eCom Hunger Games: Survival of the richest?

Edited by Vani Rao

Intense competition, lack of funding wilting out smaller players

In recent years, the internet has revolutionized the way one shops for basic goods and services. With a click of the mouse, consumers can now conclude an online transaction in a matter of seconds, thanks to the advancement of e-commerce transactions and the availability of mobile banking. Added to this, the high penetration of PCs and smartphones as well as high-speed broadband connectivity has prompted shoppers to increasingly shop online. In this scenario, India’s e-commerce industry continues to grow at an astronomical pace, with the market size of the industry growing from INR 19,249 crore in 2009 to a whopping INR 47,349 crore in 2012. It is expected to grow further to INR 62,967 crore by 2013, according to a report by Internet and Mobile Association of India (IAMAI) based on findings of market research firm IMRB.

In the past three years, venture capitalists have invested about $ 700 million in as many as 52 e-commerce companies. A large portion of this funding has gone into one single company, Flipkart.com, which has raised roughly $550 million since 2009.

Ironically in 2013, around 135 start-ups were forced to shut shop due to paucity of funds and lack of investor interest in their business model. Moreover, dozens of smaller e-com companies are merging with their rivals as investors reserve new funding for the larger and more successful ones.

Survival of the biggest

According to Microsoft’s India Accelerator, a start-up advisory, the rate of e-commerce closures in India has risen four-fold in 2012. India Accelerator resident CEO, Mukund Mohan, said, “I think the problem is that we don’t have the business model figured out very well. The economics of sale and the cost of doing business are just not working out to be a profitable venture for us. The volumes that e-com companies were expecting were not actually there. The e-com is a very low-margin business and every transaction is small; so it banks highly on volume. But our volumes are nowhere comparable to some of the smaller populations like the US and Europe. The interesting thing is that a lot of Indian companies doing B2C have started moving to B2B-C, where they are doing huge amount of platform work, using that as an opportunity for provide some efficiency for e-com start-ups and others as well. I think that’s where a lot of e-com start-ups will start moving to.”

Funding scarcity

India’s e-com industry is witnessing severe competition in recent years. As the best-funded companies race to the top, dozens of smaller ones are folding up or desperately seeking buyers, defeated by inadequate revenue growth, high customer acquisition costs, distant profitability, and a paucity of funding.

Over the past four years, at least 1,200 e-com companies started operations in India. According to VC managers, funding sources, especially for e-com ventures, are very limited in India. As companies progress from one stage of investing to another, the sources of capital keep shrinking. Unless the company reports phenomenal growth, finding investors poses a problem.

Kalaari Capital, which has invested in several e-com companies such as Zivame and Myntra, predicted doom for two-thirds of the companies in the fray if they failed to present a convincing roadmap to investors.

The investors haven’t been that generous to smaller players except for a few like lingerie online store Zivame.com, which recently received its second round of funding of $6 million. Asked how they managed to garner funds as a start-up while many of their peers were shutting shops due to lack of funds, Pratik Kumar, Director Digital Marketing, Zivame.com, said, “Funding is never a problem if you are doing the right business. People will put in money if the business has a potential to grow. For us, it was very clear that we are market leaders but were just scratching the surface. The biggest problem was that a lot of the start-ups were clones of existing websites. None of these guys (failed e-tailers) were differentiators. From the investors’ point of view, they want something new. If I have to put in money, I would invest in Myntra, it’s a horizontal apparel store. If it is lingerie, I would put in my money in Zivame. The differentiator that you bring to the table matters a lot to the investors. Everyone thought the entry barrier was low. That just go online and everything will start working out. Until or unless there is a differentiator, nobody is going to come to your website. That is the main reasons why many of these clone websites lost investors’ trust and had to eventually shut shop.”

Manoj Agarwal, Co-founder of Giftxoxo.com, a gifting platform that enables personal and corporate gifting, could not agree more. “Around one-and-a-half years ago, when the entire industry witnessed a boom, a lot of copycat models emerged. However, given the fierce competition in the market, only a few of them survived. When you start an e-com business, it looks very easy because people think it is more of a technology business. But after you have taken the plunge, you realize that technology is just an enabler, it is a very operations-heavy business. For companies like Flipkart, which sells different kinds of products, it would be easier to scale up and add more products as they already have the necessary infrastructure and logistics in place. Therefore, they get investor interest. But for single-vertical companies such as online jewelry seller Caratlane, scaling up would mean huge investments. It becomes quite a challenge for them to scale up and continue to get funding for their business. So in e-com, the big fish will always have an advantage over the smaller ones.”

India’s overall digital commerce market, which was valued at INR 47,349 crore in 2012, is expected to grow by 33% and reach INR 62,967 crore by 2013, according to IAMAI. With only 10% of India’s population accessing the internet and the rapid spread of broadband and cellular phones, the market has a huge growth potential. Moreover, the increasing number of active internet users in the country is expected to fuel the market growth over the next few years.

The exhibit below shows the online shopping behavior of internet users in 35 cities surveyed by IAMAI.

Source: IAMAI
Source: IAMAI

Gold rush

Although the e-commerce industry has been growing at around 35% for the past five years, it is yet to turn profitable. It is true that India’s online marketplace is saturated and over-crowded today, but breaking even is not even in distant view for most players. Unlike in developed markets, Indian online shoppers tend to buy low-margin products such as electronics and books, rather than high-margin products such as clothes and shoes. The market size of the e-tailing industry was INR 1,550 crore in 2009 and is expected to increase to INR 10,004 crore by the end of 2013, as shown below.

Source: IAMAI
Source: IAMAI

Moreover, in a bid to reach out a larger audience spread across India, particularly in smaller cities and towns, many online retailers have started investing heavily in supply and delivery chains, further lowering their margins.

According to IAMAI, a majority of online shoppers use debit cards/internet banking and credit cards follow closely at no two. Cash on delivery, which account for at least 50% transactions for e-tailers, stands at number three as shown below

Source: IAMAI
Source: IAMAI

Many e-tailers rely heavily on the COD mode of payment, which is expensive and cumbersome to organize, to combat low credit card penetration and distrust of online shopping particularly in smaller cities and towns. “At least 50% of our orders are COD and I think the biggest number difference comes from repeat buyers where the COD goes down to as low as 25-30%. True that it takes 10-15 days to recover the money. But we don’t mind the delay as long as it helps us grow our customer base,” said Kumar, whose company claims to deliver orders to every pin code address in India – starting from Kashmir to Kanyakumari.

Price wars in the offing

Many e-tailers also resort to heavy discounting to combat fierce competition in the market. This has resulted in a wave of closures and forced mergers. For instance, the crowded online baby care products portal space has 15 companies that competing among each other for a large slice of the market. In April 2013, Mumbai-based online baby products portal Babyoye.com merged with its competitor Hoopos.com. If the three-year old Babyoye is profitable, Hoopos, a year younger than its acquirer, is yet to make profits. The merger is likely to give them a bigger pie of the market and improve their financial health too.

The bigger fish keeps preying on the smaller ones, particularly those who have the potential to grow big someday. In this dog-eats-dog industry, acquisitions are primarily done to kill the competition. Take the case of Flipkart that acquired electronics retail firm Letsbuy.com for $25 million. The deal was brokered by their common investors Accel Partners and Tiger Global in 2012, only to kill it a few months later.

In fact, many companies are being pushed into mergers by their backers. With hundreds of millions of dollars stuck in investments and no exits in sight, VCs are tightening their purse strings and limiting themselves to follow-on investment. As a result, new e-com companies are finding it difficult to raise funding, and if at all they manage to get one, the monetary support dries out during the next level of funding. The existing firms are also under immense pressure to find partners that will allow them to lower operating costs, increase customer bases, scale up quickly, and become profitability faster.

Despite the hype created around e-commerce, it is still not a profitable business. Even the market leader Flipkart, which prefers investing in the future growth story to going profitable, reported a loss of around INR 281.7 crore in the year-ended March. Amid growing pressure from the investors, its peers Snapdeal and Myntra have announced that they expect to turn profitable in the next two years.

However, some companies such as Flipkart and Zivame are deliberately not taking the road to profitability for now. Why? “We are looking for growth and reach right now. I don’t know whether it will be true for Flipkart or not, but we know that if we have to turn profitable, we can do it in the next three months. We are in the high-margin industry, hence we know we can become profitable at whim. I would rather get more users on board and focus on growth,” said Kumar.

The main problem, though, is finding e-tailers that are financially secure enough to undertake an acquisition. The most successful large e-tailers report that they are now routinely approached by smaller competitors desperate to sell out. If this trend continues, India’s e-commerce industry will eventually undergo consolidation and be dominated by a few strong, well-funded players who will profit from the current carnage.

List of Abbreviations
  • B2B – business-to-business
  • B2C – business-to-commerce
  • COD – cash-on-delivery
  • E-com – electronic commerce
  • IAMAI – Internet and Mobile Association of India
  • PC – personal computer
  • VCs – venture capitalists

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