The recent exchange of sharp comments on social media between Sachin Bansal, co-founder and chairman of Flipkart, and Kunal Bahl, co-founder and chief executive officer of Snapdeal, reflects not just the usual rivalry in the e-commerce business, but also the growing stress in the sector. Flipkart is India's largest e-commerce player and Snapdeal is third. The trigger for last Friday's exchange was the revelation of Chinese e-commerce giant Alibaba's plans to enter the Indian market on its own in the current year, raising prospects that the competition in this space will become even more fierce. Taking an indirect swipe at Alibaba's recent investments in Paytm, a rapidly growing Indian mobile and e-commerce platform, and its acquisition of a small stake in Snapdeal, Mr Bansal suggested that its decision to enter India on its own showed that the Chinese e-commerce player's investments in those Indian ventures had not fared too well. Not to be outdone, Mr Bahl retorted by reminding Mr Bansal that Morgan Stanley had recently pared Flipkart's valuation by an estimated $5 billion. Neither of the comments could be validated with certainty, but they do underline the intense competition the e-commerce space is currently witnessing in India.
The size of India's e-commerce market is estimated to rise to $38 billion (about Rs 2.6 lakh crore) this year, notching 67 per cent growth over 2015, according to a survey report. This growth is premised on assumptions that the country's online shopper base would double to 40 million by the end of this year. However, a rise in the online shopper base of that magnitude is unlikely, given the many constraints on the industry. Only about 10 per cent of the 400 million internet users in India are estimated to be transacting online for goods and services. The absence of quality broadband in smaller cities and towns in particular has come in the way of growing the market for online retail. There is also an overestimation of the spending power and habits of the Indian shopper. Equally, there is an underestimation of Indian shopper's set of choices - the widespread network of physical retail has responded to the competition from online players with matching offers and improved services. The net result for online e-commerce, therefore, has been a huge struggle for it to move away from discounted sales and become profitable.
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To be sure, the potential for retail e-commerce is huge, but monetising that is proving to be a challenge. It is this huge potential that has so far been attracting investments - estimated at $5 billion last year. But that may be changing in the current year. Valuations for various stages of funding of retail e-commerce ventures are likely to remain weak. According to recent surveys, investors' interest in e-commerce - both from private equity players and venture capital providers - is on the wane. The implications for the e-commerce sector are manifold. One, competition among existing players would become more intense not just for gaining market share, but also for cornering more investments from a shrinking pool. Two, the focus of both investors and e-commerce players would see a welcome shift - moving away from efforts geared only to increasing valuations, to improving profitability. Three, strategic investors will emerge on the scene to acquire e-commerce companies, providing exit options for both investors and in some cases even the companies. In short, consolidation and even a shake-out in the e-commerce sector are on the cards, early signs of which are already visible.
