The Indian e-commerce industry, which grew in 2015 by 180%, grew only by 12% in 2016, as per a study by research and consulting firm, RedSeer Consulting. The current Indian e-commerce industry size is $14.5 billion. Estimates expected the sector to touch the $100 billion mark by 2020. However, as per the study, the sector will now have to clock a 45% CAGR to reach a size of $80 billion by 2020.
The adverse market condition, according to the study was faced by the homegrown players and the flag-bearers of the Indian e-commerce industry — Flipkart and Snapdeal, whose growth remained flat, if not worsened. Whereas, new entrants like Amazon succeeded in altering the market share game and turn dethroning Snapdeal from the No 2 position. The latter, despite putting up a brave face and expecting to start bringing in profits in the next two years, has been marred with leadership issues and downsizing.
Snapdeal posted a loss of INR 29.6 billion (2015-16); Flipkart revealed losses of INR 52.23 billion and Amazon a loss of INR 35.71 billion. Combined the loss reaches a mammoth figure of INR 117.54 billion. We are not even counting the losses of other smaller and fringe players.
If someone thought that demonetization actually helped the e-commerce industry, forcing people to buy online, they are wrong. While hyperlocal grocery, according to another study by RedSeer Consulting, did see a saw a sharp increase of up to 40% increase in transaction volumes, e-tailing saw a sharp decline of up to 20% in transaction volumes. According to a Financial Times report, cash-on-delivery sales went down by 30%, a figure which is pretty higher than the figure of digital transactions that went up by 20%. In India, 70% of the online commerce still happens on cash-on-delivery.
Techseen tries to analyze some other hurdles for the Indian e-commerce industry. These factors may slowdown the industry further and hit investor confidence.
The flag-bearers of the Indian homegrown e-commerce industry suffered a series of devaluations in 2016. Flipkart had a pretty bad last year 2016 in terms of markdowns. The new year too didn’t start on a good note. The first strike came from US-based mutual fund investor T Rowe Price that pegged Flipkart’s worth at $9.9 billion, down by 4% over its September 2016 figures. The latest strike came from Fidelity, in January this year, which marked down the e-tailer’s valuation by 36.1% to $5.56 billion. Fidelity had in August, last year, marked down the valuation of its Flipkart shares from $84.29 per share to $81.55 per share for the August-ended quarter. Flipkart, so far has had as many as nine markdowns.
The story of Snapdeal too isn’t a happy one. In November, last year, Softbank, which is one of the largest shareholders in Snapdeal, with close to a 33% stake, wrote down as much as $555 million in two of its biggest investments in India — Snapdeal and cab hailing service, Ola. Snapdeal, run by Jasper Infotech, reportedly, has initiated discussions with SoftBank to raise fresh funds at a valuation of $3-4 billion, which is far lower than its peak valuation of $6.5 billion, the previous year.
The devaluations could be read as corrections, but overall it does not augur well for the e-commerce industry which may discourage other players to come in. From a consumer point of view too, the honeymoon period of feeding on discounts too seems to be coming to an end. Snapdeal, last week, abruptly suspended an incentive program for customers that it employs through affiliates, highlighting the online marketplace’s struggles to conserve cash as fresh investments get tougher to secure. Snapdeal’s affiliate network comprises coupons, deal and cashback channels as well as blogs that bring in potential customers to website and mobile app. It pays commissions to affiliates based on the number of people who end up transacting on the marketplace.
The year 2016 saw instability at the top management at Flipkart, with shuffles and exits. There was nothing new in 2017 too. Flipkart, last month, elevated Kalyan Krishnamurthy as its CEO, replacing co-founder Binny Bansal, who was elevated to become the Group CEO. Krishnamurthy was heading the category management division at Flipkart. Binny himself had replaced Sachin Bansal, exactly a year ago. The latter is now the Executive Chairman. A month later, i.e. in February 2016, Mukesh Bansal, founder of Myntra, which was acquired by Flipkart, too quit the company. Chief Business Officer Ankit Nagori too joined Mukesh on the exit route. Two months later, former Google executive Punit Soni, was roped in as the Chief Product Officer too said quits, within a year of his hiring.
Snapdeal doesn’t have a different story to tell. The latest casualty has been Abhishek Kumar, Head of Corporate Development and responsible for fund raising. Last month, Sandeep Komaravelly, Senior Vice-President for the e-tailer’s mobile customer-to-customer marketplace Shopo, put in his papers.
Now let’s have a look at the churn in 2016 at Snapdeal. Senior exits had started as early as November 2015, Bhuvan Gupta had quit as Vice-President-Engineering. The year 2016, started with Ranjan Kant, Head of Strategy quiting to join Jabong. For the record, Jabong was acquired by Flipkart in July later last year. A week after Kant’s exit, Srinivas Murthy, VP-Marketing, put in his papers. In May, Anand Chandrasekaran, the Chief Product Officer, said quits, within a year of his joining. In November, Vijay Ghadge, Chief Operating Officer of Snapdeal.com’s in-house delivery arm Vulcan Express, stepped down from his post in less than five months after joining the company.
While companies have their own reasons for reshuffles, which they call optimization of resources, the churn doesn’t augur well for company culture and work progress consistency. It adds to costs of hiring and training. Besides of course, the bullish salaries the top executives at these companies have been commanding.
According to a Quartz India (QZ) report, Flipkart, between April 2015 and March 2016, paid over INR 10 crore ($1.5 million approx) each to six of its employees and over a INR 1 crore each to 101 others. QZ quoted figures from regulatory filings sourced by data platform Tofler.
The compensation to these top-paid employees alone takes the company’s remuneration bill to around INR 3,000 million (US$44 million approx).
Snapdeal isn’t far behind, which in the fiscal 2016, reported payout rise of 210% year-on-year to INR 6,734 million ($101 million), under the “salaries, wages and bonus” head. Besides salaries and bonuses, Snapdeal’s spending on overall employee benefits increased nearly 150% year-on-year, to INR 9,111 million (US$135.6 million approx), a filing made to the registrar of companies (RoC) showed.
In comparison, the two e-tailers’ foreign competition in India, Amazon Seller Services has been frugal on its payouts. Its highest-paid employee in fiscal 2016, in India, has been Stephen Walter, the HR director for India and China; Walter got INR 42.9 million (US$640,000 approx). Amazon’s India head Amit Agarwal received INR 31.6 million (US$471,000 approx).
Indian VC, Mahesh Murthy, has been scathing on the Indian bred e-commerce companies, who he feels are “ridiculously” overpaid at “insane levels.”
“The HR head of Flipkart, a gent with 8 years’ total experience, earned INR 35 crore (INR 350 million — approximately $5.2 million) last year. And the founders get much more,” says Murthy.
Increasing consumer complaints
What also doesn’t help the sector is the increasing number of consumer complaints against the e-commerce companies. Altogether, 1,386 complaints were made against e-commerce firms in 2016 to the National Consumer Helpline, C R Chaudhary, Minister of State for Consumer Affairs, informed the Indian parliament yesterday.
Bookmyoffer.com topped the list with 449 complaints. ebay stood at No 2 with 135 complaints, Snapdeal at No 3 with 120 complaints, followed by Flipkart at 92.Two other players in the Flipkart Group – Jabong and Myntra have 15 and two complaints respectively. Whaaky.com trails Flipkart with 79 complaints. Shopclues.com saw 47 complaints registered against it, and Paytm.com 46. Around 15 complaints were received against Homeshop 18, followed by naaptol.com (13), Shop CJ Network India (10) and askmebazar.com (6) during this period, the data showed.
Most of these complaints are about non-delivery of ordered items, delivery of damaged ones, or delivery of fake products.
Plug the loopholes
It would be well for the e-commerce companies if they could reduce their marketing and payout costs and invest that money into plugging loopholes in their logistics and improving last mile connectivity.
All this does not look well for the homegrown e-commerce players, as their immediate competitor Amazon India has infused heavy investment in the country. Amazon.com Inc. indicated this month that it would keep pumping money into India although its investments in the country crimped profitability. In the three months ended December, Amazon posted international sales of about $14 billion, and its loss widened to $487 million from $108 million a year ago, mainly due to its investments in India.
Amazon has committed to investing at least $5 billion in India over the next few years. According to recent regulatory filings, Amazon has so far invested over over $1 billion into its Indian operations.
Chinese e-commerce giant Alibaba’s fresh investment of putting in anything between $200 million to $250 million into India’s mobile commerce and wallet company, Paytm too isn’t good news for Flipkart and Snapdeal. Paytm’s online marketplace business is likely to be called Paytm Mall or Paytm Bazaar.
The flag-bearers of the Indian e-commerce sector need to rethink their strategies and priorities — the consumer — if they want to survive in the Indian market. India already is seeing pressure being built up by G20 to open up its e-commerce sector. G20 has for the first time asked various countries, including India, their views on e-commerce.
India does not allow foreign investment (FDI) in business to consumer e-commerce retail. Amazon and foreign investor-funded Flipkart function as marketplaces.
If India succumbs to the pressure, and FDI starts coming in, that may further bleed the homegrown players.