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Is the e-commerce business model sustainable?

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Is the e-commerce business model sustainable?

A new report by Motilal Oswal says the Indian e-commerce market is set to reach $20 billion by 2015; growing at a CAGR of 37%. The lion's share of the market value currently lies with online travel (nearly 70%) this is expected to change in the future as e-retailing grows at a much higher rate driven by aggressive investments.

Despite the fact that FDI in e-commerce is not allowed in India, there is no rule against it when it comes to online marketplaces such as Amazon, Jabong and Snapdeal. Even Flipkart has moved away from holding inventory to a more marketplace-based model to circumvent this restriction.

Just in the past four months, we have seen the likes of Flipkart, Amazon and Snapdeal raise significant money in new rounds of investments, even as last week Chinese investment giant SoftBank (which is also the largest shareholder in e-retailing heavyweight Alibaba) announced a $627 million investment in Snapdeal.

Will Amazon & Flipkart push other players into e-commerce oblivion?

The aggressiveness with which all e-commerce players are approaching the Indian market does make sense. It is not all that different from what Amazon and eBay did in the US in the late 90's. The investments are on the promise of future returns but how long can this business model sustain itself?

Despite the high revenues being reported by most of the major e-retailers, none of them are yet to turn profitable. In fact, their profit-loss ledger is still deeply in the red. In the year ending March 2014,, reported a loss of Rs264.6 crore on revenues of Rs 168 crore. Earlier, its close competitor Flipkart had reported a loss of Rs 281.7 crore on sales of Rs 1,180 crore for the year ended March 2013. Fashion marketplace and Myntra's close competitor Jabong reported revenue of Rs 438 crore in the year ending March 2014 with losses of Rs 293.4 crore (as per media reports and filings with the Registar of Companies).

With customer acquisition high on the agenda, most of the e-commerce players are spending big bucks on marketing and brand building, something that was clearly seen in this year's Diwali season.

Cash-rich etailing giants up their competitive ante

A major chunk of money is also going into developing technology capabilities, especially on the mobile front through acquisitions. For example, post the latest round of investment by Softbank, Snapdeal said it will look to make 3-4 strategic acquisitions in the coming few months specifically in the area of mobile technology while setting up an incubation centre to hone and harness start-up businesses in this space.  Flipkart's Sachin Bansal had said much the same in an interview with us earlier this year. A spokesperson for Myntra, which was acquired by Flipkart earlier this year also said that the company could turn profitable within months if needed. "But we are investing for future growth, in terms of capacity planning, mobile technology, warehousing, etc.," he said

Mobile commerce is going to be our focus area: Sachin Bansal

But with costs running high, when do e-retailers start focusing on profit margins?

This volume game does not make for good long-term strategy say analysts we spoke with, though they agreed it might be necessary in the current scenario. Praveen Sengar, Principal Research Analyst at Gartner said, “We will see profitability concerns coming up now. The current business model is not sustainable and e-commerce players will need to shift their focus on other factors like customer segmentation." This will become even more important as manufacturing brands start entering the e-retailing space; something he says has not happened yet in India.

However, Paresh Parekh, Tax Partner (Retail & Consumer Products) Ernst & Young feels the business model is unlikely to change as long as investors continue pumping in money. "It is now a question of protecting your initial investment and to do that they will need to maintain the trust and keep supporting the e-commerce players," he opined.

Are e-players likely to change track anytime soon? With the vast majority of the Indian market still untapped, it seems hardly to be the case. As one e-retailer put it when asked about the high ad spends on TV that we have seen recently by e-retailers, "It is the best medium to reach mass market and to build credibility." Credibility is what the e-commerce space is looking to build in the eyes of the first-time Indian online shopper and to do this they will no doubt need to continue investing in marketing and building robust mobile and online platforms. The US e-commerce space, much older and more mature than ours still continues to grow, though at an obviously declining rate. An eMarketer study released earlier this year stated that China will overtake the US by 2016 in online spending. India, where, as we mentioned online travel sales account for nearly 70% of the total online spends, is also pegged for healthy growth. Considering these trends there is ample room for expansion in the Indian e-commerce market and till the time investments keep pouring in there does not seem to be any reason for e-retailers to play safe.


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