The $160 million that Flipkart, India’s Amazon-to-be, has
received in its latest round of funding is a big deal for the company,
but for the e-commerce industry in the country, it is a proverbial drop
in parched sands. With this, Flipkart has now raised $540 million from
investors since it started operations in 2007. That’s more, of course,
than any other Internet start-up in India and should allow the company
to continue its growth momentum, though at what cost remains to be seen.
That the private equity entities whose money is fuelling the company’s
aspirations have such abiding faith in its future must bring great
satisfaction to the founders as well as other aspiring entrepreneurs. It
should also silence for a while naysayers of the e-commerce business in
India.
The funding holds significance for the sector as a whole. With this
round of funding, a new set of investors—Dragoneer Investment Group,
Morgan Stanley Investment Management, Sofina and Vulcan Capital are
joining existing investors Tiger Global, Accel Partners and MIH, in
making a play for online commerce in the country.
India is one of the top retailing markets in the world
and among the fastest growing. Coupled with that is its online
penetration, which is nearly 60% now, according to a research report by
Comscore for Assocham—State of e-commerce in India. India’s
Internet base, already the third highest in the world after China and
the US, is growing by nearly 40% every year. Yet despite the potential
and the platform, the sector continues to underperform with all the
major companies bleeding. Operational break-even for most of India’s
e-commerce start-ups is at least five years away with even market
leaders such as Flipkart, HomeShop18, Jabong, Myntra and Snapdeal yet to
make a mark. Consequently, in the $500 billion retail sector, the
online segment’s contribution is less than 0.50%.
What’s worse, even the business they have built at a huge
cost is rendering most of the new entrants bankrupt. Part of the
problem is that the online customer today demands sweet deals including
freebies such as no shipping charges and flexible payment options,
besides, of course, newer and newer inventory. In what is a vicious
cycle, companies report high rejection rates on top of enormous logistic
costs. Online retailers, much like their offline counterparts, make
money when transactions happen. Currently, far too many users browse
sites for information about prices or styles or even to read reviews. As
a result transaction sizes for most such firms are in the low band of
Rs200-300.
But the companies too have brought it upon themselves by
their inability to innovate and break new ground. Far too many companies
have been interested in the low-hanging fruits that B2C offers. The
supply chain needed to complete the cycle has found few backers. Yet it
is the lack of an efficient back-end that has been the bane of most such
firms. Just how important fulfilling real needs for customers is can be
judged by the fact that one out of five online users in India visits
the Indian Railways site, despite it being among the most clunky and
difficult to access.
India’s e-commerce companies have far too often
concentrated on the bells and whistles instead of focusing on deploying
and customizing technology to serve customer needs. Contrast that with
Amazon which competes not only with a Wal-Mart for retail business but
also with Apple for technological horsepower. On the evidence of its
latest Kindle, its tablet computers or its set-top box for television,
it could well pass muster as a top tech company.
Flipkart, which switched to a marketplace model earlier
this year, allowing third parties use of its platform to sell products,
is making some belated efforts with its launch of PayZippy, a kind of
digital wallet. But this too is a me-too product (modelled obviously on
PayPal) and the company’s switch of business model aims at accessing
foreign direct investment, which is banned in direct online retail. With
such limited objectives, long-term investments in technology of the
kind Amazon and even Wal-Mart are making, are not possible.
Flipkart’s sales of Rs2,000 crore should give its market
valuation of nearly Rs10,000 crore some justification. But the true test
for the company will come when and if it goes public. Amazon went
public after just two years of operations. As private equity darlings
from WebVan to Facebook have found out, there is a wide gap between the
way early investors value a company and the price the market sets on it.
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