The pricking of India's ecommerce bubble

A slew of firings at India's most talked about ecommerce sites are tea leaves for an imminent ecommerce correction.

The last few years in India have seen an excess of funding for startups. As usual, it seems that anyone with a half-baked idea that accesses the pocketbooks of the growing tribe of Indian internet users has been lavished with funds, bringing back not-so-fond memories of the last time this happened 15 years ago.

According to Bloomberg, Indian startups gratefully gobbled up over $5 billion in investment from 490 investors. Almost $4 billion was plonked into a mere 26 startups by foreign firms. Food-tech startups have been blazing hot. Hyperlocal has been the breathlessly repeated buzzword. Grocery startups, until recently, have become the darling of investors. The mad race for customer retention means that freebies have been forced down the gullets of gleeful, willing consumers. Cashback schemes from online wallets have implored people to buy. Pricey ads from online real-estate properties have plastered billboards.

But now, that frenzy seems to have had a large tank of cold water unceremoniously dumped over its head. In the last month or so, there has been a series of brutal cutbacks that have suddenly tamed this exuberance with a reality check that, in hindsight, was long overdue.

After culling 600 staff some three months ago, real estate site Housing.com, the darling of the media, has shed another 200 people. Zomato, the celebrated Indian food site now in 22 countries and an adversary of US food site Yelp, is laying off 300 people, or 10 percent of its employees. When TinyOwl, a food delivery startup canned over 100 employees, one of the co-founders even got taken hostage by some of his employees in the company's Pune offices.

Zomato CEO Deepinder Goyal was candid enough to offer a simple assessment of what was going on at his company, an admission which offers a barometer to the online startup scene in India: "We are far behind the numbers that we promised our investors," he said.

The inability to deliver the kind of numbers that investors are hoping for has now become a self-fulfilling prophecy in India. So much money chasing so many startups, many of them mere imitators of other more well-known ones, means that stronger players are being throttled by easy money spent by lesser-equipped upstarts on advertising and customer retention, thereby driving burn rates higher.

It's not as if the bigger fish have it any easier. There was a time when gross merchandise value (GMV) was an acceptable metric used to evaluate the performance of then-startups and now-goliaths like Flipkart and Snapdeal. But these companies can hardly be called startups today. It means that the time has come, as Haresh Chawla, partner at India Value Fund explains in his column in Mint, for a reassessment of where these companies stand in realising their ambitions.

Chawla said that the eight-year-old Flipkart needs to churn a mammoth $300 million in after-tax profit to justify its $15 billion valuation. In three years, this figure will swell to $400 million to support what will probably be a $20 billion valuation. And where is it now? As Bloomberg reported several months ago, the total sales of the big three (Flipkart.com, Snapdeal.com and Amazon.co.in) amounted to $85 million. Their combined losses? $160 million.

The additional problem here is the highly fractured retail landscape in India where a Flipkart can only command 5 percent of the market share, whereas an Alibaba has 80 percent of it in China. Chawla wonders how much innovation Flipkart has really been responsible for, other than throwing vast amounts of investor money to outmuscle its peers. This is, of course, going to be more and more relevant in the future if it wants to hit the numbers it needs to, to justify its lofty valuation.

At some point, investors will want to reward themselves with an exit and the best way to do this is an IPO -- but the stark reality is that Indian companies, as Chawla rightly observes, may not be able to withstand the onerous requirements that a US IPO brings with it, shackling it from pivoting if need be, or employing ad hoc tactics to combat competition. Meanwhile, it will have to fend off constant salvoes from the likes of a deep-pocketed and existentially secure Amazon.

Of course the enormous potential of the Indian market is not going away. The next five to 10 years will see the wave of online Indian consumers growing from 50 million to a gigantic 300 million and beyond, creating the next biggest Eldorado in ecommerce. But for India to truly realise this, it has to drastically improve its infrastructure such as roads, and bring down its debilitating real estate costs for things like warehousing.

Currently, according to the United Nations, India is ranked a measly 83rd out of 130 countries in terms of its ecommerce environment, which includes the number of internet users, availability of secure servers, and credit-card usage -- not exactly what propels you towards an ecommerce revolution.

Undoubtedly, India will soon see the wheat separate from the chaff in a general corralling of irrational exuberance that happens to any market experiencing a boom. The danger here is of the wheat itself remaining stunted due to lack of innovation and environmental constraints, hampering the promise of a much talked-about digital revolution.