Reports say that Flipkart has posted a loss of Rs 2,000 crore for year ended March 2015 on sales of Rs 10,390 crore. Revenues in a year have trebled, as have losses, which were at Rs 715 crore in March 2014.
Its arch rival Snapdeal is in fact bleeding more profusely with its losses jumping five times in March 2015 to Rs 1,350 crore.
Heavy discounts offered by both firms and American giant Amazon in the Indian market throughout the year is resulting in a bloodbath in the e-commerce space. Competition among the bigger players is so high that this year Google had to shut down its ‘Great Online Shopping Festival’ since the discount season was throughout the year and there was nothing major that could be offered during the shopping festival. Also, these companies had themselves announced their super discount sale just before the Diwali festival.
Funding from deep-pocketed private equity players has emboldened the two Indian e-tailers in continuing this discount battle. Flipkart, funded by Tiger Global, is competing with Snapdeal, which is funded by SoftBank. Amazon is funded by its parent company, a listed entity in the US.
The question in everyone’s mind is how long these companies will bleed before they decide to change their business model. E-commerce retailers have been reported as making operating losses as high as 30%. The only reason they are staying afloat is because of the lifeline extended by private equity players.
But for how long will the PE moneybags continue to fund them? PayTm CEO Vijay Shekhar Sharma in a recent Reddit AMA admitted that there might have been a valuation bubble and that it is getting difficult to raise funds.
Private equity players are also tightening the screws for companies. Smaller companies are either being asked to look for funding from other sources or to consolidate among themselves. Tiger Global, among the larger private equity/venture capital player in the country that funds actively in the e-commerce space, has slowed down its investments.
Tiger Global and other funds have been playing the consolidation strategy in companies in their portfolio, nudging the dominant player to acquire the smaller ones. Tiger had done so in the past when Flipkart bought Letsbuy and Myntra bought Exclusively.in. Ultimately, Flipkart acquired Myntra.
Budget Hotel site Oyo Rooms is now considering buying out its smaller rival Zo Rooms which is finding it difficult to raise the next round of funding. Zo Rooms apparently is funded by Tiger Global.
Smaller e-commerce companies have been falling on the wayside due to lack of funding. It is only a matter of time when through consolidation and lack of funding few companies will be left in the portfolios of the venture capital funds. That is when the strength and patience of the ecommerce players will be tested.
Will they still continue to fund flawed business models or ask companies to start focusing on the bottomline. In any case what seems to be clear is that ecommerce companies and venture capital funds are lining up for an endgame, one which is unlikely to have a happy ending.