22 Dec 2015 21:05 IST

Indian e-commerce:  It feels like 1999 all over again

How long will the party last if firms continue to focus on market share without generating profits?

The dot-com boom of the late 1990s produced three things that revolutionised the world: Web browsers, search engines and a whole host of companies that were willing to offer their products and services for a loss.

Gone were the age-old and time-trusted methods that we learnt in B-Schools to evaluate companies. Profits and costs no longer mattered. Return on investment and earnings per share were considered passé. What mattered, we were told, were new metrics such as market share, rapid customer acquisition and page views (all of which can be measured) and mind share (which cannot be measured).

Hocus-pocus

The most egregious example of adopting new measurements was championed by Groupon, a global e-commerce marketplace connecting small businesses with customers through coupons. In its SEC filing before going public in 2011, it said it had generated an operating income of $81 million. This number did not include its biggest operating expense – marketing. When marketing was included, the figure would be a loss of $98 million.

Indian e-commerce companies are now acting like hundreds of 1990s dot-com companies which were supposed to become household names but ended up virtually defunct. Remember Lycos, a search engine that would replace Google? It was bought by Spanish telecommunications provider Telefónica for $12.5 billion in 2000, only to be sold four years later for $95.4 million in cash. Or Broadcast.com, an Internet radio company? Yahoo acquired it for $5.9 billion in stock but quietly shut it down, getting nothing for it.

The Wall Street Journal recently catalogued Indian e-commerce majors with this excellent piece, “India’s E-Commerce Startups Throw Caution to the Wind”. It says that all the big companies – Amazon, Flipkart, Snapdeal and Paytm – are burning loads of cash each month “on big sales and discounts, all to win prized market share.”

The charade

This is silly. If there’s one thing that distinguishes most Indian consumers from everyone else in the world, it is that Indians are extremely price-sensitive. Brand loyalty and customer experience are important indicators but price, by far, beats everything else.

Indians can afford to be this way because the products they buy at these e-commerce sites are mostly goods where quality is uniform. We are talking mobile phones and tablets from the same manufacturer here, not items like produce or jewellery, which lend themselves to better product differentiation.

It is helpful to understand the mind of the average Indian through the buying process. Once he knows what product to buy — say, a Panasonic P-55 mobile phone — he simply shops around until he gets the best bang for his buck. In an earlier piece in this column, “India’s online retail markets are near perfect”, I had said that a buyer checks the prices of the same product on the same site from different sellers. He then googles the same product to get the lowest price across the three big sites and then, other sites who want to be the Big-3 sites in e-commerce.

A quick check reveals that the Panasonic P55 Novo 8GB lists for ₹6,769 at Snapdeal; ₹6,799 at Amazon and ₹7,090 at Flipkart. Most buyers would choose to make the purchase on Amazon (although the price is ₹30 higher than the lowest available) because of its quick delivery and hassle-free return policies.

What is fascinating is not how similar the prices are on the Big-3. It is that the MRP on this item is ₹9,490. How can all of them offer a product at 30 per cent off, absorb taxes and ship it for free?

Big daddy

The companies are backed by deep-pocketed investors such as Alibaba, Softbank and other VCs, all of whom are willing to let their wards burn cash each month with nothing to show but outsized revenues and higher valuations based on voodoo financial metrics. Flipkart is valued at $15 billion. Snapdeal at $5 billion. For what, exactly, you may ask. Losing money?

Amazon has already committed $2 billion to India and, given its dream of becoming the Earth’s biggest store and getting there slowly with a consistent strategy of “growth over everything else” for the last 20 years, it is highly likely that it will be a dominant player in India for years to come. There is always room for one more player. But in the US the second tier behind Amazon is made up of a bunch of companies, from online merchants like Rakuten and Overstock to sites of brick-and-mortar companies like Walmart and Best Buy.

What about the other e-commerce sites? How long will they survive? Chief Executive Vijay Shekhar Sharma of Paytm, said it best in the WSJ piece: “Discounting isn’t sustainable.”

With the Fed increasing the interest rates and money becoming slightly dearer, common sense shows that the current e-commerce madness will have to stop sooner rather than later. The reality, however, is that common sense matters little when everyone thinks that the party will go on for ever. Especially if someone else is paying for the shindig.

Like in the good old days of 1999.

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