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It has been a very interesting few months for Indian entrepreneurs focused on e-commerce.

Between October (when I pointed to the hype yet again) and December,  a lot transpired:

  • Almost every major e-commerce company in India was in the market raising capital, some purportedly enticed by unsolicited indications of interest.
  • Investment bankers and investors flocked to the sector and investment opportunities became more competitive.
  • Valuation expectations for companies that were less than six months old exceeded $50M.  The more established companies were unapproachable for less than 10 times as much.
  • It was impossible to watch 20 minutes of television without catching one or two “dot-commercials.”
  • New e-commerce startups were being created every day.

And then sometime in December, investors went cold – just as quickly and unexpectedly as the winter chill crept up on me in New Delhi.

  • Some of the most talked about e-commerce transactions failed.
  • Almost every funded startup was operating on bridge financing after running through large amounts of money on a marketing push around Diwali.
  • Existing investors bravely put up new money at questionable. valuations in some cases.
  • In others, investors just folded: some shut shop, others sold their assets.
  • In yet others, companies pivoted: e.g. deals companies became e-commerce companies, others went from flash-sales to online brands

Yes, a few transactions did get done in December, January and February but the mood is decidedly sour today.   There has been enough written about market events and I dare say some amount of Schadenfreude has set in among those who were not beneficiaries of the precedent hype.  Instead of recounting symptoms of the downturn, I want to focus on what I have learned in the process of meeting over 50 e-commerce entrepreneurs during this period of tumult.

E-commerce is Real

  • E-commerce serves a very important function in India; it is at the forefront of organized retail in a country that sees a lot less of it than other markets (US, China, Japan, Europe etc).
  • E-commerce extends the reach of brands to over 20k postal codes; to places where people can see the brands on TV and in the movies but cannot walk down the street to buy what they see on screen
  • India is not a homogeneous market: urban, semi-urban, tier-2/3, male, female, north, south, north-east, west, middle-aged, young, aspiring, conservative – so pick your target segment carefully.
  • There is demand out there and there are real people buying real goods on India’s e-commerce sites
  • But do not rush to quit your day job to start an e-commerce venture, not yet anyway.

The Future is not Now

  • Do not believe the hype in the numbers; all reports of Internet users in India are “extrapolations” based on sampling.  And sampling is one part of the problem; the other is whether the universe that the sample represents is reasonable (ask a statistician).
  • My 95% confidence interval for Internet users in India is between 50M and 150M.  What matters is that there are very few of them actually buying online.
  • Active users are probably between 20M and 50M depending on who you ask but then you have to wonder where are these users coming from?  There are far fewer broadband subscribers today.  Believers point to workday/weekday usage patterns implying that India is a “shop at work when the boss is not looking” market.
  • Less than 8M have ever bought anything online (not counting travel tickets) as per some educated estimates.
  • Registered buyers at major sites probably do not exceed more than 3M (my estimates)
  • The Internet shows a lot of promise but e-commerce is still in its early days here

The Challenges

  • Profitability: Online retail is still retail and as in any trading business, margins are thin and will remain that way.
  • Capital:  Retail businesses have always required capital to scale; do not assume you can reach break even with $30M of capital.  It will take much, much more.
  • Competition:  Irrational customer acquisition strategies have resulted in shifting investor money to consumers wallets.  We have just come out of a period when we could buy dollar bills for $0.80 (metaphorically) on these e-commerce sites and that is not sustainable.
  • Google is not your friend: The customer is fickle and irrational competition abounds.   You will likely have to acquire him/her over and over again unless you can get him to you directly (every time).
  • Category mix: Some categories are better than others so pick your entrepreneurship strategies very carefully
  • Inventory: Carrying inventory is expensive and requires serious expertise.  Drop-shipping and consignment models are more attractive but very difficult to manage and in many cases impossible to put in place in India.
  • Logistics:  Third party couriers are seriously lacking in capacity to service demand.  They hold on to your cash for way too long and there is no control over the customer’s experience with your brand.  Building out your own logistics network requires a new competency to be developed in house.
  • Talent:  There is not enough.
  • I could go on but let us stop for now and perhaps return to this subject in a later post.

Where we are today is that both investors and entrepreneurs have become more aware of the challenges than they were 6 months ago.   This is a good dynamic – both expectations and valuations are retreating to healthy levels – so everybody can go back to the basics of building good sustainable businesses.

I am curious to hear from my readers (especially entrepreneurs who are running e-commerce businesses) if they think they are running profitable businesses at least at the contribution margin level.  It would be great to test a few prevalent models for profitability.  But then again to quote one e-commerce major in India

If you are concerned about profitability, you are the wrong investor for us.

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14 comments on “India E-Commerce: the depths of winter

  • Shyam, Very insightful blog post.. how do you and others do this!!

    maybe I will emulate and try & ‘sit down’ and write…

    the few paragraphs above regarding ‘future is not now’ is particularly useful.. in many ways, there are similarities to even western world, as I have not really seen any real, measured figures of % of population that actually ‘transact’ and of those who are transacting with online only entities and % of those transacting with online extension of offline brands.. this should give us all a much better indication of what is what.. whether it is for US/UK or India/China.. sadly, all we see now is sampling and in some circumstances bad guesses..

    my gut feel is that what is needed in india is not any western copy of GroupOn.. but finding the ‘mobile’ version of a local service (e.g. Dabbawala.., probably via even plain old ‘stupid’ SMS/USSD).. which means not all western VC firms could even understand the local culture/business/social needs and “real” issues the service try to solve…

    I maybe wrong totally of course, but maybe some real out of the box thinking and meeting of minds (of entrepreneurs/ enterprises) maybe needed for the arrival of a few innovative companies that bring some real or perceived value to the majority of the public in a major town and people are happy to pay their rupees for… & solve what their pressing needs be (maybe organising the next ‘major’ family wedding/celebrations…)

    what that application might be however, you probably be the first to know, please do tell me before you tell others! 😉

    • Thanks for the comments Gareth. Indeed, India is evolving its version of ecommerce very differently and there are already India specific models like Justdial for local merchant promotions.

      However, India’s retail buying experience is far short of the economies it aspires to, so there is an unmet need and online retail is the only effective way to meet it. Brick and mortar retail has untenable cost structures and since demand is so dispersed, it cannot be met by setting up a store in every town. The friction that exists today in payments and logistics will be overcome. Now all we need is a dose of pragmatism and realistic expectations.

  • Great post! “Talent: There is not enough” – totally agree, and might help address Gareth’s point “.. which means not all western VC firms could even understand the local culture/business/social needs and “real” issues the service try to solve…” there aren’t enough talented VC’s here either. BTW, which one is a Western VC firm here? beats me!

  • Great post, Shyam. Some of the points that you are making are not doing justice to the potential of the Indian markets. India is growing and so is the urban income levels, and that is leading to less time to do you regular shopping – the need for ecommerce in India. Lot of the Indian eCommerce players are focusing on flash sales etc – well how sustainable are those models? if one can flash sell one fine day – i am sure someone else can flash outsell the other on another fine day.

    Another reality is that if two players are selling the same thing – usually Indian consumers go with the one selling it cheaper, and going to the cheaper is much easier online? right than offline. Well, the whole value when eCommerce started happening in India or for that matter anywhere – eCommerce players were able to offer stuff cheap because they didn’t have to bear the real estate expenses than the brick n M stores. well in India because of the unfair VCs, lot of these guys are also burning cash to offer stuff cheap but also spending the same in real estate – wonder where would profitability come from?

    Aren’t we should look for finding “sustainable” ways to sell stuff online little cheaper than the brick-shops so that we still continue to offer the inherent value of Online Retail to the consumers, especially in India?

    Well, as entrepreneurs, the challenge is to find that sustainable way, aint it.

    • @Vivek
      I am in agreement with the points you make; that (i) ecommerce is potentially a large market (ii) a lot of companies are not establishing sustainable models (iii) Indians are value seekers. The point of my post was to report on the current state of affairs: the reality is that way too many people jumped into the fray without fully understanding the realities of the marketplace (entrepreneurs and investors). After the hype of a few months ago we are now retreating to the other extreme perhaps but at this time it hard to find money to fund ecommerce (which cannot grow without capital in its current forms).
      Personally, I don’t think real estate cost savings are a huge differentiator as other costs replace them (albeit not to the same extent).

  • Thanks. Yup, I do agree. Additionally, I also think that the kind of exuberant marketing campaigns that were seen in the recent past are also an indicator of the fact that none of the ecomm players are sure about their market position? anxiety or lack of confidence of not winning the race with great service quality? It can also be inferred that in the quest of raising more and more capital and since revenue traction is what funding institutions (VC et al) look at, lot of unnecessary marketing money is spent to get an instant push to the top line just before and during the process of looking for more money.

  • Good insight Shyam,

    I would say current scenario in E-commerce is lucrative for Consumer but not for Investor…

    All e-commerce website is offering huge discount to acquire customer and their loyalty (I got 30 % disc. on HUL & P&G products !, I got my mobile at least at 10 % disc to offline rate) but the model is not sustainable unless a e-commerce website is selling any unique product (Designer apparels, Personalized gift items etc..) or they are in a position to provide disc. on a regular basis which i believe is a very difficult task.

  • Hi Shyam,

    I am a new reader of your post, and I must say I couldn’t stop at one and went on reading different posts of yours for almost the entire day. They are very informational and thought provoking. One question if you could help me with: What do you think, why is it only branded products which are being sold online? Be it apparel or electronics, it seems that only branded stuff sells in the virtual world is it because brands already have consumer’s confidence?


    • Urvashi: Thanks for your readership. Your guess is right; the maturity of the Indian consumer is at a level where they are seeking efficiencies in what they are already familiar with: access, convenience, and price being the prime drivers. The idea of trusting a new brand is foreign to them but they will eventually get there. There are companies like Zovi and Yepme that are trying to build new brands with some success but a better indicator is the private label business of some online retailers which is more significant than most people would guess. If the consumer has overcome the trust gap with a retailer then he may be ok with buying an unknown brand from the retailer as long as the price is attractive.

  • Thanks Shyam, great insight. I was thinking on similar lines and had a business plan. This is surely a boost of confidence for me.

  • @Urvashi Good luck, but tread carefully though. Building a private label is an expensive proposition and the economics of ecommerce are tough as it is. Send me your plan if you want me to eyeball it (when you are ready of course).

  • Hi Shyam, I plan to start an online shopping website for ethnic wear, specializing in sarees. We being the manufacturer and wholesaler of sarees can provide the customers with an unbeatable price and the most genuine of the products. But as of now my plan dosen’t includes hiring developer and getting the website ready rather I have thought of tying up with SAS providers like But the question and the subsequent doubt which arises in my mind is that the current trend prevalent in ecommerce industry is actually getting on board your own engineers for this work. I understand that having your own team of engineers is always good but can you please tell me how good are these SAS providers doing in the market? Many Thanks.

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