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Turbulent times ahead for e-commerce: Who’s to blame?

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E-commerce in India has had a dream run in 2014 and 2015. Billion dollar valuations were making headlines everyday, multi-million dollar funding rounds were being raised m-o-m, big day sales were posing threats to traditional retailers. With India’s large young population, a growing middle class and the rapid penetration of the smartphone and Internet in the country, both entrepreneurs and investors scrambled to grab a piece of the e-commerce pie last year.

Pricing to give way to convenience in Indian e-commerce: Morgan Stanley
The AlphaWise Survey says in late 2015, 70-75 pc of users with fewer than two years of history on the Internet were attracted to online shopping

Amidst all this noise, no one really paid attention to the undercurrents in these companies. Pretty much everyone including VCs, PEs and investors ignored the mounting losses, there were no questions asked on profitability of the business or even a break even window.

Two years later, here we are, investors have shut off the funding tap, have started pushing founders to turn profitable, and bring costs in control. But the real question businesses and their investors are now faced with is: “Is it too late?”

Consider this: About 1,200 startups sprang up in India in 2015, out of which over 50 per cent belong to the e-commerce sector, according to a study by Nasscom and Zinnov. In 2015 alone, these startups received over $5 billion in investment from 490 investors, according to the study.

Post 2015, the e-commerce story in India seems to have soured. From valuation markdowns to job cuts, scaling back of operations to huge losses – there seems to be no relief for a sector that was flushed with funds just a few months ago.

Where most people are blaming the fundamentally flawed business models, huge cash burns on customer acquisitions and discounting; with no focus on differentiation, profitability, and scalability, experts feel that the burden should also be borne by investors who have invested insane amount of money into me-too startups with expectation of high returns and early exit and no due diligence.

“Venture investors typically invest in businesses that carry a high-risk, but also an expectation of exceptionally high-return. At early stages, due diligence is difficult and limited. However, as the business is launched and grows, certainly the due diligence should be more stringent and the investment parameters should tighten,” explains CEO Third Eyesight, Devangshu Dutta.

Fundamentals of the Indian business environment and customer behavior seem to have been ignored, adds Dutta.

“There is no doubt that the dotcoms have grown from zero to humongous sized businesses in a very short time, but the cost at which they have done so is enormous.”

A Morgan Stanley mutual fund, in May this year, cut the valuation of Flipkart, which is considered to be India’s answer to Amazon, by 15.5 per cent, bringing the company’s valuation to $9.39 billion. This was the second consecutive markdown by Morgan Stanley, after it had marked it down by 27 per cent in the previous quarter. Restaurant aggregator has also suffered a valuation markdown and last month posted a loss of more than 4.9 billion rupees for the year to the end of March.

All these has put fingers not only on the operational inefficiencies and business models of these businesses but also on the picture that were sold to investors during the last couple of years of sky-high valuations on business models that had really no visible path to profit.

“Startup stage investment and that too in technology targeted at consumers or consumption categories is the most difficult terrain for any investor,” says Founder & Managing Director of Wazir Advisors, Harminder Sahni.

All seasoned investors understand these challenges and are walking into these investments with a clear plan that many of these will fail. However the rewards of few successes can be enormously large to make up for the losses,” he adds, saying that: “Only due diligence they can conduct at a startup stage is the quality and commitment of team towards making their idea succeed.”

Will the spell continue?

Over the last one year, everybody–from entrepreneurs to global investors to venture capitalists and even corporate honchos — made a mad dash to get onto the e-commerce bandwagon, trying their luck with anything and everything that was hot and managed to grab some newspaper headlines.

Consider food tech startups, which started floundering late last year before actually taking off. The sector, which managed to attract an impressive US $150 million in 2015 alone, is still in troubled waters, with many gradually discovering that while monies burnt on attracting consumers to apps/websites can initially increase valuations, VC/PE funding and number of app downloads, real-world business runs on a matrix of differentiation and exceptional customer services.

Also Read: 5 food-tech startups in troubled waters

However all said and done, this is not to say that the future is not bright for the e-commerce sector in India. Experts believe that e-commerce players in India have created an appetite for an online consumption and it’s about time for correct business models to reap the benefits.

“The recent failures are stepping stones for a much larger industry. Everyone including investors, entrepreneurs, professionals and even policy makers are wiser from last few years of practical experience,” says Shani.

“E-commerce is a perfect answer for many of India’s infrastructure issues like expensive real estate and cost of capital that makes inventory expensive and puts pressure on working capital needs and cash flow. With improving technologies that are getting healed by the day, penetration of smartphones and expanding bandwidth, e-commerce will grow many folds over next few years,” he adds.

Echoing the views, Dutta says, “There is now a robust fulfillment system that has been built through trial and error, and a large, growing base of consumers who are comfortable shopping online.”

Dutta, however, points out that in addition to the demand, e-commerce has also created a discount-driven economy which players must rethink to build a conducive retail environment.

“Once the customer has tasted discounting blood, it is extremely difficult to get them off it. Thus, a healthy blended retail environment, which is not driven by discounting but where the channels (online and offline) play to their respective strengths, is the best case scenario to look forward to.”

“However, it requires a significant shift in strategy and operational capability on the part of all retailers,” he concludes.