• E-commerce companies around the world are running in losses;
  • By any measure, E-commerce industry commands the most extreme valuations;
  • Having received million in private equity funding over the years, big E-commerce companies in India are planning their IPOs;
  • Most big companies in India including Amazon, Flipkart, e-Bay and Snapdeal are focusing on developing high end logistics platforms.

The increasing popularity of online shopping portals has resulted in newer business verticals and a completely new way of doing things. So far online retail companies have survived purely on Private Equity (PE) funding and must now find an exit for these PE investors.

What Led to High Valuations of E-commerce in India?

To a large extent growth in online retail could be attributed to deep discounting of products on the back of PE money. This has helped big online players in two ways –

  • Driving out the traditional brick and mortal model of shops thereby creating a monopoly;
  • By getting people in the habit of shopping online, before discontinuing discounts.

Naturally such discounting of products cannot go on in perpetuity. Venture capitalist and private equity investors have borne losses in the hope that these firms will turn profitable as they expand their operations. Alternatively, these funds could find an exit by selling their equity at high valuations via an IPO.

Are These High Valuations Justified?

Absolutely not.

Once these online retailers attain scale, there will be pressure from the investors to cut down on their discounts and come up with a more sustainable and profitable business model. In such a scenario will India go back to the traditional brick and mortal model? Or could logistics players jump in and start working with the traditional shop owners to procure and supply their products to the end consumer.

Also Read: Can E-commerce Boost Stock Prices of Logistic Companies

How Do E-commerce Companies like Flipkart,

Amazon and Snapdeal Make Money?

E-commerce companies make money in 2 main ways:

  1. Fixed Price – a fixed monthly subscription paid by the registered sellers to host their products on the platform (i.e. website) of the e-commerce company. In some cases the company also charges a fixed closing fee like 10 for every sale.
  2. Commission – Depending on product category, the company charges the registered seller a certain percentage commission on the value of the product sold. This commission could range between 5% – 20%.
  3. ** Why are E-commerce companies getting into Logistics?

The biggest advantage of getting into logistics for e-commerce players is not the back end integration as it may appear. In fact, logistics is a big source of additional revenue for these companies. They earn shipping / delivery charges directly from the customers as well as from the registered seller (for picking up and delivering the goods from the registered seller to the customer).

Deep Discounting: How Does Flipkart, Amazon and Snapdeal Manage to Sell Below The Market Price?

The justification for deep discounting of products by online retailers is often that these discounts are being offered directly by the registered seller. That the retailer just provides their website to the registered seller to offer their products.

What Really Happens:

Big online retailers like Flipkart, Amazon, SnapDeal and Junglee have cutting edge analytics capabilities and dedicated resources to compare prices of products on different websites and across stores. Based on these prices they suggest the price at which the registered seller should offer their product. This suggested price is where discounting happens.

The seller is not under any obligation to offer his products at these prices but since they get compensated for the discount element by the online retailer, there is hardly a reason for them to not offer their products at the suggested price.

How do Registered Sellers Get Compensated?

At the end of each month or quarter, the registered seller will send a debit note to the online retailer titled something like – “discounted funding bill”. This note mentions the amount of cumulative discounts at which the registered seller supplied the merchandise during the period. The online retailer can settle this balance in any way the parties decide.

In most cases this is done using the regular NEFT, RTGS or a simple cheque facility.