The large losses don’t seem to have deterred investors who clearly believe there’s money to be made in India’s online market.
The total losses for a clutch of India’s top e-retailers — Amazon, Flipkart, BigBasket, Grofers, Swiggy, Zomato, Paytm and OYO — crossed Rs 17,000 crore in the year to March 2019, a 70% jump over losses in the previous year. While revenues rose a smart 80% to Rs 26,066 crore, this was not enough to cover the sharp rise in expenses to a staggering Rs 43,431 crore, up 72%.
Backed by their sponsors, e-commerce players continue to make large investments to win over customers and gain share in what are intensely competitive markets. Not everyone’s growing at a breakneck pace and some have lost momentum. Swiggy, for example, grew revenues by 154% in 2018-19, somewhat slower than the 200% plus in the previous year. CEO Sriharsha Majety recently said Swiggy was aiming to generate about 30% of its revenues from areas other than food delivery.
Both Flipkart and Amazon have recorded only a marginal revenue growth in the past two years, but BigBasket fared better in 2018-19, growing at 69% compared with the pace of 29% in 2017-18, though this was much slower than the 107% rise in revenues seen in FY17.
The large losses don’t seem to have deterred investors who clearly believe there’s money to be made in India’s online market. Internet firms raised $9.13 billion in funding in the nine months to September, a rise of 28% y-o-y, data from Tracxn show.
The losses aren’t going away for at least the next two years, given investments need to be made in marketing and infrastructure. As Satish Meena, senior analyst at Forrester Research, points out e-retailers may have been able to win the first 100 million customers but the next batch will take a lot more doing.
At Zomato, for instance, expenses on advertising and promotions soared to Rs 1,214 crore a 15-fold increase over the spends in the previous year. Subhendu Roy, partner at AT Kearney, explains that the customer acquisition cost or CAC is about 20% of sales — 10-15% of price discount and 5-10% of marketing expenses. While CAC may have stabilised for some categories, they are on the rise for emerging categories like grocery.
Typically, e-commerce firms incur four types of costs — cost of goods sold (manufacturing, raw materials and packaging), distribution costs, internal expenses and marketing costs. While COGS forms the bulk of expenses, marketing cost makes up more than 10% of the overall sales, and distribution costs account for over 5% of sales, Roy says.
At Swiggy, which has rolled out services in 450 cities, the expenses rose multi-fold to Rs 7,762 crore. Analysts estimate food delivery firms’ monthly operating cash burn to be about `200 crore as they offer new services such as on-demand delivery and home-style meal subscription. Founder and CEO Deepinder Goyal recently said Zomato has been able to reduce its cash burn by about 70% from what it was seven months ago.
As e-commerce firms continue to expand into newer cities and diversify their businesses, they will remain in the red, says Ankur Pahwa, partner at EY.
Meena of Forester Research says till a new lot of customers gets accustomed to online shopping, companies are investing in other businesses to retain the existing ones.
Flipkart Internet’s advertising expenses shot up to Rs 1,141.5 crore in FY19 from Rs 731.3 crore in FY18. Group CEO Kalyan Krishnamurthy said recently that while business from small towns is growing at 90%, generating nearly 70% of transactions, bigger cities are growing at half the rate.
Flipkart and Amazon jointly hold close to 80% share in the e-tail segment and are wooing shoppers from beyond metros — tier II cities and beyond.
To turn profitable, the companies are adopting two strategies — moving to private labels that make them less dependent on large suppliers and passing on the burden of discounts to brands.
For instance, Grofers which was earlier pure hyperlocal and shifted to becoming an online grocer with an inventory-led model is banking on FMCG private labels to drive its second phase of growth. Close to 90% of Grofers’ users are already using the company’s private-label brands, the firm said.
Meena adds that while companies will burn money to diversify their businesses, the strategy may not always pay off; Ola’s foray into food delivery, for instance did not work while UberEats is looking for potential buyers.