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Will Beleaguered Ecommerce Companies Find a Way Out in India?

After expanding at a cracking pace, the ecommerce space in India is now bracing itself for lacklustre growth

Buying into the promise of a strong growth, many start-ups forayed into the ecommerce market in India a decade back to challenge global giants eyeing a sizeable share in the highly lucrative pie. The e-tailing sector was just about to explode then in the country.

Ten years down the line, the space is a melee of local, international and niche players. The market, however, seems to have lost much of its steam and a spate of alarming news have rocked it in the recent past. Flipkart, Snapdeal, and Amazon – the three dominant players in the market have sustained heavy losses so far in a mad scramble for market share.

With revenues and bottom lines heading in the opposite directions, this prompts the question if their current businesses models are viable and will the sector be able to survive in the long run? To find answers to those questions, one needs to understand what is essentially wrong with current business models.

The Flawed Modus Operandi

The ecommerce sector in India is just a decade old and has been powered mostly by start-ups that have expanded exponentially on the back of better internet penetration and rising fortunes of the people. Competition is red hot and growth so far has been dramatic. So, while in 2006, online retail was a Rs.850 crore industry as per research agency IMRB, by the end of 2016, it was worth a staggering Rs.72,000 crore.

Besides domestic giants of the likes of Flipkart and Snapdeal and the global behemoth Amazon that have become synonymous with the ecommerce sector in India, there are a host of others too, including niche players, in the fray. On the whole, the big names have created white and blue collared jobs, captured market share fast and have also raked up revenues to the tune of crores.

But the hard fact is profit has eluded them so far.

Reasons for it are many. The first that comes to mind are the hefty discounts the consumer internet companies offer year-round to draw customers and achieve sales. They buy a product from a company and purvey it at a discount from their end. This results in heavy losses. Then there are huge spends on marketing blitz and logistics as well. Add to the mix astronomical salaries of top honchos and you have the perfect recipe for a disaster. In 2016, Flipkart spent Rs.1,086 crore as business promotional expense and Snapdeal spent Rs 1,111 crore. The number is much higher for global behemoth Amazon.

Hence, after the initial craze of gaining market share leaving them drained financially, companies are now hard-pressed to make profits. Funding seems to be getting tougher and this could well slam the brakes on their business. The ones slated to be worst affected are the home grown ecommerce players that are mostly funded by venture capital funds seeking to tap into the lucrative retail sector in India that is mostly out of reach for foreign investors.

The Bitter Pill

Huge losses and lacklustre growth has gotten internet consumer companies, running primarily on investor money, rethinking their strategies now. Realising the urgency of the situation, most have pulled up their socks. Take for instance Flipkart. After seeing several markdowns in valuation, the ecommerce biggie has reshuffled top slots. It is now headed by Kalyan Krishnamurthy, who was earlier with its largest investor, the US-based hedge fund Tiger Global. It has reined in losses and is now looking to garner more funding from Microsoft, eBay Inc., PayPal Holdings Inc. and Tencent Holdings Ltd. to up its ante against powerful rival Amazon.

Snapdeal too was forced to take extreme steps recently faced with sustained losses. Those entailed layoffs and cofounders taking a 100% pay cut till they facilitate a turnaround in the company.

Way Ahead

Going ahead, consolidation will most likely pave the way for better results. Curbing sales is not possible. Hence companies will most probably tread on the discount path and continue burning cash. To create profit margins, they will focus heavily on mergers and acquisitions and on building leaner structures. All of this would bring about job losses and cause salary packages to become less attractive.

The industry has already seen some action in this direction. Flipkart, the largest domestic player in the ecommerce space, has made a couple of acquisitions to bolster its position. The most noteworthy among them has been that of Jabong by outmanoeuvring home grown rival Snapdeal. The move helped it acquire 70 percent of the online fashion space.

Further, Snapdeal in one of the biggest acquisitions in the brief journey of the internet industry in India, bought FreeCharge to bolster its digital commerce business.

Going forward, someday it could be Flipkart’s turn to be gobbled up by a deep-pocketed Amazon, whose growth has been primarily funded by its parent internet company so far. Sensing a threat, many startup founders have already suggested the need to create a level-playing field to compete effectively against global companies with substantially greater capital.