With the Tata group, Aditya Birla Group, Reliance Industries Ltd and large retail companies such as Arvind Ltd entering online fashion retail, the segment, which so far has been dominated by companies such as Myntra.com and Jabong.com, is set to change.
The segment may go through a journey similar to what telecom and airline sectors witnessed, where some initial entrants cease to exist and some new entrants turn into dominant and profitable players, say experts.
“E-tail in India is going through an evolution which is very similar to what we have seen in the telecom and the airlines industries. There too, at the start there was heavy discounting, followed by correction and stabilization besides churn and consolidation,” said Praveen Sinha, a co-founder and former managing director at Jabong.com who exited the fashion portal in September last year and is in now an independent consultant.
The flurry of new entrants, each coming in with its own strategy, is forcing the market to adjust quickly. For instance, in the past eight months since the launch of abof.com, the fashion portal from textiles-to-telecom conglomerate Aditya Birla Group, a lot has already changed.
“A set of new competitors is emerging and start-ups are falling by the wayside,” said Prashant Gupta, president and chief executive officer, abof.com.
Gupta explained that while the company was doing its research in 2014 ahead of the launch of abof.com, there were over two dozen e-tailers in the fashion and lifestyle space.
This has now reduced by two-thirds to about 8-10 companies, he said.
In the past eight months, investors have started to question the high valuations of e-commerce companies as they missed their targets.
For instance, when Myntra went app-only last May, the online fashion retailer set a target of generating an annualized gross merchandise value (GMV) of $1 billion by March 2016. A few months later, it pushed that target back by one year.
GMV refers to the value of goods sold on a site, not actual revenue, and excludes discounts.
Meanwhile four investors including Morgan Stanley Institutional Trust Fund have marked down their investments in India’s largest e-tailing company Flipkart, which owns Myntra, since February.
Sanjiv Bhasin, executive vice president-markets and corporate affairs at India Infoline Ltd (IIFL), predicts that the next six months will see a shakeout in the e-commerce space. Only the fittest and those with cash will survive, he says.
Moreover chasing GMV now seems like a risky strategy after the government’s 29 March notification, which allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called marketplace model with riders that have the potential to hurt current business models.
One such rider includes curbing the pricing power of e-tailers, putting an end to the era of deep discounts that led to exponential online sales growth.
To be sure, discounting has not stopped. Myntra continues to offer them, and others in the segment, too, hold ‘sales’ from time to time.
The brick-and-mortar retailers entering the online space say they are not chasing GMV but are still targeting the top spot in the market.
“If we want to be successful and relevant we have to be among the top three players. This market is not going to be a winner-takes-it-all. We believe there is space for three players,” said Gupta of abof.com while sharing that the company has entered the sector for the long term and is looking at creating a differentiated and curated customer experience.
Arvind Internet Ltd, the e-commerce division of textiles manufacturer Arvind Group which runs nnnow.com, has a similar perspective on the business.
“We are not in the GMV game play. We are going to be a billion-dollar franchise at Arvind. We are here to create value as the future is digital,” said Kulin Lalbhai, executive director, Arvind Ltd.
He pointed out that while nnnow.com is a marketplace, it is also an omnichannel platform for the company’s 1,200 stores that will provide customers an integrated online and offline shopping experience.
Unlike in the past, the entrants to the e-tail market have an established brand identity and access to reams of data, giving them ample insight into consumer behaviour online and offline.
“The large conglomerates like Aditya Birla, Reliance, Tatas know the inside out of the retail business and also have deep pockets, a necessity to stay in this as a sustainable business for the long term. If not them, then who else is better placed to capitalize on the online business?” asked Sreedhar Prasad, partner-strategy and operations, KPMG India, a management consultancy and auditing firm.
The opportunity appears unmissable.
There are over 400 million Internet users in India, of which over 125 million are smartphone users.
“Our research suggests organized retail would be 28% of total retail by 2020 and e-commerce would be about 46% of that at $125 billion,” said Anurag Mathur, partner-consumer and retail at PriceWaterhouseCoopers, while explaining the potential of e-commerce.