eCommerce in India – A quick feasibility review – Part 2

Please read my previous blog post before you continue reading this one.

(This Part-2 of the article discusses feasibility of eCommerce for distributors (not manufacturers) of branded electronic products, branded apparel etc. I was supposed to write about feasibility of eCommerce for manufacturer; but then I realized that I should first add distributor in this series).

In the previous blog post, I explained the factors a retailer should consider before he goes online. In this article, we will see the feasibility of eCommerce for distributors (NOT manufacturers) of branded electronic products, branded apparel etc.

As we all know, products have three prices.. 1. RP (Retail Price) – this is what the end buyer pays to the retailer. 2. DP (Distributor Price) – this is what retailer pays to the distributor and 3. TP (Transfer Price) – this is what distributor pays to the manufacturer. This is typical tertiary sales model. Distributors (generally) do not sell directly to the end buyer. However, if they sell products directly to the end buyer (eliminating the retailer), they have sizable margin in hand to play with.

So, consider a product, say Arrow Shirt, is priced at Rs. 1995. The DP will be somewhere at Rs. 1700 and TP will be somewhere at 1615 (assuming that retailer has 15% margin and distributor has 5%. This varies from product to product and company to company; however, I have considered average figures). Now, if the distributor is selling the products directly to the retailer, he has 20% or Rs. 385 in hand to play with. Even if he bares free delivery and pays 3% to payment gateway, he has 15% margin in hand. To match the offers on eBay (and similar sites like naptool, yebhi etc etc), he can further share 5% as discount. Every branded company runs schemes for distributors as a part of sales promotion. A smart distributor can bulk-buy products at discounted TP and this adds another 10% to his margin. Now, he is at 20% even after giving 5% discount. This 5% discount factor at least gives him a ground to compete with aggregator eCommerce sites like eBay (and similar sites like naptool, yebhi etc etc).

Applying the same calculations that we used for online retailer, with 20% margin, to reach to the break-even, the distributor needs to make sell of Rs. 1,25,000 in a month through eCommerce website (How – read the previous post, if you haven’t). If average order value is Rs. 5000, he needs to have 25 orders in a month or approximately 1 order per day. This seems achievable? I think yes – to achieve the break-even, this seems possible. However, if a sizable profit is to be earned, sales target is to be much higher. And to achieve higher sales target, distributor needs to spend more on marketing / advertising. Now, the irony comes in picture – you as a distributor will market / advertise a brand which is owned by someone else. This is exactly reverse scenario. Practically (and logically) the company owning the brand should advertise the brand and supply chain should get benefit of such advertising. But a distributor starting eCommerce will land up in advertising a brand which he does not own. Got my point?

Another big hindrance is legality. No company allows its distributors to sell directly to the buyers. This is because such activity may directly affect retailer’s business. If the distributor does not get an official nod from the company to sell its products online, he may later face legal implications and this may lead to closing down the entire eCommerce website. If this happens, he will unnecessarily lose the amount he has invested in building the website – a direct loss of around 1.2 lakhs + the time, efforts the distributor has invested in this venture.

Again, I am not discouraging distributors from going online. But they need to understand these facts before they jump into eCommerce.

In my next blog post, I will discuss about feasibility of eCommerce for manufacturers.

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