INDIAN E-TAILERS FEEL AMAZON HEAT

A downturn in investor sentiment, new government norms and overseas rivals are forcing homegrown online retailers to seek newer ways to stay afloat

Last October, Flipkart announced its ‘Big Billion Days’ sales from the 13th to the 17th of the month, one of many in the homebred online retailer’s nearly 10 years of existence, during which it has sold hundreds of products at deep discounts. However, much to the company’s embarrassment, its app crashed, leaving many buyers redfaced. “Anything you click goes out of stock. Flipkart should stop this flop show,” tweeted Vicky Vohra, an aggrieved customer. Ecommerce giants like Flipkart will exercise caution in holding such mega sales blitzes again, especially after the government in March prohibited etailers from offering big discounts on their platforms.

The government also capped total sales originating from a group company or one vendor on an ecommerce platform at 25 per cent. The norms came at a sobering time for India’s ecommerce sector, with investors holding back funds and even

‘established’ etailers wallowing in losses. With tightening of norms on the one hand and a shrinking of business on the other, froth in the segment finally seems to be settling down.

“The irrational exuberance has subsided as of now,” says Ashvin Vellody, a partner with consulting firm KPMG India. Companies are now devising new strategies to keep customers engaged and shopping more online, despite the restrictions on discounts. For instance, Amazon India, an arm of the US multinational, has built its India strategy on the three simple pillars of massive selection, low prices and fast delivery, similar to their global standards. It recently added to its offering a valueadded service called Amazon Prime, which promises speedier delivery among other benefits. Flipkart unveiled Flipkart Lite in 2015, a web app built to give users a rich experience online and offline. To expand its customer base, Snapdeal launched flight and bus ticket bookings, hotel reservations and food ordering services on its platform in July, the first etailer to do so.

The endresult of these new efforts is heartwarming. Media reports say that the total gross merchandise value (GMV), or the value of all goods sold through various online retail platforms, grew 13.3 per cent yearonyear to $10.2 billion (Rs 68,136 crore) at the end of May 2016. Much of this growth was from Amazon India, which grew to $2.7 billion (Rs 18,036 crore) from $1 billion (Rs 6,680 crore) last year. Meanwhile, Flipkart’s GMV remained unchanged at $4 billion (Rs 26,720 crore approx.), while Snapdeal’s GMV halved to $1.2 billion (Rs 8,016 crore approx.), reports said.

To be sure, the restrictions on etailers came along with a big bonanza. The government allowed 100 per cent FDI in ecommerce in the ‘marketplace’ model, bringing in more clarity on foreign investments in the sector (Flipkart and Snapdeal have foreign investors on board). The Department of Industrial Policy & Promotion (DIPP), which came up with the new guidelines, also clarified on the definitions of marketplace and inventoryled models. In the first, an ecommerce firm provides an IT platform on a digital and electronic network to act as a facilitator between buyer and seller. On the other hand, in an inventorybased model, the ecommerce entity owns goods and services which are sold to consumers directly. A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on a B2B basis, the DIPP clarified. Can this be a sign of maturity in the segment, a more nuanced approach from ecommerce players? Possibly, but it comes at a time when there has been much pain. Investors, including venture capitalists and private equity players who have bankrolled over 2,000 of India’s startups over the past 10 years, want more bang for their buck. A KPMG and CB Insights study says private equity and VC firms infused just $1.15 billion (Rs 7,682 crore) in the three months to March in Indian startups, 24 per cent lower than in the December 2015 quarter. USbased mutual fund T. Rowe Price, which had invested about $100 million (Rs 668 crore) in Flipkart in December 2014, marked down its shares in the study company by 15 per cent in April. In July, it further cut the value of its stake by a fifth, even as the etailer said it was cutting 300600 jobs to reduce costs.

A markdown in shares means a lower overall company valuation, making it cheaper for a potential buyer, in case of a stake sale. This was Flipkart’s third major setback after February 2016, when another investor, Morgan Stanley, marked down its shares by 27 per cent. Meanwhile, investors are reportedly reluctant to pour in fresh funds into Snapdeal at valuations expected by its promoters. “It’s a sentiment downturn, irrational exuberance has come down in the ecommerce segment...investors are cautious,” says Avnish Bajaj, MD, Matrix Partners, a private equity firm.

The revenues of most successful startups so far were thanks to the deep discounts they offered, which in turn was driven by investors’ largesse. But that is set to change. It has to, for it’s high time ecommerce players focused on a sustainable model, which also brings in steady profits. As of now, the situation is bleak. The combined revenues of 22 top ecommerce players grew 191 per cent in fiscal 201415 while their total losses jumped 264 per cent to Rs 7,900 crore, a study by Kotak Institutional Equities shows.

Now for the positives. India offers one of the hottest markets for ecommerce. At almost 252 million, the country has the third highest number of internet subscribers in the world after the US and China. This

10.2 BILLION DOLLARS *(RS 68,136 CR), VALUE OF GOODS SOLD ON ONLINE PLATFORMS FOR THE YEAR TO MAY ’16; $=RS 66.80 264 PER CENT JUMP IN LOSSES OF 22 TOP ONLINE PLAYERS IN 2014-15, TO RS 7,900 CR 55 MILLION NUMBER OF PRODUCTS AVAILABLE ON THE AMAZON ONLINE STORE *All figures are for online retailers in India