About a decade ago, global investors were convinced that online retailing won’t work in India. Broadband penetration was dismal, using credit cards was a scary prospect and people hesitated to shop online. The naysayers could not have been more off the mark. Over the last seven years, ecommerce has emerged as a sunshine industry in India with homegrown online retailers like Flipkart and Snapdeal having garnered valuations of several billion dollars. The segment raised the highest quantum of funding from private equity and venture capital investors last year—around $4.1 billion across 106 deals. However, despite the positives, profitability still remains a concern. Companies like Yepme, though, aim to break even this year.
During the ninth edition of the Forbes India CEO Dialogues: The Leadership Agenda, held in Bangalore in January, the country’s top online retailers and investors discussed the challenges facing the segment and the way ahead. They pointed out that clarity on taxes, better infrastructure and increasing usage of internet on handsets will help accelerate growth in the ecommerce industry.
The panellists included Praveen Sinha, co-founder and managing director, Jabong.com; Ashish Goel, founder-CEO, Urban Ladder; Rahul Chowdhri, partner, Helion Venture Partners; Advitiya Sharma, co-founder, Housing.com; Vivek Gaur, CEO and co-founder, Yepme.com; K Ganesh, serial entrepreneur and promoter-founder of Portea Medical; and Sunil Kaushal, regional chief executive, India & South Asia, of Standard Chartered Bank. Edited excerpts from the discussion moderated by R Jagannathan, editor-in-chief, Forbes India:
R Jagannathan: In general, businesses in India may not be having acchhe din, but the ecommerce business is doing well. There seems to be a lot of buzz. Is there too much hype or too little?
Jagannathan: Jabong has been very visible of late and is doing a lot of things. What is Jabong’s priority—is it building sales or going after profitability? How do you balance the two?
Praveen Sinha: It will take 2-3 years before any ecommerce player of a decent size can talk about becoming profitable though I feel it [the timeline] is highly optimistic. There are a few factors involved—one of them boils down to discount coupons. Ecommerce has not reached a stable level where it can become sustainable by itself. So, if the whole margin is 10 percent and the market operates at 15 percent discount, ecommerce companies can never become profitable. In fashion, the margin can be 40-50 percent and, hence, discount coupons can be of a higher denomination. Today, it [profitability] might be achievable, but with huge scale and building an assortment of private labels of higher margin. The next important factor is fulfilment cost where it [the industry] is more or less stable. However, some costs and services such as schedule delivery and same-day delivery will demand a premium which did not exist earlier. We will see ecommerce evolving in that direction and many big players have already started charging for such services. At present, growth is more important than profit. We want to grow in a healthy way.
Jagannathan: The sheer availability of money for ecommerce and related products: Is it a good thing or bad?
Rahul Chowdhri: Overall, I would say it is good. One or two years ago, ecommerce was like a taboo word. If you were an ecommerce company, there was a lot of trouble raising money. Etailing in general is not a very profitable business. So if you don’t have enough cash flow or capital flowing in, you have problems in scaling up. I believe what we have now is better than what we had two years ago. There would always be a situation where there is either over-supply or under-supply, but I would rather stay in a category where there is over-supply and more choice. Now, fundraising has become an important differentiator between two different companies.
Sourav Majumdar (Editor, Forbes India): You say deal-based businesses are probably making way for different kinds of businesses. Are you trying to say that we’ve had deal-based businesses as the basic thrust of ecommerce and now it is time for more grounded businesses?
Chowdhri: Just to differentiate between deal and discount businesses, worldwide there are deal-based businesses such as flash sales that have made huge amounts of money. But I don’t see discounting-based models going away anytime soon. At the same time, there are certain categories where discount is not the only thrust. For example, furniture. I don’t think Urban Ladder is looking for huge discounting.
Jagannathan: Looking at it from a vantage point of a bank, how would you bet on the normal success ratio of the ecommerce players?
Sunil Kaushal: We were reviewing some stressed accounts and there is a very large distributor, who is now shutting down 25-30 percent of his distribution because he has been disrupted by ecommerce players. That’s real pain being felt. At the other end of the spectrum, we have had conversations with manufacturers who say there are certain product categories which they may not put on ecommerce because someone else would give those at discounted rates. So the question is still whether it is really driving a profitable model or not. In today’s scenario, there is little difference between the physical and (for lack of a better word) digital model when it comes to building profitability. Both require sustained investment and a certain timeline for growth. I would say ecommerce is having a real impact. It is the future and at some point there will be a convergence between the physical and ecommerce players. And there will be the growth of a model that would take the best of both.
Jagannathan: What pain points do you see for ecommerce ventures?
Jagannathan: Do you all see yourselves becoming a normal business where there is a proper gap between earnings and expenditure? Currently, it is a potential business. When does it become a real business?
Ganesh: No, it is a real business now. There are tens of thousands of people buying online. You are solving a major pain point and giving access to people in over 5,000 towns and cities, which otherwise they won’t get access to. Someone living in Tripura will see Shah Rukh Khan in a Yepme ad, but there’s no way that you will find that kind of organised retail (premium brands) in small towns in the next 50 years. The amount of transactions that we saw on [Flipkart’s] Big Billion Day… the fact that servers came down shows it’s a real business.
Gaur: ASOS is a business that makes money. Even Boohoo, which is a single brand that got listed in the UK, makes 14-15 percent margins.
So there are enough businesses that have already turned positive, are listed, and public investors are putting in money. But we should not become like the airline businesses, which are completely undifferentiated. The differentiation in ecommerce has started to happen.
Majumdar: How much of this rush is also fuelled by the deep discounts on offer?
Ganesh: Discounts and deals were there earlier too and will continue to be there. In the US, for instance, if you buy a meal, you get a booklet of coupons. It is not just Indian mentality. The discounts being used today are getting people to change their behaviour and accept online businesses. People love the concept of BigBasket but the inertia is there; they are not taking the step to move [to online grocery]. Now what is it that will make the person shop online? Call to action, discount... all of this is important. Here, you are trying to change the customer’s buying behaviour. Can you buy big furniture online without going and sitting on the sofa and seeing how it feels? So, things like discount and return policy help.
Jagannathan: Do you think that the investment phase will continue indefinitely? Will it be investing for scale and not necessarily for bottom line?