BETTING BIG ON ECOMMERCE: DELUSION OR REALITY?

It is quite normal these days to be bombarded frequently, with news related to the ecommerce industry which is considered to be a sunrise industry from an Indian context. Exciting news articles quoting astronomical valuations of ecommerce companies have almost become a norm. While it is very affirming and pleasant to paint a rosy picture of the ecommerce industry in India, it needs to be done through a lens of rationality. This brings us to the basic concept of Gross Merchandise Volume or GMV which is a key parameter used to measure the state of an ecommerce company. GMV is a measure of the value of goods sold on a site, without accounting for discounts or sales returns. The valuation of a company is then arrived at by doubling or tripling this GMV. As such, given the valuation of a company, we can imagine the actual revenue by working backwards. Another major problem is that the ecommerce players are on a customer acquisition spree, fuelled mainly by large discounts which are in turn financed by leading global investors. This is certainly fine for an initial stage but unsustainable in the long run. The basic premise, on which the aggressive funding by investors rests on, is that after a certain degree of comfort with regard to the online channel, customers will prefer it over the traditional channel, even in the absence of discounts. While there is no denying that this is very much possible given the fast and hectic pace of lives that we today lead, the problem lies in identifying those select few companies from an apparent smorgasbord of companies that will survive the test of time to be able to give those windfall returns to its present investors.

Another factor that will be vital in deciding the future of ecommerce in India is the growth of the data services in India. With the major telecom players preparing to engage in a serious battle to gain customers by offering reliable 4G data services, the stage does seem to be set for the ecommerce industry to thrive and effectively tap the retail industry with relative ease.

Besides the technological aspect, another vital factor that will define the position of ecommerce in India is the legal perspective. Currently foreign direct investment is not allowed in the online retail sector in India. To overcome this hurdle, the Indian ecommerce companies operate on an online marketplace model that serves to simply provide a platform for buyers and sellers. The brick-and-mortar retailers have a representative body called the Retailers’ Association of India or RAI which moved the Delhi high court in May seeking parity between online and offline retailers. Consultations are going on amongst brick-and-mortar retailers, online retailers, and policy makers to decide upon the laws in this regard. If the rules allow foreign investment in both online and offline segments, the online landscape is likely to become more complex, since existing offline retailers having a strong presence in the retail segment might decide to jump into the online bandwagon. This can be aptly illustrated through the example of a company like Aditya Birla Nuvo Ltd. (ABNL) which already has a strong presence in the offline Fashion and Lifestyle segment. If it enters through the online channel, it can build upon its existing brand equity to attract customers and also leverage the benefit of having a payment bank whose licence it recently received from the RBI. Thus an integrated business model having online, offline, and payment infrastructure capabilities can effectively compete against the existing only online players.

Advertising revenue is another option which the Indian ecommerce players have been trying to avail in order to move towards being a profit making entity and also to achieve better targeting of customers. This was amply demonstrated by Flipkart’s acquisition of AdIQuity Technologies, a mobile based advertising technology firm in March to improve the former’s ad platform and more recently, Snapdeal’s acquisition of Reduce Data, a US-based advertising platform which helps brands to deliver advertising strategies for consumers across platforms and devices.

All said and done, the fact remains that predicting the future of ecommerce in India is a difficult task. This is simply because the future does not depend on only one or two factors. It will rather turn out to be a result of a complex interplay between various parameters that are mutually affected by each other. All that should be hoped for is that the Indian consumer gains along with the other stakeholders involved in and affected by this industry.

- Siddharth Shah

SIMSREE Finance Forum

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