Bengaluru: Online retail sales in India have been sluggish so far this year and start-ups across the board are struggling to make money from ads, content and sales of products and services, raising concerns whether Internet companies can attract enough new paying users to support the rosy projections of investors who have pumped billions of dollars into them.
According to a report on Thursday by Kleiner Perkins Caufield Byers, a Silicon Valley venture capital firm, the number of Internet users in India grew by 40% in 2015 to 277 million.
While the number of Internet users is growing rapidly, that of those transacting (or online shoppers) isn’t increasing at the same rate, start-up executives and investors said. The large Internet base in India looks attractive but making money from users is another matter altogether, they said.
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. Gross e-commerce sales including discounts were at an annualized $15 billion in December, according to research and consultancy firm RedSeer Consulting.
Mint reported on 14 April that Flipkart’s sales haven’t grown month-on-month since November, while Snapdeal’s monthly revenue has declined since then. (Flipkart declines to disclose its numbers, but says it’s seen “healthy" sales growth. Snapdeal also denies its growth has dropped but doesn’t share its sales numbers). The two companies have been losing market share to Amazon India over the past 15 months.
E-commerce firms struggling to raise fresh funds cut discounts and advertising spending this year, hitting demand. New foreign direct investment rules introduced in late March that prohibit online marketplaces from influencing product prices have led online retailers to put sales events on hold, though that situation is likely to change once they figure out new ways of discounting. E-commerce was expected to get a boost from the rollout of 4G services by Reliance Jio Infocomm Ltd, but that hasn’t materialized too.
Currently, e-commerce is in a perfect storm.
“It seems like investors and analysts have overestimated the growth of e-commerce," said Rutvik Doshi, director, Inventus (India) Advisors, a venture capital firm. “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% or so. If that doesn’t happen, we may have to temper our expectations about how fast e-commerce will grow."
The growth of e-commerce will also determine the expansion of other Internet businesses such as advertising-led start-ups, he said.
“First, you have e-commerce and then advertising and then other businesses. Everyone has figured out by now that getting Indian Internet users to pay is very tough. Overall, I still think the Internet economy will grow fast, just not the speed at which people were expecting earlier," Doshi said.
Flipkart and Snapdeal didn’t respond to emails seeking comment.
However, Flipkart chief executive officer Binny Bansal said in an interview on 23 May that while demand has been weak so far this year, he expects growth to pick up significantly in the next six months.
“If you look at the last 24 months, the market has grown tremendously. The last 3-4 months, it’s a different picture, yes. But if I look back in the last eight years, the market has grown that way. There are periods of very high growth and then there are periods of little more stability. Innovation drives a lot of growth. Last 24 months, a lot of the growth came because Flipkart changed the way mobile phones are sold in the country. Innovations like those drive growth. The same will happen in the next six months and it will start driving growth again," Bansal said.
An Amazon spokesperson said the company has seen “tremendous growth in three years of our operations in India".
“In 2015, we grew by more than 250% YoY (year-on-year) and have grown over 150% YoY in Q1 2016 despite a larger base. Today, we are the most-visited e-commerce site and the most-downloaded shopping app in the country," the spokesperson said in an email.
To be sure, the Internet business in India is likely to grow rapidly over the next five years by all accounts. What’s at question is whether this growth will match the projections of investors and whether it will be enough to sustain the rich valuations of Internet start-ups.
Last April, UBS AG, a financial services firm, released a report saying online retail would grow to $48-60 billion by 2020 from $4.47 billion in 2014-15. One of the assumptions of the report, which is considered to be conservative by e-commerce bulls, was that Reliance Industries Ltd would launch its 4G services by June 2015. UBS didn’t respond to an email seeking comment on whether the firm was revising its estimates.
Already, the signs are that investors have realised they over-reached. After pumping in more than $9 billion into Indian start-ups since the beginning of 2014, investors started pulling back late last year.
Because of a slowdown in funding, start-ups across the board have started trying harder to make money from users, either through ads or by charging fees for their services. This task is proving to be tough, entrepreneurs said.
For instance, classifieds site Quikr India, one of India’s unicorns, generated sales of just ₹ 24.78 crore for the year ended 31 March 2015, according to documents with the Registrar of Companies. Quikr had already raised close to $200 million by then.
“It’s not like there’s no potential for monetization in India but had we been in the West, the same 35 million users that we have would easily earn 3 or 4 times the revenue that we are earning in India," said B.G. Mahesh, founder and managing director at Greynium Information Technologies Pvt. Ltd, which owns the news portal OneIndia.com. “Digital ad spending in India still needs to pick up for more monetization to happen."
Not just Internet access, but consistent Internet access.
“The difference is between users and daily users; to get real growth we need 10 times the current daily active users, because we monetize time spent on the platform," said Farooq Adam, co-founder, Fynd, a fashion e-commerce app. “We’re hoping smartphone users become daily Internet users once Reliance Jio launches 4G cheap data plans."
In education, too, where hundreds of thousands of users consume services from start-ups, the conversion rates—the number of users that actually pay—are not encouraging.
“We have had people request us to make our videos available offline because they only get to use the Net intermittently," said Abhishek Patil, CEO, Oliveboard, a test-prep start-up. “These pain points frustrate the user and make them give up on services. A larger number of people on the Net translates to a potentially larger user base for us, but for monetization we also need to get rid of the hesitancy a lot of people have to pay online."