Wednesday, February 18, 2015

Flipping the kart

Thought for the day
"There is nothing so strong or safe in an emergency of life as the simple truth."
-          Charles Dickens (English, 1812-1870)
Word for the day
Sinecure (n)
An office or position that requires or involves little or no responsibility, work, or active service.
(Source: Dictionary.com)
Teaser for the day
For those who are overexcited about Delhi results - please note that BJP did not get simple majority on his own in Maharashtra, Jharkhand and J&K.
So what's the big deal!

Flipping the kart

While assessing the political mood of Delhi post exit polls I had a chance to meet group of traders in Delhi. Though mostly in their 30s and 40s, almost all these traders belonged to families which have been engaged in trading business for more than two generations.
Though the subject of discussion was Delhi politics, it somehow took a turn towards the existential threat this group perceives from the phenomenal growth recorded by e-retailing business in India.
All the members of the group felt that the core of the e-retailing business in India lies is the ability to sell cheaper than traditional retail. Convenience, more choice and greater accessibility are supporting factor, but "price" remains the key factor. Nonetheless, most of them have joined the bandwagon as supplier.
I am no expert of retail business in the country. But if the views of these experienced traders are any indication - e-retailing is fast turning India into a traders' and arbitrageur's economy. This is not congruous with the objective of the government to promote manufacturing in the country.
From my little knowledge I understand that e-market places would continue to need huge capital for investing in technology and delivery infrastructure. Given their business model of negative operating cash flows for a considerable period of time, debt may not be a viable option. So these ventures will obviously be high equity and low RoE models. Moreover, the business model is also shifting towards independent logistic support and non-exclusive suppliers, lowering the entry barriers.
The current trends suggest that initial investors may have multiplied their investments already, but eventual investor might be stuck with a business that (a) yields less than bank fixed deposit; (b) has low or no entry barrier; (c) owns little in terms of tangible assets; and (d) remains capital intensive forever.
Stretching the logic a little further - as a high volume but low (presently negative) margin business e-retailing shall keep the manufacturers margin under stress. Unless we have huge factories that can produce good quality stuff at really low cost (an advantage enjoyed by Alibaba in China) e-market places would continue to burn cash and keep economy under pressure.
I am trying to understand the "consumer is winner" notion of e-retailing also. If this business model subsidizes the "product prices" through lower wages, rentals, return on equity, quality of product, & traders' margin, with consistently higher viability risk, on the whole consumer may not be a winner.
Though not strictly comparable, we have seen this in power sector. Unviable price bidding for power projects has not benefitted consumers eventually.
I guess, the business so far has grown in a very localized way, without any holistic planning. This is a brilliant tool to handle the problems of accessibility, congestion, competiveness, logistic inadequacies, supply chain optimization etc. But unless it is fully integrated with town planning, manufacturing, Exim trade policy and taxation regime - the outcome may not be optimum.

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