Encore of the dotcom bust?

During the past few years India has a seen a mushrooming of “dotcoms”, especially of the B2C (business-to-consumer) e-commerce type.

Almost every conceivable consumer product seems to have a few dotcoms selling it these days. In a market that’s getting more and more crowded with little differentiation between competitors other than price, surprisingly, there seems to be no stopping the new entrants.

What’s interesting is that the players are resorting to traditional media such as TV and print to break the clutter and make themselves visible; isn’t that a bit ironic?

Learn from history

It definitely seems like a

déjà-vu of what happened in the US in the 1990’s. One would expect a few lessons to have been learnt from the earlier dotcom boom, since it was followed by a rather nasty burst, but apparently not.

Market participants seem to believe that this time it’s different. In the world of brick and mortar retail, a few key factors that customers use to decide where to shop are: Location (proximity), comfort, price and product range.

In an e-commerce model, all stores are equally accessible and comfortable from a customer standpoint; so, that leaves price and product range as key factors.

Larger multi product stores are likely to offer lower price and larger variety. That’s why players like Amazon have succeeded, while many smaller, single product e-commerce rivals have had to close shop in the US.

Of course, even the successful players required long periods of continuous investment in building scale, without any free cash flow.

Another pertinent lesson that I believe came out of the previous dotcom bubble was that there are some products/services that are just not viable to be sold online or at least there is no significant value addition perceived by customers compared to offline model, for example, the groceries experiment by Webvan.

Optimism and Risks

This does not seem to deter entrepreneurs who come up with start-up ideas for new shopping portals (which sound very similar to the old ones that bit the dust) and VC funds who are willing to back them by paying premium valuation to get in.

Everyone seems to believe that their dotcom would be the last man standing in this highly competitive industry that is bound to undergo consolidation sooner or later.

There are a few aspects that make the e-commerce business a tempting opportunity to latch on to, such as low entry barrier and instant access to a national/ international market.

But the challenge is in retaining customer loyalty, especially given the transparency in price comparison and promotional offers across stores.

Success Models

There is a reason behind the success of Walmart and Cosco in the brick-and-mortar world that may be worth studying for success in the online world as well.

From Jeff Bezos’s experience, being a large online store that offers a wide cross-section of products under one roof, helps retain customers through better schemes and offers better prices through effective bargaining with suppliers.

Also, the shop-in-shop model, where smaller retailers can directly sell on a portal like Amazon, makes it attractive for niche product companies as well.

The ability to track customers, offer targeted discounts based on customer profile and enable them to avail attractive offers through cross-promotions has proved very successful for Amazon.

Regular brick-and-mortar stores that have an online presence as an auxiliary/value add for their customers may still thrive since they already have an existing customer base which they are catering to and do not depend on online customers alone to generate income.

However the small/medium standalone online stores offering a limited set of me-too products could find it hard to sustain their business.

That is, unless there is something that can significantly differentiate them from their larger peers which already have first-mover advantage and have gained scale.

Differentiators

Today, the Indian retail e-commerce industry seems to think that having dedicated shopping portals that focus on a specific product categories (such as jewellery, shoes or bags) is a novel concept they bring to the table.

wonder if this is indeed a differentiator that is valued by the customer or something that would enable such players to compete better against rivals that offer much more products under the same roof.

During the height of the dotcom boom, there were standalone dot-coms that focussed on all things including baby diapers, but we all know what happened to them.

(The author is a business consultant. The views are personal. Feedback can be sent to perspective@thehindu.co.in )