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Flipkart is not alone on this “funding spree”. Conversations with entrepreneurs from the e-commerce sector often reveal how most of them are “constantly in discussions for raising funds”, or raising millions of dollars within a gap of a few months.
“If there’s any e-commerce company in India that says it is not looking to raise funds, it is probably on its way to shutting down,” the founder of a leading vertical-focused online retail company told Business Standard last week.
But why do the Indian e-commerce players need billions of dollars?
Building infrastructure
As first-generation companies in the sector, a lot of the existing online retailers are “building the road” that will take the sector towards a destination, says the founder of a mid-sized online marketplace.
According to him, companies such as Flipkart and Snapdeal are not just building their own businesses but are “trying and testing practices that would work for India and can be duplicated or picked up by smaller firms that do not have the resources for such experimentation”.
According to sources, Flipkart runs 70 per cent of its logistics in-house, and innovation around logistics is a key focus area for the company. Experts are of the opinion that the company has built in logistics-related infrastructure that can beat many of the mid-sized courier and cargo companies in India.
However, some players, such as Snapdeal, have chosen a model under which they outsource delivery, making expense on this segment far lower.
Business model
Additionally, fierce competition is leading several players to pay a heavy price and spend millions to stay on top.
“I believe the profit margins of big e-commerce players are getting razor-thin due to rising competition in the e-commerce sector,” said Sanchit Vir Gogia, chief analyst and group chief executive officer at Greyhound Research. “As this sector thrives mostly on lower margins and higher volumes, there is a need for continuous investments in business models to improve on profits.”
Brand creation
Television advertisement campaigns seem to have become a favourite of e-tailers, with not just the big ones but even the small players airing ads on the audio-visual medium.
“The kind of reach and returns on investments that TV provides is unparalleled by any other medium,” said Manav Sethi, group head (marketing and digital products) at AskMe, which runs TV ads with celebrities such as Ranbir Kapoor and Kangana Ranaut. “We wanted to build a brand that cuts the clutter that is there in the online retail space right with so many existing players around, and gets a direct share in the minds of consumers. So the medium and these celebrities were our first choice.”
According to industry sources, Kapoor had initially agreed to get paid in equity for the ads with AskMe. However, the company’s management did not approve of the same.
Human resources
If sources in the recruitment industry are to be believed, e-commerce companies typically spend higher on attracting top-level talent, against some other traditional industries.
“Typically, the cost of human resources would be higher for an e-commerce company because they pay a slight premium compared to some other industries mainly because they want people right away and don’t mind paying a little extra,” said Guruprasad C K, principal at global headhunting firm Heidrick & Struggles. “Sometimes they don't mind paying extra because the valuations of start-ups are in some ways linked to the quality of leadership they have. Therefore, they want the right talent at the top as it could help them attract higher valuation.”
ADVERTISING
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Snapdeal spent Rs 30 crore on sponsoring reality television show Bigg Boss 8
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AskMe spent about Rs 50 crore on television ads in 2014
- Shopclues.com ran a six-week TV ad campaign for Rs 6 crore
HUMAN COST
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E-commerce companies spend 15-30% higher on attracting talent compared to other technology sectors
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Prominent leader in the top team can help lift valuation
- All e-tailers are hiring from the same “limited talent pool”, which could raise the cost of talent
Keeping a war chest
Most large e-commerce companies are looking to keep a strong cash surplus as internet-based businesses run the fear of 'just another player' coming up and changing the entire game, experts say. "The large e-tailers would ideally want to nip competition in the bud and would so look at several small-ticket investments or acquisitions," an industry expert said.
*According to industry sources
No reason to worry
Experts believe there's nothing worrisome in the frequent fund raising of e-tailers.
"I don't think there is anything to worry in this matter," said Harish H V, partner at Grant Thornton India LLP. "This is a new business segment and we are talking about a different model all together. These companies are not just spending money on their own growth, they are also investing in building the entire ecosystem."
Gogia of Greyhound Research added that he believes that fund raising by e-commerce players is fully justified and is the only viable option for them to tackle huge losses and stay in the competition.
