India’s e-commerce industry is primed for a shakeup as sales soar, valuations drop and the fitter among the companies gobble up weaker rivals.
With the world’s largest online retailer, Amazon, preparing for entry into India and the market separating the strong from the weak, India’s best-known and stronger online retailers are taking the lead in the consolidation race.
After Flipkart announced last week that it is acquiring consumer electronic retailer Letsbuy, its biggest rival Snapdeal is in advanced talks to acquire a company that will give it a bigger presence beyond its strength in the group-buying market, industry executives familiar with discussions told ET.
“In 12-18 months, we will see the leaders emerge. There will be a couple of multi-product generalists who will be successful and a winner in each single-product category,” said Prashanth Prakash, a partner at venture capital fund Accel Partners, whose investments include Flipkart and Letsbuy.
For the approximately 10 million Indian e-commerce consumers, there has been a growing choice of online stores that sell everything from books to travel experiences. But behind the scenes, e-commerce start-ups-around 40 active ones at last count-are battling price wars and high customer acquisition costs.
Leaders in the e-commerce space-ones that have raised money, have large teams and are aggressively pursuing growth-are spending $1-2 million (Rs 5-10 crore) a month, including on marketing, overheads and salaries.
At this rate of burn, smaller firms with scant capital are unable to cope and looking for buyers. Among them are Exclusively.in, a fashion and lifestyle portal focused on NRIs, and babycare portals a2zbaby and BabyOye, according to industry executives privy to the discussions. But the companies and their investors deny that a sale is in the offing.
CAPITAL TO PLAY DIFFERENTIATOR
Harish Bahl, founder and chairman of the Smile Group, which owns such e-commerce portals like Fashionandyou, FreeCultr, Dealsandyou and Bestylish, said companies that did not raise capital, or got some funding but do not have a well thought-out business model, and companies in very narrow niches are looking to be acquired. “This is a logical progression. Consolidation had to happen.”
Consolidation is also being hastened by the inability of smaller firms to raise money at the valuation levels they commanded even last year. Yebhi, a multi-product retailer that raised Rs 40 crore (approximately $8 million) from venture capital firms Catamaran and Nexus Venture Partners in July 2011, was in talks for a fund infusion earlier this year, according to a private equity investor.
However, the venture firms valued the company at around $50 million, less than half the valuation the firm received in the previous round, according to the same private equity investor.
Yebhi declined to divulge valuation details and did not confirm that it is planning to raise more money. Manmohan Agarwal, the co-founder and CEO, said in an email that the company was adequately capitalised to meet its growth plans.
“It is a fundamentally robust industry. But there are too many players fighting for the same pie,” said Deepak Srinath, director, Viedea Capital Advisors, an advisory firm that helps start-ups and small firms raise funds.
Capital, in fact, will be the key differentiator. Without funding, an e-commerce company will find it difficult to survive, observed Raja Lahiri of Grant Thornton.
Large brick-and-mortar retailers leveraging their retail expertise online, such as Future Group and Shoppers Stop, and older, established multi-product e-commerce sites like Indiatimes.com, have the advantage of size and capital. In a capital-intensive segment like e-commerce, these companies have the staying power and marketing muscle.
Indiatimes Shopping, a Times group company that publishes The Economic Times, for example, has seen its revenues grow 100% from last year without raising any outside capital, the company said.
“Larger players are well-positioned and have the capital. But smaller players have the agility and speed, which are important in this sector. If the larger players keep this in mind, they will do well,” Lahiri said.
Even Flipkart’s valuation has been slipping, with an investment banker estimating that the company will be worth only around $550 million. Even its acquisition of Letsbuy, believed to be at the behest of the common investors, Tiger Global and Accel Partners, has done little to improve its valuation.
The consensus among industry analysts is that venture capital investors will show more caution this year while continuing to invest. Capital will start concentrating in the hands of category leaders and many ventures will not be able to raise follow-on rounds of funding, said Aashish Bhinde, executive director at Avendus Capital. “This year capital will go to those ventures that can demonstrate they can reach profitability.”