Trouble for e-tailers, as growth in shoppers dries up

The startup saga in India seems to have hit rock bottom. After e-commerce company Flipkart was devalued second time in a row by its minority shareholder Morgan Stanley, the sentiment around the growth of Indian startups has turned negative. Adding to the disturbing sentiments is another report which claims that online retail sales in India have been sluggish and start-ups across the board are struggling to make money from ads, content and sales of products and services.

The revelation has raised concerns about the capability of e-commerce companies to attract new users with high disposable income, in turn putting in question the billions of investment splurged on these ventures.

Although the number of Internet users in India grew by 40 percent in 2015, the growth in online shoppers has been sluggish. For the first time in years, online retail sales in April were at a lower level than December of the preceding year, according to executives at top e-commerce firms. For instance, Flipkart’s sales in November was flat month-on-month, Snapdeal’s monthly revenue has seen a decline in the same period. However, the slump in online sales for these two e-commerce companies was note timely because of reluctance towards online shopping. The biggest concern for these companies has been the increasing competition from American online retail giant Amazon. The two companies have been losing market share to Amazon India over the past 15 months.

Amazon has seen growth of over 250 percent year-on-year, and YoY since they entered India, and have grown over 150 year-on-year in the first quarter of 2016 despite a larger base.

The e-commerce companies this year also cut down on discounts and advertising spends, to tide over lack of funds from investors and low consumer demand. The new foreign direct investment rules introduced in late March that prohibits online marketers from influencing product prices through discounts, has also led online retailers to put sales events on hold.

“There’s no doubt that e-commerce is going to grow very fast, but at this point, it looks unlikely to grow at the pace investors expected last year. Many of the projections around growth in transacting users seem to be based on the Indian economy growing at 10 percent or so. If that doesn’t happen, we may have to temper our expectations about how fast e-commerce will grow," Rutvik Doshi, director, Inventus (India) Advisors, a venture capital firm, said.