1. Digital shopping bazaar gets bigger

Digital shopping bazaar gets bigger

The e-commerce industry in India blazed itself to new heights in 2014, attracting marquee investors and hordes of buyers alike and this momentum is likely to sustain during this year

By: and | Updated: January 5, 2015 2:53 PM
The domestic e-commerce industry, which is poised to double to a -billion entity by 2016.

The domestic e-commerce industry, which is poised to double to a -billion entity by 2016.

When the old guards of India Inc, having dabbled successfully in anything from salt to software, vouch for the country’s $3.1-billion e-commerce industry, it is an endorsement enough for the fledgling sector. The renewed vigour with which venture capital and private equity investors showered funds on the homegrown e-tailers—close to $3 billion in 2014—reflects that the appetite to partake in the e-tail growth story is only growing.

The domestic e-commerce industry, which is poised to double to a $6-billion entity by 2016, has cemented its position as the next greenfield sector, with the likes of Flipkart, Amazon and Snapdeal locking horns to grab the biggest pie. The year 2014 witnessed unfurling of a fund raising blitzkrieg by the stakeholders as much as mergers and acquisitions.

Though all e-commerce companies, including poster boy Flipkart, are still  in the red, investors were at their benevolent best to support the cash burns by way of aggressive marketing and deep discounts. In fact, both Flipkart and Snapdeal roped in new marquee investors—DST Global and Soft Bank respectively—mopping up $1.9 billion and $860 million during the year. Global e-commerce major Amazon, which kickstarted India operations in June 2013, was also a party to the game of one-upmanship, with CEO Jeff Bezos promising an infusion of $2 billion into its India operations.

Online-shopping

The veterans of India Inc were not to be left far behind. Ratan Tata, Chairman Emeritus, Tata Group, Wipro chairman Azim Premji and Infosys co-founder NR Narayana Murthy marked their foray into the sector as well. While Tata picked up a minor stake in Snapdeal and jewelry e-tailer Bluestone for an undisclosed sum, IT pioneers Premji and Murthy extended the turf war between Wipro and Infosys in the $118-billion domestic IT industry to e-commerce. Murthy’s private investment firm Catamaran Ventures had announced in June a joint venture with global e-commerce major Amazon named Taurus Business and Trade Services, where Catamaran will hold a 51% stake and Amazon the rest. Besides also being an investor in Snapdeal, Premji led a $50-million investment round through his family office, Premji Invest, in online fashion retailer Myntra.

“More than the quantum of investment, it is their involvement that matters,” said Rutvik Doshi, principal at Inventus Capital Partners.

“Participation of traditional business houses in e-commerce has been minimal or insignificant. Tata’s participation is a positive signal for the ecosystem and may lead to a lot more investment from traditional Indian business houses. There is belief that e-commerce is here to stay and grow.”

Surprisingly, the sustained losses incurred by the e-tailers seems to have no impact on their sky-high valuations. The marketplace operated by Flipkart logged a net loss of R400 crore in the year ended March 31, 2014 on revenues of R179 crore., while Amazon posted a net loss of R321 crore on revenues of R169 crore. Snapdeal, reported a loss of R264.6 crore on revenues of R168.1 crore.

Despite this, Flipkart’s valuation stands at a whopping $11 billion while Snapdeal was valued at $3 billion.

The valuations are possibly driven by the tremendous growth prospects, given the uptick in mobile phone usage and Internet penetration.

According to retail advisory firm Technopak, India is expected to have 550 million internet users in 2020, with a penetration of nearly 40%, as against the present 243 million users and 19% penetration.

However, e-tailers, while gaining acceptance, was also subjected to consumer ire, mostly over technical snags during mega sales offered by them, a case in point being Flipkart’s Big Billion Day sale. The blitzkrieg, a deep discount online shopping carnival on Monday to cash in on the festive season, brought in hordes of buyers with the e-tailer achieving sales of $100 million in just 10 hours and a billion hits on the website.

While aggrieved customers complained that most of the coveted products went out of stock within minutes of the sale commencing, some
alleged the online marketplace spiked prices. Several customers complained that their orders were scrapped arbitrarily by Flipkart.

While brick and mortar retailers went up in arms against the online players, alleging predatory pricing which was hurting the brick and mortar channels, both Flipkart and Amazon were hauled up by the Enforcement Directorate and the Karnataka sales tax department respectively, which brought the spotlight back on the allegedly dubious business models followed by the e-tailers.

Investigations by the Enforcement Directorate into Flipkart found that the company violated Foreign Exchange Management Act (FEMA) provisions to the tune of around R1,400 crore between 2009 and 2012. The e-tailer, which came under the scanner for allegedly engaging in business-to-consumer retail, can be fined anything from 10% to upto three times the violation amount, upon adjudication. Hence, this may translate into a fine of up to R4,200 crore, or it could get away with a relatively light penalty of R140 crore.

Amazon, on the other hand, found itself in troubled waters over alleged violation of VAT rules. Karnataka’s commercial taxes department has issued notices to about 75 vendors on Amazon’s online marketplace for registering the e-commerce player’s fulfilment centre as an additional place of business. The tax authorities had raised a red flag over the Fulfillment by Amazon service under which the e-tailer encourages merchants to store products in its fulfilment centres even before an order is placed to facilitate faster delivery and enhance customer satisfaction. However, the authorities contend that this makes Amazon a commission agent and wants it to pay VAT on behalf of the sellers.

Amazon maintains that it merely provides a platform to third-party merchants and does not own the inventory and so is not liable to pay VAT.

Despite these challenges, the future looks certainly bright for the industry. According to Gartner, the India e-commerce market will reach $6 billion in 2015 a 70% increase over 2014 revenue of $3.5 billion.“Digital commerce is at a nascent stage in India. However, India is one of the fastest-growing e-commerce markets in Asia/Pacific,” said Praveen Sengar, research director at Gartner. “India represents a $3.5 billion market, growing at approximately 60-70% every year. It represents less than 4% of the total retail market. B2C e-commerce leads the market in India, while B2B is limited to organisations that drive online channels to integrate with their partners and distributors,” he informed.

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