It would be a gross understatement to call the last couple of years a real struggle for Indian e-Commerce. But with the Big 3 (now it is Amazon, Flipkart and PayTM) flush with cash and some vertical players also holding their own, are the ‘purane achche din’ (good old days) back? Not really, the can has been kicked further and most of the problems that led to the ‘burre din’ (bad days) still remain.
Here are the problems. Gross margins for most categories are still low. Logistics costs remain high. And most importantly, there is no letting up on discounting and marketing costs to acquire and retain customers. If there is anything the D-Mart IPO coupled with the financials of Indian e-commerce companies has taught us, it is that e-commerce economics in India are not any better but perhaps even worse than traditional retail. The raise-and-burn mantra for all practical purposes continues and if it wasn’t for the benevolence of one (maybe a few more) vanity investor, then we would have seen some significant blow-ups. We also know from history that vanity investments are not sustainable and time and tide take them away.

The only long term elixir is an alien concept to this industry, becoming cash positive. Few brave vertical players are proclaiming that they will get there in the near future, e.g. Myntra, Lenskart, Nykaa and PepperFry. What happens remain to be seen but there are two common factors that potentially drive these claims.

First, is their focus on merchandise with inherently high gross margins. Fashion and furniture in that respect are better than cell phones. Issue with relying only on high gross margin merchandise is that competition and predatory discounting from the biggies can still destroy these margins. Consequently, growth rates and valuation multiples decline as well.

Second is the focus on private labels, as is the case with vertical players like Lenskart, PepperFry, and a few others like Urban Ladder and Zivame. That is far more compelling as the margins of an attractive brand will be a lot more defendable. One does not have to depend on a stratospheric scale possibly achieved over 50 years (or never) to be profitable and one can generate cash and stop depending on irrational investors. It is interesting to also note that Amazon is building a multi-billion-dollar private label business and adding to its potential of having a true and consistent bottom line.
Another possible savior could be going hybrid, i.e. adding a large offline component. Possibly attractive but it remains to be seen how such economics will look at scale. For now, private labels appear to be the best bet and I have no doubt that the smart e-commerce companies will increase their share of private label business and enhance their prospects for making money. Otherwise, there will be more and bigger blow-ups when (and not if) vanity investments dry up.


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