According to IAMAI report, the e-commerce sector in India has grown by 34% (CAGR) since 2009 number of 3.8billion USD to touch 16.4 billion USD in 2014. The sector is expected to be in the range of 22 billion USD in 2015.
Is it possible for an industry to grow without being profitable?
While the GMV (gross merchandise value) is increasing the profitability of the e-commerce players is taking a hit. Infact most of the players have been unable to become profitable despite millions and billions in funding from the PE players.
What is wrong with the E-commerce industry in India:
A) Business Model is missing- Burning investors money on discounts or advertisements is not really a very smart move to create a sustainable business model. Flipkart has already raised billions of dollars and it is still far from achieving profitability.
B) Too much of competition- With new e-commerce ventures opening up every other day, it is becoming increasingly difficult for the big players to maintain their dominance. Boutique and niche based ecommerce companies are posing a serious threat to the established players. Funding is easily available for anyone with a good business idea in the ecommerce field, and one good idea is enough to kill an established business. Flipkart, Amazon and Snapdeal may not have anticipated competition in the specialized fields like- retail clothing, baby care, real estate, groceries, stationery, books, organic foods etc.
C) Customer Loyalty is a problem- Customers who have been lured by discounts are not loyal customers and they will be lost to any competitor who offers a better deal.
D ) Limited internet penetration and mobile connectivity issues hit at the spine of the industry. The 19% internet penetration is still far away from reaching the levels of USA’s 86%.
E) Logistics Management and Infrastructure- The E-commerce business thrives in an economy where logistics and infrastructure quality is high. Poor inventory management systems, inefficient transport facilities and lack of good infrastructure poses a serious threat to e-commerce growth in India.
F) Reputation is very brittle- One poorly serviced customer can use social media platform to destroy your brand value within their network. Few pictures and a story around the poor experience shared on social media can take a huge company on its back-foot.
Thus the most important advice for the e-commerce companies is a create a self-sustainable business model. Get consumers on your site, then engage them and make sure they keep coming back to your platform for their needs. Offer discounts to lure customers initially but never burn investor’s cash to lure customers in the long run.
I am not cynical about the potential of ecommerce business in India, but I believe a lot of blood-bathing will take place before this industry get consolidated and become self-sustainable.
Warren Buffet- “It is only when the tide goes away, we realize who has been swimming naked”