The e-commerce space has seen lot of action in the past few weeks. Amazon has committed an investment of USD 2 billion for India. Flipkart got a funding of USD 1 billion. Alibaba’s IPO is the biggest in the world so far. It is in talks with Snapdeal for picking up a stake. Quikr and OLX have got Venture Capital funding as well. All this even when e-commerce accounts for less than 2% of the total retail market. Out of that 70% comes only from online travel bookings.
Flipkart posted a loss of Rs 281 crores in 2012-13 with sales of Rs 1180 crores .This makes me wonder whether such kind of investments in the online space are viable.
Though e-commerce is growing at 30% CAGR (88% in 2013) against a global rate of 8-10%, is it the right time to pour in such huge amounts in the online space. Is this a pure valuation game in which private investors would eventually exit making a moolah while putting retail investors at risk.
Agreed that Indian e-commerce market, which is worth Rs 78,000 crores, will get a push from increasing penetration of smart phones and internet. But I see two challenges as follows:-
a) Managing on ground logistics in a country where the population is scattered over hundreds of towns and thousands of districts. This calls for several brick and mortar fulfillment centers across India. Plus the density of population in semi-urban areas is not as high as urban areas, which increases delivery costs.
b) All the frills that the e-commerce sites offer, like free returns, rock bottom prices, same day delivery, etc eventually lead to erosion of profit margins.
c) Most of the online sites operate on a market place model. The major disadvantage of this model is that the shipping cost is higher because multi-product orders are fragmented across vendors and shipped separately. And this in turn may lead to customer dissonance because a customer won’t receive his entire order at one time. This may also lead to non-compliance of delivery timelines promised; reasons being cross state barriers and non-availability of stock with the vendor, order cancellation, and loss of consumer trust.
Several investment advisors believe that e-commerce valuations are being driven more by investor demand than by any significant improvement in their financial performance. A day will come when investors will start expecting positive returns on their investments. This is when valuations will become more realistic.
Also currently there is inorganic growth rather than organic growth that is based on business fundamentals, which may not be a right strategy.
Hence the next 2-3 years are very crucial for this space. If these e-commerce portals survive for next 2-3 years, we will have a e-revolution in retailing.
Vishal Desai
Faculty
Vishal Desai is a permanent faculty member at DGMCMS. He is an alumnus of Narsee Monjee Institute of Management Studies, Mumbai. He has experience of 12 years in marketing, sales, product management and key accounts management at key positions in leading entertainment companies like Zapak Digital Entertainment Ltd. (Reliance Entertainment), Shemaroo Entertainment Ltd. and Milestone Interactive Group. He has managed mega entertainment brands like Slumdog Millionaire, Dhamaal, Chandni Chowk To China, Bal Ganesh, Spiderman, Batman and many more.
