If online commerce companies keep on burning investors’ cash, a flop-show similar to WeWork may be from India’s e-commerce sector.
The Indian government is reportedly looking into heavy discounts offered by e-commerce platforms Amazon and Flipkart during their special festive sales. The authorities will investigate if the foreign-owned online marketplaces have violated foreign direct investment rules.
It does not come as a surprise. Last month, the Competition Commission of India reportedly said that the regulator will keep a close watch on these deep discounts following written complaints by the brick-and-mortar retailers lobby, the Confederation of All India Traders (CAIT), to commerce and industries minister Piyush Goyal. CAIT, in its letter on September 13, cited that discounts offered by e-commerce firms sometimes go up to 80 percent of the maximum retail price (MRP) of a product which the lobby group believes is a violation of the foreign direct investment regulations as such activities influence pricing.
According to a report by Reuters, both Amazon and Flipkart said they comply with the stipulated regulations while CAIT said that the two companies have been burning cash to offer hefty discounts in order to attract consumers which, in turn, has impacted business of brick-and-mortar retailers who have allegedly lost 30-40 percent business this festive season.
In its report, Reuters cited emails that Flipkart had sent to its sellers that detailed the Walmart-owned firm’s discounting game which included details of how the company was going to burn money.
To be sure, discounting is not a new concept. What’s new is that Amazon and Flipkart, and every other e-commerce platform, have got into the deep discounts game despite knowing the fact that all foreign-owned e-commerce firms were under of lens of CCI this year. Even CCI chairperson Ashok Kumar Gupta was quoted by the Economic Times last month saying. “Deep discounts could make some businesses unviable as it erodes the value of products and services in the mind of the consumer if done for extended period”.
Both Amazon and Flipkart built their businesses by offering discounts since the very first day they started businesses in India. First, it was to attract consumers to an entirely new platform which did not exist before. As a result, consumers at large benefitted as e-commerce companies kept on burning investors’ money. The discounting game continued because they wanted to increase the penetration of online commerce in the world’s second most populous country.
Flipkart had to do it just to be in the business as it was competing with cash-rich Amazon that could not crack China – the world’s most populous country that is projected to cross the United States to become the world’s largest retail market by end of this year. Naturally, Amazon had to be successful in India, and it did manage to crack it.
Burning investors’ cash did seem to pay off a bit. In just a few years of its existence, e-commerce grew rapidly to reach almost each of India’s 19,100 postal index numbers, even if the penetration is still as low as 5 percent (Source: RBC Capital Markets, August 2019). No doubt, the opportunity that is yet to be tapped is huge.
Deep discounts, special deals, exclusive selling rights are among the things that gave online commerce companies an edge over brick-and-mortal retailers. Since companies like Amazon entered India, physical retailers have been shouting how the discounting practice has been impacting their business, though the presumptive loss has never been quantified.
Then, some of the brick-and-mortar retailers started offering higher discounts to gain back lost customers.
But, is it only the investors’ money that e-commerce companies burn to offer discounts? That may not be entirely true. The online commerce model is quite different from the brick-and-mortar ones, especially the inventory-led model – which is now being questioned by the regulators in the Draft National E-commerce Policy in February 2019. The policy is yet to come in force.
In the inventory-led model, e-commerce companies procure directly from brands, cutting off the supply-chain. Thus procurement happens at a lower cost. Besides, there is no requirement of a physical store which naturally saves a lot of money considering the high cost of real estate in India, especially in metro cities that physical retailers bear. To be fair, a good part of the total discount of a product can be worked out from the savings in the supply-chain and rent of real estate.
If discounts diminish from online commerce, consumers will be the losers. And, the growth of e-commerce in India will drastically slow down. There’s no doubt then India’s e-commerce will miss projections of crossing $200 billion revenue by 2026 from just $38 billion in 2017.
But, it is time e-commerce companies should probably stop offering hefty discounts burning investors’ money whether or not the Indian government or the competition watchdog forces them to. At one point, investors will stop investing unless they see hope for profitable exits.
A recent instance of such a flop show was WeWork that operates like a marketplace for co-working spaces. The company, which has so far been burning the cash of its private equity backers, failed to attract retail investors for its planned IPO even at a valuation that is less than a fourth of its last fund raising in January 2019 when Softbank invested in the American firm at a valuation of $47 billion. It had to call off its IPO last month. And, now, Softbank is likely to take control of WeWork.If e-commerce companies in India keep on burning cash, a similar scenario like WeWork may not be far off.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.