Large online players could end up spending close to a billion dollars (about Rs 6,000 crore) on discounting, marketing, and ramping up their employee strength as they battle fiercely for market share.
Indian e-tailers Flipkart and Snapdeal and Seattle-based online commerce juggernaut Amazon have, between them, already guzzled about half a billion dollars of investor money doling out lavish discounts during their much publicized Diwali promotions.
Over the past year, Wall Street hedge funds and big internet investors like Yuri Milner's DST Global and Masayoshi Son's SoftBank Corp have funnelled billions of dollars into India's consumer internet story. Flipkart and Snapdeal alone have raised about $3 billion this year. What this, in effect, means is that Indian consumers are being subsidized by investors on Wall Street and elsewhere as they binge out on the latest and the sleekest.
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Most investors in these companies say Indian consumers can expect the good ride to continue unabated for the next couple of years making online shopping extremely attractive. It is not just computers, phones and washing machines that are being offered at mouth watering prices; joining the fun—from a consumer's point of view—are app-driven cab companies. Again, flush with funds raised from bulge-bracket backers, cab services like Uber, Ola, TaxiForSure and others are offering cheap rides, often lower than auto rickshaw fares, to commuters in big Indian cities.
"By offering discounts, e-tailers are looking to expand the market. The bigger the deal a customer gets, the greater the chances of her shopping online," said an investor in Snapdeal, who did not wish to be named. The company raised $627 million recently led by Japan's SoftBank and is on course to clock annual sales of $2 billion, while Flipkart is said to be nearing a run rate of $5 billion in gross merchandise value (GMV) for 2014-2015. Amazon said earlier this year that it intended to spend $2 billion on its India operations without setting a timeline. It is learned to be advancing towards $2 billion in GMV. E-tailers usually make anywhere between 5% and 20% of GMV depending on the category.
Discounting in e-commerce parlance typically includes flat-out sale, cash-back given to first-time users, advertising and marketing expenses, and employee costs. The top six e-commerce players collectively spent about $200 million (approximately Rs 1200 crore) on advertising across print, television and digital, a media planner said on condition of anonymity. These six would now be among the top 25 advertisers in the country.
While Flipkart and Snapdeal declined to comment for the story, an Amazon India spokesperson said, "Prices of products are determined by merchants. They pass on these savings as lower prices on the platform. On occasion, to promote our platform, we run marketing promotions."
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The huge flow of funds into these e-commerce companies has also meant soaring valuations for them; Bangalore-based Flipkart is now being valued at over $10 billion. A venture capitalist who has invested in one of the e-commerce biggies said, "There will be no profitability till, say, Flipkart reaches about $50 billion in GMV. However they will keep raising more capital. What is likely to happen in the next two-three years is that two out of the three players will merge. It will become a two-horse race."
Something similar happened when travel portals started in the first wave of the dotcom era (early 2000s) when they doled out heavy discounts. Such throwaway deals have now become far less common. But Indian consumers have stuck to online travel, said one investor when asked if people would stop buying if discounts were to vanish. E-commerce in India is an $11 billion market and is estimated to touch $20 billion by 2015 buoyed by internet-enabled smartphone penetration, a recent report from Motilal Oswal Securities said.
Sandeep Ladda, technology leader at consultancy firm PricewaterhouseCoopers said, "Given that e-commerce players experience longer gestation cycles, the strongest player with a backing of marquee investors is likely to clinch the game and there could be a consolidation in the marketplace." Analysts said that investors realize these discounts are aimed at acquiring customers. Arvind Singhal, chairman of retail consultancy firm Technopak, said, "Three years from now, the dust would have settled with fewer players and a return to normalcy." Till then, it's going to be Diwali and Christmas for Indian consumers.
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