India’s e-commerce boom

With the high penetration of phones in India and with improving Internet connectivity, e-commerce firms are expected to reach millions of new users in the coming years. Photo: Bloomberg
With the high penetration of phones in India and with improving Internet connectivity, e-commerce firms are expected to reach millions of new users in the coming years. Photo: Bloomberg

Source: Live Mint

Published on 20th June, 2014

A year ago, Mukesh Bansal, the chief executive officer (CEO) of India’s largest online fashion retailer, started the process of raising a new round of funds by reaching out to several investors, including Premji Invest, SAIF Partners and others.

At that time, Myntra was facing aggressive competition from Jabong, backed by Germany’s e-commerce conglomerate Rocket Internet, as well as India’s largest e-commerce firm,, both of which challenged Myntra’s dominance of online fashion sales by offering deep discounts (30-40% on a daily basis, in most months).

The battle was obviously being closely watched by the investors Myntra was courting.

“The feedback from most of them was: we are interested and we like what you are doing, but not now. But we needed money then; so ‘not now’ was not very helpful. We had cash till early 2014, so we were not in imminent danger of running out but, still, six months of cash is nerve-wracking,” Bansal said.

Apart from Premji Invest, the private-equity arm of billionaire technology entrepreneur Azim Premji, all other investment firms shied away from Myntra, reflecting the bearish investor sentiment on India’s e-commerce business of the previous two years.

After rigorous due diligence and discussions that lasted as long as six months, Premji Invest finally agreed to lead a $50 million fund raise into Myntra in January.

Barely four months later, things have turned upside down—or rather, downside up—not only for Myntra, but for India’s e-commerce businesses in general.

In May, Myntra agreed to be bought by Flipkart in India’s largest ever e-commerce deal. Myntra fetched an estimated value of more than $330 million, significantly higher than the $200 million valuation it received in January.

At least 10 e-commerce firms, including Flipkart, Snapdeal, Jabong, Pepperfry and Limeroad, have announced fund-raisings over the past two months and investors and analysts say that several other sites such as online marketplace Shopclues and fashion retailer Yepme are likely to receive money within the next six months.

Flipkart said on 26 May that it received as much as $210 million, mostly from Russian firm DST Global Solutions Ltd, which has backed companies including US-based Facebook Inc. and Twitter Inc. as well as China’s Alibaba Group. The online retailer has now received $770-780 million since starting out in 2007, including $360 million last year.

A few days before Flipkart’s latest fund raise, online marketplace Snapdeal announced that it raised $100 million from new investors. including Temasek Holdings Pvt. Ltd, BlackRock Inc. and Premji Invest. It had raised $133.7 million less than three months ago.

The fund-raising by Flipkart and Snapdeal reflects both the increasing amounts of capital required to build a national e-commerce business as well as the strong revival of investor appetite for India’s fledgling Internet firms.

Explosive growth

“India is going to be the third biggest e-commerce (market by value) in the world (after the US and China) going forward,” Flipkart CEO Sachin Bansal said. “It’s a capital-intensive business. If you want to build a large e-commerce business, capital is required.”

Online retail is worth $3.1 billion, or 10% of the organized retail market, and is estimated to grow to $22 billion, or over 15% of the organized retail market, in five years, according to a November 2013 report by brokerage firm CLSA.

The revival of investor interest comes after two years, when most of the venture capital firms steered clear of local e-commerce companies.

From 2012 to the beginning of this year, hundreds of sites such as and Urban Touch, which raised anywhere between $1 million and $10 million each, shut shop as investors become increasingly parsimonious about giving money to e-commerce start-ups because of high cash burn and lower-than-expected sales growth.

Now, analysts say, they can’t seem to get enough; large global financiers such as Morgan Stanley, Singapore’s state-run investment firm Temasek Holdings and US investment firm BlackRock are queuing up to invest in India’s e-commerce businesses.

Several things have led to the change in perception, according to investors.

The explosive growth of Flipkart and shows that Indian shoppers are willing to buy a range of products online, which gave a strong boost to investor confidence, said Vani Kola, managing director at Kalaari Capital, which is an investor in Snapdeal and online innerwear seller Zivame, among others.

“It’s clear now that consumers are ready to transact online. There are quite a few sites now that have shown that they can scale up very fast; so online demand is no longer an issue. And on the supply side, mobile commerce has exploded; so the connectivity problem is solved to a large extent. E-commerce firms now have ready access to people in towns and villages,” Kola said.

Shoppers in India are increasingly using their smartphones to buy products, with sites such as Flipkart, Snapdeal and Shopclues reporting that up to 35% of their traffic comes from the mobile phone. With the high penetration of phones in India and with improving Internet connectivity, e-commerce firms are expected to reach millions of new users in the coming years.

The impending initial public offering (IPO) of the Chinese e-commerce conglomerate Alibaba Group, which may be valued at $150 billion according to some media reports, has also spurred hope in India.

India, with 205 million Internet users, has the third largest Internet user-base in the world, behind China with 300 million and the US with 207 million, according to a report released by the Internet and Mobile Association of India (IAMAI) and IMRB International in November 2013.

“The thinking is that if China can produce Alibaba, even India can have 10 firms with more than $1 billion in value (each) over the next few years,” said Sasha Mirchandani, managing director at Kae Capital, an early stage investor in start-ups. “Investor interest in e-commerce will be strong, at least for the short term. Ancillary services providers such as logistics companies and supply-chain companies are also likely to benefit from this, apart from the e-commerce companies themselves.”

The Flipkart buyout of Myntra has also convinced many investors that large sites such as Flipkart, Snapdeal and Amazon would be willing buyers of smaller online firms that build differentiated businesses or innovative technologies, Mirchandani said.

Amazon challenge

E-commerce sales in India are currently dominated by local sites such as Flipkart, Snapdeal and Jabong.

Though large global sites such as Japan’s Rakuten Inc. and others are likely to enter India over the next few years, the largest challenge to local sites comes from Inc.’s India unit for the time being, analysts say.

The world’s largest online retailer launched its India marketplace in June last year and has already built one of the biggest product assortments in the country. Amazon has been lobbying heavily to convince India to allow foreign direct investment (FDI) in e-commerce, and the company’s executives have told Mint it is investing “hundreds of crores” in India.

Global online retailers such as Amazon and eBay Inc. are now banned from selling products they have sourced themselves, and must rely on third-party suppliers. Their platforms, which they own fully, are marketplaces for these suppliers. India’s new government could ease the rules as early as in July, Reuters reported on 4 June, citing people it didn’t name.

“The pace at which we’ve ramped up in India has probably been one of the fastest ramp-ups by Amazon in any country,” said Amit Agarwal, the country manager of Amazon Seller Services Pvt. Ltd. “Over the last 11 months, the number of our sellers has gone up by more than 50 times—we have 5,000 sellers, growing every day, very rapidly. In at least 10 categories—books, music, movies, toys, among them—we’ve built the largest selection in India. And in many of the categories, our selection has grown four to five times after we’ve launched.”

The other large global company, eBay, has been largely unsuccessful in India, registering sales of just Rs.50.8 crore here for the year ended 31 March 2012, according to documents available with the ministry of corporate affairs. Despite launching here nearly a decade ago, eBay’s India unit has been overtaken by several local online firms, forcing the company to invest heavily in Snapdeal as it seeks to forge a meaningful presence in the country.

China’s Alibaba has a business-to-business site in India but doesn’t offer a consumer-facing platform.

“We believe India is one of the most exciting markets for Internet-related companies (and their investors), as it offers the rare combination of high growth on a large base,” Jefferies analyst Arya Sen said in a report dated 4 February. “Although both Amazon and ebay are present, there is enough opportunity for local players to play a pivotal role.”


Sen estimates that online retailers in India are valued at over $4 billion and “this could get much bigger, given the exponential growth in the e-tailing market”.

“We expect exponential growth in e-commerce to lead to more listings—experience in other markets suggests India’s listed Internet market capitalization could exceed $50 billion in the next five to six years,” Sen said in the report cited above.

Some analysts, however, aren’t buying the e-commerce boom.

They caution that while India’s consumer spending power has been compared with that of China in the past, it hasn’t ever worked out that way in reality. They also point out that no e-commerce firm is profitable, or anywhere close to reaching profitability.

“Most of the products that online retailers are selling aren’t consumer staples (food, groceries, etc.), they are discretionary items like apparel, electronics, etc., so e-commerce hasn’t really become mainstream in India,” said Santosh Kanekar, an independent consultant who advises investment firms on Indian companies.

“Investors believe that online firms have successfully created a secondary distribution channel apart from the traditional network that packaged consumer product makers like HUL (Hindustan Unilever Ltd) and (ITC) Ltd have—that’s a myth. The logistics costs involved are just not viable. Online firms’ business models aren’t built for profitability.”

Regulatory trouble

Most e-commerce firms, including Flipkart, have now moved to the marketplace model from the inventory-led model. This is partly because of the current bar on FDI in direct online retail.

To circumvent regulations, most e-commerce firms had set up complicated structures where their back-end entities receive funds from global investors, while on paper the e-commerce platforms run separately.

This structure has caught the eye of regulators.

People familiar with the situation told Mint in April that both Flipkart and Myntra are being probed by India’s Enforcement Directorate for possible violations of FDI rules. If the new government does indeed allow FDI in e-commerce, it would significantly change the online retail landscape.

Flipkart and Amazon, a company that was Flipkart’s role model until recently, are on the opposite sides of the table on FDI.

Flipkart has been lobbying against FDI in e-commerce, a Flipkart executive said on condition of anonymity.

Flipkart did not respond to an email seeking comment.

Amazon is in favour of FDI and has been lobbying with government officials to open up e-commerce to global firms.

“It’s a bit hypocritical of Flipkart (to oppose FDI) as they are funded by foreign VCs (venture capital firms) and till last year they were an inventory-led online retailer,” said an analyst, who declined to be named as he works with several e-commerce sites. “It’s clearly a move by them to protect their turf because if FDI is allowed, the threat from Amazon will rise in a big way.”

Source: Live Mint

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