India’s e-commerce story has soured. There has been a spate of bad news about India’s online companies in recent weeks, from valuation markdowns to job cuts and scaling back of operations to huge losses. There seems to be no relief for a sector that had become the darling of the Indian business world, attracting billion of rupees of funding last year.
With India’s large, young population, a growing middle class and the rapid growth of smartphone and internet use in the country, investors were piling in to grab a share of the market. But suddenly there has been a dramatic shift in sentiment.
“Definitely there is some correction happening for many of the e-commerce players’ valuations,” says Apoorv Ranjan Sharma, the co-founder and president of Venture Catalysts, a seed investor and innovation platform in Mumbai. “There are adjustments because of the presumptions on which these businesses were built. Companies are struggling to justify their valuation primarily because of issues related to their business models. These corrections are because they need more capital to sustain themselves.”
The market is fiercely competitive. A Morgan Stanley mutual fund a week ago cut the valuation of Flipkart, which is considered to be India’s answer to Amazon, by 15.5 per cent, bringing the company’s valuation to below US$10 billion.
Bangalore's Flipkart has held a series of funding talks with investors over the past few months, but they have declined to put up any cash, according to the Indian business newspaper Mint. It also reported that Snapdeal, another major Indianonline marketplace, had faced similar challenges raising funding.
Flipkart has also come under fire amid a row with the Indian Institute of Management (IIM) Ahmedabad. The company had been planning to take on new recruits from IIM branches across the country this month, but citing organisational restructuring it has deferred their start dates until December. IIM Ahmedabad wrote to Flipkart complaining about this move.
Meanwhile, the restaurant website Zomato has also suffered a valuation markdown and last month posted a loss of more than 4.9 billion rupees (Dh270 million) for the year to the end of March.
“The investment climate is different,” says Karma Bhutia, the founder of Ishippo.com, an e-commerce marketplace for handcrafted goods. “The biggest change is perception. People are asking some hard questions.”
He says that e-commerce sites have been spending vast sums of cash on customer acquisition by offering generous discounts on products, for example, which has mainly been “bankrolled by venture capitalists’ money”.
“The levels of funds has been tightening. Now they are at the stage where they have had to get into a phase of self-preservation. If they continue at that burn rate, trying to subsidise the customer acquisition with huge discounts and huge cashback, then they will fail,” says Mr Bhutia.
“This is a loss-leading concept where the guys making the maximum loss procure the customer because the products are the same. They have the same mobile phone, so the differentiator is the price. That model is unsustainable, and that’s where it’s taking a turn in terms of the e-commerce landscape. The market has become more conservative in terms of capital. These are the kind of challenges that have come in, so companies are having to pull up their straps.”
This is not to say that the future is not bright for the sector, however.
“In the e-commerce space there’s still a big gap to be filled in the market. A country like India is totally underserved,” Mr Bhutia says.
Projections suggest enormous growth potential in India’s e-commerce market, which is expected to reach $119bn by 2020, according to Morgan Stanley. It forecasts that India will have close to 320 million online shoppers in 2020, up from 50 million last year.
The number of internet users is estimated to have reached 402 million at the end of last year, meaning India has surpassed the United States to have the second-largest number of internet users in the world, with only China in front, according to the Internet and Mobile Association of India and IMRB International.
At the same time, a large portion of Indians do not have bank accounts, and even among those that do have debit and credit cards there is a reluctance to pay online, which is why cash on delivery has become a widespread option in the country for internet shopping.
“The bad news has been coming up this year,” says Mohd Wasi, the founder of Fagnum, an online start-up. “This will go on for some time and we’ll see how the companies evolve.”
He says companies will have to work on new strategies to sustain their business.
Raising funds is tough in the current environment for e-commerce and other online start-ups.
“Investors are not giving money because they want to see the profitability of start-ups in mind,” Mr Wasi says. “Nobody is giving money on an idea stage right now.”
He says the sentiment is that this year will continue to be a challenging time for raising funds.
But Mr Sharma explains that the situation is a phase that the sector needs to go through as it matures.
“It will lead to a new breed of e-commerce companies,” he says. “The model will be more robust in terms of economics and profitability.”
He says that some companies will inevitably go out of business, while there are also likely to be some takeovers and consolidation.
“This is a sign of maturity coming into the market. Earlier it was the phase when all these start-ups were raising multiple rounds and investors were putting money on the hopes that this was a very large market. It was required.”
He notes that India’s e-commerce “is still a very large market that has yet to be tapped”.
The shift in India’s e-commerce sector comes after the India’s government announced at the end of March its official position on foreign investment into the rapidly growing industry. Its rules stated that overseas investors could take stakes of up to 100 per cent in e-commerce marketplace companies in India.
But the government also outlined that under the new rules e-commerce companies would not be able to add their own discounts to products, which has been a key strategy for these websites.
“E-commerce entities providing a marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field,” it said.
There is a significant amount of competition in the market, which adds to the pressure, particularly given the presence of international firms such as Amazon that have strong financial backing and tried-and-tested business models, Mr Sharma says.
There are no signs of competition abating soon. Tata Group, one of India’s biggest and oldest conglomerates, has just entered the e-commerce space, investing hundreds of millions of dollars to launch its TataCLiQ.com website, selling products including clothes and electronics. It offers customers the option of ordering online and having the item delivered or being able to pick up the item from a partner store.
Tata says it believes it could “be a massive game changer in the e-commerce sector … reducing logistics and delivery costs for viable unit economics and a long term sustainable profitable business”.
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