As I write this, I am watching Pakistan whip India in the Kolkata ODI and I am struck by the similar stories of our cricket team and e-commerce in India .
Just over a year back, we had won the World Cup, we were the top Test team, our batsmen and bowlers were in the Top 10. In e-commerce, valuations were soaring, global investors were salivating for a piece of the action here and all sorts of e-commerce companies were building high-growth plans.
And then. We were whitewashed 4-0 in England, and in Australia. We were knocked out of the World T20 in the first round and handed England their first series win in India in decades. The last straw is losing the ODI series to Pakistan in our own backyard. Suddenly, go-for-sales-at-any-cost investors too are singing a profitability tune; e-commerce players are realising that buying sales is not sustainable, valuations have plummeted and the last straw — select e-commerce companies apparently being investigated for allegedly breaking foreign investment regulations.
I think back to 1999-2000. Dotcom boom and bust. India had just lost 0-3 to Australia in Australia and 0-2 to South Africa at home. That was the nadir. Over the next decade, Indian cricket slowly but steadily improved, till it became the best. Though everything looks grim now, I am hopeful, and with good reason.
During the dotcom bust of 2000, most e-commerce companies closed down (Indiaplaza.com being the only survivor still around). They were undercapitalised and the market was too small with less than 3 million Indians using the internet. The numbers are different today — over 100 million Net users, around 7 million online shoppers. By 2015, these numbers are estimated to grow to 350 million and 75 million respectively.
The present challenge is in the way e-commerce companies have approached their business. Almost all shopping websites have focused on sales growth. However, across categories, retail margins in India are the lowest globally. The only way to build a robust business is to keep costs low and scale smartly. Most firms have invested in huge warehouses, large teams, stockpiled massive inventory and married these costs with low- or negative-margin sales. Venture capitalists who were so far encouraging pure sales growth are now asking for profits.
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Valuation is the other issue. Many companies attracted funding at high valuations hoping to get acquired but the current harsh capital environment means many may be forced to raise fresh funds at lower valuations. Some are rumored to have already done so. This creates a new set of issues for investors.
So why do I still feel sanguine? It is because millions of consumers have shopped online and millions more will in the coming years. Network infrastructure is improving; broadband connections are surging; millions of smartphone users are accessing the web, and consumers are trying out product shopping. The urban infrastructure, on the other hand, is crumbling. Traffic jams and no parking space will make shopping online attractive.
Pricing is another factor. We all love a good deal and online sites are best equipped to offer these. Even offline retail stores, struggling for profitability, are beginning to realise that e-commerce provides them the best chance to access large consumer bases at low costs and helps them to amortise their existing supply chain, warehousing and inventory more efficiently.
Investors are asking entrepreneurs to focus on profitable growth instead of mindless growth. This shift will have harsh short-term impact, but it is great for the industry in the medium term. Many existing companies and models will struggle to adapt; a few will make it. More companies will be launched that will enhance customer experience. Meanwhile, the selectors just announced a new team for the next ODI series with some fresh faces. I continue to remain sanguine.
K Vaitheeswaran
CEO, Indiaplaza.com