In what is surely a welcome change, Mukesh Bansal, the chief executive officer (CEO) of fashion e-retailer Myntra, told this newspaper that his company will reach "profitability somewhere around the second half of 2016". Myntra, now owned by Flipkart, set up shop in 2007; so it will have taken nine years to report a profit. It will be the country's first e-retailer to come out of the red. This is welcome because, so far, e-commerce firms in India have unfortunately shied away from talking about profits. They have argued that the Indian e-retail space, though it is growing fast, is still small, so their current focus is on growing the market - profits will come later, though nobody is willing to even begin to predict when. It is an open secret that most e-retailers, financed amply by private equity funds, are burning significant amounts of cash to acquire customers. Deals, discounts and free returns have eroded the bottom line of almost all e-retailers. And competition in the space, though it is still in its nascent stage, is intense. That's why many e-retailers find it difficult to step out of the cycle of discounts and deals. It is like walking into a trap. So long as private equity funds have the appetite, e-retailers will be able to find cash to run their business. But the day it begins to diminish, many will find themselves in trouble.
This euphoria is familiar. It is exactly the same as during the first "dotcom" boom. The buzzword at that time was "eyeballs", and nobody cared for profits. Conventional valuation methods, based on future cash flows and net earnings, were jettisoned and new unheard-of tools were applied. In several private equity deals, due diligence norms were ignored. Some investment commitments were made in half an hour flat. It took little time for the boom to go bust. This time around, all the talk is about gross merchandise value, which indeed is growing at breakneck speed for most e-retailers. Moreover, e-retailers often say they are in an innovative business space, where profits come after a lag. That might be true, but the most basic principle of business and economics remains the same: no business can run at a loss forever. That's why Mr Bansal's claim that Myntra will become profitable by the second half of next year is significant and should be applauded. It is worth noting that Mr Bansal's statement came days after Flipkart Chief Financial Officer Sanjay Baweja said his company did not want to open itself to scrutiny from investors and analysts every quarter by getting listed on the stock market, so that it could stay focused on its current growth plans.
To be fair, profits don't come easy in e-retail. Amazon, the world's largest e-retailer, has not been able to generate profits consistently. Jeff Bezos, the founder and the CEO of Amazon, has often expressed his disdain for short-term profits. On the other hand, Jack Ma's Alibaba is hugely profitable, which could be a result of its dominance of the Chinese e-commerce space. In India, there is no one player that dominates the ecosystem. That makes profits harder to report.