- By Vivek Kaul
Phir ye bhi chahta hai use rasta mille
- Waseem Barelvi
In yesterday's column I had explained how Indian e-commerce companies tend to talk about the gross merchandise value of what they sell and not their "real" revenues that they make. Gross merchandise value is essentially the sale price charged to the customer. So if a site selling airline tickets sells 20 tickets at an average price of Rs 4,000 each, then the gross merchandise value is Rs 80,000.
What they should be ideally talking about is the cut they make on selling air tickets. But that doesn't seem to be the case. The gross merchandise value does not take discounts into account. At the same time most e-commerce companies typically make 5-20% of what they sell and hence that should be their revenue. The rest is just a pass-through.
Given this, the gross merchandise value is anywhere between 5-20 times the actual revenue of the e-commerce firm. This is not a very helpful calculation but it does help in understanding that the gross merchandise value does not give the correct picture of e-commerce companies.
In response to yesterday's column a reader brought to my notice a newsreport in The Economic Times. ( I have to admit here that it was a rainy day in Mumbai, I got up late and started working directly without reading the newspapers).
This newsreport was on Flipkart and the company's plans to boost its annual gross merchandising value to $10-12 billion (Rs 64,000 crore to Rs 76,000 crore) over the next nine months to a year. This is more than the $8 billion gross merchandising value that the company hopes to achieve during the course of this financial year.
In order to boost its gross merchandise value Flipkart has plans of selling homes, travel deals and groceries, reports The Economic Times. It has already started selling furniture. By selling these items where the average ticket size (other than possibly grocery) of an order is high, the company hopes to boost its gross merchandise value even further.
Flipkart accounts for 45% of the e-retailing space in India. It is not the only Indian e-commerce company operating in this way. It. Snapdeal, another big e-commerce company is also busy chasing gross merchandise value. It recently achieved a gross merchandise value of $3.5 billion.
In April earlier this year, Snapdeal had bought Freecharge.in, a mobile recharge services firm, for $450 million. Snapdeal now expects Freecharge to contribute close to a billion dollars in gross merchandise value by the end of this financial year, a report in the Mint newspaper points out.
Other than these two behemoths, other e-commerce firms are also chasing gross merchandise value.
All of these companies want to capture India's burgeoning e-commerce market. Goldman Sachs expects the Indian e-commerce market to grow at a rapid rate and touch 2.5% of the GDP, by 2030, growing 15 times in the process. The investment bank feels that "hyper growth in affordable smartphones, improving infrastructure, and a propensity to transact online,"will lead to Indian e-commerce to grow at a very rapid rate.
Goldman Sachs also feels that India's attractive demographics will have a huge role to play. "Further, India's attractive demographics - the youngest population in the world - should lead to over 300 million new online shoppers in the next 15 years, making e-tailing the largest online segment," the research report pointed out.
Cheap smart phones and presence of 3G data coverage will also help. "India has enough spectrum and telecom infrastructure to provide 3G data coverage to 25-30 per cent of the population...Further, 3G-enabled smart phones are available for USD 40 with more than 900 phones launches last year."
All these reasons are fairly straightforward. The question that no one seems to be asking and hence not answering as well, is that when will the Indian e-commerce companies start making money. Goldman Sachs tells us that e-commerce players suffer a 35% loss on an average on each unit of a product that they sell.
The strategy seems to be the sell things at a discount, get the customers hooked, crush all the competition in the process and then have a monopoly which can be exploited. There are multiple problems with this approach. Almost every e-commerce company which has access to private equity/venture capital money is following this approach. And everybody cannot succeed following the same strategy. And what's the strategy? Give discount, so that people will buy. Something's got to give.
As Gary Smith writes in Standard Deviations-Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: "The problem is that, even if it is possible to monopolize something, there were thousands of dotcom companies and there isn't room for thousands of monopolies. Of the thousands of companies trying to get big fast, very few can ever be monopolies." While Smith is talking about the dotcom companies in the US, this applies equally to the current crop of Indian e- companies as well.
Hence, not surprisingly e-commerce companies are bleeding.A February 2015 report in The Economic Times estimated that the losses of Snapdeal for 2014-2015 could increase by five times and touch $250 million or around Rs 1,500 crore.
Flipkart is in the same boat as well. A newsreport in the Mint newspaper points out that the various India entities of the company made total losses of Rs 719.5 crore in 2013-2014. This on a revenue of Rs 3035.8 crore. In 2012-2013, the company had made losses of Rs 344.6 crore on a revenue of Rs 1,195.9 crore.
To conclude, let's go back to where we started. The gross merchandise value of Flipkart in 2013-2014 was at $4 billion. Now compare this with the revenue of Rs 3,035.8 crore or around $500 million. Hence, the actual revenue of Flipkart is around one-eight the gross merchandise value. What this clearly tells us that the big numbers being bandied around by the e-commerce companies aren't really true and it just helps in the valuation game. The Economic Times newsreport referred to at the beginning of this column points out that Flipkart is now seeking to raise money at a valuation of about $15 billion. This is up from the $11 billion valuation that it had reached in December 2014.
The problem is that these numbers don't really mean much because the company isn't making any money.
Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.