The money is coming in, but there is a sting in the e-tail

  • Sanjoy Narayan, Hindustan Times
  • Updated: May 03, 2015 11:01 IST

Each time one of India’s biggest Internet-enabled retailers (in new economy parlance, e-tailer) delivers a package to you or to anyone else, it loses Rs 140.

Another of its competitors — one that’s not as large but an important player nonetheless — is in the red by Rs 220 every time you click and order a mobile phone, clothes, an electronic consumer product or anything else from more than a dozen categories of stuff that you can buy on its website.

These two e-tailers shall remain unnamed but even venture capitalists who provide funding to start-ups that they think have high growth potential will tell you that nearly every Indian e-tailer is losing money even as they are getting millions of dollars in funding, spending crores of rupees on advertising, and attracting customers by luring them with the promise of deeply discounted prices. Discounts that make little or no business sense.

India’s e-commerce ventures are growing at an explosive pace but their underlying business models seem to be fundamentally flawed. To many people, their haemorrhaging bottom line could be a sure sign that most of them are fated to fail — but certainly not so to investors such as venture capitalists (VCs).

In 2014, investors from around the world put a staggering $5 billion (Rs 31,500 crore) into Indian e-tailing. Leading VCs such as Accel Partners, Tiger Global and Naspers have put $2 billion (or Rs 12,600 crore) into India’s biggest e-tailing firm, Flipkart; in Snapdeal, which began as a daily deals site but now is an online market like Flipkart, investors such as SoftBank, BlackRock and Temasek have invested $1 billion (or Rs 6,300 crore); and even much smaller enterprises have raised funds in the range $50-200 million from investors eager to get a piece of India’s booming e-tailing business. What do VCs see in such companies that others don’t?

To find an answer, look at the two kinds of e-tailing that are booming in India. The first kind is the crowded and competitive business of shopping, real estate, travel, transport and so on. In most of these, particularly shopping, which is the biggest, the objective is to build huge customer bases by offering lucrative discounts that are intended not to make money but for brands to rack up consumer loyalty so that, like Amazon did in the 1990s, they emerge as the preferred destination for shoppers. E-tailers behave like wholesalers-cum-retailers: straddling the entire transactions chain, they buy from manufacturers and sell to consumers. Only, unlike traditional middlemen or retailers, they don’t add price mark-ups when they sell to retail customers; instead, they offer discounts — very deep ones. A strategy like that can attract customers in droves but the problem is that at the same time it can bleed a company ceaselessly, especially if (as it is in India) it is a competitive market where everyone is doing exactly the same thing: Offering deep discounts. Go to any Indian e-tail shopping website — right now, if you like — and you will be offered deals and discounts that sometimes shave off as much as 70% of the price of the merchandise.

The second kind of Indian e-tailers is the ones that do business in less crowded markets such as online ticket booking, jewellery retailing or furniture selling. Besides being less crowded, such markets are niches and that helps. Examples: Bluestone, which sells jewellery online; Bookmyshow, which covers the largest network of cinemas that helps it add a premium to the ticket price; and Pepperfry, which delivers furniture across many locations in India. Such businesses may have a bigger chance of surviving than those that have to resort to deep price cuts that lead to growing losses.

Yet, inexplicably, money from investors continues to flow into the crowded arena of online marketplaces as VCs from around the world pull out all the stops to pour in investment. Flipkart is valued at $12.5 billion (12 times its revenues) and Snapdeal at $5 billion (five times its revenues) and neither has ever turned a profit. Clearly, VCs know something that we don’t.

The writer is the editor-in-chief of Hindustan Times

also read

Show comments