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Online Discounts on Last Leg

Companies may be forced to rein in their spending and cut down margins through discounts.

Published: 24th April 2016 02:54 AM  |   Last Updated: 24th April 2016 02:54 AM   |  A+A-

Arun Sharma, a sports coach in Delhi’s Amity International School does not miss out on any of the discount deals that e-commerce companies offer from clothes, shoes, electronic goods, furniture and many more, almost every few weeks. He buys goods, not because he needs them, but  just because of the amazing discounts they offer. But, as they say, all good things come to an end. Sharma’s run for discounts too could end soon. Analysts predict that the big bang discounts might well be on their last leg.

Online.jpgThe initial public offering(IPO) of Infibeam in March marked a milestone in the journey of e-commerce in the country. The entry of e-commerce into the capital market space will have direct consequences on how these firms cater to their customers, say experts. The first casualty is set to be discounts.

“Once these firms enter the capital markets and list themselves, they will see a shift in attitudes. For one thing, they are now responsible to a much larger set of stakeholders, not just a few investors,” said Anand Ramanathan, Director, KPMG. The consequent financial responsibilities are set to force companies to rein in their spending and cutting down margins through discounts.

Onlinea.JPGIn short, e-commerce firms are maturing and profits will soon begin to play an important role, in the online market. There are other indications of a maturing market. Many experts say that venture capital investments in this segment have peaked and are starting to come down. Private equity and venture capital firms infused just $1.15 billion in the last three months--Jan March, 2016, which is  24 per cent lower than the investment in the previous quarter.  The third quarter of 2015-16 gave an indication of the trend to come when the investments dropped by 48 per cent over the previous.

“New funding is not drying up entirely but becoming more cognizant of longer term sustainable business models. This may lead to some consolidation in the market with the more innovative and fundamentally sound business models winning over other players,” said Sudhanshu Gupta, Vice-President, Paytm.

Onlineb.JPGThis by no means points to a decline in e-commerce. By 2020, India is expected to generate $100 billion online retail revenue. While the cost of delivering a package in India is the same as in other markets—about $2—the average selling price is far higher overseas, which underlines the scope for further growth in this industry segment.

“I believe 2016 will be a great year. Many of the frothy companies would have to face reality or risk dying since the market will ensure that only the fittest survive,” assures Upasana Taku, Co-founder and Director, MobiKwik.

Angel investors feel that the next 24 months will be crucial for the development of e-commerce in India. According to analysts, the discount frenzy will give way to consolidation.

“Funds will now be focused on actual problem solving companies rather than hyper valuated startups. Funding in non revenue generating startups will dry  up and actual focus will be on the bottom/top line,” says Ritesh Malik, an Angel investor and founder of Guerrilla Ventures.

Government policy too is set to play a role in weaning out discounts from the segment. While it approved 100 per cent FDI in online retail of goods and services under the marketplace model, it has also clarified that marketplaces cannot influence pricing of products and services on their platforms. The only way forward now is consolidation. “Given the slowdown, consolidation will happen. Shake out is inevitable. Mergers and acquisitions will soon grab headlines,” says an analyst.

“It will also be a happy hunting ground for larger companies as they enjoy undivided attention from investors,” points out Upasana.

However, there is a ray hope for breed that Sharma represents.  “Discounts will stay and there will be great demand for products in the fashion apparel, personal accessories and sports goods segment going forward,” said T P Pratap, co-founder, Giftbig.com, an online gift card purchase website.

But discounts are certainly on their last leg — government, market and analysts have already raised their red flag.

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