Flipkart India Pvt Limited’s acquisition of Myntra makes for good headlines. The country’s largest e-commerce firm spent anywhere from $300 million to $400 million to pick up its erstwhile rival; with that amount of money in the mix, the motif of the sector’s potential has, naturally, been a recurring one. But it isn’t all sunshine and roses when it comes to the country’s largest ever e-commerce deal. Looking beyond those eye-popping figures, there are issues of sustainability and scale worth exploring. In that context, the deal points not only to the e-retail sector’s potential, but also its vulnerabilities and problems.
For all of Flipkart’s founders’ protestations that they weren’t looking at Amazon as a threat, it’s the 500-pound gorilla in the room. Since it started operations in India last year, it has rapidly become the biggest threat to Flipkart. And this is just the beginning. As of now, regulations only allow for FDI in the marketplace model where companies like Flipkart provide a platform for third-party sellers to sell to consumers. But it’s widely expected that the Modi administration will allow FDI in business-to-consumer e-commerce as well, where e-retailers will be able to sell directly to consumers. This is when the real threat from Amazon — and other international e-retail giants — will emerge. With their years of technical expertise, their deep pockets, massive inventory capacities and supply chains, they will have several advantages.
In markets the world over, one lesson has been driven home again and again: e-retail is a brutal space where the majority of the players crash out, the prize for performing well is being brought up by bigger players and actually surviving in the long term is a rare feat. These trends are already visible in India. Of the 52 e-commerce startups in India which, taken together, had managed to raise $700 million in venture capital funding in the three years ending in 2012, only 18 were able to raise follow-on investments in 2013. And even the big players that have been successful — like Flipkart and Myntra — haven’t been able to break even so far, leave alone turn a profit. In that context, the former hasn’t just acquired the latter’s capacities, infrastructure and market share; it has also acquired an added drain on its finances. Those red entries in the balance sheets are going to prove tricky to deal with once the international competition grows.
The irony is that the e-commerce sector is set to explode in India concurrent with the rapid growth in smartphone and broadband penetration. Currently, excluding travel — which makes up 70 per cent of the sector — India’s e-commerce market is worth $3.1 billion. According to various analyses, it’s expected to be worth anywhere from $50 billion to $75 billion by 2020. But if Indian companies want to take advantage of this, they will have to figure out how to work out around issues such as the majority of consumers preferring to pay by cash at the point of delivery rather than by using debit or credit cards, raising transaction costs by 5 per cent or so — a significant issue in a sector where margins tend to be wafer-thin in any case. They will have to match the international players when it comes to incentives such as one-day delivery and massive discounts. And they will have to build advantages in areas such as making local and artisanal products available. Else the Darwinian churning in the e-commerce sector will not be kind to them.