Indian e-commerce: rough road ahead

In the second of a two-part series, we look at the huge logistical and infrastructure challenges for e-commerce in India and why investors are still putting in big money.

India is often touted as the next mega technology play after China. But a series of problems stand in the way of a homegrown version of Alibaba or Amazon.

In Part One, FinanceAsia looked at the people who are helping to build India's e-commerce sector and the challenges of turning a country where cash is still king into one that buys products online.

But the challenging financial landscape is only one issue. Poor and costly distribution networks represent another big challenge for India’s e-commerce aspirations.

On Alibaba’s marketplace, the logistical costs are borne by merchants and buyers. In the US, Amazon adopts an inventory-based model and spends about 10% of its net income on warehousing and logistics. But in India, e-commerce companies pay as much as 30% of net income, reckons Technopak Advisors.

That’s because of poor infrastructure — a relative lack of haulage-worthy roads, bad internet connectivity, and terrible traffic, which results in huge bottlenecks.

India has a long road network but the quality is sub-standard. India’s railways are also quite extensive but, again, inefficient. 

India will spend up to 970 billion rupees ($15 billion) building roads and highways during the fiscal year ending March 2017, the country’s Finance Minister Arun Jaitley said during his budget speech in February. 

To work around this, India’s e-commerce companies rely on last-mile delivery or third-party delivery. That means orders have to be picked up by a delivery agent on a scooter with GPS-enabled addresses plugged into his or her mobile phone, before they reach their final destination. 

An unreliable national postal service is another hurdle as there is no standard way of writing an address and many people can share similar names in a district.

And yet, for all the logistical difficulties, Indian consumers are some of the most demanding in the world when it comes to delivery. According to a global survey by logistics firm DHL in 2013, Indian online shoppers expect delivery in five days, compared with a global average of 6.5 days and 5.5 days in China. 

Prompt delivery is a deal-clincher for many Indians. About 70% of all returns comprise customers unhappy with the delivery time, according to Sellerworx, a Bangalore-based consulting firm for e-commerce vendors.

So, in order to improve connectivity between vendors and buyers, the race is on to build new fulfillment centres – state-of-the-art packing warehouses that use both humans and automated processes such as computer-controlled chutes to move items.

“All the e-commerce majors are building warehouses and the focus will be on a warehouse-led model in coming years, as they can ensure quality control and customer experience,” Satish Meena, a Delhi-based analyst at Forrest Research, told FinanceAsia.

Technopak Advisors estimates the e-commerce industry will invest between 3% and 6% of its top-line sales from 2017 to 2020  building modern warehouses – a cumulative spend of $450 million to $900 million. Online retailers could spend an additional $500 million to $1 billion on logistics for the same period, enabling them to make faster deliveries at a lower cost.

Amazon added eight new fulfillment centres last year, boosting its storage capacity in India to almost 5 million cubic feet across 21 cities. It claims to have the country’s largest storage capacity and warehouse infrastructure.

Flipkart opened its 17th fulfillment centre in November and plans to invest more than $500 million in building further such facilities. Using automated technology to select and move packages to designated pickup stations and make the whole warehouse process quicker and smoother. 

FUNDRAISING BANDWAGON

Despite the challenges facing the Indian e-commerce industry, there seems to be no shortage of capital to make it work.

Investors pumped $9 billion last year into India’s technology start-ups, up 50% on the previous year, and Goldman Sachs estimates that the private e-commerce start-ups, which received more than 80% of the venture capital money last year, could raise another $20 billion between 2015 and 2020. 

ShopClues, a Gurgaon-based e-commerce marketplace, raised an undisclosed amount in its latest round of funding in January, valuing the company at $1.1 billion and placing it in the ranks of India’s technology unicorns. 

“The recent addition of [Singapore sovereign wealth fund] GIC and the continued strong support from our existing investors is a validation of our capital efficiency with a clear path to profitability,” Sanjay Sethi, chief executive officer of ShopClues, said in a statement.

Snapdeal raised a further $200 million in February from a group of investors that included the Ontario Teachers’ Pension Plan, one of the world’s largest pension funds. The investment valued Snapdeal at up to $7 billion, up from $4.8 billion in August.

Flipkart, meanwhile, is said to be in talks with investors including Alibaba and Chinese conglomerate Fosun Group, according to two people familiar with its fundraising plans. 

Flipkart declined to comment directly on the matter but its CFO told FinanceAsia that the company’s current cash holdings can last it until 2019. The company, which claims on its website to have more than 46 million registered users and gets 10 million daily page visits, is one of the most heavily funded technology start-ups in India, having raised more than $3 billion since 2014, according to investment research firm CB Insight. 

The company raised $700 million in its 10th round of private funding last year, valuing it at $15.2 billion.

However, that was before Morgan Stanley — specifically the Morgan Stanley Institutional Fund Trust — disclosed in February that it had marked down the value of its stake in Flipkart by 27%, highlighting the difficulties India’s burgeoning e-commerce industry is still facing to make money. 

None of India’s e-commerce leaders are close to profitability and, as a result, some pricing adjustments are being made, according to some industry analysts.

“The investors are moving beyond [gross merchandise volume] and asking for a more reasonable valuation before investing in the e-commerce companies,” said Meena at Forrest Research. 

According to Goldman Sachs, e-commerce companies in India are burning cash at an average rate of 1.35x of the GMV sold as a result of free shipping and other various marketing incentives. 

Loss-leading a business that’s riding a wave of new technology and fighting for market share often makes sense but also has its limits; at some point, it’s got to come back to the ultimate commercial goal of making money. 

“We need a constant balance. You cannot burn money [in a] stupid way as long as you invest in [a] smart way,” Masayoshi Son, founder of Japanese technology giant Softbank, said in January at a government conference in New Delhi to promote start-ups.

India plans to set up a Rs100 billion ($1.5 billion) fund to encourage start-up businesses and has pledged to ease regulations for entrepreneurs, as the administration of Prime Minister Narendra Modi strives to create more jobs and boost growth.

Son, who will probably dine all his life on the $20 million investment he made in 2000 in a certain Chinese e-commerce company that was unprofitable at the time called Alibaba, is looking for new hidden gems in India. A Snapdeal backer, Softbank is on course to exceed its planned $10 billion investment in India over the decade, after spending $2 billion last year.

But being patient is well worth it when the potential is so great.

“It is OK not to make money but what is important is customer acquisition, business model, and customer satisfaction. The overall business should be created to get enough scale, active user base, and you will make profits,” Son said.

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