Growth at All Costs - The E-commerce Story in India

You know what the best thing about shopping online is? No lines to wait in! Unless of course, your internet decides that very moment to start buffering endlessly... Argh!

Jokes aside, though, e-commerce in India has seen tremendous growth over the last decade. Crazy to think how brands like Flipkart and Amazon have become household names in just the last few years. But here's the mind-boggling part - almost no e-commerce company seems anywhere close to profitable yet! You'd think with revenues growing at breakneck speed, the profits would follow. But no!

Well, today, we dive into the reasons behind those mounting losses in Indian e-commerce and decode whether the elusive path to profitability will materialise.

The Bttr [Lowdown]

• The gross merchandise value (GMV) of India’s e-tailers touched $60 billion in FY2023, jumping 140% in three years.

• Flipkart India has reported a 9% revenue growth at Rs 55,823 crore, but its losses have widened by 42%.

• ONDC, the government-backed open platform for hyperlocal e-commerce, clocked more than 3.3 million cumulative transactions in September, up from a mere 1,000 transactions in January this year.

The E-commerce Story in India

E-commerce in India started taking shape in 2007-08 as niche startups like Flipkart and Myntra started operations. However, growth was very slow in the initial years due to limited internet penetration and low adoption of online shopping. It was only around 2016 that e-commerce started booming in India, driven by affordable mobile data and the proliferation of smartphones. From just 4% of total retail in 2015, e-commerce has grown at a scorching pace to reach around 8% of total retail in 2022.

This hockey stick growth has attracted billions of dollars in investments into Indian e-commerce from companies like Walmart, Softbank, Tiger Global, etc. The potential to serve a billion-plus consumers online has made India a very attractive frontier. However, this growth has come at a very heavy cost in terms of losses for major players.

This begs the question - why are companies and investors still pouring billions of dollars into the e-commerce sinkhole in India despite no signs of profits as losses mount year after year?

Winning the customer, building the technology

E-commerce is a game of scale - the larger your customer base, the better your unit economics and path to profitability. To attract customers, e-commerce players spend heavily on advertising, promotions and discounts. Sales events like Flipkart’s Big Billion Days involve large spending on marketing the event and offering deep discounts to hook customers. Cashbacks and incentives are offered to drive loyalty. Amazon India had an ad spend of Rs 4,591 crore in FY21 as it battled Flipkart for market share. Taking a hit on margins is seen as an investment in acquiring and retaining customers.

On the technology front, e-commerce firms in India have invested significantly in building proprietary platforms tailored to Indian consumers and markets. Huge investments have gone into developing apps and web interfaces localised to Indian languages, payment modes etc. Advanced logistics management systems have been built from scratch to enable smooth last-mile delivery across the country. Analytics and AI are leveraged for inventory and supply chain optimisation. Top engineering and product talent has been hired at high salaries. Technology is seen as the competitive edge in this game.

The Sunk Cost Fallacy (or is it not?)

The massive investments made by e-commerce companies also lead to the sunk cost fallacy where firms continue investing in loss-making activities due to previous resources already sunk in. Now, after the bonanza of COVID-19-led growth starts waning, these players are faced with a tough choice. Should they cut their losses and exit some profitless categories and ventures? Or should they hang in there, hoping that profits may materialise someday?

Well, the lure of India’s billion-plus potential consumers and the first mover advantage is too tempting. Not to mention all the time, effort, and personal ambitions already invested by founders and top management. Quitting now would mean turning their backs on the massive sunk investments made over the years.

There are also significant brand building costs invested to create awareness and trust. The loyalty of existing users represents an asset that would be lost if operations ceased. However, some prudent firms have pivoted to cut their losses when the capital requirements appeared too daunting - Snapdeal has downsized significantly from its heydays, focusing only on profitable niches and Tier 2 and 3 cities; firms like Pepperfry, Nykaa and Lenskart focused on narrower segments online have expanded offline.

The Signals of Hope

While the mounting losses paint a concerning picture, there are some reasons why profitability could be attained in the future:

• Market still underpenetrated - Internet users in India will hit 1.1 billion by 2025, with 30% of them estimated to be online shoppers. However, e-commerce penetration is still about 8.5% of the total population - lots of headroom for growth. And again - it was only around 2016 that e-commerce actually became a thing in India.

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• Maturing logistics - As supply chains and logistics networks penetrate deeper into smaller towns, costs can be reduced.

• Operational leverage with scale - As firms achieve scale, fixed costs get spread over larger sales. Unit economics could improve.

The Bottom Line: Cautious optimism

While profitability has been elusive for over a decade, there are signs of hope for Indian e-commerce majors. The sheer size of India's untapped domestic market and its growth potential give reason for optimism. Internet penetration beyond metros, increasing consumer comfort with online shopping, and growth of new formats like D2C and chat commerce provide ample growth headroom.

However, turning potential into profits will require flawless execution - acquiring customers in a targeted way, building strong brand loyalty, optimising supply chains, and carefully segmenting product categories rather than spraying and praying. Profitability will likely emerge in some segments faster than others.

Food for [Bttr] Thought

• Do you think profitability is around the corner, or are losses here to stay?

• Will customer loyalty outlast investor patience?