Published by SmartCEO Magazine September 1, 2014
These days, e-tailers, in India, have been making headlines with their mind-boggling valuation figures. One of the most established firms in this space, Amazon has a valuation of more than 500 times its earnings. Amazon’s sales growth is near exponential with 40% CAGR over last one decade. However, even after decades of existence, it makes a meager net profit of around USD 270 million on sales of over USD 74 billion. Economist reported that Amazon’s core retail business does little better than break-even; most of its meager profits come from the independent vendors who sell through Amazon’s marketplace.
Back home, Flipkart declared that it wants to become the first Indian company to touch 100 billion USD – not in revenues or profits but in valuation. Indian newspaper reports are full of valuation and funding stories of different e-tailers. However what is lost in the hysteria is the debate on business viability or bottom line numbers. Analysis of the balance sheets filed by the top e-retailer companies with the Ministry of Corporate Affairs, shows that most of them are making massive and consistent cash losses. Yet valuations are ever increasing. The argument that scale will ultimately bring desired profits does not seem a strong one, looking at profitability of Amazon after decades of existence.
Clearly, these e-retailers, unlike traditional retailers, prioritise valuation over profits. While for a “brick and mortar” company, these two factors should have a strong positive correlation; the game seems to be different for e-retailers.
The tactics for higher valuation is simple – get more and more customers to buy from the website – more the customers more is the valuation. The way to do it is massive variety (Amazon offers 30 times more variety than Wal-Mart) and massive discounts. As customers, we would have no complains at all. But what about the brand companies supplying to these firms?
Brand companies feel it is important to be there in the e-retailer channel or suffer from market share loss, as more and more customers are moving on-line to buy across different consumer goods category. But Brand companies have to offer massive discounts to stay relevant in this channel. With high discounts on one channel and normal prices in the traditional wholesale channel, channel conflicts are inevitable. Recently Samsung faced a rebellion from all its traditional dealers. Hundreds of Samsung dealers across the country have threatened to boycott the company’s products over pricing concerns. The dealers said that they would stop stocking Samsung phones unless the South Korean tech giant takes steps to narrow the wide gap in pricing between its phones sold at various physical outlets and on e-commerce sites.
On one hand brand companies want to be present in the e-retail channel to retain market share but on the other hand, this action may ultimately destroy the traditional channel where brand companies have significant volumes sold with good prices. It is like being caught between the rock and the hard place.
One can have two arguments against the proposed threat of e-retailers.
- The size of e-retail market for any consumer product category is too small to even worry.
- If modern retail could not create a significant dent in traditional channel in India, why should we be worried about the e-retail challenge