Behind the Hype of e-Commerce

Rahul Varman

One is at a loss for words to describe the rise and rise of e-commerce in the eyes of the ruling and middle classes as well as the mainstream media. Not a day passes without the sector capturing the headlines and prominent space. Words like e-commerce, start-ups, and digital India, and brands like Flipkart, Amazon, Ola, and Uber have become household names in no time. Massive numbers in terms of investments, valuations, etc. in the sector are being presented.

This sector is talked of as the engine of economic growth and source of 'good' jobs that are equal to the aspirations of the young and educated. [People] are also told that start-ups and e-commerce are making the nation innovative and entrepreneurial, and that, for the first time in history, the young are becoming providers instead of seekers of jobs. After the announcement of 'Start-up Action Plan' by the Prime Minister Modi in January—last year amidst much fanfare, the signature of the present regime, and in the presence of high profile galaxy of CEOs of a large number of big corporations that supposedly are 'start-ups' in the internet related areas, Forbes India gushed : "Never before in India's economic history has 'entrepreneurship' been given such a centre stage by the Government and policy makers".

Apparently e-commerce has answers for every problem and all ills. The Government recently announced plans to create an 'Amazon-like market for farmers' by online linking of mandis, i.e., wholesale agricultural markets. In May last year, a Facebook-sponsored report by PricewaterhouseCoopers proclaimed that the Indian economy can add $1 trillion to its GDP (that means an almost 50 percent addition to its present size) if only internet access could reach every single person, whatever that means! E-commerce has also become synonymous with hi-tech, and representative of the 'new' economy and modern society that apparently represent impulses like sharing beyond merely market based competition, what is called the 'gig economy'. In this way, Ola/Oyo are presented as only a means to connect those who are looking for a certain service with those who wish to provide it.

In short, words like 'start-ups' and 'e-commerce' are, for the rulers, powerful new symbols of a rising India, and supposedly represent the hopes and aspirations of the new generation.

By e-commerce here [what is meant] is its common usage, of trading and commerce through the means of information technologies like the internet and mobile applications, which spans various sectors and aspects of an economy. Some of the sectors that form part of e-commerce are: travel (e.g.—IRCTC, MakeMyTrip, Yatra etc.), retail (e.g.—Flipkart, Amazon, Jabong etc.), classifieds (e.g.—OLX, Niaukri.com, Shaadi.com, Housing.com etc.) financial services (e.g.—net banking, online wallets like Paytm etc.), and digital downloads (e.g.—Netflix, iTunes etc.).

[No doubt] e-Commerce has become the focus of the rising aspirations of the Indian elite, and is projected to touch the $100 billion mark by 2020, a 20-fold increase from $5 billion in 2010. These expectations are based on rapidly increasing internet and smart-phone penetration and usage : supposedly, India has the 2nd largest internet use base in the world, overtaking USA recently, even though only 22 percent of the adult population in India have any access to intenet. (The figure for the US is 89 percent, and the global median is 67 percent.)

According to a recent Morgan Stanley report, the Indian e-commerce market is expected to grow the fastest globally over the next three years : in fact they 'increased' their 2020 estimate (of this market) from $102 billion to $119 billion. The report estimates that India will have almost 320 million online shoppers by 2020, compared with 50 million in 2015. As per the report, India received $6.6 billion in venture capital and private equity investment in 2015, a 50 percent increase from the previous year.

At $13.8 billion, the Gross Merchandise Value (GMV) of the top three e-commerce companies exceeded that of the top 10 offline retailers at $12.6 billion last year. Further, according to a report by the Confederation of Indian Industry and Deloitte India, the business to business (B2B) segment of e-commerce is expected to more than double from $300 billion in 2014 to $700 billion in 2020. India's e-commerce market is expected to reach $220 billion in terms of GMV and reach 530 million shoppers by 2025, according to another report by Bank of America Merrill Lynch.

The most fantastic aspect of the e-commerce story is the frenzy around the valuations of these companies. The only thing that they seem to be attracting more than the hype and news around them is the amount of cash and investments, at least till last year. The Indian variants appear to be losing some of the sheen and hype in the past year. 'Valuation' is supposed to be the current 'worth' of a company as determined by the present and prospective stockholders depending upon the price at which they are willing to sell and buy its shares.

Last year Amazon as a global corporation was worth $250 billion, that is, more than Wal-Mart, which has such large number of physical stores and assets across the globe. Amazon thus became the 'largest' retailer in terms of the company's worth and its founder, Jeff Bezos, became the fifth (now fourth) wealthiest individual on the planet. Similarly, last year Uber became a more 'valued' company than GM and Ford, having reached a valuation of close to $70 billion! While Uber, a seven-year-old 'startup', employs 6,700 persons, GM has more than two lakh employees at present, and is a century-old auto giant with manufacturing plants across the globe.

The rapid appreciation in valuations of home-grown startups does not appear to be any different. The poster boy of e-commerce and e-retail, Flipkart, achieved a valuation of over $15 billion (Rs 1,00,000 crore), that is, more than a corporation like Tata Motors last year, or close to Indian Oil currently, which makes it amongst the 20 topmost corporations in the country in terms of its total worth. Ola Cabs, a home-grown taxi aggregator similar to Uber was founded only five years ago. It achieved a valuation of more than $5 billion (Rs 33,000 crore) from the investors last year, which is almost same as the market worth of Tata Steel today!

How does one make sense of such dizzying valuations of the e-commerce companies that apparently hardly own any physical assets, and are just upstarts in every sense compared to those whom they seem to have roundly beaten in terms of their worth? It is said that a company's worth represents its current fundamentals and the potential for future earnings for its investors.

Going by the kind of investments and media frenzy that e-commerce is attracting, one should not be faulted for assuming that the sector must be enormously profitable. But that is very far from the actual reality. Early this year, a study by brokerage firm Kotak Institutional Securities found that India's top 22 online commerce 'start-ups' (in fact many of them are huge and several years old like Flipkart, but they are termed 'start-ups') reported an almost four-fold jump in annual losses to a whopping Rs 7,884 crore for the financial year 2014-15 on combined revenue of Rs 16,199 crore. To put the figure in some perspective, the Government spent all of Rs 4,200 crore on the Swacch Bharat Abhiyan in the same year, the campaign that was started with so much fanfare under the new NDA regime!

While the losses were across various sectors of e-commerce (real estate, online classifieds, food delivery, etc.), the biggest chunk came from e-retail, with the top three e-tailers, Flipkart, Snapdeal and Amazon, posting a massive combined loss of Rs 4,984 crore. The report also predicts that for "FY 2016 losses for our sample set would be higher than FY 2015". Nor is it a one-year aberration: the combined losses of Flipkart, Snapdeal and Amazon for the year 2013-14 were close to Rs 1,300 crore.

It is very difficult to get the financial figures of these companies, as they are privately held (and, given the state of their financials, they simply refuse to comment on media queries). Yet their mounting losses are attracting some media attention.

Last year Amazon India spent Rs 662 crore in sales promotion and another Rs 744 crore on advertisements, that is, a combined expenditure of more than Rs 1400 crore on marketing out of a total annual expenditure of Rs 2,750 crore. Similarly for Snapdeal: their Rs 1,300 crore loss last year appears to consist almost entirely of their advertising and promotional expenses of Rs 1,060 crore. Out of this, Rs 426 crore was 'Advertising and Publicity Expense', while the remaining Rs 633 crore was 'Business Promotion Expenses'.

Of all the expenses for these companies, the most interesting head is the 'sales and promotion' account. It is said that much of this money goes into providing discounts on whatever is sold through their platform. Apparently that is the primary cause of the cheap merchandise and various sales festivals that gather so much of hype.

A whole new lexicon seems to have appeared to assess the 'potential' of these startups. A key factor that has emerged is something called a 'burn rate'. During the rush of 2014-15, the higher the bum rate, the more likely the firm could attract millions and billions! 'Burn rate' is the rate at which an entity promises to 'burn' the cash, that is, spend the capital which they have sourced from the venture capitalists—that too not on durable assets, but on operating expenses. The only thing that mattered was their capacity to convince financiers that the startup had the wherewithal to spend the money, according to informed sources (of course, with the eventual aim of making huge profits). Thus in its peak days, in the last quarter of 2015, the burn rate for Flipkart was a mind-boggling $80 million (Rs 500 crore) per month, or close to a $1 billion a year.

Flipkart was not an exception, as Snapdeal was said to be shelling out $25 million (about Rs 150 crore) a month as discounts and marketing expenses. According to a PwC report last year, at times 70-90 percent of the funding by these companies was being spent on 'facilitating discounts'. A Business Today cover story last year stated that a nearly $5 billion 'war chest' of Flipkart, Amazon and Snapdeal was going to be used primarily for cash burn, but also added that they "will probably need even more money to win market share... and that will add to their already humungous losses." During the recent visit of the Prime Minister to the US, Jeff Bezos, the CEO of Amazon, announced that they will spend another $3 billion on India over and above the $2 billion that they have already committed. A similar report by the financial data portal VC Circle stated that Flipkart was losing Rs 2.23 for every Re 1 in net revenues, while Amazon and Snapdeal in comparison were losing almost Rs 2 each for every Re 1 in net revenue.

Other e-commerce sectors did not seem to be faring any better with Housing.com, a real estate portal that had attracted millions of dollars in VC funding, said to have reported losses of close to Rs 280 crore on revenues of Rs 13 crore for 2014-15, their advertising and promotional expenses being 123 crore! Zomato, the online restaurant search, discovery and delivery portal which too had a very high profile with valuation of $1 billion last year, has reported losses of close to Rs 500 crore for 2015-16.

Such massive losses are not restricted to Indian companies or even the Indian operations of foreign e-commerce companies. Let us take the case of Amazon, the mightiest of them all. Amazon began announcing quarterly profits around 2012-13 after almost 20 years of being in business. The net result of nearly two decades of losses was a soaring share price. Amazon's price-to-earnings (p/e) ratio in 2013 stood at an alarmingly high 550 in comparison to technology companies like Google (p/e 29), or eBay (p/e25), or physical retail giant Wal-Mart (p/e 2). It was only in 2015 that the parent Amazon in the US has started reporting annual profits, that too profits of less than $1 billion on revenues of more than $100 billion. However, these profits are not coming from their core e-retail operations, but from the web services division that rents computing power to other organizations like Netflix and CIA.

With more than $1 billion dollars in funding and operations in 100 cities, and with 2.5 lakh vehicles on its 'platform', Ola was apparently losing about Rs 420 per ride, while Uber, the US based taxi aggregator which is now after the Ola market in India, is losing around Rs 500 per ride. Apparently, Uber's Indian arm has made 'marginal' profit in first two years of operation in 2014 and 2015 as per their Registrar of Companies filing. However, in the same report informed sources commented that "Uber must still be making losses", but "the losses could be either parked in some other company within India or even abroad to help lower the tax burden."

Even the parent firm Uber in the US seems to be making massive losses similar to Amazon. In a recent report Forbes quoted 'confidential financial documents' to suggest that Uber, though "growing rapidly... is also burning through cash at a faster rate than ever". Overall, Uber remained "massively unprofitable" with losses totaling $671.4 million in 2014 which expanded to $987.2 million in the first half of 2015 though cash and cash equivalents available with them increased from $1.96 billion at the end of 2014 to $4.15 billion in mid-2015. While Uber is supposed to be operating its ride-hailing services in more than 400 cities globally, it is reported to be losing more than $1 billion annually in China alone.

[Excerpted from the introductory section of a longish piece by the author, appeared in the 'Aspects of India's Economy', No. 65 issue. Courtesy : RUPE]

Frontier
Vol. 49, No.31, Feb 5 - 11, 2017