By. Md. Taraq Junaid
It looks like a?glorious era of e-commerce has finally come to an?end. With Flipkart, Amazon and Snapdeal reporting combined losses of?INR 11, 754 crore, for the 2015-16 Fiscal Year, the future of the e-commerce business model in the country seems bleak. Over the last few years, the Indian market had become a battle ground for e-commerce companies. Relying on irrational business models and indulging in ludicrous marketing and discount policies, e-tailers have piled up debt that seems impossible to service.
Currently, the market is abuzz with news of Snapdeal being in talks with Paytm and Flipkart for a potential sale. Snapdeal reported a loss of US 14.93 million in the FY 2015-16 and also announced, in February 2016, that it will lay off about 600 employees to cut costs. Flipkart has already been devalued twice?by Morgan Stanley, which has adversely?affected its market value. Amazon is burning through its deep pockets to keep the company afloat in this competitive market.
With trouble brewing in India?s e-commerce business paradise, here are some common factors working against these tech-giants:
- Irrational business models: The basic problem with the e-commerce?business models in India is that their sales are largely driven by unrealistic discount schemes. With investor funds inundating their bank accounts, most e-tailers rely on low prices?to attract users.
- Unrealistic valuations: In the initial stages of startups, more emphasis is laid on customer acquisition than revenue generation. Most e-tailers only strive for?large?user-bases, neglecting the need to return profits to their shareholders. If the valuation of a company is driven by its ability to make profits, instead of an arbitrary number of users, we may look forward to?companies that are financially sustainable.
- Considering GMV as the yardstick of success: Currently, all the e-tailers are competing against each other to register the highest Gross Merchandise Value (GMV). GMV is the total sales value of merchandise sold on the platform. E-tailers (non-manufacturers) only act as mediators between the sellers and the buyers. Their income is only the commission on each transaction but not the total value of the transaction. Startups often present inflated statistics of their GMV (implying higher commissions) to attract investors and mislead their competitors. This was the story behind Flipkart and Snapdeal during their initial rounds of funding. GMV is a highly misleading index to measure the progress of a company in the long run.
- Lack of innovation: All the e-commerce companies in India offer the same services as their competitors such as ?free shipping, cash on delivery (COD), return policy, replacement policy, discounts and payment options. None of the e-tailers in India have a differentiated strategy to?give them an edge over their competitors.
- Indulging in unhealthy competition: Over the years, Amazon, Flipkart and Snapdeal have been fighting it out during the Great Indian Festival (by Amazon), Big Billion Day (by Flipkart) and Unbox Sale (by Snapdeal). While the three rarely clash, the competing e-tailers employ aggressive cost-cutting strategies during these occasions.? Amazon, which has a plethora of revenue generating sources, can sustain?the losses longer. However, companies like Flipkart and Snapdeal, which are largely dependent on e-commerce revenues, take a severe hit.
- Statutory regulation: In March?16, the Government of India?added to the woes of e-tailers through its?new e-commerce policy. Now, online marketplaces, that act as facilitators between buyers and sellers – will?not be permitted?to have more than 25% of their merchandise?sourced from?one vendor. Some of the e-tailers sell their own merchandise, via their subsidiaries, which contribute to a large?portion (sometimes greater than 25%) of sales made through the platform. In such cases, the regulation will pose a huge threat.
In addition, as per the new regulations, e-tailers will not be allowed to influence the selling price of goods and services listed on their platforms. This means companies like Flipkart, Amazon and Snapdeal will be penalized for offering large?discounts. This could be game changing as discounts drive the e-commerce market in India.
With Snapdeal approaching its end and Flipkart struggling with a wide range of issues, Amazon may emerge on top of the Indian online marketplace. However, there is little foresight of new competition that may arise in the future or if the large domestic incumbents can bounce back.
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