Will the High Court ruling on 100% FDI in E-commerce Marketplace be the trigger ?

I have this strange sense of Deja-Vu. I was there in 2000 watching my dreams unfold and drop all around me with Launch and closure of  India.com a company co-founded by me in 1999.  My contemporaries Shaadi.comBharatmatrimony, MakemytripRediff.com,   Bazee.com and Naukri.com all came through that time. The Classified Portals were the best managed, less funded and frugally run. Ad Spending matched  Revenue and was not just a mindless customer acquisition game .I can say this with confidence, as I was selling media and creating customers for them. My Revenue earnings was contingent on their ROI. We became experts in data mining and Ad copy along with the client. Iterating on a weekly basis to deliver more for more spends .Spending was variable .Till date these are the only businesses that are profitable, not counting their latest offspring.

When Flipkart started the e-commerce ramp up with Books, Rediff.com was the Big Daddy with a 30 Million engaged and a loyal user base . Add others E-bay and IndiaTimes and you had a pretty powerful Troika to Trump, within themselves accounting for nearly all retail e-commerce, flanked by IRCTC and the Travel Portals. Yet Fllipkart  which started selling books  under the radar, quickly expanded the market fueled by venture  funding. It now sits at  a valuation is $12.5 Billion ,while Rediff.com the retail e-commerce pioneer languishes at an unrealistic valuation of $51 Million .Now Flipkart seeks to raise its valuation  to $15 Billion by raising $ 800 Million in Private Equity.Flipkarts Capital raise is 16 times Rediff’s Valuation . Mind you Flipkart’s valuation is not real.Its what a few venture investors think .Rediff’s valuation is what the market and retail investors think .Rediff does not break out its E-commerce revenue ,but markets report its e-commerce fees at $6 Million per year .This will be a $ 60 Million Gross Merchandise Value  per year

E-commence companies valued at 3 x the GMV (Gross Merchandise Value)

As per Flipkart metrics, Rediff e-commerce business should be worth $180 Million. Rediff as an Internet and Shopping Brand is as Big as Flipkart so the valuation metrics for the two should be comparable. It can be  be more for Rediff ,as  they have  to spend nothing on customer acquisition .Sales are driven by Organic Traffic. Yet the retail market values it at $51 Million. They do not care about the Indian Internet Story ,the mobile adoption and the E-commerce frenzy. Look outward at EBay Globally. Ebay is valued at its  Gross Merchandise Value and not 3 X Gross Merchandise Value. It’s also present in the India market and was there before any of  today’s valued e-commerce entities. This is again a reality based metric. This implies we have a Bubble. Look Out!

Also E-commerce is not an audience business. The users engagement with you is transactional. If you change your pricing or service level, he will go to the next available option. There is no loyalty to a marketplace. Consumer Loyalty is with the Brand. That’s why Amazon is so dangerous. Over the years its becomes  a suppliers and supply chain system B to B brand and can get the best offerings to the Market. When the Indian E-commerce companies stop their discounting and delivery subsidies, the consumer will switch to the better marketplace. The only way to stop DOOM for E-Commerce companies is to stop FDI to Internet marketplaces. But how can they when all Indian E-commerce marketplace are themselves dependent on FDI ?

Will the High Court ruling on 100% FDI in E-commerce Marketplace be the trigger ?

Kishore Biyani or Chroma total-retail-sales-vs-ecommerce-sales-300x221now need to get ready to fill the void if the Bubble bursts. Do a tie up with a Rediff like audience entity and Boom they can fill the space and market created by venture capital at a Profit. Why fight for a Level field with the old way of Retailing. Embrace e-tailing, FDI and work strategic. The combination of Brick and Motor plus Internet can be disruptive. Here is  a link to Kishore Biyanis’ article today advocating that e-commerce companies marketplace model for 100% FDI violates in letter and spirit, the law for not allowing FDI in Physical retail. Very cogent argument. High Court Judgement in 4 Months. To my mind this will be the trigger. Most likely it will not happen as the Modi Government will not look very business friendly .That’s why I advocate plan “B” for physical retailers .They already have better operating inefficiencies .Leverage this strength ,raise FDI money to sustain  a price war and outlive the Giants without their inflated overheads. Physical Retail will still be the big beast and the most optimistic projections  do not give Internet e-tailing more that 1.4% of overall Retail Sales

95% of E-Commerce Users buy for Discounts. So is anyone building a Brand ?

coupon-shoppingHere is a little survey which is quite telling. The bottom line captured in a Graphic from the survey. Attribution in the survey Link

This has given rise to whole host of coupon start ups. At least these guys are making money. Now let me reproduce an extract from  Jay Lee, senior VP and MD, Asia-Pacific, eBay, interview to TOI on Discounting.  for more context from Domain Experts

Do you think the valuations of e-commerce companies here are justified?

India is possibly one of the most vibrant e-commerce markets in the world. However, it is still nascent. The Indian e-commerce industry is 1% of the Chinese market, which means that there are huge growth opportunities.

My view is that India will develop differently to China, which is a more homogeneous market. India will be more dynamic and diverse with opportunities for multiple players.

Chinese and Korean markets grew on a combination of product variety and pricing. In recent times, the Indian industry has been too focused on pricing (discounting). This can be damaging to the overall growth of the e-commerce industry as it is not sustainable and can create a false consumer promise.

Sooner or later, e-commerce companies will realize this, especially when they want to become public. We are already witnessing Indian e-commerce companies making changes to their business models in order to prepare for this event.

What’s Flawed about the 3x GMV or any Valuation Metric on Sales

This is an incentive to Buy your Sales. You can lose Rs 1/- on Rs 3/- GMV and make up on Valuation. A Sales of Rs 2/- will give you a Valuation of Rs 6/- per SKU. You can do this forever if you can keep raising the money. This is quite apparent when you look at the constant growth in GMV of E-Commerce companies. Continuing Discounts and Increasing Valuations. Its what my Product Head used to call a Leaky Bucket. You can keep going as long as the VC Funding is filling the losses. A report from Bloomberg Business is telling.

Burning Cash

Combined sales of India’s three largest e-tailers — Flipkart Online Services Pvt, Snapdeal.com and Amazon.com’s India portal — was $85 million in the year to March 2014, while losses totaled about $160 million. Goldman Sachs Group Inc. analyst Rishi Jhunjhunwala wrote in a research note this week. According to Goldman estimates, e-tailers will need at least $20 billion over the next five years.

The Ideal India Internet E-Commerce, GDP Story and the Real World

India’s greatest Internet Assets are

  • Its Demographic Dividend, 60% Population below 35. These people will buy online ! if they have wages
  • Mobile Internet to compensate for poor BroadBand and PC Reach IAMAI releases a report 213 Million Smartphones by June 2015. Mobile App is the way to go .So what if its a walled garden and has extremely high acquisition cost, that too on traditional media

Much of the exuberance  is based on China. Are we really comparable ? Now for a Lesson on Basic Economics courtesy of Bloomberg View.

  • India per Capita $ 1500 and China per Capita $6800. Is our purchasing power comparable . Can valuations then be based on the China experience ?
  • We have no clear E-Commerce Policy. What if 100% FDI is withdrawn ? Covered earlier
  • Poor infrastructure .As per United Nations we rank 83 out 130 countries in terms of e-commerce environment. We see ourselves as the No 2 country after China for E-Commerce. Is that perception grounded in reality ?
  • The fact of the matter is that where many valuable internet models were built on dis intermediation ,operational and service productivity. None of these factors are evident in the valued e-commerce entities .In fact there is a blind race for customer acquisition based on some LTI value
  • Ask yourself why the Pioneers Ebay, Rediff and Indiatimes have not gone on a reciprocal discounting e-commerce spree ?After 15 years in operations they intimately know the operational metrics and can build,buy and outsource the technical smarts

Net Neutrality and the Bubble

A neutral internet access marketplace is a great leveler and an upstart can easily challenge a $15 Billion Unicorn’s  like Flipkart .Unless they can preserve their bubble with venture money. Its not surprising that they along with Facebook are aligning with Airtel to support differential charges so that users can get preferred access to their sites and applications. This is a warning to us all .If we don’t act as users for net neutrality ,we may never see the bubble .Players like Flipkart may gain more from money power than genuine consumer traction and brand building. So keep signing those petitions to TRAI and get rewarded with innovations that make your life easier ,better and richer.

I look forward to comments and a lively debate.


Views expressed here are personal. Wherever articles or quotes are referenced attribution has been given. I will gladly update attributions or delete content if there are objections.

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