'Adapt or perish': e-retail to brick-and-mortar cousins

'With online upstarts chomping away business', retailers have no other option but to go online

"Too late !", said one of the leading industry experts when asked about the entry of brick and mortar retailers like Reliance and Future Group into e-retail. Just about a couple of years ago, the fate of e-retail in India was under serious doubt. The dot-com bubble burst of the early years when many online businesses were shut down continued to haunt the budding e-commerce business in India.

Now with billions flowing in and Flipkart getting a valuation of about $7 billion, it looks like everyone including the traditional brick and mortar retailers have to accept that e-commerce is here to stay and grow. So either one adapts to the changes of the market or perishes.

 

And the American companies in the country are smart to identify the change. World's biggest retailer Walmart is set to start its online cash and carry operations - the first for Walmart anywhere in the world. Amazon, with deep pockets to invest, was quick to warn Flipkart of their intentions by announcing its plans to pump $2 billion in India. The Indian players like Tatas, Birlas and many more will enter the space in the coming months. It is ironic how two former employees of Amazon -Sachin Bansal and Binny Bansal, founders of Flipkart- stand as a tall challenge to the American giant in the country. If not for Flipkart, Amazon should have had it much easier expanding in the country. 

 

On one hand while e-commerce has recorded exponential growth, the balance sheet of the brick and mortar segment has not brought any good news. At the aggregate level, operating and net margins have all shown a declining trend for brick and mortar companies with a Crisil report stating that “online upstarts are chomping away business”. But the companies have no other option but to go the online way.

 

The overall size of the Indian retail market is around $500 billion. According to the Crisil report, as of 2012-13, organized retail accounted for just 7 per cent of the total retail market, with online retail accounting for a miniscule 0.5 per cent of the total market. However, in terms of growth over the past few years, the numbers are truly mind boggling. Crisil estimates that online retail has grown at, hold your breath, 56 per cent per annum from Rs 15 bn in 2007-08 to Rs 139 bn in 2012-13. One could argue that looking at the global picture, of the two largest growing markets, with Alibaba dominating the Chinese market, it makes sense for Amazon to go all out in India.

 

While the numbers are truly staggering, one cannot but be skeptical of their ability to turn a profit. In what is probably the most developed online retail market in the world, the US, Amazon still struggles to make a profit after being in business for twenty years. The strategy it seems is to capture a larger market share. Profits are still a while away and no one including Flipkart seems to be bothered about it. "We are creating an entirely new ecosystem in the country." said Sachin Bansal,CEO,Flipkart.com.

 

The larger question is whether these companies can justify these staggering valuations? Just to put the figures in perspective, at $7 billion, which is roughly Rs 42,000 cr, Flipkart is valued more than the biggest real estate company in the country, DLF.