Is there money to be made in e-commerce?

23 Jul,2012


By Tuhina Anand


There has been a lot of buzz surrounding e-commerce, what with new sites being launched every other day, investment galore and customers finally warming up to buying more than air or train tickets online, one would think that the category come of age.


However, if the front-end gives an impression that everything is hunky dory, a closer look will throw up a completely different picture. There are several reports doing rounds on how Flipkart, the site which is largely responsible for rewriting the game of e-comm is bleeding profusely and unofficial estimates put the losses to around Rs6-7 crores monthly. One does wonder if this is the scenario, then how it is with other e-comm sites and what lies ahead for the players.


Kashyap Vadapalli

Kashyap Vadapalli, Chief Marketing Officer, eBay India said: “There is a lot of buzz around e-commerce – new funding, new player announcements, consolidations and closures, expansions into new areas of business – all making news and hitting the consumer consciousness. However, it is certain that e-commerce is here to stay. Reputed players in the e-commerce industry are focusing on building consumer trust by evangelising online shopping’s benefits to them. This is probably of as much importance as it is to convert internet users to online shopping.”


“There is a significant increase in supply side dynamism, especially over the last 2-3 years, where we have seen large brands, manufacturers and offline retail chains increasingly showing interest in the e-commerce opportunity. Once brands with offline recognition participate in e-commerce, comfort levels for end users will also increase. The fundamental characteristic of building a successful e-commerce business is one that provides consumers with ‘selection’ or ‘variety’ and not just ‘deals or value for money’,” he added.


An interesting facet is that for the many outside the few cities where modern retail has penetrated, online shopping provides access to brands which are not available in their city or town, bridging distribution inefficiencies. eBay India Census 2011 identified buyers from 3,311 Indian cities which are shopping online covering all 28 states & 7 union territories of India.


The Internet & Mobile Association of India (IAMAI) has estimated Indian eCommerce market to be worth Rs46,520 crore or $10 billion in 2011, with a user base estimated at around 10 million people.


Ravi Vora, VP – Marketing, Flipkart said: “The e-commerce story in India is still to reach its full potential. 2011 was the year when this industry finally started to come of age. Today, increased attention from serious players and investors has given this ecosystem a much needed boost. Consumers too are slowly buying into the concept of online shopping – and as online companies continue to improve on their service experience, we see this trend continuing. It’s true that we are seeing the entry of lots of players in the current scenario – and going forward we do expect to see some consolidation in this space. However, the India n e-commerce story is far from over. In fact, in the near future we expect to see it become as robust a model as offline retail is in the country today.”


Mr Vora of Flipkart elaborates that the domestic market has a lot of potential: “The company is scaling up business in order to be able to make the most of it. Our initial customers were the urban, net-savvy youth. However, with our current campaign we have started focusing on offline shoppers, especially in tier 2 and 3 cities. We believe this is where the growth will come from in the coming months – and our aim is to convert these offline shoppers to the online mode. Additionally, we are betting big on the digital business. We think it will expand a lot in the near future and have already made our debut with our online music download service – Flyte.”


K Vaitheeswaran

While the players talk about potential, and the largely untapped, market in tier II and III towns, there is another side of the story. K Vaitheeswaran, Founder & CEO, India, one of the pioneers in online shopping in India, having founded in 1999 and later acquired and rebranded as, has been through two cycles of boom and bust in the dotcom. He is of the opinion that the category has already begun to see some correction: “Unlike the first time when most e-comm companies had to shut shop, I think now the scenario will be different. Now the customers have experienced online shopping and know its merits so what one would see is consolidation in this category.”


For him the mantra for success has been by “keeping a ruthless focus on cost management”. So no snazzy address and definitely no stocking inventory or having a warehouse, but focus is on great selection of products, good pricing and timely delivery. It’s a simple market place structure where they have vendors who provide goods and they manage the backend. Mr Vaitheeswaran said: “If you look at our ROCE (return on capital employed), I think we will top in profitability. Today most players are burning money; I mean how can a business be profitable if you are losing money faster than you are making and you are mindlessly growing operations cost? I think its high time people look at e-comm as a business and not merely as hobby.”


The estimated size of the e-commerce industry is Rs2,000 crore (that is if one is looking at margins) minus the travel. This has been growing at 50 per cent, especially last year.


In this growth, Flipkart has played a role which cannot be undermined. With its superfast delivery mechanism and COD (cash on delivery) option, it has revolutionized the e-comm market in India. Its high decibel campaign addressing deterrents in e-comm has also helped in making e-comm amenable to Indians, besides helping the company create a brand name for itself, which has a high recall. However, this has come at a cost for the company. Its investors – Tiger Global Management and Accel Partners (the latter did not revert on our query) – it seems are not keen on investing any further. Hence, now for Flipkart, which has recently acquired, the option is to be either open to acquisition by a global giant or look for a larger PE investor.


Mahendra Swarup

Giving his take, Mahendra Swarup, Partner, Avigo Capital, said: “In the long run, e-commerce will grow, given that internet penetration in India will only rise and more number of population will become comfortable with the medium.”


He believes what has gone wrong is the way e-comm companies have been structured. What the companies have been selling on the net is a value proposition, while at the same time, the cost of customer acquisition remains high. In fact, in many categories like the books there is hardly any margin. He said: “The VC’s have taken the e-comm business to scale, but after a point there is a need for large PEs to come to rescue as in the case of Flipkart.”


Mr Swarup’s company Avigo Capital has not invested in any e-comm sites as he said: “we are not interested in that game”. He makes a relevant point when he says that most e-comm sites have failed to create a mature management and have been stuck at the entrepreneur level, unlike in other parts of the world where entrepreneurs take back seat and hand over the reins in able managers while still remaining the face of the company, fine example being Google and Facebook.


Also their supply-chain management is not that mature, so in reality, they haven’t created anything that will be attractive for a PE to invest: “I think many small e-comm companies who are non-funded have a better chance to survive than the funded ones.”


Mr Swarup said that the whole talk of Amazon buying Flipkart holds no value as the latter has created no value or attractive proposition for the former to buy and as far as customer loyalty on the web is concerned, none exists. He feels niche players providing specialized merchandise like bikes, mountaineering equipments or kids clothing and accessories have a better chance of survival.


However, the whole e-comm buzz has helped players who remained dormant after creating e-comm platforms on their sites. A large player has seen 100 per cent growth in last year by just tweaking its website and catalogue changes with no additional cost. In fact, most players follow no inventory, no warehouse model, unlike Flipkart whose losses is attributed to its business model of stocking products, which has helped it in delivering fast but cost a dent to the company.


Also, the COD model, which has lured many customers to order from the net, is seen as a complete ‘con game’, as one doesn’t get cash immediately and margins gets reduced immensely plus products get returned, thus creating additional cost burden. In fact, this problem could be solved by creating a database which can be shared by the e-comm players with suspect customers similar to banking sector.


Ashutosh Lawania

However, all is not lost, Ashutosh Lawania, Co-Founder & Head of Sales,, said: “We have been doubling every six months and it has gone as per the plan. Currently there are 120 million internet users in India which is estimated to grow to 300-400 million users. Out of the 120 mn internet users today, only 10 per cent are transacting online. This number will only grow as more and more people will have trust on online shopping. Overall, this is a big market and there is enough for all the players. In the next 12-24 months, I do see some kind of consolidation happening.”


Myntra, which started with offering personalized merchandise, now sees almost 55 per cent demand from the footwear category. There is potential and there are ready customers so the e-comm story which began as a roller-coaster ride will see some correction to pave way for future growth.


However, one should pay caution to the business model as speedy growth comes at a cost and for running a business what one must always remember is the basic – be profitable and do whatever it takes to achieve that. However, e-comm in India right now has become nothing less than a soap opera.


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