The big e-commerce news this week is the Jabong acquisition by Flipkart, which is in line with the ongoing consolidation in the space. (Another news was the acquisition of Hiree, a jobs portal, by Quikr for an undisclosed amount). Snapdeal was also in the race for the acquisition, suggesting that despite its alleged financial troubles, Jabong is still considered a viable business. But one look at the valuations reflects how much the optimism in the system has waned: The portal sold at USD 70mn, less than 1/5th its USD 380mn valuation some two and a half years ago.
Fortunately, however, declining valuations, are more an outcome of the slowing down of the e-commerce music, than a symptom of things to come. The sector has had to grapple with multiple issues. At the broadest level, the macros haven't helped. The global economy is slow, Indian economy has its pain pockets in particular and in general, there isn't really a boom happening. In good times, the e-commerce boat would be lifted much higher.
Fortunately, however, declining valuations, are more an outcome of the slowing down of the e-commerce music, than a symptom of things to come. The sector has had to grapple with multiple issues. At the broadest level, the macros haven't helped. The global economy is slow, Indian economy has its pain pockets in particular and in general, there isn't really a boom happening. In good times, the e-commerce boat would be lifted much higher.
But that is hardly all. The challenges with the sector go down right down to the operational level. A case in point being job offers being withdrawn from leading business schools at the last minute earlier this year.Not only did this ring alarm bells about the financial health of leading e-commerce companies, it also suggested management weakness in handling what should have been a more delicately handled situation.
Till not very long ago, the e-commerce space was seen as a promised ray of light in an otherwise challenged business environment. It was the brave new sector, with young, energetic entrepreneurs, and confident venture capital betting on their success. It has been hard to miss the glowing early success of the sector unless you have ignored business news in India completely. But with e-commerce also facing a correction now; it is a good idea to consider what it means for the Indian economy as such? Specifically, leaving aside its sentimental impact on Indian business, what is its overall role in the economy?
My ongoing interactions, questions I have been asked and analyisis over the past few months have been put together in a few notes. They are as below:
#1. E-commerce valuation bubble: The bubble seems to be all but over, most obviously seen from the rationalisation in valuations of companies like Flipkart, which in turn is derived from an analysis of their recent funding rounds. The latest Jabong acquisition also endorses that valuations are now at saner levels. Further, ongoing news of further consolidation in the e-commerce space is indicative of the fact that there are companies that are possibly not being able to sustain themselves, at least at the demand levels initially forecast.This could either be due to relatively low barriers to entry, which make it a highly competitive sector or because of a demand-supply mismatch.
#2. E-commerce relevance:Unlike the original IT bubble at the turn of the 21st century, the tech bubble 2.0, led by e-commerce, is meeting a far more real and relevant demand. The industry is here to stay, even if it goes through its own process of constant creative destruction till it finds its roots.It has changed the way many people in urban India are shopping. This is true for products ranging from furniture to food.
#3. Reflection on larger investment picture: E-commerce companies form only a fraction of the overall investments. For instance, there is recent news that Amazon is looking at investing some USD 3bn in the India. While this is a significant absolute amount, this is a relatively small proportion of the overall USD 55bn received in FDI in 2015-16 alone. And chances, are that the retailer will not bring in these amounts in 1 year alone – more likely it will be spread out overtime. As per recent reports, Flipkart is said to have raised USD 3.4bn in total so far, which gives some perspective. Therefore, e-commerce valuations declining or subdued funding for e-commerce is unlikely to impact the overall investment climate. To consider the health of the overall investment climate, we should still look at the big deals taking place among established companies and in large segments like infrastructure of banking and financial services, for instance.
#4. E-commerce for job creation: While we don’t have employment numbers – direct and indirect – on startups, we can imagine that in the unlikely scenario of a big e-commerce player shutting shop, there would be some employment loss at the margin, especially where inroads have been made into tier 2 and 3 cities. Ideally, there should be active consideration of this aspect, considering that human resources are India’s biggest economic asset on which our growth story rests. Also, considering the experiences of companies like Tiny Owl etc. there can be some active steps considered to prevent such occurrence. Some risk taking is part of entrepreneurship, but employees’ livelihoods should still be protected as far as possible. Over the longer term, we cannot depend on e-commerce as the major employment provider. Segments in manufacturing are still likely to play a much bigger role in the same. But, across industries it will become increasingly important to deliberate even more consciously about employee related issues. A lot of changes are already underway, for instance, Flipkart has a very progressive maternity leave policy, which is one aspect of keeping step with changing times.
#5. Improving the current e-commerce scenario: Perhaps at the present point in time, some bigger e-com startups could benefit from provisioning for employee costs. So a proportion of their total liquid balances can be kept away for contingencies in case of inability to pay salaries and wages. This has not just been a challenge in e-com but also in segments like aviation, as we well know.
My ongoing interactions, questions I have been asked and analyisis over the past few months have been put together in a few notes. They are as below:
#1. E-commerce valuation bubble: The bubble seems to be all but over, most obviously seen from the rationalisation in valuations of companies like Flipkart, which in turn is derived from an analysis of their recent funding rounds. The latest Jabong acquisition also endorses that valuations are now at saner levels. Further, ongoing news of further consolidation in the e-commerce space is indicative of the fact that there are companies that are possibly not being able to sustain themselves, at least at the demand levels initially forecast.This could either be due to relatively low barriers to entry, which make it a highly competitive sector or because of a demand-supply mismatch.
#2. E-commerce relevance:Unlike the original IT bubble at the turn of the 21st century, the tech bubble 2.0, led by e-commerce, is meeting a far more real and relevant demand. The industry is here to stay, even if it goes through its own process of constant creative destruction till it finds its roots.It has changed the way many people in urban India are shopping. This is true for products ranging from furniture to food.
#3. Reflection on larger investment picture: E-commerce companies form only a fraction of the overall investments. For instance, there is recent news that Amazon is looking at investing some USD 3bn in the India. While this is a significant absolute amount, this is a relatively small proportion of the overall USD 55bn received in FDI in 2015-16 alone. And chances, are that the retailer will not bring in these amounts in 1 year alone – more likely it will be spread out overtime. As per recent reports, Flipkart is said to have raised USD 3.4bn in total so far, which gives some perspective. Therefore, e-commerce valuations declining or subdued funding for e-commerce is unlikely to impact the overall investment climate. To consider the health of the overall investment climate, we should still look at the big deals taking place among established companies and in large segments like infrastructure of banking and financial services, for instance.
#4. E-commerce for job creation: While we don’t have employment numbers – direct and indirect – on startups, we can imagine that in the unlikely scenario of a big e-commerce player shutting shop, there would be some employment loss at the margin, especially where inroads have been made into tier 2 and 3 cities. Ideally, there should be active consideration of this aspect, considering that human resources are India’s biggest economic asset on which our growth story rests. Also, considering the experiences of companies like Tiny Owl etc. there can be some active steps considered to prevent such occurrence. Some risk taking is part of entrepreneurship, but employees’ livelihoods should still be protected as far as possible. Over the longer term, we cannot depend on e-commerce as the major employment provider. Segments in manufacturing are still likely to play a much bigger role in the same. But, across industries it will become increasingly important to deliberate even more consciously about employee related issues. A lot of changes are already underway, for instance, Flipkart has a very progressive maternity leave policy, which is one aspect of keeping step with changing times.
#5. Improving the current e-commerce scenario: Perhaps at the present point in time, some bigger e-com startups could benefit from provisioning for employee costs. So a proportion of their total liquid balances can be kept away for contingencies in case of inability to pay salaries and wages. This has not just been a challenge in e-com but also in segments like aviation, as we well know.
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