Kanwaljit Singh, Senior MD at Helion Advisors, is positive about the Indian e-commerce market. Amazon's pending entry into the market, he reckons, would change the ecosystem. Here, he talks about how the valuations of Indian e-commerce firms have shot up because of speculation that Amazon might opt for the inorganic route in India.
There is speculation about Amazon's entry in the Indian e-commerce market once regulatory hurdles are cleared. What impact will Amazon have on the competitive landscape?
Amazon's entry will impact the ecosystem. They will bring in more choice to the consumer. The bigger question is whether the market is large enough for two big players. That is the unknown part. Second, is there something in India that requires some minimum level of learning and execution - the cash on delivery as a construct, logistics etc. But the brand is very powerful; they have a database in India which they can immediately target. Doesn't it make sense for Amazon to take the inorganic route?
At one level, the inorganic path gives them a faster start. On the other hand, in the anticipation of the company's inorganic moves, the valuations of Indian firms have gone up. Indian companies are getting highly priced. It will be a make versus buy decision for Amazon - if they have to pay a very large cheque to acquire versus throwing one quarter of that money in learning the ropes themselves, they may choose the latter. But Amazon has been an acquisitive company. Can e-commerce companies in India, who are burning cash in acquiring new customers everyday, ever make money?
There are two ways to build a business in e-commerce. One is to deal with large categories that are inherently low margin businesses. Electronics is one of them - the only way to make money in the long run is through large volumes. So grow volumes rapidly and in the process, acquire long-term customers, offer them more choice. You can amortize some of the costs of customer acquisition through larger number of repeats and through more frequency of buying. The depth of the catalogue will allow the customer to come back and keep buying. But since the margins are lower and volumes will take time to build, it will take time to be profitable.
Unfortunately in India, e-commerce has got equated with discounts, which is not the way it has happened in the US and UK. E-commerce provides a lot of other benefits of convenience, access, reach, larger catalogue than a physical store can have.
In the long-run, is there a viability to the business model? Will the consumer buy because of all these positive reasons? Once you reach a steady state - Rs 1000 crore or Rs 5000 crore - you can start offering the consumer the value proposition of what e-commerce really stands for without necessarily discounting every item. Take Flipkart as an example. They have now started charging for delivery if you order something below Rs 200. That is one clear step in the direction of telling people that if you like the service and what we provide, please pay a small shipping and handling fee. Clearly, the idea is to not have a business that never makes money. The attempt is to reach a scale and build an engine that is self sustaining. Tell us about the levers companies have in their quest for profitability.
Horizontal players have a huge cross-sell opportunity. They may buy products with different margin structures. First is volumes, second is the range of products that you have so that you can cross sell and up sell. Third, even on individual items sold, you can still make a reasonable margin. Fourth, they have to come up with innovative ways to amortize some of the costs. While people think that Flipkart
is burning VC money
, I can assure you that there is some method to the madness. Are there high-margin categories? One if them is apparel where you can have margins between 40 and 60 percent. We have invested in Yepme. They are a fashion brand. They have around 50 per cent margins so you will make net cash after every transaction you do from day one.