End game for E-commerce bubble?
As per data furnished to Hong Kong Stock Exchange, it showed that E-retailer Snapdeal\'s loss rose from around Rs 270 crore in FY 2014 to nearly Rs 1,350 crore in FY 2015 as the company shelled out $25 million (over Rs.150 crore) a month as discounts and marketing expenses. Meanwhile Snapdeal\'s valuations have risen from around $2 billion to $4.7 billion in a matter of one year.
As per data furnished to Hong Kong Stock Exchange, it showed that E-retailer Snapdeal's loss rose from around Rs 270 crore in FY 2014 to nearly Rs 1,350 crore in FY 2015 as the company shelled out $25 million (over Rs.150 crore) a month as discounts and marketing expenses. Meanwhile Snapdeal's valuations have risen from around $2 billion to $4.7 billion in a matter of one year.
Flipkart reported a loss of Rs 400 crore in FY 2014, according to filings with Registrar of Companies (RoC). The company's loss has quadrupled to nearly Rs.2000 crore in 2015, as per market reports. Meanwhile Flipkart's valuation has shot up to a mind-boggling $15 billion as it commands the largest market share of 44% in India.
Amazon India clocked a net loss of about Rs 320 crore for its first year of operation of 2013-14. However, its parent Amazon Inc has surprised the Wallstreet by posting a profit of US $ 79 million during Q3 of 2015. Amazon Inc’s cloud computing business is the single biggest reason for its surprise profits in Q3 of 2015, as e-commerce is still struggling with losses.
Flipkart, Amazon and Snapdeal have been engaged in a fierce price war in a bid to attain a bigger slice of the Indian e-commerce market. Handsets from Micromax regularly get sold online at 20% below wholesale prices. “If I sell at 20% off, I would lose money,” said Vikas Jain one of Micromax’s founders.
As a result of heavy discounting of prices to build turnovers or Gross Merchandising Value (GMV), all the above three E-retailers are currently running in huge losses.These E-Commece retailers also spend extravagent amounts to expand their product range, build massive warehouses, hire thousands of people and splurge lavishly on advertising to attract customers and win market share.
E-commerce retailers are making operating losses as high as 30%. The only reason they are staying afloat is because of the multiple rounds of funding extended by private equity (PE) players.
E-Commerce companies in other verticals have similar stories. Pisces eServices, which operates Foodpanda, recorded a loss of Rs.36 crore on revenue of Rs.4.8 crore in FY 2014-15. It has recently fired 500 employees out of its total 1300 odd employees.
Fashion and lifestyle etailer, Jabong's loss for the first six months of 2015 jumped by over 46% to Rs 227 crore compared to Rs 155 crore loss a year ago period. This was primarily owing to heavy discounting to compete with rivals like Myntra.
"Offering lower prices will not be viable in the long term. Despite luring customers in the initial stages, lower prices won't be able to retain customers in the long run" as per a research report on retail industry by PwC India.
The mute point is whether any e-commerce company in India has built, or is in the process of building a business model that can generate profits? The question in everyone’s mind is how long these companies will bleed before they decide to change their business model.
The added risk to the E-Commerce players is that Bricks and mortar big daddies like Tatas and Reliance are preparing to disrupt the market.
It is high time that the Ecommerce firms recalibrate their strategies and ensure that profitabile growth is the new game. “One cannot say that today I will grow and tomorrow I will make money. Both growth and making money have to happen simultaneously” as aptly put by Ashish Shah, co-founder of online furniture firm Pepperfry.
Private equity players are wondering whether they are sitting on a ticking time-bomb of overvalued ecommerce companies which may show massive growth, but their equally massive losses have to be funded from capital infused by the PE players. Hence PE investors are seeking consolidation among the E-Commerce companies to reduce their losses and put them on a profitable path. E-Commerce companies need to compete based on service, technology, product range, cost-effective business models (Viz., moving from an inventory model to a marketplace one) etc rather than depend on unsustainable price-wars.
(Author is a management professional and alumnus of IIM, Ahmedabad.)