In a marketplace overflowing with apps, driven by lofty revenue models in packed market segments, with little to tell each other apart, perhaps the real question is not whether the bubble will burst, but what will prick the bubble... It could be something as basic as an investor who decides that there is a real time value to money, and it might be better to get some current returns
By Aliefya Vahanvaty
First the positives: The Indian e-commerce industry has witnessed rapid growth over the last few years, with the proliferation of the Internet and the rise of low-cost smartphones, but the consensus is that the best is yet to come. According to investment advisory firm Grant Thornton, the year 2014 has seen nearly Rs 20,000 crore ($3,300 million) in mergers and acquisitions (M&A) and private equity (PE)/venture capital (VC) activity so far in e-commerce. The market size grew from $600 million two years ago to $2.3 billion in 2014. Investment firm, Matrix Partners, predicts many ‘billion dollar e-commerce companies’ are expected to be created in India by 2020.
Then the not-so-positives: Thankfully, not everyone is optimistic. An industry expert, on condition of anonymity, says, “It’s a game of investors, not really of entrepreneurs. Flipkart today is more a Tiger Global and Naspers company, than Sachin Bansal’s. Similarly, Snapdeal is more a Softbank venture than a Kunal Bahl venture. It's a fool's paradise.” So is e-commerce really the best thing to happen to entrepreneurship in India, or are we choosing not to hear the echoes of the past?
Take for example, Facebook's valuation which is basically, a valuation of its database. The same thing can be said about Whatsapp. So, these entities have a huge mine of data and that is what makes them valuable to investors. But that is also what was true of the gold mine rush in the 1840s in America, where at its peak, technological advances reached a point where significant financing was required and mining companies became important. No doubt, gold worth tens of billions of today's dollars was recovered, but it only made a select few very wealthy. Of the thousands who had come rushing in, most returned home with only a little more than what they had originally started with.
CRACKING ZERO CAC (CUSTOMER ACQUISITION COST) - CLICK TO READ
On the other hand, some believe that the things that have changed since the 2000 dotcom burst may make another such scenario far less likely. The earlier dotcom bubble was due to lack of proper valuation mechanisms to capture traffic and customers. In the last decade, there has been a sea change in Internet penetration and also in the use of the Internet, and users are well aware of the importance of certain applications and services. Today, not only is the quality of information better, but the speed as well. And that seems to make all the difference.
Consequently, the big home-grown marketplace majors like Flipkart and Snapdeal are slugging it out with global giant Amazon and drawing out new strategies to woo the consumer. Whether it is through deep discounts or deals, the e-commerce big boys are currently spending all their energies in attracting consumers, changing their shopping habits, hoping that profitability will be next.
And even as the top e-commerce players and investors debate the issue of profitability, consolidation is in the air (Flipkart’s takeover of Myntra last year for a record $300-330 million and more recently, Ola’s $200 million acquisition of TaxiForSure) in the Indian e-commerce market with clear leaders breaking out of the pack in some verticals like fashion, kids’ products, furniture, etc., while a troika of sorts with Flipkart, Snapdeal and Amazon has emerged in the horizontal e-tailing space. The new set of e-commerce entities are successfully moving ahead in specific verticals—be it in the areas of jewellery e-tail, food apps, aggregation of taxi services, real estate, automobile classifieds or movie and event tickets—and gaining traction with investors in the process. With the marketplace model getting crowded, differentiation will now be the key to success.
Scaling heights
In 2014, 35 verticals were funded by investors who put in a total of $261 million into such firms, estimates VCCEdge, which tracks investment activity in the country. These niches are a far cry from horizontals (or marketplaces like Flipkart and Amazon), which engage in multiple categories and are generalist retailers. Experts call this a step in the evolution of e-commerce in India.
The action so far:Ola Cabs acquired TaxiForSure by paying $200 million (Rs 1,200 crore) in cash and stock in March 2015, making it the biggest acquisition in the domestic consumer Internet space after Flipkart’s acquisition of online fashion store Myntra last year for $2 billion.
Online classifieds startup Quikr is now valued at $1 billion with a fresh round of fund infusion of $150 million from existing investors like Tiger Global and eBay as well as new investor, Steadview Capital in March this year.
Jabong raised multiple rounds of funding including the last round of $27.5 million around February 2014. In September 2014, Jabong's Germany-based incubator Rocket Internet merged the company with four other fashion entities in other geographies to form the Global Fashion Group (GFG), expected to go live early April.
As part of the expansion plan, Snapdeal has acquired a "minority stake" in GoJavas, which is the former logistics arm of rival Jabong. Sources said the deal is pegged to be between Rs 150-200 crore. At present, Snapdeal does not have a captive delivery arm and relies on third-party logistics.
Baby products has been another hot area with multiple investors chasing this space. One of the biggest e-tailers, Firstcry has raised $59 million so far. The investment comes amid a wave of consolidation in the baby care e-tailing segment, which currently accounts for less than 5% of the estimated $10 billion baby care products market in India.
In the last few years, a lot of action has been seen in the furniture and home furnishings space. Pepperfry has so far raised $28 million and is looking at raising funds to the tune of $60 million to $80 million by May 2015.
Is e-commerce an expensive bet?
In July 2014, Amazon announced $2 billion investment to its India focused marketplace, Amazon.in. This was hot on the heels of the poster boy of Indian e-commerce space, Flipkart, raising $1 billion from Tiger Global Management and Naspers. Japan-based SoftBank Internet and Media, Inc. (‘SIMI’) committed $627 million in funding to Snapdeal which had also earlier in the year, already amassed $133 million funding led by eBay. So, both investors and strategic investors bet over a billion dollars or more each in the top three e-tailers alone.
“The outlook for e-commerce investments and overall venture capital and private equity investments is very good overall in 2015 as it was in 2014. We have a very good environment and we are also expecting some more positive forces, following the new Budget and further reforms in the country. All of this bodes very well for the level of private equity and venture capital that would flow into India in 2015,” says Arvind Mathur, President of the Indian Private Equity and Venture Capital Association (IVCA).
While action is expected to get hotter this year, what is the ground reality of what’s driving such investments? “We have to look at venture capital and private equity as long term investments. And this is really nice because it gives time to the entrepreneur to implement his full strategy, to scale up, to reduce his cost from economies of scale which takes time and that’s when they move into a profit-mode-making zone. The growth of this industry was around 30-35% in the last five years, over the next five years until 2018, there’s going to be a 40% compounded annual growth of the e-commerce industry,” Mathur says.
Even in verticals like jewellery and grocery, online players have created strong brands despite many people saying these won’t work in India because people would like to touch and feel the product that they want to buy. “In organized retail, what happened in the US or Europe is not going to happen here. E-commerce is going to take over that organized retail and everything is going to happen online, rather than a chain of stores or Walmart opening 50 stores or something like that. India is going to be a different story,” says Bikky Khosla, Chairman of the e-commerce committee of ASSOCHAM and CEO, tradeindia.com.
Flush with funds, ad spends are going upOne has only to consider that in 2010, Snapdeal was started by Kunal Bahl and Rohit Bhansal with seed capital of Rs 40 lakh to conclude that venture capital is not needed to start a business, but it is definitely need to scale up the business. Flipkart, Amazon and Snapdeal, all have raised investments or have commitments of $1 billion or more. This money is being burned to acquire new customers, offer discounts and pump up products on offer.
Spending over Rs 1,000 crore in a media blitz, e-commerce players together spent half of what the country’s largest advertiser Hindustan Unilever did in 2014. “Ad spends will definitely go up. To get new users for online buying, they will have to spend. Today, about 32% of Internet users are using e-commerce and buying online. But to get that number to grow, they will have to do some branding and advertising,” says Khosla.
Another interesting trend that’s seeing hot action is that of sponsorships as the deep-pocketed e-commerce companies increasingly snap up title sponsorship of major television shows, fashion and sporting events to increase their visibility. Amazon made a late start in the fashion category, but has ambitious plans for India's booming online fashion industry and beat peers such as Snapdeal.com and Myntra to bag the sponsorship of the prestigious bi-annual event organized by the Fashion Design Council of India (FDCI).
Last year, Snapdeal.com had replaced Vodafone as the main sponsor of popular TV reality show Bigg Boss. The Delhi-based online retailer is also an associate sponsor of the Bangalore Fashion Week. Jabong is an associate sponsor of Lakme Fashion Week and official retail partner of marathons in Delhi, Mumbai and Bengaluru, while its rival Myntra is sponsoring a women's marathon event in Bengaluru.
“I think it wouldn’t be unfair to expect similar numbers to 2014 in ad spends, whether it’s Rs 1000 crore or Rs 800 crore doesn’t matter. This is going to continue because the industry will have to invest in branding and communicating value propositions that are present to their consumers,” says online fashion retailer, Jabong.com’s co-founder and CEO, Arun Chandra Mohan.
“We started our first TVC in October last year. We believe this is the time for us to acquire more customers and spread awareness. Ad spends for us in 2015 are going to be higher. As the market gains scale and now we are trying to build awareness, brand building is an area where we will spend a lot of money,” says Ashish Shah, COO, Pepperfry.
And since these players are also competing with each other, they need to provide the cheapest pricing for the best products. “People in India, or for that matter everywhere in the world, like value for money. And that aspect has been taken care of with discounts and sales. But I don’t know for how long this can continue because if this goes on, they will not be profitable,” says Khosla. “Flash sales, daily deals and discounts for us are a part of the business. We are in the fashion business and that’s how we communicate to the consumers,” argues Mohan.
But there actually may be another way around this. Firstcry.com seems to have put in place a strategy to combat the heavyweights present in their vertical and adress the challenge of rationalizing customer acquisition costs without throwing mega discounts or spending on mass media. (see box)
The future is mobile
The e-commerce companies also need to ensure that the users they lure to their sites via marketing, should like what they see. So spends on usability of the site through good designing and IT is where a huge chunk of the funding is allocated. Some like Flipkart and Myntra have gone a step ahead as to actively steer traffic away from their desktop site and encourage users to only visit their mobile app. They have already discontinued their mobile sites. Others like Jabong are also investing heavily in enhancing their mobile presence. “Mobile is something that has been extremely strong for us over 2014 and in fact, has been one of the key pillars of growth; over 50% of our sales are coming from mobile and we feel that potentially, 75% of our sales could come through mobile in the medium-to-long-term. So this is something that we are focussing very strongly on for 2015. Our recent collaborations with Line or WeChat will help us accelerate our growth in the mobile strategy,” says Mohan.
“About 35% of our traffic comes through mobile today. People actively browse through our catalogue on their phones/tablets and make purchase decisions. However the transactions do not close on handheld devices because we are a highly engaged purchase,” says Shah.
“At least 40% of our sales today come from mobile. We expect it to touch 65% in another 12 months,” says Supam Maheshwari, co-founder and CEO, Firstcry.com.
Logistically speaking
Another aspect of the business that is seeing major spending by e-commerce players is investment into the backend channels and logistics. Experts believe that "last mile delivery" will increasingly be a crucial front in the war for leadership in India's e-commerce industry.
In a report on e-commerce released in November 2014, broking firm Motilal Oswal found that for every Rs 100 spent on e-tailing, Rs 35 is spent on supporting services like warehousing, payment gateways, and logistics, among others. Delivery costs a platform owner 8-10% implying significant burn. Though 50-60% of delivery logistics today are handled by large e-tailers themselves, this proportion may reduce going forward as the participation of lower tier cities picks up. “We have lakhs of pincodes and reaching the last mile is an issue which needs to be addressed. And today, the challenge is that anyone orders anything, they want it very fast. And to be able to reach the last mile is the challenge and how to do it effectively. but, I’m sure these challenges will get addressed as we go forward this year,” says Khosla.
Aiming to reduce delivery time to enrich the customer’s experience and manage last mile delivery, Amazon last week set up a logistics company in India – Amazon Transportation Service Privatte Limited (ATSL). The regulatory filing made by ATSL shows that the Delhi-based company has a paid-up capital of about Rs 24.8 crore. Amazon was the first online marketplace to offer two-day and one-day guaranteed delivery in India. This prompted Snapdeal and Flipkart to follow suit and launch same-day delivery as well, with Flipkart announciang plans to launch three-hour delivery this year. With little to choose between the top online retailers and capital no longer a constraint, logistics is proving to be the differentiator.
“We are the only company today that distributes furniture items, large items in 150 cities on our own and we are going to expand our delivery capacities to 250 cities by the end of this year,” says Shah. Online retailers Flipkart, Amazon and Snapdeal have not been able to make inroads into online furniture retailing in India because of inherent constraints related to delivery and supply chain. But if they decide to enter this market, online furniture retailers such as Pepperfry that have invested significantly in supply chains would be ripe for acquisitions.
The M&A route
As valuations drop and the large companies gobble up their weaker rivals, the sector is poised for a round of consolidation. Larger firms are on the lookout for niche and specialty players for acquisition but whether it will be a win-win situation for both the parties remains to be seen. “I think you will see acquisitions for two reasons – both from the acquirer’s point of view and the target’s point of view. The acquirers want to grow rapidly and they want to bring about synergies and economies of scale. From the standpoint of the target, there would be young entrepreneurs, who would want to become serial entrepreneurs; so these people are going to sell their companies to the big acquirers and move on and create new ventures and serial entrepreneurs, which is going to be great for this country,” says Mathur. “Some of the smaller companies which are either less efficient or too small, which have not been able to carve out a niche for themselves, are more likely to get consolidated,” says Mohan. “I think the important thing here is that in the medium to long run, are these companies going to be viable entities? I’m quite sure that some of these will be viable entities, some will fall by the wayside, some will get acquired, there will be synergies, there will be economies of scale and all of this will be great for the market in the end,” adds Mathur.
Profit possibility
Industry sources believe that as things stand today, the verticals may make money far earlier in the process, maybe even within two to three years as the market and the demand for e-commerce matures.
“Verticals are now attracting cash. We raised cash and so have companies like FabFurnish, Urban Ladder and Ola cabs. These are verticals that have raised good amount of capital because there is a significant probability of getting profitable early in the process than the horizontals which are just competing on discounts amongst each other. That's why their game of profitability is far ahead as they are postponing that final verdict,” says Maheshwari.
“Turning profits is going to take some time. It will not happen in the next one or two years I’m not looking at it getting very profitable,” adds Khosla.
“Profits come in the long term and if you look at even Amazon in the US, when it started, it was a great business model, but it took time and it took a number of years before they could get into a profit-making situation,” says Mathur.
“For our category, profit margins are simply easier because we're not in the business of making 2 to 5% margins. We run a category which gets decent margins but all of that currently gets utilized in distribution and logistics expansion, team enhancement and brand building. But over time, we will not need to spend money in those areas. According to me, early 2016 is the time when we should turn profitable,” says Shah.
End game?
Everyone wants to get on to the e-commerce wagon today, but it is clear that the e-commerce pie is not one that is up for sharing. It is a game of survival by all means. Smaller players without deep pockets are facing the heat, and eventually burning out. Presently, aggressive pricing in India is leading to e-tailers making losses on every segment. For every Rs 100 sale of a product like a book, the e-tailer incurs a loss of Rs 24, there is a loss of Rs 13 in mobiles, and Rs 8 in apparel. So, the question remains - What does the future hold for the e-commerce player? “This industry is really going to boom. According to some of the reports I’ve been reading and people I’ve been talking to, in the next five years it is expected to go up to $90 billion. So you can imagine the kind of scope and opportunity there is,” says Khosla.
“With the new government, there is a stable policy framework, the GDP forecasts are higher and what we are seeing is that this demand, this consumerism, is largely going to be met by the e-commerce channels. From a broad macro perspective, you add a very large youth population, Internet penetration, increasing level of people’s willingness to use their mobile for consumption – you tie in all those things and the conclusion is that definitely the future is bright and we are very excited to be in the space where we are at the time,” concludes Mohan.
So as more acquisitions are announced and even more funding acquired on perceived ‘puffed up’ valuation of the company post acquisition, the good times are likely to continue at least till the markets have a good run. “But in the next 12-15 months, when one of the larger horizontal players is unable to raise funding or takes a down round, that is when the whole market will start correcting itself and everyone will then chase the path to profitability and at this time, the player with the highest amount of cash visibility, will be the last man standing. That’s how this whole game is going to be played out,” explains a source on condition of anonymity. Sadly, that’s not how stable companies are raised. Today, Flipkart is a company that has raised the second largest amount of private capital in the world after Uber. And Uber is at a $60 billion valuation. Flipkart is at a $12-15 billion valuation. There will be a time in the not-so-far future, caution experts, that the bubble will burst and sanity will prevail.
