Subrata Mitra, Partner at Accel, is on the board of top Indian e-commerce companies Flipkart and Myntra. He says that some companies may take up to five years to show profits.
What does Accel think about the path to profitability for e-commerce firms in India? So far, most have been burning cash because of delivery models such as "cash on delivery". How long will it take for players that emerged around 2007 to be profitable?
We don't believe that the delivery model is causing these companies to burn cash. It's a question of weighing customer acquisition costs to a reasonable lifetime value; today acquisition costs are high, repeats are low and basket sizes are low for most ecommerce companies. However, as companies mature in terms of their brands, product selections and customer experience, they should see significantly better repeat behavior, and that is the only way that ecommerce would make sense.
At the unit level most companies cannot afford to have negative margins; however, e-commerce is capital intensive due to inventory and infrastructure requirements, and therefore overall profitability can only come with some minimal scale. So, the short answer would be that these companies might want to scale in the immediate future (assuming capital is available) and then try to get to break-even by increasing efficiencies as scale starts to taper off. If historical data from other geographies is any indicator, companies may take up to five years to show major profits. What does Accel make of the competitive landscape for e-commerce in India? They are many players and none of them have any pricing power. Given such a scenario, what is the financial viability of e-commerce players in the country?
The somewhat older companies have started to show volumes and therefore have better price economics than before. As more and more consumers buy online the markets would expand, and companies will get to scale. The exact timing of it is hard to predict, but longer term our feeling is that there will be several successful e-commerce companies in India. We are starting to see online sales contribute significantly in many categories to a brand's overall commerce. More interestingly brands believe they are reaching new customers through e-commerce whom they otherwise cannot reach given their current (offline) retail networks. Would the profitability graph (time before they can become profitable) of Indian e-commerce firms be different from that of its US or Chinese peers? Please substantiate.
Not totally sure, but companies like Amazon
took many years to become profitable, and when then did, they are (at least partially) responsible for Borders going out of business. Likewise, there are many ecommerce companies in China which are burning (way more than numbers in India) cash. So, our feeling is that it's a characteristic of the category. We need a reasonable size of internet savvy user-base for successes to happen, and that might still take some time; however, beyond that tipping point, many e-commerce companies might become viable; possibly more than US, since organized retail in India might never have high penetration. Talk about Accel's investments in the e-commerce space.
In the time horizon of our currently active funds, we do expect several e-commerce companies to scale and become successful. Our investments are in line with that philosophy; e.g., we have recently made new investments in BlueStone and Zansar, which are in large unexplored e-commerce categories. Obviously, lot of the outcome depends on how online savvy users are and the numbers of such users that are available; all indicators are that these numbers are moving in the right direction, and will likely get to critical mass in a few years. However, it's equally important for these companies to execute very efficiently, keeping the burn lower and scaling in tune with the market.