CA Paras Mehra

Three days ago, the big giants like Flipkart, Amazon received a serious threat from the Maharashtra Government itself. Some leaders of Swadeshi Jagran Manch (SJM) which is an economic policy front of RSS had met the Finance minister Arun Jaitley and sought a ban on ecommerce portals as they are killing the domestic business.

This was in the news, however somewhere, it is true that the e commerce giants like Flipkart, Amazon etc. are really affecting the domestic businesses. Many of us, assumes that these giants actually uses the loopholes in the laws and leveraging the Indian markets. Let us understand the actual concept behind this, the idea, the revenue, the peak and the downfall. Through the present of these companies is all time high, but the future is really in the dark. Lets us have a look:

Evolution of the idea

Traditionally, when businesses were not able to sell their products, offers discounts to increase their sales, however businesses were never happy to offer the discounts because it not only sometimes reduces the profit, but also results in losses. Discounts were basically the tool to clear the piled stocks. However, in the modern age, some business thought that if the sales really increases in the discounting period, then why not give discount every time and why not leverage the increase sales every time. And that’s how, the discount based model of business came into picture and since, the market is always a price sensitive, then it was a fact that these businesses will attract the customers. They adopted the discounts based models and created a online market place, where anyone can come but the last price will be controlled by the market place by offering discounts and other schemes.

The High Engine Growth

After the evolution of this idea, the traditional cycle gets punctured and this new means of doing business is creating havoc in the Indian markets. With 70,000 crores valuation, flipkart is actually leading at all fronts. Flipkart was doing aggressive marketing, the one day delivery, high discount offering and many more. At the same time, the Amazon, snap deals were also keeping high. Revenues of all these companies are launching, reaching the billions of dollars, and their commission income was also very high. Let us look at their real incomes.

As per the table, flipkart is leading with 179 crores, next is amazon with 168.9 crores and then is snap deal with 154.11 crores. These figures reflect that the battle for the top is really hard and it also suggest that the spending on the discounts will increase to remain on the top and to be in business.

The unfold trap – the biggest threat

Everything looks good when we see these above figures, the valuation, the publicity or anything except when we look at the audited balance sheets of them. The most interesting fact about these giants is that no one has tasted the profits yet. And surprisingly, the company which is on the top at the revenue table, is also top at the losses table. Flip kart is having a loss of 400 crores, second is amazon at 321.3 crores and at last is snap deal with 264.6 crores.

Now, let us analyze these figures, the reason of these big losses, despite having hefty net revenue, is the discount which attracts the customer. The main component of the losses is actually due to discounts and advertising expenses. Flipkart offers it the most and that’s why its losses are the maximum. But the main problem is that flipkart, despiting knowing of this fact, cannot do anything because this is what their business model is is all about. If they had to be on the top, then they have to offer much discount to let their prices less in comparison to other competitors.

Due to this trap, these companies creates a deficit between the revenue and expenses and which ultimately met by the VC’s funds.

 

Other problems

Besides these traps, the government is now also in a mood to regulate these e commerce portals. In India, FDI in multi retail is banned, however, these companies are actually doing that online and this is actually a loop hole in the law but it is never that intention of the government and therefore, it will expected that in the next budget, the life cycle for e commerce players will get tougher and tougher.

The Dark Future

With all the pros and cons of these e commerce giants, it looks like the future is very dark. Despite having the high valuation, no business can survive on losses. There will be an end. The discount based model will have to discontinued, otherwise, the stakeholders in future may face a dot comm. Bubble once again.

The Survival

Now, the question is how long will this system survive? Not too long. Actually this battle between the e commerce portals has become a war of funds. Since, the deficit is actually borne by the VC funds, therefore, larger the pool of funds, the longer they will survive.

(Author CA Paras Mehra is a Practicing Chartered Accountant and also co founder of www.Quickcompany.in, a leading website for registering companies and providing single solutions to start ups for all their legal needs in India)

More Under Finance

Posted Under

Category : Finance (3671)
Type : Articles (17008)
Tags : CA Paras Mehra (23)

0 responses to “A Loophole for Giants -FlipKart, Amazon & Snapdeal – A New Study”

  1. SHANKAR says:

    Dear friends

    I am a retailer having IT Hardware shop in coimbatore . We normally buy the materials from national distributors like redington,Ingram Micro,Inspan Infotech,Example Our Billing cost of one Genius Mouse is around Rs.170/- for 100 pieces, Amazon sells to customer at the price of Rs.93/- in the name of lightning deal Is this a Business model? We people love the technology but these people destroying the whole India’s business model.If you are selling the material at minimum profit or cost to cost also acceptable. If you are collection money from foreign investment institutions 10,000/- crores. Spending 3000 crores to marketing, 3000 crores to discounts,another 3000/- crores to salary and development. After finishing the money then Again you are going to borrow another round of funding. Meanwhile all retailers closed the shop . More than 20 crore peoples loosing their wealth loosing their assets within few years but . E commerce sites slowly eat one by one themselves then finally may be 10 players will lead in the race and only they can do business in future India what they are planning after erase all offline stores even small grocery shop then they will fix the price whatever they want nobody will going to be there to ask then they will earn. They will implement robotos and self controlled flying machines to deliver the materials also in future then the delivery employees also loose their jobs.vanishing 20 crore jobs.creating 10 multi millioners. does india want? Ok But again the whole money of Indians will fly to other countries pockets easily . they are claiming creating milliners wrong . Every body including me also listed in snapdeal,shopclues,amazon but now we quit due to we are supplying for rs.1000/- they are selling for 800/- so we turned off our stores in their sites , Daily new comers coming and going is happened. Now they started their own products ( from china) in the name of Digiflip(flipkart) ordinary good quality branded headphone is around Rs.350/- in market . They are start to sell their own brand equal to that brands price. In future People only going to buy their own products at their own quoted price this is a example .Please take this matter serious kindly take this issue to our Hounarable Prime Minister’s attention.

  2. Luckshya says:

    No business can survive without profits. In such business model, ultimately, the net worth will become negative and if VC and other investors lose confidence in the business model of these companies no sort of capital restructuring will be possible. Accordingly, the business will starve for funds and die.

    But can these people be that stupid to have never thought of it. I believe, certainly not! In my opinion, the present business model is being used to grow the market. Over a period of time the number of people and the amount of transactions over internet are going to increase. 10 years ago, rarely anyone would purchase anything on-line, now almost every person who has access to the technology and is catered product delivery in his/her locality does.

    In the long run, I expect a change in the approach of the e-commerce companies to more profit based business model as the market reaches a saturation point.

  3. SAGAR says:

    I am agree with Pratik.

  4. Pratik says:

    It’s actually funny how u believe that in today’s world of Internet, e-commerce won’t survive.
    People like you are the ones who don’t see the future coming.
    Loopholes or not, they are the ones who will succeed. And using Loopholes has never been bad in the past, when u made money using N number of loopholes? Smart will always find Loopholes. Anyone, even the government can’t think of stopping growth. It’s in these Loopholes that majority of the IT cos. make money! Or the infrastructure companies world-wide. Plz don’t get me started on Loopholes and growing companies.
    They are the ones where every CA thinks they should have had invested when they had time… It is their risk averse and small money thinking which stops them to invest and loose!
    So please, let the e-commerce brigade grow and you have fun!

  5. Dinesh says:

    Although FDI in multi brand is not permitted, the e-commerce companies act as ‘facilitator’ between buyers and the sellers.
    Thus, they take the advantage of loop holes and accept huge funds from the foreign private equities.
    I hope the government soon establishes a regulator for the e-commerce companies and iron out the issues.

  6. Anil says:

    I fully agree with this article.

Leave a Reply

Your email address will not be published. Required fields are marked *