The industry is a grabber’s paradise, where one is almost punished for not being greedy

There is nothing that conjures a sense of schadenfreude more than seeing the mighty fall. Or from watching an industry reach for the stars, and fall sharply short.

Accordingly, much ink has been spent over the near drought-like conditions that Indian e-commerce firms currently face. As the narrative goes: e-commerce may indeed be the future of commerce, but if it is, then the future is a tough place indeed.

"The issues facing online retail are no secret. Most of the large players poured in millions of dollars, looking to build the best alternative to brick-and-mortar stores. In their haste to overcome technological and physical limitations, some companies, quite literally, bit off more than they could chew.

In their defense, much of the initial investment was to overcome a lack of general infrastructure in the country and awareness amongst the consumer. The absence of a decent logistics network meant that Flipkart, for instance, had to set up its own warehouse system.

The infamous cash-on-delivery—which came with its own set of problems — then had to be introduced as online payment issues such as gateways crashing affected the shopping experience.

Looking at the grandfather of e-commerce, Indiaplaza, and how it struggled with late deliveries, other online retailers also had to procure and store their own inventory; instead of sourcing it after a sale had been made.

At this point, the average Indian consumer was still a little wary when it came to shopping online. So companies had to put down money on staffing huge customer care departments— a high-investment hassle that even companies such as Google have so far succeeded in avoiding.

And the cherry on the cake? Marketing costs ran in to the millions as print, TV and Internet ads were needed to make it ‘cool’ to shop online."

Follow the money

The obvious question at this point, of course, would be: where was the moolah for this? Not from their revenues, nobody was (and still is) turning in profits. The saviour proved to be venture capital but only from 2009 and until 2011. The last two years have seen even this dry up, sparking the current crisis.

The end result of this whole affair is that the big two—Flipkart and Myntra—still haven’t been able to see profit , even after guzzling venture capital in the range of $40 million -$150 million each.

Myntra, for example, has taken in over $40 million in venture funding over the last six years and has an estimated annual revenue run rate of $100 million. It is looking to break even hopefully by the end of the current fiscal year. Flipkart’s situation is, perhaps, more precarious.

This sordid scene has prompted talk that online retailers are at risk of ‘losing their sheen as they ignore sustainability in the hunt for greater market valuation’. The alternative, they say, should be a slow return to what Paul Graham called ‘ramen profitability’ or in an Indian context — idli profitability.

Idli profitability is when a company makes just enough to pay the salaries of its employees and provide for the founders’ living expenses. This is at odds with traditional profitability, where a company usually becomes profitable after raising and spending quite a lot of money.

Strong and slow

Idli profitability, on the other hand, occurs when a company becomes profitable after a much shorter period of time — mainly because it operates in a very frugal manner. Low expenses, small number of employees and so on. The advantage here is that you do not have to turn to venture capital, which comes with its own risks. To be idli profitable, therefore, is to grow slowly, not rush in, and definitely not pour in money, looking to gain any short-term advantage.

The problem though is that the concepts of sustainable growth and idli profitability do not go well with the very nature of online retail. In a nutshell, the industry is a grabber’s paradise, where one is almost punished for not being greedy.

Why? This is because Internet commerce, in India, is about new technology and having no entrenched competition. In this backdrop the modus operandi is ‘land grab’. The objective, therefore, is to get as many customers as quickly as possible, so that later competitors will have a serious barrier to entry.

In an established industry, with entrenched competition, this does not make sense. In the fledgling e-commerce sector, however, ‘winner takes all’ is king. Why is this so? For a simple reason called the ‘network effect.’ Simply put, the more customers one has, the more customers you will get later.

A swirling vortex

A good example of the network effect is the immense popularity that Facebook enjoys. If you want to connect with people online, you must go where they are, and Facebook as a social network has the most people on it by far. A competitor, therefore, cannot come along, say with slightly better features, and expect to take away market share from Facebook. This is because, for the most part, users of Facebook are locked into the social network. After all, what would be the point of switching to a social network that had no users? Once you settle on an online buying experience, you really don’t change, unless it turns sour. In India, the sector also has no established players as most of them are creating the market from scratch. Those who would wish to play the online retail game in India, therefore, have no choice but to ignore idli profitability and all it stands for.

If they try to grow slowly, another player will sneak ahead, and once that happens, nobody will be able to gain another toehold. As a case in point, try to guess who is Amazon’s biggest competitor. (Hint: there’s none.)

In the case of Amazon, it started in 1995, but became profitable only by 2001. It was also able to sustain itself through the funds from its IPO – a strategy whose broad contours we see developing on the horizon for large players here in India as well.

Flipkart co-founders Sachin and Binny Bansal, along with the rest of the Indian e-commerce sector, are tracing the path that Jeff Bezos once set and have climbed on the Amazonian tiger. Will they ride it safe or will they be gobbled up? The answer will decide the future of the e-commerce industry in India.

The article has been corrected for editing error.