How much money does Flipkart need to keep going till it breaks even and eventually turns profitable? That is something even the top team at India’s number one e-retailer may not have figured out. But given the fierce competition, Flipkart’s going to need a fairly large sum to be able to stay in the game. Between them, India’s top three e-tailers—Flipkart, Snapdeal and Amazon—are expected to post losses of close to Rs 6,500 crore, or nearly a billion dollars, for the fiscal year gone by. That comes on top of an estimated Rs 4,150 crore that was lost in FY15, when the collective revenues of the trio were just over Rs 2,620 crore.
There’s no doubt online sales are growing fast—in FY15, they were galloping at an estimated 400% for Flipkart and 500% for Snapdeal. But, obviously, the costs are overtaking sales. While it is logical to focus on scale because that is what will bring in the operating leverage, the question is whether the pace of sales-growth will sustain. Right now, it looks difficult.
Take the food-tech segment: at least a dozen enterprises have shut down because it is overcrowded and there is little differentiation. One app is no different from the other. Or the hyperlocals like Grofers which are pulling out of cities rather than moving into new ones; there is simply no demand for these services.
One could argue hyperlocals are too niche, but every space is getting overcrowded; there is simply too much competition. In addition to half a dozen general e-tailers, there are the niche players selling furniture, airline tickets, groceries and hotel rooms. Add to that a hundred other platforms hawking anything from loans to handicrafts, and it is quite a market. And this before the brick-and-mortar retailers have even got there.
More critically, shoppers are spoilt for choice having got used to buying merchandise at hugely discounted prices. So, while consumer spends are rising and the catchment is growing, there is unlikely to be enough topline to go around. Weaning customers off these hefty discounts isn’t going to be easy even if a good chunk of shoppers buys online for the sheer convenience of doing so. In fact, given discounts have been the core of their sales strategy—the DIPP’s diktat disallowing e-tailers (those that want to be funded by foreign investments and don’t hold inventories) could hurt because it is unlikely manufacturers will want to hurt their margins by selling at hugely discounted prices.
What can be compelling for customers is an array of affordable merchandise, something retailers have cottoned on to. Each one is wooing vendors, trying to bag exclusivity deals and helping merchants with standardised shipping rates and cataloguing services. Snapdeal, for instance, has struck an alliance with the country’s leading lender, State Bank of India, to fund smaller merchants. But retailers will need to do a lot more. Flipkart, for instance, is reportedly moving to an arrangement by which it will charge vendors the higher of 2.5% of the transaction size or Rs 20 as commission, rather than 2.5-22.5% as commission. The idea is to earn revenues from advertising with merchants paying more for the better spots. The ratio of sellers to shoppers today is skewed towards the latter: 0.2 million sellers for 40 million buyers, as estimated by Kotak Institutional Equities. For perspective, Alibaba has 8.5 million sellers on its platform, catering for 350 million buyers. So, while it might seem like there is a huge opportunity—and there is certainly one—the competition will be tough. There may be thousands of vendors across the country but, at the end of the day, every retailer wants to partner with the top sellers in any category. Over the long run, it is hard to see exclusive arrangements lasting too long, though there are several of these today.
Private equity (PE) players have been extremely generous, writing out big cheques so far and all of them betting India will become another China. Despite down rounds, money continues to move in and, in recent months, several players—among them, Snapdeal, Shopclues, Lenskart, Bigbasket and Ibibo—have managed to get more investments. But if they don’t see profits soon enough, even the most deep-pocketed financiers will hold back. With yet another mark-down for Flipkart, investors have definitely turned a tad more cautious. Following Morgan Stanley and T Rowe Price, two more investors, Fidelity Rutland and Valic, have now decided the e-tailer isn’t as valuable as they thought it was a year back and have revised valuations by 32% and 17.5%, respectively. Consequently, Flipkart—which originally modelled itself on Amazon but is now fashioning itself after Alibaba—is now worth roughly $10 billion, about a third less than the $15 billion that it boasted of in June last year.
If media reports are to be believed, Snapdeal hasn’t been able to convince investors they should back it at a valuation of $6.5 billion. In another recent downgrade in the food-tech space, analysts at HSBC said they valued Zomato at a 50% discount to the $1 billion consensus valuation, using the discounted cash-flow method. They reckon Zomato’s model is too dependent on advertising and difficult to scale up; moreover, the competition, they believe, would find it easy to eat into Zomato’s marketshare via other routes, particularly the last-mile-delivery model. Marking down investments doesn’t mean investors will stop funding businesses. But it is getting investors that is going to be a harder sell.