Flipkart vs Amazon: Consumers will be the ultimate winners as e-commerce war heats up

A decade ago people might have rolled their eyes at the thought of buying a book or mobile phone online. But little did they know that in ten short years India would become home to one of the most prolific e-commerce markets in the world.

In the last few years, Indian e-commerce companies have been the darling of investors, with certain players like Flipkart and Snapdeal raising multiple rounds of funds from incumbent backers. According to data from Venture Intelligence, a research service focused on private equity, venture capital & M&A in India, 2012 saw $273 million pumped into e-commerce ventures, 2013 saw $540 million and till April of 2014 $240 million had been put up by investors.

The last two days will go down as red-letter days in the e-commerce space simply because of the staggering numbers involved. With Flipkart raising $1 billion in a single round of funding and Amazon announcing a $2 billion investment in the country--all in half-a-day's time--India is now the ring where homegrown Davids are fighting it out with the global Goliaths.

Pragya Singh, associate vice-president, retail & consumer products at Technopak, said, "Though e-tailing in India is currently small, it is backed by strong fundamentals and projected to follow a high growth trajectory. The investments are a reaffirmation of global investor confidence in India's e-tailing market potential and bodes well for the overall space."

An Economic Times article yesterday argued that Flipkart's fund raising activities prove that Indian companies are moving into the big leagues when it comes to raising capital. Writer Rishikesha Krishnan,director and professor of strategic management, IIM-Indore, says, "...We can no longer give lack of capital as an excuse for businesses failing to take off. If you have the right idea, team and business model, capital should follow. That's great news for India's start-ups."

Estimates have pegged Flipkart's valuation at $7 billion after the recent funding rounds, which leaves India's brick and mortar retailers in the dust. Flipkart's $7 billion (Rs 42,000 crore) valuation is more than two times bigger than the combined market cap of nine listed brick and mortar retail companies at $2 billion (Rs 12,274 crore) . Trent, with a market valuation of $676 million (Rs 4,064 crore), is the largest listed retail company. It is followed by Shoppers Stop at $541 million (Rs 3,255 crore), Future Retail at $493 million (Rs 2,962 crore) and Future Lifestyle at $275 million (Rs 1,655 crore).

But the e-commerce business model isn't very kind when it comes to balance sheets, with companies like Flipkart and Amazon yet to make a profit. Constant developments and innovations when it comes to services, logistics and back-end infrastructure are a major source of cash burn for these companies.

Several articles like this one in the Mint and this in The Hindu BusinessLine argue that despite the $1 billion strong war chest that Flipkart has amassed, competition from Amazon, Snapdeal and others will prove to be a thorn in the side of Flipkart's dreams of ruling the e-commerce roost.

Amazon is enemy number 1 when it comes to Flipkart. Technopak's Singh said Amazon has invested in steadily adding on categories, increasing its vendorbase and building backend capabilities like logistics and warehousing, thereby establishing itself as a serious contender in the Indian market and intensifying.

The company's India head Amit Agarwal told The Times of India, "As far as India is concerned, we are just getting started here, it is just Day One, customers here should expect more investments in the coming years and decades as we will not slow down. We will be aggressive and not conservative."

He is unfazed about the competition as he thinks "India is very large, many models will get invented and there will be multiple winners".

However, as Hemchandra Javeri, Co-Founder, Forum Synergies India PE Fund Managers and Leader, TiE Retail Special Interest Group (SIG), told Firstbiz (http://firstbiz.firstpost.com/corporate/7-bn-question-flipkart-burns-money-every-month-how-will-it-take-on-amazon-92308.html), the companies will fight it out to gain market shares and the ultimate winners are going to be the consumers.

"The business models of the two companies are quite similar. They will fight to obtain and retain consumers. The good news is that the Indian consumer will benefit from heightened competition," Javeri said, adding that they need to deploy capital to build supply chain and reduce supply costs, build consumer loyalty and reduce cost of customer acquisition and discounts.

"Lastly, they must enhance consumer experience from log in to payment," he said.

This Economic Times article explains how Amazon and Flipkart plan to woo more customers by improving products, services and their team strengths. According to the report, Amazon is targetting Rs 6,000 crore in sales this year. It will introduce new category, expand range of books and electronics on sale and also increase the number of warehouses to 10, with new ones in Maharashtra, Haryana and Ghaziabad.

Meanwhile, Flipkart's target is to increase sales four-fold over the next year. It hopes to increase seller base from the current 4,000 to 50,000 next year and will put in place more exclusive partnerships like the one it had with Motorola and Xioami. The company will also be open to acquisitions of companies dealing with fashion, technology, wearable tech and robotics.

Clearly, the battle has only begun. Despite the naysayers raising suspicions about the valuation and profitability of e-commerce companies, they are here to stay.

Published Date: Aug 01, 2014 08:00 am | Updated Date: Aug 01, 2014 08:00 am

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