Three days ago, the big giants like flipkart, Amazon received a serious threat from the Maharashtra Government itself. Some leaders of Swadeshi Jagran Manch (SJM) which is an economic policy front of RSS had met the Finance minister Arun Jaitley and sought a ban on ecommerce portals as they are killing the domestic business.
This was in the news, however somewhere, it is true that the e commerce giants like flipkart, amazon etc. are really affecting the domestic businesses. Many of us, assumes that these giants actually uses the loopholes in the laws and leveraging the Indian markets. Let us understand the actual concept behind this, the idea, the revenue, the peak and the downfall. Through the present of these companies is all time high, but the future is really in the dark. Lets us have a look:
Evolution of the idea
Traditionally, when businesses were not able to sell their products, offers discounts to increase their sales, however businesses were never happy to offer the discounts because it not only sometimes reduces the profit, but also results in losses. Discounts were basically the tool to clear the piled stocks. However, in the modern age, some business thought that if the sales really increases in the discounting period, then why not give discount every time and why not leverage the increase sales every time. And that’s how, the discount based model of business came into picture and since, the market is always a price sensitive, then it was a fact that these businesses will attract the customers. They adopted the discounts based models and created a online market place, where anyone can come but the last price will be controlled by the market place by offering discounts and other schemes.
The High Engine Growth
After the evolution of this idea, the traditional cycle gets punctured and this new means of doing business is creating havoc in the Indian markets. With 70,000 crores valuation, flipkart is actually leading at all fronts. Flipkart was doing aggressive marketing, the one day delivery, high discount offering and many more. At the same time, the Amazon, snap deals were also keeping high. Revenues of all these companies are launching, reaching the billions of dollars, and their commission income was also very high. Let us look at their real incomes.
As per the table, flipkart is leading with 179 crores, next is amazon with 168.9 crores and then is snap deal with 154.11 crores. These figures reflect that the battle for the top is really hard and it also suggest that the spending on the discounts will increase to remain on the top and to be in business.
The unfold trap – the biggest threat
Everything looks good when we see these above figures, the valuation, the publicity or anything except when we look at the audited balance sheets of them. The most interesting fact about these giants is that no one has tasted the profits yet. And surprisingly, the company which is on the top at the revenue table, is also top at the losses table. Flip kart is having a loss of 400 crores, second is amazon at 321.3 crores and at last is snap deal with 264.6 crores.
Now, let us analyze these figures, the reason of these big losses, despite having hefty net revenue, is the discount which attracts the customer. The main component of the losses is actually due to discounts and advertising expenses. Flipkart offers it the most and that’s why its losses are the maximum. But the main problem is that flipkart, despiting knowing of this fact, cannot do anything because this is what their business model is is all about. If they had to be on the top, then they have to offer much discount to let their prices less in comparison to other competitors.
Due to this trap, these companies creates a deficit between the revenue and expenses and which ultimately met by the VC’s funds.
Besides these traps, the government is now also in a mood to regulate these e commerce portals. In India, FDI in multi retail is banned, however, these companies are actually doing that online and this is actually a loop hole in the law but it is never that intention of the government and therefore, it will expected that in the next budget, the life cycle for e commerce players will get tougher and tougher.
The Dark Future
With all the pros and cons of these e commerce giants, it looks like the future is very dark. Despite having the high valuation, no business can survive on losses. There will be an end. The discount based model will have to discontinued, otherwise, the stakeholders in future may face a dot comm. Bubble once again.
Now, the question is how long will this system survive? Not too long. Actually this battle between the e commerce portals has become a war of funds. Since, the deficit is actually borne by the VC funds, therefore, larger the pool of funds, the longer they will survive.
Author is CA Paras Mehra, a Practicing Chartered Accountant and also a co founder of www.Quickcompany.in, a leading website for registering companies and providing single solutions to start ups for all their legal needs in India