2016 will be a reality check for India's e-commerce industry
Sreedhar Prasad, Partner at KPMG India believes that now it is about value and profitability for e-commerce players
The Indian ecommerce juggernaut led by players such as Flipkart, Snapdeal and Amazon India, has already overshadowed the traditional retail sector. But, Sreedhar Prasad, Partner (E-Commerce & Startups) at KPMG India believes that 2016 will be a reality check for India’s multi-billion dollar ecommerce industry, which is surging ahead on foreign capital funding despite heavy losses. Now, the focus is on the path to profitability, says Prasad in an interview to Forbes India.
Edited excerpts:
Currently, in the Indian e-commerce space, there are new shifts, including a focus on valuation (a long standing talk point) and questions around profitability. Your views?
In the e-commerce business, while the larger businesses are slowly stabilising, the question of value and profitability does arise. The business model of the larger players such as Flipkart, Snapdeal, Myntra, Jabong, Amazon (India), and others - is clear. Discounting was what was driving the business. Using this mechanism, companies have captured the market and got customers to buy online across categories. Now, there focus is on path to profitability. But, the money won’t come from the customer - that is the reality of the current landscape. E-commerce will need to earn its profits from other sources than the end consumer, and there are ways to do that. Take the ecosystem around any of the larger players - there are so many other enabling businesses which is contributing to the sale of a tee shirt from one of the big players. Today, e-commerce companies are not charging those enablers. For example, e-commerce changed the logistics landscape in India. However, there is no preferential pricing given to the e-commerce players - they pay the same rates, even though they have exponentially boosted the industry. There are multiple similar businesses (photography, cataloging, packaging, warehousing, invoice printing and last mile delivery business), which now need to step up and share the risk associated with the whole online retail space. It cannot be about the benefits alone. This way, the customer will get the same product at the same price he was always getting it at, without any added burden. And the risk is not one businesses’ alone, but is shared by the ecosystem at large.
About the path to profitability: the bottom line is that e-commerce companies in India are suffering from losses, which hasn’t impacted funding. Do you see a disconnect there?
There is a disconnect and I will tell you why. When an industry starts and shoots up so large, the only other comparable example is the telecom industry in the late 90s in India. Today, if you ask me, salaries in the e-commerce industry has no benchmark. In top B-school campuses across the country, e-commerce players have overshot top recruiters from other sectors by offering students double the salary. While people were not bothered till today, going forward cost will be a major concern for the e-commerce industry. There are typically two major costs for an e-commerce company — discounting and the business cost. This year, we will see a reality check among the top e-commerce players in the sector.
Most of the e-commerce players have played well on alliances, acquisitions and building an ecosystem. Is this the way forward you feel?
If there is an asset which has a gestation period and longevity, it is better to acquire. And most of the top e-commerce players have done that. The way acquisitions are looked at is: if I can’t build today, let me acquire. I feel, there will be a lot of consolidation in the space of advance customer experience. There will be a lot of tech investments in the area of mobile applications (apps). Companies in the areas of big data and pure play analytics will get acquired. There will be a lot of disruption in the e-commerce space.
What kind of disruption will happen?
Intermediates in the e-commerce industry, who are in the last mile logistics space, addressing the rural middle class and rich segment will be the next big wave. These intermediates will enable the top e-commerce players to address that lucrative rural market. And mobile applications (apps) is the future to target that market. If you see the large population of India don’t have access to computers through out the day unlike the office goers who are in front of computers for an average of 8 to10 hours a day. Disruption will happen in that space. I have a view, click and buy happens on the app, while browse and buy happens on laptops and desktops.
