Consumers have never had it so good. Online marketplaces, vying for volume, are offering mouth-watering discounts.
From smartphones to white goods, discounts range all the way down to 50 per cent. Debit and credit card usage has spiked; e-wallets are becoming ubiquitous; even public sector utilities are turning digital-savvy.
In a curious way, demonetisation has catalysed cashless transactions. Account-linked FASTag stickers on vehicle windscreens using RFID technology are already in use in around half of the country’s 375 toll highways. More toll plazas are expected to go digital with RFID-enabled FASTags and other e-payment options to allow vehicles to drive through without stopping. In the West, nobody pays cash at toll checkpoints.
A recent survey revealed that due to delays at cash toll booths, Indian truckers cover just 300 km compared to Western truckers who cover 700 km in the same time period.
But while consumers – still struggling with Rs 2,000 denomination notes and limits on cash withdrawals – are enjoying unprecedented online discounts across product categories, e-commerce retailers are bleeding.
Pepperfry, the online furniture marketplace, doubled its annual loss from Rs 88 crore in 2014-15 to Rs 156 crore in 2015-16. For a relatively small firm that basically aggregates furniture sellers, that’s a big hit.
Even bigger is the loss reported by Quikr, the online classifieds major. In 2014-15, it lost Rs 446 crore. This fiscal its losses have mounted to Rs 534 crore with no daylight in sight at the end of the tunnel.
Both Pepperfry and Quickr have grown revenue over the previous year – Pepperfry by 400 per cent and Quickr by 60 per cent – but that is cold comfort.
The more e-commerce firms sell, the greater the loss. Besides, if Quickr, for example, hadn’t earned Rs 53 crore from excess venture capital funds it placed in treasury operations (bonds, debentures and mutual funds), its annual balance sheet would have looked even worse with non-treasury annual losses at Rs. 587 crore.
Bigger e-commerce marketplaces like Flipkart and Snapdeal are bleeding far more. In 2015-16, Flipkart recorded a loss or Rs 2,306 crore. Online retailers make up these humongous losses – which would have long put brick-and-mortar firms out of business – through newer and newer rounds of fund raising.
That window though is narrowing as valuations dip. Morgan Stanley recently reduced Flipkart’s valuation to $5.60 billion – a third of its valuation of $15.2 billion in July 2015. Fighting deep-pocketed US rival Amazon becomes more difficult if liquidity is strained.
If you lose Rs. 2,306 crore a year by selling goods to happy consumers at way below MRP, you’ll need funding to match that. At current valuations, that means substantially diluting promoters’ equity. At a $15.2 billion valuation, Flipkart could dilute 10 per cent equity to investors for $1.5 billion (Rs. 10,000 crore). Today it will have to dilute 30 per cent (of already diluted equity after several funding rounds) to raise the same amount.
And if losses mount to Rs. 3,000 crore or more a year, the level of dilution can become unsustainable over a three-year period.
The solution? Cut discounts. Easier said than done. Volumes could drop vertically. Traffic could flee. For e-commerce vendors, their only asset is traffic volume. Lose that, you lose everything.
The key then is to nudge discounts down and nudge valuations up. How?
Financial surgery to cauterise the balance sheet is the only way to stop the bleeding. Unless cash discounts fall, losses will climb. That’s not a sustainable business model for what is now essentially a commoditised click-and-deliver logistical play.
Columnist
Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group
