Inside the air conditioned conference room of a Five star hotel in Chennai, over 20 electronics sellers sat across the table from nearly a dozen vendors talking about an issue that is increasingly making life difficult for them: Online sellers like Flipkart and Snapdeal are selling products on a heavy discount, posing a serious threat to their livelihoods.
“For the past few months we have been facing a threat from the online portals,” says Muthiah Pillai, an offline retailer who has been selling electronic goods in Tirunelveli for the last 20 years. The past few months have become increasingly difficult for his business.
Offline sellers like Muthiah have not been able to match prices being offered by online portals. “They are mainly betting on the price difference. Our community has been in this industry for 20-25 years,” he said.
Recently, the Confederation of IT Associations, the 1200 distributor network strong association conducted a meeting that called on the regional heads of various electronic majors of the country to tackle what they call “unethical practices by online players.”
The offline channel partners complain that online companies project electronic products at 10-15% lesser than their MRP, compared to the discounts allowed by the vendors to them.
The problem has not just hit the smaller players but also bigger players like Croma. According to sources, last Diwali for instance, Flipkart sold more electronic goods than offline retail chain Croma. The smaller sellers and offline distributors also saw their sales dive during the festive season.
“In the festival season last year – during Diwali and Dussehra, we saw a 30-40% decline in revenue because the majority of the sales was taken by the online players,” says Muthiah, who is also the president of ConfedITA.
By skipping local taxes and employing resellers who are willing to forgo margins, online players have been wooing buyers hard, allege the offline sellers. Over a third of the $1.75 billion e-tailing business in the country is made up of sales of electronic goods. This is also the category in which vendors’ official offline channel partners are seeing red.
Online portals have a practice of skipping local tax. Our I.T products are covered under the 5% and 14.5% VAT slabs. Usually the online products route the products through different states. If you order it from Chennai, they’ll route it through Mumbai and directly bill it to the customer.
While he agrees that it is technically a reasonable and acceptable move, he says that it should not be used for reselling of goods.
Most E-commerce companies that now operate online marketplaces unwittingly employ resellers. Offline channel partners claim that anyone can be a reseller. There is no system to verify if a person is part of an authorised distributor network, or is a reseller who decided to go online overnight.
Pragya Singh, Associate Vice President, Retail at consulting firm Technopak says:
It’s possible that a small time dealer who isn’t necessarily authorized, got online and started selling goods. It’s unauthorised and it’s reselling, beyond the first level of authorised distributors.
Customers caught in the crossfire
In India only 0.5% of the $500 billion retail industry is online. With a majority of their business still happening offline, companies cannot afford to ignore the offline channel partners who are still a key source for the promotion and distribution of their products. The companies soon went into damage control mode and started issuing advisories against e-commerce companies.
It is the customer who got caught in the crossfire.
In September last year, Nikon removed Flipkart and Snapdeal as its online partners. In the past few months, Lenovo, Toshiba and Canon have taken similar steps. Lenovo de-authorised Flipkart, Snapdeal and Amazon and cited that customers may not be eligible for warranty on these products.
It has come to our notice that some of the online stores and marketplaces are selling Lenovo products at heavily discounted prices. Our observation is that these may not be Lenovo authorized resellers . Keeping our end customer’s interest in mind, we have accordingly issued an advisory on our website.
Canon too followed suit. It released a list of authorised online sellers for its printers on sites that include Flipkart, eBay and Amazon India. The company is also mulling extending warranties for those buying from offline retailers in a move to balance out the online-offline equation.
All this has created a lot of confusion in the customers mind. Will companies honor warranties for products bought online, seems to be the most important question.
Online retailers were prompt with their rebuttal to companies’ de-authorising them. Amazon, Flipkart and Snapdeal stated that all products bought on their website were genuine.
We can assure our customers buying Lenovo products on Flipkart that they are genuine. Customers will continue to enjoy the warranty and services extended to all original Lenovo products as always.
With the announcement, one thing was made clear. As per Government law, no company can deny warranty so long as the product being sold is genuine.
“That is why we haven’t used this as an issue in the vendor committee – Confed ITA meet. We cannot ask them to stop warranty, unless it is coming in through a parallel import or smuggled goods or something like that,” says Muthiah. He explains that it is easy to track the source of a product, and identify its authenticity owing to the serial numbers attached to it.
“It is easy to track down wrong-doers through the secondary sales data with the serial number. In the same way if the vendor is keen on stopping this, they can eliminate the channel. They have to eliminate the root, there’s no point in penalising the end customer,” he adds.
Where a Grey Market Lurks
With the number of complaints received rising massively, the Cyber Police of Bangalore sent the following message to subscribers of Airtel:
Pls be careful when buying goods from online portals placed by others as you may be cheated by fraudsters – Cyber Police, Bangalore
There are many explanations being given for methods in which prices are being undercut. One is through routing VAT through cheaper states, the other is through the selling of goods procured through parallel markets.
“If any of my customers have a problem with their product, they can come to my doorstep and claim their dues. In online trading, the billing product is in Mumbai. Fine. Customer is buying a branded product, no doubt. Sometimes when they go for warranty, they will be denied it because it does not stick to our system,” he said.
Offline sellers have given a 15 day ultimatum to hardware makers to form a clear online policy. They have asked vendors to meet 3 demands – maintaining price point disparity, declaration that vendors won’t be allowed to quote predatory pricing, and the appointment of an ombudsman who will be a vendor representative.
“We will stop promoting products of those who do not represent themselves through an ombudsman,” say Muthiah.
What Vendors Said
Vendors from Acer to Lenovo and Toshiba have taken the following action already.
Acer – issued warnings to those who indulge in unfair trade practices, doesn’t have direct engagement with online portals. They have a day-to-day vigil on the portals and those selling below MOP.
Lenovo – Issued legal notices to erring partners, is reworking agreements with T1 & T2 partners.
Canon – Has direct engagement with Flipkart, not Snapdeal who undercuts Canon’s products. Will come up with a clear online policy in the next few days. There will be a policy on usage of Canon brands for online portals akin to a 20% tax on online sales present in a few countries.
Dell – Dell billing price to any online store to be higher than price billed to channel partners.
Toshiba – no engagement with online portals, does not authorise any of them. As a policy, Toshiba only supports offline channel partners.