Consumer E Commerce Market

Published Date: 02 Nov 2017

Iimblogo

Consumer E-Commerce Market: Strategizing E-retail for the Indian Context

A Project Proposal

Submitted to

Professor Murali Patibandla

Indian Institute of Management, Bangalore

On

February 20, 2013

In

Partial Fulfillment of the Requirement for

Contemporary Concern Study in

Post Graduate Diploma in Management Program

Akshay Ram L (1111004)

Amar Deep Singh (1111005)

Table of Contents

EXECUTIVE SUMMARY

Consumer E-Commerce can be broadly defined as buying and selling of products and services on the Internet. The B2C and C2C E-Commerce industry can typically be classified into the following categories [1] :

E-tailing, comprising Online Retailers and Online Auctions

Travel, comprising Travel aggregators, Tour Operators, Hotels and Railways

Classifieds, comprising Online Jobs, Online Matrimony, Online Property, Online, Automobile and General Classifieds

Paid Content Subscription, comprising research, articles, exclusive videos, etc.

Digital downloads, from Internet to Mobiles and internet

E-tailing of goods and services, with huge growth potential in India, is expected assume a position of central importance in the near future. E-tailing is already gathering market share of total commerce very fast in India. Venture Capitalists opine that the inflection point for Indian E-tailing industry is only 10 years away.

With FDI approval granted for multi-brand retail in India, the day is not far off for FDI approval to the E-commerce space as well. This will see big names such as Amazon, Buy.Com, etc. soon entering the growing Indian e-commerce space. With larger and bigger players, consumers will be able to gather more competitive price information with only a click of the mouse. Hence it will be interesting to study the overall business models in the e-commerce space, and more specifically the challenges and impact the e-retailing industry will have on the Indian market.

Amazon.Com was the pioneer of the E-retail space. Jeff Bezos’ innovative idea of selling books from his garage by taking orders online has now developed into the world’s largest online store. Adopting a similar model, e-retailers with online presence but no physical outlets have mushroomed in India – Myntra, Koovs, Flipkart, eBay, etc. to name a few. The benefits of e-commerce have also prompted brick and mortar stores such as Future Group, Arvind, etc. to take the e-retail route. Further, with service sector contributing to more than 50% of India’s GDP, Internet is also definitely a vehicle that can be very effectively used to promote, sell and perform services in India [2] .

To sustain the online retailing model in India, a robust business model is required. An attempt to chart out the detailed modus operandi of e-retailers in India would be the focal point of our study. Role of FDI approval in this space will also be an interesting aspect to analyze differing strategies for local and foreign players. E-Commerce is the future of shopping. The Internet economy will continue to grow robustly especially in developing economies such as India. Internet users would start buying more products and buying more frequently online. A detailed competitive study of both new and established companies in the Indian e-retail space will give a holistic understanding of the challenges in this business. It will be structurally impossible for most pure Web retailers—unless they hit Amazon.com-like scale—ever to turn a profit, let alone to take a dominant position. The clear advantage in retailing goes to big highly skilled traditional retailers that use the Web to extend their already potent physical presence [3] . Strategies have been recommended by identifying whether and how big players can consolidate the growing Indian e-retail industry by achieving economies of scale.

LITERATURE REVIEW

E-business is all about value creation & sustenance, by use of technology to assist value migration. Teece D. J. (1986) analyzed the role of complementary assets in sustaining competitive advantage as shown in the Figure below [4] :

Value creation is possible only through persistent innovation. The degree of homogeneity of a firm with respect to its competitors in the industry as perceived by the customers is a good index that will tell how much the firm has innovation-oriented. Difficult-to-imitate resources (and processes) are good indicators of sustenance of a firm’s innovation for a longer period of time – here’s where e-commerce space has leveraged its strong competitive advantage in recent times. R. Amit and C. Zott (2001) analyzed the sources of value creation in e-business. According to them efficiency, complementarities, lock-in, and novelty are the four major sources of value creation in e-business as depicted by the Figure below [5] :

The trajectory of internet based e-commerce starts with the trajectory of technology enablers and moves forward to B2C models and B2B innovation in the following manner [6] :

Internet market space can be classified based on the domain of operation in Internet Economy into 4 layers namely Infrastructure, Applications, Intermediary and Commerce. As seen before the nature of these players engaged in the e-commerce business is of two types – B2C (large number of individual buyers, low volume of purchase and personal goods and services) and B2B (Corporate/Industrial Buyers, High volume of purchase and focused buy). E-retail mostly comes in the B2C category which is of specific interest in the Indian context for this project study. Finally an E-commerce firm can play the 3 roles of Portal, Market Maker and Product/Service Provider. E-retail will fall under the Market Maker category where the buyers and sellers rely on the market-maker for his match making and value added service. Other e-service providers on the other hand, rely on the information asymmetry between buyers and sellers to make a business out of the same. Study of Amazon.Com’s e-retail models in North America will help in understanding the differences between e-retail and traditional retail markets.

STUDY OF E-RETAIL MODELS: AMAZON.COM

Amazon.Com is the pioneer of the E-retail space. Jeff Bezos’ innovative idea of selling books from his garage by taking orders online has now developed into the world’s largest online store. Amazon was started in 1994 by Jeff Bezos as an online bookstore in USA. Since then it has grown to be the market leader in the E-commerce industry with a CAGR of over 60% over the past 16 years and CAGR of over 28% in the last 10 years. Amazon’s market share is currently about a third of the total e-commerce industry in the USA [7] .

Over the years, Amazon has added over 20 product lines to its operations which are classified into the following major categories:

Media: This category, which contributes about 37% of Amazon’s revenue, includes Books, music, video, software, Personal Computer (PC) and console games.

Electronic and General Merchandise: 60% of Amazon’s revenue comes from EGM. This is further divided into Hard-lines and Soft-lines

Hard-lines: This includes Kitchen equipment, sports equipment, tools, hardware, musical instruments, electronics etc.

Soft-lines: This includes Shoes, apparel, jewelry, watches, lose stones.

Amazon was spun off in the USA - currently it operates in 9 countries (USA, Canada, UK, Germany, France, Spain, Italy, Japan and China) with unique websites.

Amazon has been on an aggressive acquisition spree since early 2000s and currently owns over 20 fully owned subsidiaries. These acquisitions have been either rival e-commerce companies (e.g. Zappos, myhabit.com) or complementary product companies (e.g. Kiva Systems, Junglee.com).

Currently Amazon has over 56000 employees worldwide. It has over 50 million unique products in its catalogue. It has over 165 million active customers who make at least one purchase every month. And it has over 2 million sellers on its websites world over.

Amazon’s revenue streams from e-retail can be divided broadly as follows:

E-RETAIL: This involves purchasing finished goods from the vendors, stocking in warehouses, taking online orders from the customers, packaging and delivering to the customers. The supply chain of this e-retail business is described region wise in more detail in later sections.

SELLER SERVICES: Amazon rents various parts of its established network (web portal, warehousing, packaging, trusted & efficient payment services) to third party sellers (i.e. who are not vendors). Various combination of such renting is done (as described in subsequent sections). One unique difference between Amazon.com seller services and other similar portals (e.g. E-bay) is the Amazon.com A-Z guarantee scheme under which many product categories are insured by Amazon. Thus Amazon.com bears a part of the "cost of bad experience" even for third party sellers. Hence the choice of third party sellers is also done carefully and their quality of product as well as service is regularly monitored.

FULFILMENT SERVICES: It’s a kind of a seller service but needs special mention because it bears a significant portion of Amazon.com revenues. Besides Amazon takes these services into factor when designing and setting up warehouses.

PLATFORM & DEVELOPMENT SERVICES: Amazon rents its cloud services and server support to others. Many famous internet companies (e.g. LinkedIn) initially were housed in Amazon servers.

It will be helpful to look at Amazon.Com’s strategy in terms of Supplier contracts, inbound transportation logistics, warehousing and delivery logistics. Use of technology to leverage the supply chain aspects of these businesses has defined Amazon.Com’s successful e-retail business models. This will also have wide implications for the growing e-retail business market in India.

AMAZON E- RETAIL STRATEGY: NORTH AMERICA

E-RETAIL VS TRADITIONAL RETAIL - AMAZON SOURCING SERVICES

Sourcing Services of Amazon can be categorized into Retail outlets, Distribution Centers, Product Stocking and replenishment centers, Suppliers and Inventory brackets.

INTERNET RETAIL OUTLETS

Amazon.com works on pure-play internet format of retailers. So it doesn’t have any retail outlets. All transactions are executed through the virtual stores created at Amazon.com website and affiliate websites. There are supply chain benefits to this model of internet retailing without retail stores. In order to ensure product availability, physical retailers have to carry inventory in each store location as well as in distribution centers. By consolidating inventory at Distribution Centers (described in next subsection) and other inventory locations operated by partners, Amazon.com manages to carry a much wider selection of inventory while maintaining a competitive advantage over retailers in inventory turnover.

DISTRIBUTION CENTERS (FULLFILMENT CENTERS)

Amazon.com operates ten leased distribution centers throughout the United States. These facilities are large with a square footage generally falling in the range of 500,000 to 600,000 square feet per facility. Location decisions are made based on proximity to customer concentrated areas and tax implications. Amazon.com has also taken advantage of unique opportunities to grow its distribution network, such as the abandonment of a large facility in Kentucky by another retailer that gave Amazon.com the opportunity to lease at a favorable rate. Amazon.com's ten distribution centers are located in Arizona, Delaware, Indiana, Kansas, Kentucky, Nevada, Pennsylvania, South Carolina, Tennessee and Virginia.

PRODUCT STOCKING & REPLENISHMENT PROCESS

Amazon.com replenishes its distribution centers’ inventory through a variety of suppliers. Suppliers for its media product segment are large book distributors such as Ingram Book Distributors, Baker and Taylor, as well as smaller book distributors. Publishers, CD, and DVD manufacturers also replenish products to distribution centers. Amazon.com utilizes Sales and Operations (S&OP) planning process to determine forecasts for each product that it stores in its distribution centers inventory. It keeps track of its inventory position in real-time based on warehouse receipts and shipments. Purchase orders are placed to suppliers based on the forecasted amount needed minus the current inventory on hand in the warehouse. The Replenishment process is illustrated in the figure below:

SUPPLIERS

The number of third-party sellers that enable Amazon.com to offer nearly unlimited product selection without ever purchasing the inventory is increasing. This option gives Amazon.com the opportunity to maintain balance between products to be stored in inventory based on supplier contracts and products to be sold directly through Syndicated Store programs and other partners. In general, Amazon.com focuses on two factors while deciding suppliers for its product offers - Preferred contract type and Risk associated with contract type.

INVENTORY SUPPLIERS

According to the Annual Report 2011 of Amazon.com, no vendor accounted for 10% or more of Amazon.com’s inventory purchases. Amazon.com generally does not have long-term contracts or arrangements with its vendors in order to guarantee the availability of merchandise, particular payment terms, or the extension of credit limits.

RISKS ASSOCIATED WITH SUPPLIER RELATIONSHIP

Amazon.com has significant suppliers, including licensors that are important to its sourcing, services, manufacturing and any related ongoing servicing of merchandise and content. But it does not have long-term arrangements with most of its suppliers. If its current suppliers were to stop selling or licensing merchandise, content, components or services to Amazon.com on acceptable terms, or delay delivery, including as a result of one or more supplier bankruptcies due to poor economic conditions, as a result of natural disasters or for other reasons, it may be unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms, or at all. But Amazon.com compensates this risk with more profits by getting better deals from the availability of suppliers at competitive level.

INVENTORY

There are two important factors to be considered for the inventory management of Amazon.com. Both of these factors are explained below-

INVENTORY SEGMENTATION

Segmentation of products to be stored in distribution center depends on the product handling facilities in the distribution centers. Products that are easily sortable and conveyable are stored in highly automated facilities. Most of the items in the media product category fall into the sortable, conveyable category as products are relatively small and have a small variation in dimensions. Products that are large or have irregular dimensions are stored in less automated facilities. Certain items in the toy product line have irregular dimensions and thus are difficult to handle in an automated fashion. Also, large consumer electronics such as plasma televisions are an example of a product type that is not conducive to automated conveyor and sorting systems.

INVENTORY MANAGEMENT PROCESS

Amazon.com offers millions of items for sale through its website and affiliates. Amazon.com supports this selection through its multi-tier inventory network. The following is a description of the three tiers or echelons that comprise Amazon.com's inventory network. The website www.amazon.com owns the relationship with the customer.

First-Tier of Multi-Tier Inventory Network –

It is basically the distribution center of Amazon.com. Inventory is aggregated in distribution centers, which enables Amazon.com to carry less overall inventory than physical (traditional) retailers. The benefits of inventory aggregation are an improved ability to respond to fluctuations in geographic demand and high service level support with a lower level of safety stock.

Second-Tier of Multi-Tier Inventory Network –

It includes drop shippers such as Ingram Book Distributors, Baker and Taylor, and other book distributors. CD distributors and other partners working to fulfill Amazon.com orders are also considered at this level only. If Amazon.com is unable to fulfill the item from DCs (First-Tier), its IT systems look into partner inventories. This prevents the Amazon.com customers from experiencing a stock-out for an item that Amazon.com carries but currently does not have in its own stock. It also allows Amazon.com to offer items that it does not sell directly through its inventory.

Third-Tier of Multi-Tier Inventory Network –

Publishers, manufacturers, vendors, and third-party sellers comprise the third-tier. These parties further enable Amazon.com to offer the nearly unlimited selection that they offer. Additionally, products sourced from these entities enable Amazon.com to avoid distributor mark-ups, reduce their dependency on distributors, and improve margins. The graphical representation of Amazon.com's three-tier inventory model is shown below.

AMAZON SELLER SERVICES

The evolution of Amazon has been driven by a spirit of innovation that is part of the company's DNA [8] . Amazon is a customer-centric company – customer obsession being one of its core leadership principles. Amazon’s Fulfillment centers form a core part of the company’s supply-chain in helping it deliver hundreds of thousands of items to customers each day. Fulfillment by Amazon (FBA) puts Amazon’s fulfillment technology to work for the sellers. The seller-customers sell the product to the end consumers, Amazon ships the product. Amazon has created one of the most advanced fulfillment networks in the world, and sellers’ business benefit from Amazon’s expertise. With FBA seller can store his products in Amazon's fulfillment centers and Amazon directly pack, ship, and provide customer service for those products [9] . FBA is self-service and comes with an easy-to-use inventory management console as part of Amazon Seller Central. Sellers can also use Amazon’s global fulfillment center network like a giant computer peripheral. In just the last quarter of 2011, FBA shipped tens of millions of items on behalf of sellers. When sellers use FBA, their items become eligible for Amazon Prime, for Super Saver Shipping, and for Amazon returns processing and customer service [10] .

Some of the benefits of FBA for the sellers as listed by Amazon on its website are given below3:

ELIGIBLE FOR FREE SUPER SAVER SHIPPING AND AMAZON PRIME

Customers love FREE Super Saver Shipping and Amazon Prime. FBA Listings on Amazon.com feature these delivery messages increasing awareness of product eligibility for free shipping.

COMPETITIVE PRICING

Sellers’ FBA listings on Amazon.com are sorted by the item price without a shipping cost. Amazon assumes the seller will ship for free with FREE Super Saver Shipping or Prime, which gives seller an edge when competing.

TRUSTED CUSTOMER SERVICE AND RETURNS

FBA listings are displayed with the "Fulfillment by Amazon" logo, so customers know that packing, delivery, customer service and returns are all handled by Amazon.

FULFIL ORDERS FROM OTHER CHANNELS

FBA can fulfill seller orders from other sales channels from seller inventory stored at an Amazon fulfillment centre. Seller manages its inventory through a simple online user interface, and can direct Amazon to return the inventory in its fulfillment centers at any time.

COST EFFECTIVE AND SIMPLE PRICING

Seller pays for Order Handling, Pick & Pack, Weight Handling, and Inventory Storage. Amazon’s fulfillment network enables to bring to the seller benefits such as Free Super Saver Shipping and Amazon Prime at competitive prices. Sellers can select a rate schedule, view a product example for the same and use the revenue calculator to identify the cost savings and profit margin from FBA.

The following steps explain FBA’s simple supply chain process [11] :

Step 1: Seller sends its products to Amazon’s fulfillment centers and uploads its listings to Amazon’s system. Amazon fulfills seller’s inventory

Step 2: Amazon catalogs and stores seller’s products in ready-to-ship inventory

Step 3: Amazon fulfills orders placed directly on Amazon.com or fulfillment requests submitted by seller for sales not on Amazon

Step 4: FBA picks seller’s products from inventory and packages them. Amazon locates seller’s products using its advanced web-to-warehouse, high-speed picking and sorting system. Customers can combine seller’s orders with other items fulfilled by Amazon

Step 5: Amazon ships the products to seller’s customers from its network of fulfillment centers

AMAZON.COM’S SELLER CUSTOMERS (FBA) - SUPPLY CHAIN MODELS

Amazon.com gives this customer segment the opportunity to sell its products via Amazon.com’s website and through their own branded websites. Amazon.com also provides distribution services on behalf of these clients. Revenues from seller customers come in the form of fixed fees, revenue share fees, per-unit activity fees or some combination of these (Amazon.com, Inc., 2008). Amazon.com has established a flexible fee system that allows Seller Customers to choose how they want to structure their relationship with Amazon.com as described below on Amazon.com’s different supply chain models. This flexibility enables Amazon.com to meet the true requirements of its customers because the customers choose their level of involvement with the company.

MODEL-1: NO WEBSTORE/NO DISTRIBUTION MODEL (3P SELLER)

In this Seller-Amazon-Consumer model, a Seller Customer makes its products available to Consumer Customers via Amazon.com’s branded website. The Seller Customer does not utilize its own WebStore or Distribution through Amazon.com’s distribution network as depicted in the Figure below:

No Webstore/No Distribution Model (Source: Amazon.Com)

The supply chain begins with the Seller Customer uploading product inventory information to Amazon.com. This product information is then made available to Amazon.com’s Consumer Customers. When a Consumer Customer purchases an item, it makes a payment to Amazon.com which then retains a fee before transferring the remaining funds to the Seller Customer (unless the Seller Customer decided to opt for a monthly subscription fee). The Seller Customer is then responsible for shipping the product to the Consumer Customer. This model is less risky for Amazon.com in that it does not have to manage or hold the Seller Customer’s product inventory. Amazon.com also does not have to incur the materials handling expense of preparing an order for shipment. The biggest challenge for Amazon.com is ensuring that its brand name is not tarnished if the Seller Customer does not upload correct information to its website or if the Seller Customer does not deliver the product in a timely manner to the Consumer Customer. Accurate information and managing relationships are core to this supply chain model.

MODEL-2: WEBSTORE/NO DISTRIBUTION MODEL

This model is similar to the previous model; however, the Seller Customer creates its own branded website via Amazon.com. The Seller Customer creates an account with Amazon.com and designs its own branded WebStore. The Seller Customer uploads its product inventory information to its WebStore and begins selling to the Amazon.com’s Consumer Customer or to the Seller’s own customers. Amazon.com charges a fixed monthly fee and a referral fee (if the WebStore offers items found on Amazon.com). While the WebStore is powered by Amazon.com’s IT infrastructure, it allows the Seller Customer to build its own brand awareness. This model can be depicted as shown in the Figure below.

Seller-Amazon-Consumer (Webstore/No Store) Model (Source: Amazon.Com)

MODEL-3: SELLER-AMAZON DISTRIBUTION ONLY MODEL (FULFILMENT BY AMAZON MODEL)

Seller Customers send their product to an Amazon.com fulfillment center where Amazon.com will store the items until a customer order is received. In a distribution only model, a Seller Customer interacts with the final customer and submits fulfillment requests to Amazon.com. Amazon.com then picks and packs the Seller Customer’s products and ships the order to the final customer. The fees Amazon.com charges vary by the type, dimensions and weight of the product and the selected shipping method. Figure below shows a pictorial representation of this model.

Seller-Amazon Distribution Only Model (Source: Amazon.Com)

MODEL-4: SELLER-OWNED SITE/ SALES & DISTRIBUTION MODEL

This model operates exactly the same as the above Distribution Only model, but the Seller Customer has the ability to not only sell via its own website, but also via Amazon.com. This model, as illustrated in the Figure below, extends the Seller Customer’s reach to not only the customer that frequent its site, but also the Consumer Customers that visit Amazon.com. Whether or not the final customer orders via the Seller Customer’s own website or via Amazon.com, final fulfillment is provided by Amazon.com. Additional fees would be paid to Amazon.com for the Amazon.com website access.

Seller-Owned Site/Amazon.com Sales & Distribution Model (Source: Amazon.Com)

MODEL-5: DEVELOPER-AMAZON WEB SERVICES MODEL

This final model deals specifically with Amazon.com’s Developer Customers. The Developer Customer seeks technological services from Amazon.com. For a fee (depending on the application sought by the Developer Customer), Amazon.com allows the Developer Customer to utilized its services. Ideally these services, which would cost the Developer Customer less than developing them in-house, would enable to Developer Customer to better reach its customers.

Developer-Amazon Web Services Model (Source: Amazon.com)

IMPLICATIONS FOR AMAZON IN INDIA

Due to legislation disallowing FDI in multi brand retail in India, Amazon’s entry has been put on hold for past few years. But Amazon has shown commitment by buying large warehouses in Mumbai and Bangalore. Hence till the legislation comes through, Amazon can offer seller services and thereby prepare ground for entry into retail at a later stage.

JUNGLEE.COM

Amazon’s entry strategy into India has been unique compared to other geographies. This is due to Government polices as well as difference in characteristics of the Indian market. Amazon.com acquired Junglee.com- a virtual database maker in 1998 and re-launched it in 2012 as a comprehensive product search engine in India. For the first time Amazon website carried information about brick & mortar retail outlets. This can be perceived as an entry strategy into India by Amazon as presently Junglee.com is not a revenue earning source but rather a free service to the users and sellers. But Amazon seems to be tracking the sellers and taking customers’ feedback to identify potential vendors/ third party sellers when official Amazon.in is launched. Besides it can also be seen as a brand building exercise where there will be recognition as well as customer faith in Amazon once the operations start.

SUPPLIER CONTRACTS

As initially Amazon would only target third party sellers to whom it will offer its various fulfillment services, contracts similar to as described in the seller services section can be considered. To help maintain the brand value, the choice of sellers should be made properly considering the product and service quality of sellers. For this Amazon can contact Flipkart’s existing suppliers and leverage learnings from Junglee.com.

WAREHOUSING

Since the aim of this project is to identify the best practices of Amazon worldwide and replicate them in India, studying Flipkart’s established network of warehouses also gives insight into how Amazon should go about selecting locations of its warehouses. Since the tax implications are not much different across states (interstate sales tax is levied by the central Govt. and is same throughout) Amazon should target areas very close to metro cities for setting up its warehouses. This will be beneficial because:

1. Internet penetration is very high in the metro cities. Hence most of the customers will be concentrated here.

2. Most retailers/ sellers are also concentrated around metro cities as in India metro cities are the major trade hubs.

3. Land inside metro cities may be very costly. Hence slightly outside the city/ suburban regions will be ideal for establishment of warehouses.

4. Warehouse staff would need to be trained. Usage of advanced robotics (Kiva systems) in will help operate warehouses with minimal labor.

INBOUND LOGISTICS

As in other countries, this can be outsourced to third party transporters or courier services. As operations increase, Amazon can look towards owning its own small fleet of carriers for emergencies and less than truck load transfers.

PACKAGING

Though packaging is done by Amazon in most of other geographies, in India this will lead to payment of excise duty which will be high for a company like Amazon. Instead it can be outsourced to small scale industries that enjoy tax benefits in India. This will lead to better cost management and will contribute to margins.

DELIVERY

Since cash-on-delivery is a big hit with customers in India, Amazon would have to provide this facility to gain market share in India. For this the following alternatives can be considered:

Outsource hub to hub transport while owning the last mile connectivity services in major cities. This will allow proper cash-on-delivery operations.

Use government postal services like in Japan & China. Cash-on-delivery option was introduced long back by catalogue companies in India through Government postal services by a service called VPP (Value Payable by Post). This can be used by Amazon without having to incur extra cost of setting up own distribution channel which has become a major challenge for Flipkart now.

AMAZON IN INDIA

Due to FDI restrictions on multi-brand retail in India, Amazon is still vying for the right time and method to open shop in the country. But Amazon is still tinkering with the idea of a presence in the country, and could possibly start off with its Marketplace program [12] . Amazon’s Marketplace is a program is part of Amazon Services that lets individuals and individual companies sell their products through Amazon by way of one of the above described five supply chain models.

Amazon’s India Marketplace would be a little bit different. While foreign-based Amazon isn’t allowed to directly run a multi-brand retail operation, Amazon can be an aggregator for a bunch of Indian retailers. Junglee.Com has already given Amazon a strong foundation to start operations in India. Amazon has reportedly been in partnership talks with a bunch of different Indian retailers. Hence Amazon can essentially provide the online traffic and the storefront while the Indian companies would fulfil all the orders6. Other implications for Amazon in India in terms of supplier contracts, warehousing, inbound logistics, packaging and delivery have been identified by comprehensively studying Amazon’s major business operations in other countries around the world. It will be interesting to see how Amazon uses its power and positions against Flipkart in India – in all likelihood Amazon is definitely bound to benefit from the second mover advantage. All in all, these are exciting times ahead for e-retail space in Indian context.

FLIPKART: BIGGEST PLAYER IN INDIAN E-RETAIL SECTOR

6.1 INTRODUCTION [13] 

Flipkart was established in October 2007 by two self-motivated entrepreneurs Sachin Bansal and Binny Bansal. Both have been the employees of Amazon and thus decided to replicate the same e-retailing model in Indian market space. Initially, their idea behind starting this venture was to sell books online and eventually they came up with their own website called ‘Flipkart.com’. This idea received great appreciation by consumers in India. This provided the company the initial boost and rapid growth. Started just few years ago, Flipkart is considered one of the early entrants into the Indian e-commerce industry. But Flipkart is currently the largest online bookseller in India and hence called as "Amazon of India".

Customer satisfaction has always been the priority for Flipkart and they have frequently come up with innovative promotional offers. It has warehouses in Mumbai, Kolkata, Bangalore, Chennai, Delhi, Pune, Noida and Kochi to serve the customers efficiently and has offices in 8 cities across India. As of June, 2012, Flipkart had 4,500 employees on board. Flipkart was concentrating on only books during the initial few years, but now they have extended their portfolio to sell other items including electronic gadgets and mobile phones. In 2010, Flipkart acquired "We Read", an online book reading community and social book discovery tool to help customers make purchase decisions based on recommendations from social groups. Flipkart acquired Mime360, a digital content platform company and Chakpak.com, a digital music catalogue company in 2011 helping them extend their product portfolio in digital content. But with the acquisition of Letsbuy.com in 2012, Flipkart showed signs of becoming a major online retailer in electronic products. Flipkart integrated Letsbuy.com with its operations and closed the website while directing the customers to Flipkart website.

Though majority of the Flipkart business is still through the sale of books but it is slowly moving towards the segments of electronics, home and kitchen appliances, fashion and lifestyle segments. Out of the unique customer deliveries made during the December 2010 to March 2011 period, almost 91% of them were books.

6.2 VRIO FRAMEWORK

We accomplished the VRIO analysis of Flipkart so as to better understand the current status of different factors of Flipkart as for an organization [14] . The summary sheet of the same is produced as below:

Resources

Valuable?

Rare?

Costly to imitate?

Exploited by the organization?

Competitive implication

Corporate culture

Yes

Yes

Yes

Yes

Sustained competitive advantage

Computing capacity and data mining mechanisms

Yes

No

Yes

No

Unexploited competitive advantage

Warehousing capabilities and inventory

Yes

No

No

Yes

Temporary competitive advantage

Procurement system

Yes

Yes

Yes

Yes

Sustained competitive advantage

Shipment

Yes

No

Yes

Yes

Competitive parity

Most of these strengths are sources of a sustainable competitive advantage. It is therefore possible to assume that Flipkart’s internal strengths, combined with its willingness to wait for seeds to develop, long-term earnings potential are very-high.

6.3 FLIPKART MODEL ELEMENTS

Profit because of Economies of scale of business

Growing market

Increased sales

Improved efficiency of SCM due to help from Flipkart

Convenience of shopping

More options of products

Convenient Payment option

Stakeholders

Suppliers

CustomerMain components of Flipkart business strategy are analyzed below:

Value Proposition

Marketing Strategy

Directed towards becoming major player in Indian retail market

Differentiation through low cost and faster delivery time

Online product catalogue model

Margins shared across the complete value chain (supplier, Logistics)

Revenue Model

Online Portal

Ease of Use

Site Navigation

Payment Modes

Display of products and features

First Mover Advantage in India

First alternative for bricks and Mortar Model in Book retail

Market Opportunity

Companies selling similar products and similar services

Very High Competition

Competition

6.4 SALES PROCESS OF FLIPKART [15] 16

The role played by various teams and systems in the sales process of Flipkart is explained below –

WEBSITE - Flipkart website allows customer to place online order for the product. Customer can see the price and expected delivery time for the product. Flipkart has ERP system implemented, which takes care of the payment and order management.

ORDER MANAGEMENT TEAM - This team is responsible for informing the customers about their purchase and the expected time require to deliver. This team also works as a bridge among all others teams. Customer gets updated about the shipping details. Order is closed only after the customer is received the product.

WAREHOUSE - Warehouse stores not only inventory but are responsible for procuring the product from supplier or vendors, updating the inventory details and same to the CPT so as to update information on the website. Right from incoming order to dispatching through couriers are handled at warehouse. Flipkart uses different kind of packaging to differentiate between prepaid or cash on delivery.

PROCUREMENT - In the case of non- availability of a product in inventory (which could be the case for rare title books or non-book items), and then the CPT (Central Procurement Team) is contacted and asked to procure it. The CPT routes the order to concerned RPT. Flipkart is associated with more than 1000 suppliers of various sizes. Flipkart seek to have frequent updates from the major suppliers about their stock updates. Around 70% of the orders are fulfilled from the inventory, for rest of the orders procurement is required. Following are the departments involved in procurement process.

Role of Business DEVELOPMENT (BD) team

Increase vendor network through meeting with vendors and suppliers.

It also does vendor development

Resolution of issue arising between procurement team and vendor.

Regional Procurement Team

With the kind of their interaction and negotiation with the vendors, they may also be called as the "Face of the Vendor". They enable the crucial part of procurement from vendors to replenish warehouses.

This team is responsible for the data management of information on books shared by the vendors. Vendors key information of their current books stock and other inventory and transactional details through e-mail which are subsequently fed into ERP system by the team.

The team is also equipped with separate field team whose main job is to collect vendor data, ensuring books availability at different vendor location, exploring opportunity to add new vendors to Flipkart system, and carrying exhaustive search in the market for availability of books not currently available with any of the vendors for which demand is available.

Central procurement Team - Their responsibilities are similar to those of Regional procurement but they do this on national level. The company also has one international procurement team which is responsible for international vendor management.

SHIPMENT - The product is packed and shipped through the courier of customer choice. Flipkart has its own in house courier system called as Flipkart logistics. This has been an important trigger to improve upon the SLA. Flipkart provides 30 day return policy to customer. Flipkart do not charge extra for this and ensure the replacement of the product.

The sales process of Flipkart is explained below through a Flow chart. It explains the different processes involved in the sales process starting from the order being placed by the customer to the end when customer receives the order –

flipkart-sales.jpg

6.5 EVOLUTION OF SALES & DISTRIBUTION MODEL OF FLIPKART

Flipkart started with very basic distribution channel which used Courier services and Speed post for its operation. As demand through online channel was very limited, they followed a ‘Procure and Deliver’ strategy (Also known as Drop Shipment Strategy) which was causing delivery delays of around 7-8 days. Similarly, cause for less online ordering was found to be reluctance on customers’ part to make online payment.

In April 2010, they came up with Cash on Delivery Payment model which got huge response from customers but that came up with few challenges like late collection of payment and safe delivery of products. Then, came the idea of starting Flipkart’s own courier system and rollout of it started from Bangalore where Flipkart Self-Delivery services became operational. Currently, around 50% of the products are shipped through in-house courier. Demand for the products increased drastically starting from 2009 and need for inventory management became a priority for Flipkart. Till late 2009, they had only one warehouse in Bangalore. After 2010, they established warehouses in cities like Chennai, Mumbai, Delhi, Kolkata, Noida, Pune and Kochi.

In 2012, they have expanded their product category to include consumer electronics like TVs, refrigerators, home and kitchen appliances. These items cannot be delivered by Flipkart directly so they have come up with an arrangement with local suppliers of these items in selected cities. In this arrangement, customer books an item online and the delivery is done by the local supplier directly.

Flipkart had also started flyte; online music store which is new innovation in e-commerce as far as India is concerned. Now, via this store they are selling music with perceived support from music producers on account of reducing piracy of music. This service is similar to the iTunes online music store. Flipkart had also acquired companies to strengthen its position in market and able to diversify in new markets. They acquired mime360 and chapak.com in 2011 to start the flyte, online digital store. [17] They also acquired Lets Buy to expand their consumer electronics space. Letsbuy was closed and its business was integrated with Flipkart’s business. This integration helped Flipkart to expand to the categories of Fashion, Lifestyle and Electronics.

6.6 IMPACT OF FLIPKART MODEL ON COST

Following are the major costs incurred in the business model of Flipkart -

INVENTORY COST

Inventory cost is certainly less than that of a physical store. Since inventory is aggregated in few geographical locations, the inventory cost is low. The benefit of inventory reduction by aggregation is lesser for high demand books with predictable demand, but significant in the case of low-demand books with demand uncertainty.

FACILITY COST

Being an e-business model, the facility cost is less than that of physical store. As demand has grown, Flipkart has opened their own warehouse where it stocks books and non-book items. They are also planning to open some more warehouses in the upcoming months in cities like Pune, Guwahati etc. Hence, with increase in the business facility cost will increase further.

TRANSPORTATION COST

This is the only component of cost, which is higher than that of traditional retail store. Since Flipkart has to ship the book to customer and they bear this cost by giving free delivery to customers, it increases transportation cost. Transportation cost is the significant portion of the overall cost of a book. With inclusion of in-house courier the transportation cost has increased further. With more number of new warehouses opened, transportation cost will reduce at the expense of facility cost. Also Response time will get reduced.

INFORMATION COST

The information cost is required in notifying the customer about the product. Flipkart ERP system is updated and efficient. Information flow is also important for Flipkart along with product flow. Continuous tracing of products is significant for resolving issues if any, as soon as possible. It is also useful in keeping customers updated about the exact position of the product in the channel. They also have ERP on call team which is available 24x7 to support the system.

INSURANCE COST

Flipkart insures Non-book expensive items against the damage during delivery process. With Flipkart expecting 50% of sales through non-book items by FY2012, insurance cost is bound to increase.

6.7 FLIPKART VALUE PROPOSITION

Businesses frequently use the concept of a value proposition to characterize the combination of end result benefits and price to a prospective customer from purchasing a particular product. A customer will choose the competing product, or no product, that offers the best value, meaning the best combination of benefits and price. Along with value proposition to customer value proposition in complete value chain has to be studied including suppliers and stakeholders. We will be analyzing Flipkart value propositions for its customers and suppliers.

CUSTOMER VALUE PROPOSITION

Flipkart was the first mover in online books retail business and this provided them with the opportunity of satisfying untapped need of ‘Shopping Convenience’ of Indian consumer. Hence shopping convenience and enriched experience was the sole value proposition for the customer when Flipkart started its operations. But gradually they understood that customers were reluctant to pay online and in April 2010 Flipkart introduced ‘Cash on Delivery’ and created value proposition for customer by providing convenient payment option. Variety and large number of products to choose from online product catalogue is another value addition customer gets by shopping through Flipkart.com.

Following are few benefits that customer gets by purchasing form Flipkart -

COST BENEFITS: Flipkart provides large variety of options from which customer can choose and provides competitive prices for the product. Many of the products have discount up to 35%, hence price sensitive customer find it beneficial to buy from Flipkart.com.

FREE SHIPPING: Flipkart provides free shipping of products which provides customer convenience and reduces cost of purchasing product.

30 DAY REPLACEMENT GUARANTEE: This provides customer with opportunity to test the products and in case of any defect product gets replaced immediately. Representative from Flipkart collects it from customer from his premises and again makes the delivery. This facility is not provided by Bricks and Mortar model.

GIFT PACKAGING: Customer can order their products with customized gift packing which enables to send products as a gift to friends and relatives.

SUPPLIER VALUE PROPOSITION

In line with Flipkart's pursuit of its low-cost strategy, Flipkart historically chose to maintain relations with multiple suppliers for each product in each region. This enabled Flipkart to increase competition amongst its suppliers and to strike deals with them to source items at costs lower than its competitors. Flipkart did not focus on maintaining long-term contracts with select few as this would have meant compromising on its terms to meet those of the suppliers. Also, during the initial stages of the e-commerce industry, vendors were skeptical about the organizations coming up in this space.

Flipkart has established itself as a major player in ecommerce market and looking at the growth of business in last few years, suppliers are feeling confident while doing business with Flipkart. Following are some of the benefits suppliers enjoy while doing business with Flipkart.

INCREASED SALES: Flipkart business is based on economies of scale and hence many products should be displayed so that a customer gets large options to buy from. Suppliers have found new business opportunity with the advent of ecommerce retail business and hence sourcing products to Flipkart has increased their sales significantly.

LONG TERM BUSINESS: Flipkart’s business model is based on quick delivery of products and hence they try to reduce the shifts between suppliers. Hence this provides opportunity for suppliers to enter into long term contract with Flipkart which ensures longevity of business.

IMPROVED SUPPLY CHAIN EFFICIENCY: Flipkart follows very unique model of establishing Collaborative Networks with their suppliers. This strategy can very well be seen when Flipkart builds IT solutions for their suppliers and helps them improve supply chain efficiency. This benefit can be leveraged by supplier while supplying products to the other customers.

6.8 ISSUES AND RECOMMENDATIONS [18] 19

Sl. No.

Issues

Recommendations

1

Improper optimization of transportation costs:

In the case of orders involving aggressive inventory assignment, mostly a trade-off is made with higher transportation costs in order to increase inventory turnover and hence to reduce inventory holding costs. This leads to high transportation costs whereas neglecting the scope for local procurement and delivery with lower transportation costs.

There should be automated software-based mechanisms to map the procurement costs, inventory costs and transportation costs related to different product categories on a geographic basis for enabling an efficient process of cost optimized inventory assignment.

2

Low inventory utilization:

The average inventory utilization of about 75% is quite lower than the targeted figures of around 90% for Flipkart which is benchmarked based on industry standards. The figures also vary widely across different product categories affecting the respective margins.

The inventory utilization could be increased through proper demand forecasting and inventory planning across different product categories and also on geographic basis.

3

Inadequate Geographic Coverage:

Geographic coverage of Flipkart’s services requires proper inventory planning and management.

It needs to plan and balance inventory to reduce the need for costly rush orders or out-of-stock situations. Proper inventory planning will reduce the costs of transportation as well and enable Flipkart to cost effectively respond to the needs of customers in different geographic locations across the country.

4

Lower margins due to uniform SLA:

Currently, Flipkart provides uniform SLAs for delivery across the country. Be it in metropolitan cities or far-away corners of the country, the SLA on the website remains the same. In order to adhere to this the company has to bear high transport costs which affect the margins.

The company should try to provide SLA based on the geographical location. They should use the location of the customer as an input and incorporate the transport cost while providing the ETA for delivery. This will help the company improve its margin and also better on-time delivery record and will result in customer satisfaction

6.9 BENCHMARKING OF FLIPKART AGAINST AMAZON

The performance of Flipkart depends on various factors as given below. Comparing the performance of Amazon and Flipkart based on how they have leveraged the advantages of e-business model yields the following results.

RESPONSE TIME – more for Flipkart as they have low warehouse concentration than Amazon

PRODUCT VARIETY – Flipkart have less variety compared to Amazon

INVENTORY – less product variety reduces the cost of inventory management in Flipkart

TRANSPORTATION – low warehouse concentration and free delivery policy of Flipkart makes the transportation costlier in Flipkart.

CUSTOMER EXPERIENCE - Amazon has Recommendation system and customer review system which suggests customers about the products based on their previous transactions and helps in improve the credibility respectively. These processes are not available in Flipkart currently

Benchmarking of Flipkart against Amazon

S.No

Factors

Impact on Amazon

Impact on Flipkart

1

Response time

-1

-2

2

Product variety

+2

+1

3

Product availability

+1

+1

4

Customer experience

+1

0

5

Time to market

+1

+1

6

Flexible pricing, portfolio, promotions

+1

+1

7

Efficient fund transfer

0

0

8

Inventory

+1

+2

9

Facilities

+1

+1

10

Transportation

-1

-2

11

Information

-1

-1

RECENT TRENDS IN E-RETAILING IN INDIA

Below here, we have enlisted some of the

LAUNCH OF COD (CASH ON DELIVERY) FACILITY BY INDIAN E-RETAILERS

This is a new mechanism that was introduced by Indian e-tailing companies especially to suit the needs of Indian customers. Most of the Indian customers are skeptical of transacting online. This deficit of trust and fear of losing money in online frauds has hindered their desire to purchase online. COD specially caters to such customers as in this mechanism cash is paid to the delivery boy at the time when actual delivery is done at the door step. This has significantly boosted the e-commerce business in India and all major and even small players now offer this facility. As per estimates, 40-60% of Indian customers prefer to order through COD even though they possess either debit or credit cards. [20] However, COD has also eroded the margins of the companies owing to high rejection rates by customers, multiple trips required for delivery, margins charged by intermediate courier companies, and late realization of cash as it is a complete postpaid mode of transaction. [21] 

‘DROP SHIPMENT’ MECHANISM OF PROCUREMENT

Drop Shipment refers to the procurement mechanism being adopted by many e-commerce companies especially the start-ups. In this method, companies procure the items from wholesalers only once the order has been placed. This eliminates or reduces the costs of inventory space and inventory management. However, this method also incurs the additional delay in delivery due to the time spent in procuring the item from the wholesaler or distributor. This provides the seller an opportunity to list large no of items on website without any exposure to significant risk.

ENTRY TO FULL-BLOWN MARKETING CAMPAIGN

Indian E-commerce market has been heated up with the news of the probable entry of global giant Amazon to Indian E-retailing Space. This has prompted Indian e-retailing players to grab as much customer share as possible and develop a loyal set of customers so that they can retain their position and make use of their first mover advantage even if Amazon enters to India. Flipkart has already launched a no of Television advertisements which have caught the attention of Indian consumers while others have stepped up in interacting with customers through newspapers, web advertisements and email campaigns.

EXPANSION TO TIER-2 AND TIER-3 CITIES

Though traditionally only Tier-1 cities netizens were considered to be the main target market for e-retailers but recently Tier-2 and Tier-3 cities’ customers have been attracted to e-retailing shopping. This may be attributed to the strong expansion of internet facilities to these cities and also the unavailability of quality products at affordable rates in these cities which can easily be procured through online shopping now.

EFFECTIVE USE OF SOCIAL MEDIA (FACEBOOK, TWITTER ETC)

Since all the customers af e-retailing sector are netizens and have sound knowledge of internet, therefore there is very high probability of their presence on Social media platforms like Facebook, Twitter, Web-blogs, Pinterest, YouTube. Therefore e-retailing companies have stressed a lot so as to interact with their customers through Social Media Portals. Flipkart over 5 years accumulated a total of 12 million likes for its Facebook page but Amazon’s newly launched website Junglee.com surpassed it within 9 months which have already garnered more than 15 million fans on Facebook.

MERGERS AND ACQUISITIONS ARE ON ROLL: MOVE TO CONSOLIDATION

A lot many companies emerged in the space of India e-retailing business which is still in the stage of infancy. This led to strong competition and erosion of margins. This led to the process of mergers and acquisitions. Flipkart acquired Letysbuy.com and integrated it to its website thereby increasing the product portfolio and also customer base. It further acquired Chakpak.com and Mime360 so as to build up its own music portal with the name of Flyte. Similarly, the trend of Consolidation is up with other e-retailing portals too.

NO FDI ALLOWED IN E-RETAILING SECTOR

Recently government opened the Indian retail sector for foreign players with some riders. However, it clearly stated that this will apply to only Brick and Mortar Stores and not e-commerce stores. This is because the e-commerce sector in India is not yet fully developed and also regulated. Recently there have been a lot of efforts from India e-retailing firms for opening up the sector so that they can get much needed investments while Amazon has also initiated efforts so that it can well come in India at right time to consolidate its base in Indian market for long term.