Risks to E-Commerce Companies

Risks to E-Commerce Companies

E-commerce has been expanding rapidly in India at an unprecedented rate due to multiple reasons. With this fast growth, many of them are vulnerable to several types of risks, which can be categorized broadly into:

1.       Financial Risk

a.       Profitability/ Business viability/ Sustainable business model: Many of the e-commerce start-ups have either shut down their operations or finding difficult to sustain in the market due to their models of heavy discounts, bombarding customers with unsustainably priced products, etc. They are bleeding and running with several rounds of funding with the hope that one day they would be able to make money. Many of the critical financial ratios would be negative for several e-commerce companies and long-term sustainability itself is a big question-mark.

b.      Credit Risk: Many purchases of high-end products by customers are based on credit (like EMI). If these customers default or delay payment, the resulting NPA might be added to operational cost of the company, leading to losses.

c.       Inflation/ Price-adjustment Risk: The prices of many products might change while the stock is lying in the inventory. E.g. fast-moving technology products like mobile handsets keep on updating models/ features. In such cases the previous models have to be sold at lower prices.

d.      Exchange-rate fluctuations: Many e-commerce platforms sale imported items. In case of fluctuation in exchange-rates, their profit-margins might be severely affected.

e.       Fraudulent transactions: On several occasions e-commerce companies have suffered losses due to either fraudulent transactions.

2.       Customer Related

a.       Product Return: Most product returns (due to genuine reasons such as apparel size mismatch or misuse- such as wearing a party wear in an event and then returning or reasons such as “the product did not match the website descriptions”) cost heavily to e-commerce companies in terms of return-courier charges, banking charges (returning the money paid) and putting the fresh product into open-box/refurbished sale.

b.      Delivery Refusal: Some customers refuse to take the delivery of products (by citing any reason), which add to losses due to packaging and shipping costs incurred by e-commerce companies.

c.       Product Exchange: In some product categories (such as apparel), product exchange is inevitable though it increases cost and overuse of this feature is a big risk to companies.

d.      False Claims: There have been cases when customers have received products in good condition, damage it within return-window and claim that they had received damaged/ defective products. Increased misuse of this is a risk to e-commerce companies.

e.       Mismatch in service delivery and expectations: Customer reviews influence the sale of several high-involvement purchase products. Hence a mismatch in service delivery and customer expectations could be a big risk to e-com companies. Negative product reviews/ social media propaganda affect the e-commerce companies quite badly.

3.        Logistics/ Warehousing

a.       Damage during shipping: Certain percentage of products/ packaging are damaged during shipping/ transit which is a risk that e-commerce companies have to minimize through devising more efficient systems.

b.      Delayed delivery: On-time delivery is one of the most important criteria for e-commerce companies to succeed in highly competitive industry. They cannot afford to bear the risk of delayed deliveries beyond a certain percent.

c.       Out of Stock: There is high risk of losing reliability if customers find on many occasions that the products they have searched and wanted to order is out-of-stock.

d.      Mis-delivery/ Delivery to wrong person: This is one of the common risks e-retailers are facing,.

e.       Product expiry/ outdated product: If inventory is not managed well with FIFO or similar concepts, there are high risk that certain products are either expired or become outdated.

f.        Theft/ Cheating by delivery boys: Despite using advanced technologies, there have been instances when delivery boys have been found cheating with the companies/ customers. Recently food-delivery company was in bad news due to similar act by one of its delivery-boy. Companies need to minimize such risk.  

4.       Merchants

a.       Fake/ duplicate products: With millions of products selling through marketplaces like Flipkart, Amazon, etc. it is extremely difficult to ensure that all products being sold are genuine/ authentic. One of the key reasons for companies like Snapdeal to fail is inability to control sale of such products through their portal.

b.      Delayed shipping: Several merchants are unable to take the load of timely shipping, particularly during festive-seasons or high-demand seasons. These delays by merchants shake the reliability about the brand among the customers.

c.       Illegal/ unacceptable products: Companies have been found selling products those are culturally shocking, e.g. last year Amazon was served notice as one of its merchant was selling foot mat with tri-color on it.

5.       Web-Attackers

All e-commerce are prone to the following risks:

a.       Phishing

b.      Credit Card fraud

c.       Unprotected online services

d.      Hacking of customer data

e.       Data errors

f.        Customer data security

6.       Competition

a.       Competition from Offline retailers: Offline retailers like Big Bazar in India, Best Buy in USA pose a big threat to e-commerce companies as they are both able to manage the pricing, discounting model and offer the advantage of being able to test the product before buying.

b.      Imitation: Since anyone can browse through all the product-categories of e-commerce portals and can see all the specifics like the product quality, price, merchant, etc. it is easier to copy the product line and width and stock similar items on their portal.

c.       Lack of feel and touch: This is still one of the biggest risks the e-commerce companies face, especially in categories like apparel, eyewear, etc.  

7.       Environmental, Legal and Others

a.       Brand Ambassador: Wrong timing of the brand being endorsed by certain celebrity has also caused big risk to certain brands, e.g. when Bollywood star Aamir Khan was in news for all the wrong reasons, it affected brand-affinity of Snapdeal negatively and several of its loyal customers started boycotting the brand itself.

b.      Environmental risk: E-commerce companies use packaging material such as plastic wrappers, hard-paper, etc. very heavily for packaging and shipping. It is a big environmental risk to them as well as to the eco-system.