in India should read the tea leaves. Let us face it, e-commerce has been a boon to the consumers who have lapped up its convenience and cheapness with two eager hands. But sceptics have always wondered if it is sustainable. In the US, it is the inventory model under which ecommerce firms buy on their own account, driving a huge bargain that comes with bulk purchases and share the savings with the buyers. In India however the inventory model is banned under the FDI regime obtaining for ecommerce firms. In other words, they have to embrace the marketplace model under which they have no control over the inventory and price fixation. They are just enablers providing a robust online trading platform for thousand of sellers and millions of buyers with a robust payment gateway infrastructure lubricating the entire process. Under the marketplace model, the ecommerce portal has to be content with commission or fees charged from the sellers for onboarding them. Had it been pristine marketplace model, ecommerce firms would not have piled up losses in India.
While bulk, direct purchase from the manufacturer is at the core of both brick-and-mortar stores and e-commerce models, the latter has had to contend with huge packaging and delivery costs. Roughly, these could jack up the total cost at least by 15% thus making the ecommerce model unsustainable in the long run. The shoe at last is pinching. Not that it was not pinching all these years but the ecommerce firms either behaved ostrich-like or naively thought that once hooked, the online buyers would not mind paying for convenience.
In any case, the latest Amazon manoeuvres are clear admission of the short-sightedness of its business model all these years. Let us face it, for shopping from the convenience of home or while on the move, one has to pay something extra and not be pampered with discounts. Airlines and IRCTC charge convenience fee from those booking tickets online.
Amazon setting up brick-and-mortar stores or acquiring them is a sign of realisation of the futility and unsustainability of the consumer-centric online model. In the US, brick-and-mortar stores coexist with online stores. Recession might have dented the revenues and profits of both but the truth is it makes sense to invite customers to large stores where they can make all their purchases under one roof, pay on the spot and drive away with their stuff.
Back home, what does the recent Amazon move portend? One can expect the ecommerce market leader to pull up its socks and cut costs in India too. To be sure, there is a sizeable number of consumers who have been hooked by the convenience of online shopping. But the moot question is would the brick-and-mortar giants like Costco and Walmart set up shop in India where urban land is a lot pricier than in the US? The government FDI regime requires a minimum $100 million investment, half of which must be in infrastructure like cold storage etc. That may not be as much a dampener as the cost of urban land which giant stores need. Locating them on the outskirts of cities will put shoppers off.
However, big stores or small, the point is they are going to beckon the shoppers again once the e-commerce giants up the prices and impose fees for their services. Online sellers at some point of time have to say enough is enough. The dawning realisation seems to be that standalone online sales are unsustainable — physical stores alone are win-win. Yes, online sales are not going to vanish anytime soon but customers can no longer expect to be pampered. There is no free lunch.
S Murlidharan is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues