E-commerce Boom in India – Will it last?

E-commerce

Recall the days gone by when Indians were introduced to the “Big saving days” or “Cheapest three days of the year” by big retail stores. Consumers were baited by the promise of cheaper everything – from grocery to shoes, from fashion to appliances. But over a period of years these same stores have either vanished or have (been forced to) changed their business model because of various reasons. Mounting debts has been one of the major factors for all kinds of business realignments, sell-offs, mergers, spin-offs – you name it – they’ve done it.

Cut to 2015 – Everywhere I turn, I see an Amir Khan asking me to shop on Snapdeal.com, a very confused Mr. Bachchan on Firstcry.com and even a Shahrukh Khan taking a grocery delivery from Bigbasket.com. I would be forgiven to think that e-commerce businesses are the most lucrative ventures and most profitable space to be in.

Déjà vu anyone?

Call of the rosy figures – e-commerce in India is still just taking off. Success stories are awe-inspiring. The numbers beckon more. It seems only about 10% of card holding Indians are shopping online. Then there is the COD option for the rest of millions of Indians not having a card. And millions don’t have online access yet but once they do it’s a realm less market – a marketer’s delight, an entrepreneur’s dream. And not to forget, we keep hearing and reading that deep pockets of investors and venture capitalists are just waiting for the next new idea.

So every aspiring entrepreneur with dollar signs in his eyes is jumping onto the ‘start-up’ bandwagon. The ‘start-up’ either promises to serve its customers in some unique way or is selling something – all online. Invariably, new businesses are online companies. So essentially there is no real wealth generation. Either the new age entrepreneurs are offering a service or are retail stores. Real wealth generation, so critical for an economy to grow and prosper has been sidelined from our entrepreneurs’ economic vision and consciousness.

We are thriving on e-commerce success stories.

Being an entrepreneur and running a profitable business is not an easy job. Having a profitable online business is all the more difficult. Online ventures very easily get into a vicious circle of self-destruction.

A business with physical presence takes loans/debts or funding / venture capital (do they even manage to attract VCs these days– I doubt) and invests it either in its product or its facilities or in expanding its physical reach.

What do online businesses do with their funds? Believe it or not, they spend it in providing subsidies to their customers.

How? Is the free delivery of products really free? No! Granted for the customer the delivery and return pick-up may be free but someone is bearing the cost of delivery! The logistics partner of an online retail store has to be paid. The e-commerce businesses often end up using their funds for paying their vendors or for managing daily cash flows.

Who is bearing the cost then? The investor or the VC or whoever is providing the funds.

Why? In the firm belief that the customer will be a returning customer and over a period the losses will be recouped and profits will be generated. In a monopoly, it would be true. But where there are tens of other similar online business offering similar products and services, customer loyalty is not assured. The customer was fickle, is fickle and will remain fickle for times to come.

The funds received by e-commerce businesses with much fanfare in millions of dollars (the numbers are never less than millions) is not used for strengthening business processes or for any real wealth generation. It is widely used for subsidies, discounts, day-to-day cash flows, undercutting the competition and soon a day comes when the funding cushion disappears.

Even revenue generation does not mean profits are accrued. A classic example of this scenario is the story of Taxi for Sure. TFS exhausted all its funds in underwriting the various costs it was incurring in offering competitive prices to the customers and had to sell eventually out to its competitor Ola. Note that even higher revenue/number of trips did not result in profits for the company.

Remember Indiaplaza.com? It successfully survived the dot-com bust of the early 2000s. But once it got trapped in the vicious circle of utilizing the investor funds for daily cash flow it folded up pretty soon for want of fresh infusion of funds.

Amazon is a world giant in online retailing. Many online businesses may have taken inspiration from Amazon. A quick google search reveals that despite being a giant, Amazon has never been a high margin/profit making company. Its business model is such. What is the probability that Amazon inspired online businesses may be following if not the same maybe a similar model? Quite high I believe!

That just doesn’t bode of a very rosy future for e-commerce players then, does it?

In many online businesses the systems and processes are just not in place. And then starts the often deceitful and such a tangled web of (shady) business operations where the promoter and vendors fill their pockets till the funds last. The inside story of Foodpanda in India makes an absorbing read in this instance.

Fundraising has become the raison d’etre for online businesses. And in the meantime hopes of entrepreneurs dreaming up of physical business ventures with solid business plans just wither and die for want of a fraction of funds the e-commerce companies raises.

But why do the investors keep on investing funds in ventures that do not have a profit generating business model in place? Do they not question the avenues and ask for business plans about where and how their funds would be put to use? Questions I would love to have answers to. Answers anyone?

Source: Data credit – Mint Newspaper

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