<div><em>E-tailers as intrinsically technology companies are supposed to be disruptive, but they are overburdened with large operations teams to acquire sellers and manage inventories, writes <strong>Vishal Krishna</strong></em><br><br> </div><div>Why are the “Business-to-Consumer” (B2C) e-commerce companies raising billions of dollars on the one hand and increasing their head count on the other? A technology company needs a minimum number of people. Having a people-run process isn’t disruption and today e-tailers say they are technology companies. E-tailers like Flipkart and Snapdeal combined would be employing nearly 60,000 people. Uber has only 800 people globally. So which one is more disruptive?</div><div> </div><div>There are three reasons why these companies employ more people. First of all, half their strength probably consists of delivery boys and warehouse employees. By law they cannot hold inventory. However, because of the nature of the retail (e-tail) market place businesses processes, where products are sorted in a warehouse, we must agree that these delivery boys and warehouse employees are a necessity (subject to laws governing the e-tail business).</div><div> </div><div>But what about the rest? The e-commerce market places are employing people like an IT services business and they are increasing their headcount every six months. An IT services business, like Infosys or Wipro, works on the number of clients acquired and adds more people accordingly. But why should e-commerce companies do the same?</div><div> </div><div> This brings us to the second reason. Since they work on a self-serve model, where sellers register on the platform without anyone approaching them on behalf of e-commerce companies and are not working for etailers, then surely the majority of the employees must be business development teams. The team must be hustling the idea of a market place from shop to shop, in every Indian city, and getting owners to register with etailers. The technology and analytics team surely must not be more than 1,000, per company, in these etail businesses. No wonder the business has bled more in salaries including Rs 9,774 crore in pure discounting and in managing their reverse logistics cost.</div><div> </div><div> The third logical conclusion is that if only 15 per cent of the registered sellers are regular on the platform, then truly this business is not working out in its current form. And no wonder they have these associate distribution companies, like CloudTail and WS Retail, which are exclusively selling products on the platform. Again by law an etailer can source only 25 per cent from an associate company. The government of India must either make these businesses open to retailing or make raising money a level playing field for brick and mortar retailers.<br> </div><div>Experts that <em>Businessworld </em>spoke to say that investors will continue backing these companies till a reasonable scale is achieved. What is awkward is the fact that sellers get marketing emails, from Snapdeal or Flipkart, saying that they sell uniquely to 4 crore (40 million) Indians on a regular basis. This 40 million is the expected potential of the entire etail basket in India, which includes Flipkart, Amazon, Snapdeal and several others. </div><div> </div><div>Is it the money or rather valuation that makes them talk like that? These valuations are like calculating future free cash flows based on current market conditions. However, being technology companies that they are, Flipkart and Snapdeal should probably add more weight to market uncertainty and consumer behaviour. </div><div> </div><div>It is, however, the fault of the media for flag bearing a change that includes for 4 per cent of the Indians. The technology, however, could benefit a larger market if only the political will can add reasonable protection to the modern retail industry, which obviously must include the etailers. T</div><div> </div><div>The first steps were taken by an 18-member committee headed by Narayan Murthy, which advised the Securities and Exchange Board of India (SEBI) to set up an alternate investment forum for startups in India. SEBI has promptly released a set of probable guidelines for start-up listing in India where losses will no longer be a consideration for raising money.<br><br>The market regulator has cleverly limited the minimum amount of participation to Rs 10 lakh, for retailer investors, therefore protecting the common man from participating in such stocks. The platform promises to be a good exit strategy for Venture Capital money that wants to off load stake. However, it all depends on the tax structure, on capital gains, for this startup investment platform to succeed. The tax rate on short term gains is currently 30 percent in India. Flipkart may actually list in Singapore or in the USA.</div><div> </div><div>Sources say that Snapdeal may be the first to take that route after acquiring or consolidating a couple of smaller e-tailers. Like we said in our e-tail bubble story last week, we just hope the e-tail industry does not run out of steam because of of foreign money wanting to pull out too soon. </div><div> </div>
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