Even as the Indian e-retail market is slated to touch $84 billion by 2016, according to the Internet and Mobile Association of India, its economic viability remains a major concern.
Industry sources say that not a single online firm has turned profitable even after three to four years of operations, thus making the second round of private equity funding difficult.
Several PE players such as SAIF Partners, Accel Partners, Tiger Global and Bain Capital have invested in the online space with amounts ranging from $5-40 million. Though most have yet to receive appreciable returns, funding in the second round seems remote.
There are about 250 active portals in the country that offer huge discounts on consumer durables. According to the Internet and Mobile Association of India (IAMAI), the Indian e-commerce market at present is pegged at Rs 56,000 crore, of which only eight per cent is contributed by online sales of physical and digital goods.
“India still has to reach a stage when it will define the day-to-day consumer spending pattern. It will happen in the next five years,” said Subho Ray, President, IAMAI
At present, players are mainly focused on getting clicks or footfalls to drive volumes without caring much about the margins.
“Focusing on volumes is right, but the cost at which a customer is acquired is as high as Rs 1,500-2,000 per person, which is double the world average,” said Ankur Bisen, Vice-President (Retail) at marketing research firm Technopak Advisory. Besides logistical challenges, huge discounts also eat into the margins of the company, thus making the venture unviable, he adds.
Online retailers have to include shipping charges to make a profit. Flipkart, the country’s leading e-tailer, has recently introduced delivery charges on all transactions. Their minimum order has also been benchmarked to Rs 300. Other players might just follow suit.
Bisen said all e-tailers need a good repeat business (a customer returning to the portal). He added that for a company like Flipkart, which has been online for three to four years, the repeat business would be around 40-50 per cent, while for a start-up, it would just be 5-10 per cent.
According to Samarth Mungali, founder of Tadpolestore.com, “Many players enter the space because of the low start-up cost without realising the high operational cost involved. The next round of investments is likely to be in niche categories.” E-commerce in its current form is definitely a bubble, he added.