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Flipkart, Amazon, Snapdeal, Urban Ladder, Shopclues and many more such start-ups are dotting the Indian e-tailer industry. Most of them are being touted as one success or the other backed by millions of dollars flowing in to their individual kitty. They are backed by the alphabet soup investors i.e. VC’s, PE’s, etc. So are these companies really successful? Let’s take a closer look.

The other day I bought a trolley branded Disney Bag for my child. The tag cost was Rs. 1,600. The amount quoted on Amazon – Rs. 800. The bag was sold by Mom and Me (part of the Mahindra Group). Let us look at the mechanics of the entire sale. Mom and Me (the seller in this case) chose to use Amazon as a market-place i.e. a platform to sell its goods to a customer i.e. me. Mom and Me would have sourced the product from Disney which in turn would have got it locally manufactured at the lowest cost producer. So if the product is tagged at 1600, keeping in mind a healthy margin of 20%, the cost price of the product for Mom and Me would be around 1200-1300. The product is being sold at 800 a good 400 below the cost price. Surely, somebody is losing money in this? Who is paying up the mark-up to the bridge at least the cost price if not the margin? No marks for guessing that the market-place is discounting the product but the seller might also be taking a small hit in the bargain. Another example, I bought Asics shoes on Flipkart, the cost price of the product 6,900. The fetched price – a good 50% off. The product is imported directly from Malaysia by Reliance Retail. So who is making good on the deep discounting in this case? Again the market-place.

So now to the moot point. Is this sound economics? Is it a sound business plan where in the product is so heavily discounted that you need to pay from your own pocket for any product that is sold? Flipkart currently is the victor in the battle of the e-tailers. Somehow I feel this is nothing but a pyrrhic victory – a winner’s curse. The more a person looks to buy on Flipkart, the more the e-tailer burning cash. The annual cash burn rate for Flipkart is a whopping $600 million. That is about $50 million monthly i.e. 300 crores in Indian money. No wonder the e-tailer is on the deal street every 6 months looking for investors’ money to shore up its bank balance. The money that is raised is used for general corporate purposes i.e. acquisition, shoring up the back end and the interface and most importantly – discounting strategy. Well, in my 15 years of marketing and strategy experience and my 2 years of management education I never knew that the word ‘discounting’ can at all be used in conjunction with strategy.

Anyways, let us look at a few numbers. This data is for the finanical year FY14. The data has been culled from various business dailies. The revenue chalked up by the company was around Rs. 3,000 cr. The profit is somewhere close to -700 cr. i.e. a loss of 700 cr. The GMV (Gross Merchandise Value – the total value of the prouduct sold on the website) was Rs. 25,000 Cr. The valuation commanded by it a jaw-dropping $ 11 billion i.e. Rs. 68,000 Cr. So if we look at the delta i.e. the multiple that the e-tailer is commanding, we are looking at anywhere close to 22 times the revenue and a multiple in terms of the profit cant be calculated since the company is making a loss currently. Such a high multiple for a company about 10 year old with unproven track record is quite unheard of definitely. But then the measure that is being used here is the delta with respect to the GMV’s. The number of customers (unique or otherwise) the website is able to successfully tap. Since there is no benchmark in the industry (it being nascent in nature), the general rule of thumb is that the valuation is decided by the next round of funding in to the company. The more an investor invests for a lower equity stake – the higher the subsequent valuation (post money valuation).

So how does a company making losses, having a unsound strategy of paying for products from its own pocket be valued at over $11 billion of greenbacks?

I get a feeling it’s a game that we used to play when we were kids i.e. monkey off my back. Every child used to make sure that the monkey on his back is given away to somebody else. As is in the game – the kid giving the monkey away is lighter whereas here the investor in the e-tailer is richer by a few millions. So is there a loser in this game? Well not really, atleast not in the near term. Everybody is gaining. The founders with the heady valuations and with the tiny slivers of the equity that they own – they are already millionaires. The investors backing the company look to ramp up the valuation since ultimately in the long run when they cash out they would look to pocket a tidy sum but in the near run there is some heartburn with the cash burn in the e-tailer. For the customer it is Diwali or Christmas (the way you look at it) every day. It is making hay while the sun is shining and why not – no need of going to the market but the market comes to you and that too at a heavily discounted rate.

I remember a TVC for a SIM card company in which the protagonist is off to foreign land and he is using the company paid mobile phone to call up home. His common refrain is ‘company ka maal dairya mein daal’ (Company’s money put it in the drain). Well this is so apt in this case just with a slight twist – ‘VC ka maal, pocket mein daal’ (VC’s money, put in your pocket).


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