Just when everyone thought India’s e-tailing story was crumbling, and Amazon was creeping up to pole position, Flipkart last Monday announced it had raised $1.4 billion (Rs 9,100 crore) in fresh investments from China’s Tencent Holdings, and US’ Microsoft Corporation and eBay Inc. The new round of funding will keep Flipkart’s fires burning against Amazon’s onslaught; more importantly, it will also keep the party going for the bargain-hunting Indian consumer.
While the valuation of Flipkart has gradually eroded to $11.6 billion in this round of funding compared to the peak valuation of $15.1 billion two years ago, the money will infuse new life into Flipkart in a contest that seemed to be running away in favour of Amazon.
Falling Short
E-tailing, or the selling of everything from mobile phones and electronics to books and bed sheets on the digital marketplace, hasn’t performed as well as it had been predicted. After various forecasts of galloping revenues of $120 billion by 2020, today all the players put together are struggling at about $15 billion.
Growth has been a measly 16 per cent last year with online sales accounting for just two per cent of total retail sales. China is over 40 times ahead with online retail sales of $752 billion in calendar 2016, a 26.2 per cent increase from the previous year; and online purchases accounting for as much as 15.5 per cent of the total retail pie.
So far, Indian e-tailers have only losses to report. Flipkart more than doubled its net loss to Rs 2,000 crore in FY16. Amazon India’s losses for FY17 could touch Rs 6,500 crore.
As funding is drying up, the industry is going through sharp consolidation. Snapdeal has initiated a merger process with Flipkart. Two years ago, Snapdeal founder Kunal Bahl boasted he would achieve gross merchandise value of $10 billion by the end of FY16. Today, Snapdeal is virtually non-existent.
Discounting Strategy
The traditional big e-tailers’ strategy is to sell products at heavily discounted prices, with the option of returning the product. This cash burn route, they hope, will shift consumer behaviour away from physical stores to dependency on the ease and comfort of online sales. Once the consumer is ‘hooked’, discounts will disappear and profits emerge. But, the Indian story has never been so simple. The severe competition between well-funded players has ensured that discounts have gotten bigger. The advantage of saving on physical stores has been eroded by the huge cost of marketing and of logistics – of supply chains, of warehousing, and of dealing with returns.
The Indian consumer is smart. He is not loyal to any seller and is willing to bend the rules. Sample this: A young professional in Dehra Dun who regularly shops online explained his modus operandi. When movies were still being watched on DVDs, he would order half a dozen, watch all of them overnight, and then ship the DVDs back claiming they were defective.
No Leader
In both the US and China, after fierce competition and cash burn, a single e-tailer emerged as leader and was able to call the shots in pricing and strategy. In the US, it is Amazon that dominates by a huge margin. For online sales for the 12-month period up to May 2016, eMarketeer reported Amazon revenue growing nearly 16 per cent to a humungous $82.7 billion compared to the nearest rival Walmart at $12.5 billion. Similarly, Alibaba has emerged the leader in China. Its various retailing sites control over 80 per cent of the market, and in 2016 notched sales of over $20 billion and net profit of $5.8 billion.
In India, there is no leader. So far, it has been a three-way fight among Flipkart, Amazon and Snapdeal. Snapdeal has given up but there is a third fighter now waiting in the wings. The Vijay Shekhar Sharma-founded Paytm, which has successfully run an e-wallet operation, is now launching an online shopping marketplace in alliance with Alibaba. The China giant has pumped in $200 million so far and could hold up to 50 per cent in the new venture.
This means, the three-way slugfest will continue with no dominant leader any time soon. This also means the happy times of bargains and discounts are here to stay for a while.
(The author can be contacted at gurbir1@gmail.com)