The story of Indian E-commerce portals

e commerce

Diwali Shopping had been an age-old custom for all Indian families. The festival of lights is also the time of year when shops record maximum visitors and sales. The shop owners anticipate and plan months ahead for Diwali season. The interiors and exteriors of the shop will be grandiosely decorated and new products will be lined up to attract customers to the store. The trend hasn’t changed much this year as well, except that the retail stores recorded maximum footfalls without revenues. The footfalls to revenue ratio started dipping despite huge discounts offered to buyers.

A major portion of this effect is attributed to customers visiting physical stores only to compare the products and prices so as to buy online. A few other buyers push the sales person to sell at lower than dealer rates for the on-store products. That meant the products are sold over and above the discounts in-order to complete the targeted sale. It is not because of the decrease in shopping interest; also not because of increased confidence of the customer; not even due to competition as well; but due to dawn of E-commerce marketplace portals (aka etailing) in India, which is slowly capturing the market and mind share of the Indian youth. How do these portals manage to sell products on profit? Is this E-commerce trend a fad or a revolution?

India represents a $3.5 billion E-commerce market and growing at around 60-70% every year. This still constitutes only 4% of the total retail market (source: Gartner). The mobile commerce constitutes around 5% of the total digital commerce. The future of the E-Commerce industry is promising as this market is said to reach $6 billion in 2015 and likely to grow at a rapid pace. These figures are possible by increased access for consumers to internet through broadband and mobile data connectivity. The market potential thus provides space for newer E-commerce companies to start business as the competition is not in just capturing the market share but also to increase the overall market size of E-commerce. The “Big Billion Day” sale by Flipkart and Diwali sale offers from Amazon and Snapdeal are just an indication of the trend that is expected in the future of E-commerce in India. So is everything rosy about these E-commerce companies?

Amazon had been in this E-commerce business for nearly two decades and hasn’t booked any major profits till now. While the $75 billion revenue generating machine continues to make major investments in emerging markets like India; it also exhibits record losses with the recent one at $437 million. The same is true with the Indian Amazons like Flipkart and Snapdeal.  Flipkart,which pegged itself at $7 billion,records an accumulated loss of Rs.281 crores(source: Business Standard Report) in its balance sheet for the year ended March 2013. Snapdeal reported a loss of Rs.264.6 crores for the year ended March despite five times jump in revenue to Rs.168.1 crores in 2013-14 (Source: livemint).  The losses are attributed to lower margins and heavy discounts offered on the products. The investments do not seem to stop either: with Flipkart raising $1 billion, Snapdeal with $233.7 million and Amazon with a massive $2 billion for the year. Huge loss at one end and huge investments at the other may defy the business logic of any regular investor, but the story is set to continue for next few years as well.

“We believe India can produce a USD 100 billion company in the next five years, and we want to be that. Whether it takes 5 or 10 years, we are here for the longer-term,” Flipkart co-founder and CEO Sachin Bansal told CNBC-TV18 after the fund raising.

With increased infusion of Internet in our day-to-day lives and increased market for smart phone-backed Internet, online retail sales are expected to cross the $30 billion figure within the next five years (Source: Moneycontrol). The etailers had also gained the trust of the customers with transparent door delivery process, newer payment models such as cash on delivery and easy return policies. These options were not available for the regular customer in the brick and motor shops. The E-commerce companies also cater to the tech savvy Indian youth, who are impatient and wants to shop at their convenience. This trend will only move upwards, as we expect increased adoption of data in smart phones across the country. The valuations for these companies are not based on sales, but on Gross Merchandise Value (GMV) i.e. the value of goods sold on the site. Hence the investors are even ready to digest huge losses recorded by these companies in an effort to raise a golden goose.

The top-line of E-commerce portals seems to be over the hills while the bottom-line is well under the deep oceans.

*This article was reproduced from my post in news magazine.