Is the Rise of Flipkart Killing the shopkeepers?

Of late, newsworthy events have been happening in the Indian e-commerce sector. In the festival month of October, Flipkart, India's biggest online shopping portal, announced with much fanfare October 6th as 'the big billion day' (what the big billion stood for is anybody’s guess). It was the day when it offered big discounts, ranging from 30 to 80 percent, across various segments of consumer goods. On that day, a huge number of people thronged  the website in anticipation of great bargains, turning 'the big billion day' into a big fiasco. Flipkart's servers crashed due to the heavy online traffic and millions of disappointed customers turned away empty handed.

Though it was a fiasco for many customers and Flipkart had to apologise, there was a sense of awe in the business press. Despite the mess, on that single day Flipkart achieved 10 percent (Rs. 600 crores) of its target (Rs. 6,000 crores) in gross merchandise value for the year 2014-2015.

Flipkart was not alone in doing good business on October 6th. With the tag line 'it's just another day for us' Snapdeal consoled the customers who came away disappointed from the Flipkart website. It too did a business of nearly Rs. 600 crores (gross merchandise value) that day. Not to be outdone, Amazon did a clever little trick; it bought the domain name www.bigbillionday.com. Many customer searching for 'big billion day' ended up buying from Amazon instead.

These skirmishes and oneupmanship have become a regular occurrence in the past few months. They highlight the aggression with which the prominent online portals are moving in a bid to capture the still nascent but fast expanding e-commerce market in India.

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For a segment that currently has less than 1 percent share in the total retail market, e-commerce’s competitors in the physical retail are already feeling the heat. Not only does e-commerce offer the advantage of showcasing and selling all consumer goods under the sun at one place, namely the internet, but also has many inherent cost and pricing advantages over physical retail. They do not have heavy overheads; they do not incur rental costs for stores. The lack of physical stores greatly reduce their labour expenses like salaries of floor managers, store clerks, sales person, housekeepers and various others. Their scale of operation also allows them to bargain for the lowest price from their suppliers, enabling them to undercut the physical retailers.

At present e-commerce is confined to metro dwelling, web savvy, computer and smart phone using professional class. It is the same class that is also being served by the big corporate-run stores like Provogue, Pantaloons, Planet M, Spencers, etc. Right now, this segment of the retail, more than the small shopkeepers, faces threat from e-commerce. Sales per square foot for Indian big retail has been declining due to this competition from e-commerce. The decline is particularly noticeable in segments like music, electronics, books and apparel. For past three years, many big retailers like Shoppers Stop, have cut down on their new store openings as a result of competition from e-commerce. Planet M the prominent music retailer actually closed 100 stores between 2011 and 2013.

Until now, it seems that only the big retailers that have been affected by the rise of e-commerce in India. But in the long term, this may not remain confined to the big retailers alone. If we look at the US, we can see that big retail has the capacity to withstand and adapt to the competition from e-commerce. Retailers like Walmart and Tesco are adapting fast to the new environment of e-commerce. They are cutting down on the physical stores and establishing their presence on line. They have achieved or on the path to achieve, a synergy of e-commerce and physical retail by shifting to a 'multichannel model' of retailing. For example, in 2013, Walmart was the 4th largest online retailer in USA after Amazon, Apple and Staples in terms of revenue. Though it lags far behind Amazon at the moment, it is aggressively expanding it's e-commerce side of the business.

In India too, it will not be long before big retailers try and adapt to the competition. Already some of the retailers, like Pantaloons and Shoppers Stop, are establishing e-commerce platforms. How well they will be able to adapt depend on many factors. But no doubt they will be in a better position to cope with the competition from e-commerce than the shopkeepers.

In USA, big retailers like Walmart either swallowed or pushed aside family run stores long before e-commerce came in to the picture. Their model is based on huge superstores located in the city outskirts. These superstores display and hold an inventory of a large variety of goods with in and across all consumer product ranges. People can come in their cars and buy anything from vegetables to furniture in these superstores. The stores are so huge that the average size of a typical Walmart superstore is 17,000 square meters. The Walmart model was and is mainly dependent on two factors. One is the American automobile culture, where ownership of a car is not a luxury but a necessity. Second is the easy availability of cheap land in the outskirts of cities and towns.

Both these factors made Walmart model very competitive relative to family owned stores. As a result, today, big retail has a share of 86 percent and family owned stores a miniscule 6 percent in the US retail market. So, e-commerce in America, with a market share of 8 percent, is competing more with big retailers, a la Walmart, than small shops.

But, in India it is a different scenario. Despite many misgivings, big retail did not overwhelm the shopkeeper in this country, as it did in the US. Here the smaller family owned shops have some advantages over the big retail. Unlike in the US, the big retail in India is forced to locate its stores in very expensive prime real estate localities to attract customers, increasing their costs. For every Big Bazar store located at a visibly central place in the city, there are a multitude of specialist, small shops conveniently located closer home to the customers. As a result, big stores neither have substantial advantage in pricing nor do they offer greater convenience to the customers.

Also, this model of big retail does not allow it to penetrate smaller towns and interiors efficiently, where business volumes require operations at much smaller scale, which only the local shop keepers can provide.

As a result today 93 percent of Indian retail is still in the unorganized sector (shop keepers). If e-commerce industry really wants to expand in India, it will have to eat into the space of unorganized retail. It has certain advantages over shopkeepers which big physical retail does not have. People need not travel to the local market to shop or keep to shopping hours; they just need to take out smart phones from their pockets or log into their tablets or computers. With improvements in logistics, warehousing and advanced technologies like Amazon's anticipatory shipping, e-commerce companies can provide same-day deliveries as well.

The e-commerce players can also offer products at cheaper prices than either small shopkeepers or big stores. As mentioned before, their scale allows them to dictate prices to the producers and distributors. The absence of physical shops sharply reduces establishment and labour costs.

All these factors can contribute to the potential dominance of e-commerce in the retail sector. Right now, e-commerce is still in the process of getting it's logistics, technology and warehousing in place. There is also the issue of the low penetration of internet in India, though with smart phones getting cheaper, the internet penetration is set to grow rapidly. When all these things fall in to place, e-commerce has the potential to pose a serious threat to the livelihoods of the millions employed in retail, who constitute 6 to 7 percent of the workforce in India. Already, due to the competition from e-commerce, shopkeepers dealing in consumer electronics in the metros are downing their shutters. If government does not act now, it will not be long before this is replicated in other regions and other segments of consumer goods.

Government needs address this issue before the thereat materialises. FDI is multi-brand rule was not allowed to protect small scale retail. Are e-commerce players violating the rules of not allowing FDI in multi-brand retail? Not only is there a need for the government to regulate e-commerce but also a need to provide institutional and technological support to small retailers, in order for them to better withstand the competition from e-commerce. Without such protection, small scale retailers will be squeezed out of the market, very much like the mom and pop corner stores were in the developed countries.

Disclaimer: The views expressed here are the author's personal views, and do not necessarily represent the views of Newsclick