With so many e-commerce players in trouble, it’s clear that playing on prices alone is a poor strategy in the online marketplace
Kumar Anshuman | 02 Mar, 2017
ON THE NIGHT of February 19th, Yogendra Vasupal, CEO of Stayzilla, a homestay aggregator, was not at ease with himself. He had just finished drafting a blog and couldn’t decide if he should post it. It couldn’t have been easy for the entrepreneur to announce that the company he had built over a decade was going to shut shop. “But I thought, ‘If I do it now, others will learn from it and understand what not to do in a business’,” he says. He posted the blog and went to sleep expecting an online backlash. To his surprise, he woke up to messages praising him for his courage in accepting failure. ‘I would like to announce today that we would be bringing to a halt the operations of Stayzilla in its current form, and looking to reboot it with a different business model. This has been one of the toughest decisions that I have taken so far but it is the right thing to do,’ Vasupal had written. The company, one of the early ventures in the online marketplace that was founded as Inasra in 2005, decided to close down after 12 years of operation. At the time of shutting down, it had over 50,000 stay options in 4,500 locations across India. But matching the steep discounts offered by rivals and upping its marketing spends had drained its resources. The company reported $14.2 million in losses for 2015-16. Delhi-based OYO Rooms reported $52.5 million in losses for the same period, but it has a vast chest of investor money, having raised over $180 million. Consolidation in the sector— with the MakeMyTrip-Ibibo merger—and competition from Airbnb have now put travel startups on edge. Newer startups like Treebo Hotels, a budget hotel brand with 125 properties, are treading with caution, raising small amounts in funding and ensuring high occupancy rates even as they expand.
There is reason to worry, and not just for travel companies. Two days after Vasupal made his big announcement, there was another such note on February 22nd, an email by Kunal Bahl, founder of the ecommerce platform Snapdeal. The company had just laid off around 600 people as a necessary cost-cutting measure. Bahl candidly admitted that the company was going through hard times and some tough choices had to be made.
The decline of two of the most successful ecommerce companies in quick succession has raised doubts over the health of what was seen as India’s sunrise sector for the past few years. The blue-eyed boys of the Indian startup diaspora were busy giving speeches and sharing their success stories with the world. But the trouble that had been brewing underneath was left ignored. “They were like spoilt brats, with investors giving them a lot of money to spend,” says TV Mohandas Pai, former Infosys CFO-turned-angel investor. “So they spent everything and now you see what is happening as a result.” Stayzilla and Snapdeal are not the only passengers on the sinking ecommerce ship. Between August and November last year, the valuation of Flipkart, the country’s favourite unicorn, fell by 36 per cent. In the first week of February, Ola, India’s homegrown Uber, fell by 40 per cent in valuation as compared to the previous quarter. Apart from the large players, as per Nasscom-Zinnov’s 2016 report for the sector, around 1,000 online startups closed down in 2016 for lack of funding and a sustainable business model. From Askme and Peppertap to more obscure names like iTiffin and Doormint, many a dream was cut short.
With Snapdeal in losses, the founders have agreed to forgo their salaries for the time being. Both drew Rs 1 crore each in 2014, which went above Rs 50 crore in 2015
The euphoria over ecommerce has been replaced by realism and investors are asking hard questions about profitability and sustainability. In November last year, Japan’s SoftBank, one of the major investors in Snapdeal and Ola, wrote down around $555 million, most of it invested in these two companies. Investors have since turned wary, forcing companies to rethink their strategies.
The ecommerce sector has attracted more funding than any other in India over the past few years. According to an estimate made by Mint newspaper, $8 billion of money had been pumped into the sector by the end of fiscal 2015-16. Experts say that with that kind of money flowing in, entrepreneurs were bound to make mistakes. Kunal Bahl of Snapdeal admitted as much in his email: ‘A large amount of capital with ambition can be a potent mix that drives a company to defocus from its core. We feel that happened to us. We started doing too many things.’ Snapdeal has raised around $1.5 billion from 19 different investors so far, and it has always aspired to be the No 1 in the marketplace, competing against Flipkart and Amazon.
Flipkart has raised a whopping $3.2 billion so far. Companies in this business attract investment based on their Gross Merchandise Value (GMV), which is the total value of products being sold on a platform. A high GMV means a higher valuation and hence more funding. “Rather than focusing on convenience and better customer service, as Amazon does, Indian ecommerce companies started focusing on product pricing. Hence you witnessed an advertisement war on who is offering the highest discount,” says Pai. Advertisements for festive season sales have got bigger and louder, with online retailers spending Rs 7,252 crore on just TV and radio ads in 2016, an increase of 26 per cent over the previous year.
The extra money also made companies expand in various other directions, often at the cost of their core business. ‘We started diversifying and starting new projects while we still hadn’t perfected the first or made it profitable. We started building our team and capabilities for a much larger size of business than what was required with the present scale,’ admitted Bahl. Just a year into business, Snapdeal acquired Shopo, a customer-to-customer marketplace, with a commitment of investing $100 million in it. It finally had to shut the company down in 2015. The same year, it acquired Freecharge, a digital wallet company, for $400 million, but failed to exploit the platform even as payment banks became the rage. Freecharge is now up for sale at $300 million.
“These companies have to realise that the online market is not a technology. It is like any other business and business is done for profit, not for valuation,” says Faisal Kawoosa, principal analyst, Cyber Media Research. Vasupal couldn’t agree more. “I have realised that what is not profitable in the beginning will not sustain and become profitable in the future,” he says.
Some of the companies I invested in vanished, but some have survived. The process will continue and you will see more layoffs in the coming days. They all chew more than they can eat
The big casualties of the ecommerce wars are these firms’ employees. This is not the first time Snapdeal has trimmed its workforce. Last February, the company laid off 200 employees. Its rival Flipkart sacked around 1,000 people in a year. Smaller players like Yepme, a fashion retailer, have let go of 20-30 employees this year. “We have outsourced warehouse and quality control, which resulted in 30 people associated with the department moving out,” says Sandeep Sharma, co-founder of Yepme. Vasupal of Stayzilla agrees that layoffs are the toughest part of restructuring. He had apprised employees of the situation—that if he didn’t get further funding by the end of January, a shutdown was imminent. Resignations started pouring in right after the announcement, but he told them to hold on for as long as they could. There is no holding on now.
With consolidation in the online marketplace, layoffs are inevitable, say market watchers. Proptiger, a real estate company backed by Rupert Murdoch’s News Corp which had acquired the ailing Makaan.com for an undisclosed amount, has just merged with Housing.com, raising its valuation to about $250 million. “The objective of this consolidation is to grow market share gradually and manage operational costs, while focusing on enhanced monetisation and profitability,” says Dhruv Agarwala, group CEO, PropTiger, Housing and Makaan. “The idea is to ensure optimal utilisation of resources and to leverage synergies across the merged entity.” The company has no comment to offer on retrenchment plans, but market watchers expect it to cut a fourth of its current employee strength of 2,200.
The quaking business models of online companies have also begun to hurt suppliers. Rajiv Singh, CEO of Vocus Communications, a Delhi-based company that sells CCTV cameras through online retailers, is facing the heat these days. “First you sell your product at the smallest margin, bearing the cost of transport and installation. Then these companies make you wait for months for your payments,” he says. “I am not alone. There are a thousand small entrepreneurs like me who have no money to grow their business.” Singh now plans to take his distribution business offline. He was making good money earlier, selling offline, but he had to offer free maintenance and customer support for a year. With deals struck online, he only has to install the product and ensure it’s running.
For drivers, the promise of making a dignified living by working for a new-age startup was a big thrill to begin with. Now, in the aftermath of diminished incentives, reality has hit home
IN THESE TIMES of upheaval, the companies that are leaving the longest trail of disgruntled workers and consumers are Ola and Uber. For drivers, the promise of making a dignified living by working for a new-age startup was a big thrill to begin with. Now, in the aftermath of diminished incentives, reality has hit home. Akhilesh Prasad, 45, lost his job at a courier company in Noida last July. While he had a few job offers, he decided to start something on his own. He bought two Swift Dzire sedans and started working with both Ola and Uber in the Delhi-NCR region. “Initially I would easily make Rs 40,000-Rs 45,000 a month from one cab and I couldn’t have been happier,” he says. “Since November, my income has drastically come down to less than Rs 15,000 from one cab. [The companies] have stopped giving incentives and it is no longer profitable to drive for them.” Prasad is among thousands of drivers who recently went on strike demanding a better deal from Ola and Uber. He says he will soon have to sell his cabs and look for a job. While drivers in Delhi have called off the strike after a meeting with the state government, Bengaluru services remain largely suspended. “The difference between the US and the Indian market is that in the US, most drivers are part-timers and they have another job to make additional money from,” says Pai.
India, with a taxi services market placed at an annual $12 billion, is the fastest growing business region for Uber, which was forced to withdraw from China after losing out to domestic rival Didi Chuxing. The US-based firm operates in 28 Indian cities and has 200,000 drivers. Ola, its biggest rival in India, is present in 102 cities and boasts of a fleet of 450,000 cabs and autos. Between them, thanks to deep discounts and fares that go up and down depending on real-time demand, they have created a strange passenger culture in which a customer often pays only half of what the ride actually costs. Now with thousands of cabs off the road, commuters who were hooked to cheap travel are a worried lot. Atul Roshan, a telecom engineer working in a multinational company in Gurgaon, takes a cab from his house in Sector 10, Noida, every day. “It is convenient and cheap and I share the fare with a friend,” he says. But the strike has made him rethink his decision to not buy a car. “Cabs are getting increasingly unreliable. There are times when you wait a long time and the driver asks for more money. Buying a car makes more sense even if it is expensive,” he says.
There are similarities between Snapdeal and the Ola-Uber crisis. “With so many players in each category, there is no unique proposition,” says Anil Talreja, partner, Deloitte India. “The only way to win over consumers is by slashing prices and there the problem begins.” Pai says the dynamics of the online market are very different and the current players have got their objectives wrong. “For a consumer—whether he is a buyer of products online or a customer who avails the service of a cab aggregator—the bottomline is the variety of options and convenience,” he says. “There may be some who are attracted by low prices, but a majority would be happy to pay the [full] market price for the sheer ease of service.”
Online is here to stay, but it must come back with a better business proposition. I may be down now, but I’ll reboot soon and take it slow
Very few online companies have managed to report profits over the past few years. Bigtree Entertainment, the company that runs Bookmyshow.com, is one of them. It made a profit of Rs 3.1 crore in 2015-16. The company didn’t offer any discounts on tickets and charged a service fee that made it profitable. But with new entrants in this field like Paytm, which is aggressively wooing customers, Bookmyshow has been forced to offer discounts as well. “We are working on a strategy that will be implemented in the next financial year,” says a senior manager on condition of anonymity.
Kunal Bahl and his co-founder Rohit Bansal have agreed to forgo their salaries for the time being. They drew Rs 1 crore each in the year 2014, which went above Rs 50 crore in 2015. The figures for 2016 are not yet out. But this belt tightening measure may not be enough for Snapdeal. “Right from valuation to operating costs to salaries, everything needs to be corrected if they plan a comeback,” says Kawoosa of CyberMedia Research.
So is the online startup story nearing its end? Not quite. “Twenty years from now, would our kids be buying grocery online? Hell, yeah,” Vasupal says. “Online is here to stay, but it must come back with a better business proposition. I may be down now, but I will reboot in three months and take it slow.” Pai sees the current woes as a course correction. “Some of the companies I invested in vanished, but some have survived. The process will continue and you will see more layoffs in the coming days. They all chew more than they can eat.”
What Kunal Bahl wrote in his email speaks for the entire industry. ‘Gross Merchandise Value is vanity, profit is sanity.’