A different kart race
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Online retailers cannot sustain their current cash-burn beyond a point
Flipkart's valuation at roughly $7 billion, after the latest round of funding received from global investors, is remarkable for a company that came into being only in 2007 and has grown over a period when the Indian economy experienced a prolonged slowdown. Its growth is a tribute to both the entrepreneurial energies of its young founders and the power of technology. The internet and mobile telephony are today doing to business and commerce what the railways, telegraph, electricity or container shipping did within decades of their introduction. India currently has 240 million-odd internet users, of whom some 70 million use broadband connections that allow sales and purchases to be done online. But with the spread of 3G/4G and mobile broadband services, these numbers are set to rise dramatically. They will, in turn, further drive growth of the country's already $3.5 billion online retail market.
The market valuations now commanded by Indian e-commerce players such as Flipkart and Snapdeal are essentially a bet on the future growth, on the back of increased internet penetration and increased purchases online. A reasonable benchmark is China, which has an estimated 270 million online buyers as against India's 25 million. The $1 billion gross merchandise value handled by Flipkart is a fraction of the $248 billion worth of goods sold through Alibaba, China's (and the world's) largest online retailer. The potential for growth was captured by Flipkart CEO Sachin Bansal's statement that "India can produce a $100 billion company in the next five years and we want to be that".
But pursuing such ambitions isn't going to be easy. Amazon has for years reported losses or abysmally low profit margins. Yet, investors have continued to push up its stock believing in the American e-retail giant's capacity to become the world's No 1 store. Flipkart, too, is loss-making but has still managed to raise $1.8 billion cumulatively. There are limits, though, to how much cash it can continue to burn. The huge investments the company needs to make in warehouses, distribution networks or mobile technology platforms will eventually have to generate profits. And it needs to do this in the face of competition — not the least from Amazon, which has announced investment of an additional $2 billion in India following Flipkart's successful capital mobilisation. While Indian firms enjoy a slight advantage since foreign online retailers are not permitted to hawk products directly — they can now only offer their platform as a 'marketplace' for others to sell — this benefit cannot obviously be a permanent one. Competition is a reality that market participants in every sector have to ultimately be reconciled to. And consumers won't mind if Flipkart, Amazon and other retailers — online or brick-and-mortar — fight it out for a share of their wallets.
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(This article was published on July 30, 2014)
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