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Why are Ecommerce businesses not concerned about continuous losses
The e-commerce market scenario has seemingly grown at a very past pace during the last few years. Moreover with the scale of business operations one would have expected them to have made a significant amount of profit. The real picture is however quite different.
Ecommerce businesses have been operating at massive losses for the past few years. While investors have poured millions, the question is not when but if these markets become profitable? Not only is it impossible for them to become profitable at present but even in the near future this has become a distant dream.
Amazon for instance reported a loss of Rs. 3,572 crore in India for the 2016 fiscal. India is the second largest market of the Seattle based firm after U.S. The reason behind such massive losses is clear: heavy investment in infrastructure and technology in India.
Its competitor Flipkart, also faced the same predicament after its losses doubled in the 2016 fiscal due to increased spending on advertisement, logistics and discounts to maintain its top position in the country.
Other online retailers have also followed suit and have reported an increasing sales along with an equally increasing amount of losses. Here’s a photo form those companies who reported to the Registrar of companies:
Even apart from these major companies, travel is where the real money lies in India’s e-commerce markets. However even travel sites make a meager 2.3% profit.
So one begs to ask the question: why are these companies not bothered despite the severe losses? The answer is simple. Indian companies are not even considering profitability yet. At present, the game is more about market shares and market penetration so that all the players are prepared for when the industry scales multiple times.
While in terms of base, India may be lower than China or Japan, its growth is way ahead of others. India had an annual expansion of 51% while China's e-commerce grew at 18%, Japan at 11% and South Korea at 10%, according to a joint study. India is ahead of countries like Brazil and Russia even within the BRICS nations. In 2016, India had India an Internet user base of 400 million whereas Brazil had 210 million internet users and Russia has 130 million of internet user. By December 2017,the internet penetration in India’s urban areas was estimated at 64.84 per cent and 20.26 per cent in the rural areas. In fact, the number of digital buyers in India is projected to jump from around 82 million in 2015 to nearly 249 million by 2019. The Indian e-commerce industry is expected to surpass the US to become the second largest e-commerce market in the world by 2034.
Investors have said that markets have momentarily stopped growing for players have reduced investment in market development. India’s shopping market is expected to go up to 100 million in the next few years. At theis point the goods and value merchandise or the GMV based upon which these statistics are estimated, is considered to be an inadequate yardstick to measure the success of a company. In an earlier interaction with TOI, Binny Bansal, cofounder & CEO, Flipkart , said the e-commerce major was keenly looking at ways to tap into its existing base of users. "There are 50-60 million consumers buying online today. Given the large base, it makes sense to ensure you are selling more to the same customers as that opportunity is big enough compared to three years back," he had said.
Where the market is experiencing exponential growth, GMV is often dismissed. "The moment of reckoning is coming or may have come already for Indian e-commerce companies. The ease with which these companies have been able to raise money from VCs may have made them all sloppy , and the test then will be which ones can now work on the `building-a-business' channel. As for whether the fault lies with Indian consumers for not jumping fast enough onto the online wagon, it is a chicken-and-the-egg problem that we have to deal with," says Aswath Damodaran, professor of finance at the Stern School of Business at New York University.
Thus it remains to be seen with the current scenario, how these players remain in the game despite continuous losses. Whether their strategy plays off is now a question which is yet to be determined.