RADHIKA P NAIR & BISWARUP GOOPTU
Leading Indian online retailers, including Snapdeal and fashion portal Myntra, expect to turn profitable in the next two years, signalling a seismic shift in an industry where so far growth has been pursued at the expense of the bottom line. Pressure from risk-capital investors and growing consolidation in an industry where the leaders are outpacing the laggards is forcing online retailers to identify newer revenue streams and cut down on costs. Snapdeal, an online marketplace, expects to reach about . 6,220 crore in gross merchandise sales by the next financial year, and profitability the year after. “We want to be India’s first profitable e-commerce company and its largest mobile commerce company,” said Kunal Bahl, cofounder of Snapdeal. “Mobile will be the big driver.” In fiscal 2013, Jasper Infotech — the parent company that owns and operates Snapdeal — posted losses of . 120.1 crore, wider than the . 81.2 crore loss in fiscal 2012, according to company’s financials filed at the Registrar of Companies. The renewed focus on profitability comes at a time the company looks to list its shares on public markets in the United States over the next 12 to 24 months.
In Bangalore, fashion retailer Myntra aims to be profitable by 2014 end. “Only at scale can you amortise technology and marketing costs,” said Mukesh Bansal, founder of Myntra. He said online retailers that have built large volumes of business can now think of profitability. “Without scale, profits might be possible but are meaningless.”
In the quest for profits, Bansal’s firm, which expects turnover of . 800 crore in FY14, has chosen not to sell fast-moving, low-value apparel that would have boosted sales but brought in lower margins. In FY13, the company had sales of . 212.4 crore at a loss of . 134.7 crore, according to the ministry of corporate affairs’ (MCA) website. Mukesh Bansal admitted e-commerce companies cannot afford to take their foot off the accelerator. “But the choice is between sales at any cost or sustainable growth. We have chosen the latter.” Experts said the main reason for this focus on profits is the push from risk-capital funds. “Most investors today are looking for ventures that have real profitabilitybased feasibility. They do not anymore want to look at business plans and strategies that have unfeasible timelines for profitability,” said Ashish Jhalani, founder of eTailing India, a firm that tracks the online retail industry. Since 2011, equity investors have put in almost $1.2 billion (over . 7,450 crore) into online product retail, according to research firm Venture Intelligence. However, this year, money has grown scarce. More than half of the over $600 million (over . 3,700 crore) raised by e-commerce companies went to market leader Flipkart. The Bangalore-based company asserts it is still focused on growth and not profits. “Our focus right now is still on investing in our growth story,” said Binny Bansal, cofounder of Flipkart. Flipkart India, the wholesale cash-and-carry entity of the online retail firm, reported a loss of . 281.7 crore before extraordinary items and tax in fiscal 2013, compared with a . 109.9 crore loss in fiscal 2012. “Our business is growing at 100% (annually) and till this growth slows down, we will not be looking at profitability as a factor,” said Bansal. In FY13, the company earned total income of . 1,180 crore, compared with . 204.8 crore the previous year. The sales target for 2015 is to reach $1 billion, or about . 6,200 crore.
“No investor is saying compromise on growth. But everyone has realised there is a finite amount of capital available to reach break-even,” said Prashanth Prakash, a partner at Accel Partners. The fund has invested in multiple online retail ventures including Flipkart, Myntra, Bluestone and Zansaar. “While earlier people thought there was six to seven years to break even, now investors are looking at a more reasonable time frame.”
Globally, Amazon, the world’s largest online retailer, founded in 1994, has never been profitable since inception. In contrast, China’s Alibaba, the world’s largest online marketplace, has had a far smoother road to profitability, given that it does not own any of the products that is sold on its flagship websites, Taobao and Tmall.
Indian entrepreneurs said this latest focus on business fundamentals points to growing maturity of the local market. “A year or two ago, everyone was looking at who the leaders will be. Now, the market leaders are emerging and no one doubts the viability of ecommerce,” said Rohit Bansal, cofounder of Snapdeal.
While leaders like Flipkart can bide their time, others are focusing on clearing the red ink on their balance sheets. Online marketplace, ShopClues has opted for cheaper and measurable digital campaigns instead of expensive traditional advertisements. They have also incentivised customers to opt for card payments instead of cash on delivery, which costs companies more due to additional processes and higher rates of returns.