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Survival crisis for small online retailers (e-tailers) in India as big players seize the market


  • Growth of the Indian online retail industry
  • Big e-tailers vs small ones
  • The future of e-tailers

 

Indian retail industry has surfaced as one of the fastest growing and enterprising industries, with a total expenditure on consumption expected to reach $3600 billion by 2020 ($1824 billion in 2017). E-commerce is disrupting the retail market and is expected to contribute 7% to the total retail market by 2021 from a meagre 0.4% in 2014.

The Indian online retail registered a CAGR of 53% between 2013-17, this was driven by aggressive discounts and improved infrastructure and logistics. India has become one of the fastest growing economies for online retail in the Asia Pacific. The country has a young population along with rising penetration of smartphones and the internet, which triggered the advent of small e-tailers like Shop-Clues, Koovs, Voonik, Craftsvilla in the market when bigger players like Flipkart, Snapdeal, Myntra and Jabong had already established their identity.

The Indian e-tail industry got into limelight when Amazon entered the market in 2013. The big players like Flipkart and Snapdeal had to rework on their strategy as Amazon swiftly became a threat for these players. Flipkart soon acquired Myntra, the biggest e-commerce fashion brand to get into the fashion category. Snapdeal acquired Doozton, a fashion and lifestyle product discovery platform and Unicommerce, an order management firm to improve its logistics. This was the initial wave of consolidation in the e-commerce retail in 2014-15.

Amazon’s foray into the Indian market changed the dynamics to such an extent that Flipkart and Snapdeal, arch-rivals, considered an acquisition deal a few years down the line in 2017. This further manifested that they did not stand a chance against Amazon on their own. However, the deal did not materialise and Flipkart was ultimately sold to Walmart at an astonishing $16 billion in 2018. Additionally, Flipkart owned Myntra and Jabong integrated their operations in 2018 and surpassed others with a whopping 70% market share in the online fashion retail. Snapdeal, on the contrary, struggled to get fresh investments and lost its market share.

Indian online retail industry is characterised by competition based on heavy discounts to drive the sales volumes. When the business is highly dependent on volumes, market share plays a pivotal role as all companies bear losses existentially. While Flipkart spent hefty amounts on a strategy to compete and grow further, the smaller players have been struggling to hold the ground with their average losses amounting for more than two times of their revenue.

Currently, Flipkart and Amazon are battling aggressively for the number one spot in the market. Together, they lead the market with more than 70% share and have rendered it highly concentrated. Flipkart is now backed by Walmart and it no longer faces lack of cash, while smaller players with a cash crunch, logistics concerns and most importantly trust issues are battling for their existence. The package returns from smaller e-tailers like Voonik, Craftsvilla, etc. is around 35-40%, while it is only 20% for Myntra or Amazon. The instances wherein the packages get rejected at the time of delivery are as high as 10-15% for smaller businesses, thus, exerting pressure on shipping (and reverse shipping) costs borne by these players.

Snapdeal, on the contrary, has revamped its strategy and offloaded Unicommerce and FreeCharge and shifted its focus from premium to seller-branded goods to reclaim its position. It is also in talks to acquire Shop-Clues that focuses on Tier 2 cities and low-priced products. Amazon and Flipkart have so far not forayed into these cities giving Snapdeal and ShopClues an advantage. Snapdeal together with ShopClues could give a tough competition to Paytm Mall as shown in the below table. Paytm Mall’s revenue is almost double of their combined revenue, while its loss is much higher.

One of the major hurdles for e-tailers has been the excessive focus on the gross merchandise value (GMV) that has led to the burning of cash, rising costs and lower returns. The below table summarises the negative flow of cash, with $15 cash burnt on every $75 GMV for Indian online e-tailers. A lot of small businesses have failed, while others have realigned their strategies to focus on the revenue than GMV to mitigate the losses. Snapdeal and ShopClues are the forerunners to withdraw from the frenzy created by GMV. Stayzilla, an online homestay aggregator halted its operations in 2017 citing reasons as treasuring GMV instead of cash flow fundamentals as the rationale for the failure.

Moreover, investors backing the smaller e-tailers are writing off investments or are not fuelling them up with more cash as the potential to survive with the giants seems bleak. Companies like Craftsvilla and ShopClues are looking for bigger partners for consolidation. Wooplr has shut down its business while Roposo, which began as a fashion social platform and it has revamped into a video-sharing app.

Furthermore, another major threat to the existing e-tailers could be the arrival of Reliance Retail in the e-commerce business. Reliance with 10,000+ stores and a presence in 6,600 cities already has the capability to quickly launch and serve both Tier 1 and Tier 2 cities. It is in fact expected to challenge the dominant position of Amazon and Flipkart and make survival for smaller players even more taxing.

However, the changes in the FDI policy for e-commerce initiated by the Indian government may bring some respite for small fishes. The policy disallowing sharks like Amazon and Flipkart from stocking more than 25% of their inventory from a single vendor and restricting the selling of products by retailers in which they hold stake would ultimately lead to less manipulation of prices and discounts. According to draft research by the PwC, this could lead to a loss of $46 billion in sales by 2022.

The coming years for the Indian online retail are thus expected to go through a rigorous transformation with the battle to lead the market becoming fiercer.

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