E-commerce biz burning cash too fast
It is extremely intriguing to note that companies incurring huge losses for years to gather customers, are selling products at discounted rates. Which is this industry that defies the basic logic of doing business?
It’s the Indian e-commerce business, whose dream run seems to have come to an end with many shutting shops and the rest trying hard to keep themselves afloat.
Fuelled by easy funding from venture capitalists (VC), more than 50 major e-commerce companies sprang up in the last three years or so. The space has suddenly become crowded and to chase the volume-game, which seems to be the buzzword in this industry, every one is offering huge discounts, leaving no money on the table.
Finally, anticipating an imminent bubble burst, some VCs have decided to close the tap. Indeed, the business has grown. Of the total Rs 50,000 crore e-commerce market in India, approximately 80 per cent is accounted by travel and the balance 20 per cent or Rs 10,000 crore by online shopping, the true nature of e-commerce.
Encouraged by the rapid acceptance of this business model, people now order even groceries, vegetables and meat & fish online; industry watchers are optimistic that online shopping may reach Rs 200,000 crore by the year 2025. But, the flip side, the reality, is extremely disturbing: even after 12 years, none of the e-commerce (read online shopping) companies in the country make money and no one has any idea when they will break even.
“At present e-commerce business in India is not making money,” says Partner at Accel Partners, Prashanth Prakash. Prakash, whose team invested in Flipkart and Letsbuy.com, however, maintains that these businesses are in their nascent stages and need two to three years to grow and make profit.
“Right now it’s too early to predict their future and I will give them more time to establish themselves,” adds Prakash. Reportedly, as these two companies were competing with each other in the space, Accel and Tiger Global, another investor, made Flipkart to acquire Letsbuy.com.
When e-commerce first came into existence in India around 12 years ago, Indiaplaza was among the first to go online trying to be India’s Amazon , riding on the tide that promised to become a boom. The company began operations in 1999 with warehouses in five cities in India, trying to cater fast services to its new customers. However, by 2002, Founder and CEO of Indiaplaza, K Vaitheeswaran realised that the only way to make his new business profitable was to start sourcing products from vendors and do away with the warehouses. So it closed all of them.
More than a decade has passed since the company revamped its model and the e-commerce scene, now, is congested with new entrants racing to topple competitors with incredulous discounts and offers. “We had to decide between opting for the sales-driven model or to make money. We went with the latter,” says Vaitheeswaran.
What most e-commerce players agree is that the high operational efficiency coupled with strong back-end work is the need of the hour for the industry to gain more credibility. This industry is generally categorised into warehousing model and the sourcing model.
In case of the former, the e-commerce company buys goods and keeps an inventory, thus giving it a better chance to deliver goods faster, as soon as an order is placed. In case of the latter, the goods are not bought or stored. They are sourced from a vendor who supplies it in accordance to the order placed.
Venture firm Helion Advisors Senior Managing Director, Sanjeev Aggarwal believes that though the inventory model delivers a richer customer experience, it lowers their profit margin. The argument in favour of the sourcing model is that companies do not need a cash-pile to buy all the stock and can thus make money by utilising whatever capital they have got.
“E-commerce in India is hype,” says Indiaplaza’s Vaitheeswaran. Ask him why and he will relate to you that it is actually nothing but retail business and if not managed properly, growth cannot be sustained as retail margin is the lowest in India.
In India e-commerce has always looked to exploit the weakness of the price-conscious consumers who seek the best possible deal at any cost. However, this has boomeranged on e-commerce companies. The colossal discounts offered are actually absorbed by them, eating up the wafer-thin margin.
Accel’s Prakash told Deccan Herald that it will no more invest in an e-commerce business unless it has a unique business model. “We do not want another generic Amazon-type e-commerce,” he adds. However, some investors like Helion who also have funded ventures like Letsbuy.com are still open to evaluate new companies.
Free is not free
Now, the companies are realising that nothing comes free. Not even customer acquisition and satisfaction.
Thus we might soon see a tag saying ‘no more free home deliveries’. This issue has to be addressed if they want make profit. However, some say it is working. CEO of Snapdeal.com Kunal Bahl says, “People who come to buy a 70 rupee product also end up buying some more things which makes us comfortable with the free shipping model.” The company, which started as a deal aggregator, has in 2011, forayed into product business and believes that their model of sourcing goods from vendors will make them a more profitable venture in future.
With 16 million registered users on its site and more than 20,000 shipments every day, Snapdeal sees more transactions now, as many companies have exited in the recent months, making more room for them. “Yes, the scene in e-commerce was a little saturated last year, however, with some exits we are confident to mint more money now,” adds Bahl.
The target of India’s e-commerce business is primarily people in the age-group of 18-25 years because they constitute the biggest chunk of buyers who go online more often than others. Myntra.com - retailer of branded garments, shoes and accessories is among those companies that have started advertisement campaigns targeting the youth. “I am very confident that the youth is critical as they are more familiar with the social network and everything that goes online and thus will drive our growth,” says Myntra CEO Mukesh Bansal.
On sustenance of this industry, Bansal sounds really optimistic as he feels that like global e-commerce, the Indian counterpart will also be profitable one day. However, he is cautious in saying that the huge discounts offered by this business is a risk that needs to be managed properly or else will spell doom for the industry.
Time will tell
Some like Prakash are confident that in the next 2-3 years e-commerce sites will turn the tide and start making money.
It is known that even Amazon took eight years for making profit. “I’m patient and will invest in more ventures that can differentiate themselves,” says Prakash. However, he points out how some companies are focusing on the wrong point and trying to lure customers only with attractive prices. According to him, they should also try and differentiate on how customers are served and also on the intelligent maintenance of the inventory (for people who have).
“Intelligent analytics is the way to find out which product is selling faster and that is the item the company needs to buy more stock of,” explains Prakash. If a company does not pay attention to these aspects, then price differentiation will not matter in the long run, he adds. On the whole it looks like the e-commerce industry needs some serious introspection to do on their game-plan to be able to ride on a comfortable road ahead and not just end midway. Only time will tell if Indian e-commerce will go the dotcom way (which went belly up in 2008) or become a phenomenon like Google or Apple.