Losses widen, slower funding restricting cash-burn
To say e-commerce in India has taken off would be an understatement. With almost every product or service now available at a click, and smart phones becoming cheaper by the day, households are more than happy to shop online. The top three e-retailers saw transactions worth an estimated $7-8 billion on their platforms in FY15, and the value of transactions this year could be higher by 30-35%. To be sure, much of the merchandise today comprises electronic goods and it is the big discounts and deals that are attracting customers. Nevertheless, the convenience of buying online is hard to resist.
The question is whether customer will continue to shop once the discounts are withdrawn. A study by Kotak Institutional Equities shows that a clutch of 22 e-commerce players reported a combined revenue growth of 191% in FY15 while their total losses rose 264% to Rs 7,900 crore. The three biggest marketplaces—Amazon, Flipkart and Snapdeal—grew at nearly 500% and their loss margins fell. However, for other players such as Askme, the loss margin rose substantially to 693% while revenues barely grew. Since growing a business costs money, it would be incorrect to assume that the costs-to-sales ratio will fall very dramatically, unless revenues grow at a brisk pace. Apart from the fact that there is little or no demand for a host of services in the smaller towns—which is why hyperlocals are pulling out from here—it is not as though there is unlimited purchasing power in the metros. Moreover, shopping at offline stores, or eating out at restaurants, hasn’t gone out of fashion yet, and probably won’t for a long time. In the long run, therefore, it is hard to see too many players surviving within a particular segment because each, by itself, is unlikely to be able to garner the kind of volumes needed to cover costs and leave a surplus. But customers will get addicted to buying on the Internet and might even be willing to pay a premium for the convenience of having products delivered at home. So those e-retailers with the financial muscle to battle the initial years—and of course a strong customer proposition—will survive. In the meanwhile as the ad-spends rise and the discounts get deeper, more cash will be burnt; losses in FY16 are likely to be significantly higher.