Indian E-commerce Hype – The Reality check

Indian Ecommerce - Reality CheckWe have already covered the phase of Indian eCommerce Startup Valuations breaking through the roof between 2013 to 2015. The year 2016 saw funding crunch, the sector has had a reality check. GMV is no longer the holy grail and the focus has now shifted to metrics such as the net promoter score, user monetisation and customer experience. Also, there is a growing recognition of the fact that India is different from China and may not necessarily mirror the early e-commerce trends and trajectory in China.

Indian e-commerce firms have pursued several initiatives including increasing the commission rates (at an overall portfolio level), controlling the logistics costs (particularly returns), rationalising discounts and shifting the portfolio mix in favour of high-margin categories to curtail the losses and create a foundation for achieving profitability. Regulations have so far been followed in letter but not in spirit. However, with some more clarity on the rules, and some greater intent from the regulators, e-commerce companies are now adjusting their business models as well.

Since the beginning of 2016, there have hardly been any large deals in the sector, with the largest announced deal so far being the US$200 mn fund-raising announced by Snapdeal in Feb-16. Amazon continues to invest aggressively and is relatively immune from the subdued private funding environment. Funding in the horizontal e-commerce space was significantly weak, after a good 2015. The vertical e-commerce players, too, struggled to raised funds although the funding environment has been relatively better in the fashion vertical. Logistics, food tech and taxi are the other segments that have witnessed low funding activity levels.

GMV has always been an ambiguous metric to depend upon—many companies report GMV without netting off the discounts and returns. In addition, GMV can be increased by selling higher-value but lower-margin items. However, since end-2015, there were signs of rational competitive behaviour by companies, driven by changing investor expectations. Flipkart may exit 2016 with broadly similar GMV as 2015. Amazon, on the other hand, has continued its aggressive approach and may exit 2016 with significant growth in GMV.

Although the e-commerce firms continue to burn money in their operations, there have been some measures in the past one year to optimise the operations. Management teams are now focusing on metrics such as revenue per customer (function of number of orders per year, value per order and commission), net promoter score (a measure of customer satisfaction) and overall user monetisation (including alternative sources such as advertising as well as new service
offerings such as hyperlocal services).

Customer Long Term Value and Acquisition Cost
The ecommerce platforms have turned their attention to both parts of the equation — the cost of acquiring the customer as well as the CLTV. As per TAM Media Research estimates, the marketing spends of the Indian e-commerce players such as Flipkart, Snapdeal and Shopclues were lower in 2016 (though Amazon continues to invest aggressively in marketing)—and this excludes discounts. On the CLTV side, there have been initiatives to develop user loyalty and stimulate more transactions from existing buyers. For example, Amazon has launched its Prime services in India (at a very affordable price point). Flipkart already had Flipkart First, which did not receive much traction, and has now been complemented by F-assured. Snapdeal also has a similar offering Snapdeal Gold. Amazon’s recent push into fast-moving consumer goods is part of its broader strategy to encourage frequent online buying patterns, particularly among its prime members.

Indian e-commerce retailers have resorted to aggressive shift in category mix. They are trying improve the CLTV by widening the portfolio of offerings on the platform by launching new categories of products or services. Fashion as a category is being pursued aggressively by nearly all the e-commerce platforms. Snapdeal plans to invest US$100 mn to expand its fashion portfolio. Flipkart has made two large acquisitions in the fashion segment Myntra and Jabong and claims to have a 70% share in the overall online fashion market now. However, Myntra and Jabong continue to operate as independent platforms.

Services is another area where the horizontal e-commerce firms may look to expand. Snapdeal has already tied up with Urbanclap for home services and Freecharge is an integrated part of the platform. Paytm has a broad range of services. Amazon, too, has Amazon Now (for hyperlocal grocery).

Controlling Logistics Cost – There have been several measures taken by the companies to control these costs, ranging from controlling return rates, optimising the logistics functions to take advantage of the economies of scale and judiciously using 3PL players.

Returns Come Under Scanner – Flipkart and Amazon cancelled the options for the customers to return the product if the reason was just a “change of mind”. Products such as computers and cameras, defective or damaged products were made eligible only for replacements and could not be returned. Fashion is one category where the return rates have been higher, due to the non-standardised nature of the product.

Regulatory Clarifications – There have been two recent regulatory changes / clarifications related to e-commerce. First, the government has clarified that 100% FDI (foreign direct investment) will be allowed in an e-commerce company as long as the company adopts a marketplace model but with no single seller accounting for more than 25% of GMV.

With the focus now clearly on Optimizing Operations and trend on the path to profitability, Amazon has been the biggest nightmare to both Flipkart and Snapdeal as it has reported market share gains at the cost of both Indian retailers.