e-commerce: Why idli profitability will not work in India

“If you can just avoid dying, you get rich,” Paul Graham, top start-up investor once said.

According to Graham, ramen profitability or idli profitability where a startup makes just enough to pay the founders’ living expenses and its staff and doesn’t need to rely on investors money is a trick for not dying en route. But the theory may not hold true in India where the internet space is considered as a ’land grabbing opportunity’, where one is almost punished for not being greedy.

According to a report in the Hindu Business Line , in India’s e-commerce space there are no established players as most of them are creating the market from scratch, which is why “If they try to grow slowly, another player will sneak ahead, and once that happens, nobody will be able to gain another toehold.”

Little wonder than many acquisitions in this space have been made at gunpoint by investors in the last year. India’s e-commerce industry is undoubtedly heading for a bigger consolidation phase this year due to cut-throat competition and non performance of several portals.

Even though India’s e-commerce industry is projected to grow at 40 percent, new players are foraying into the business each day, with mergers and closures becoming the new norm as these companies find it tough to get fresh funding.

[caption id=“attachment_798289” align=“alignleft” width=“380”] Even though India’s e-commerce industry is projected to grow at 40 percent, new players are foraying into the business each day, with mergers and closures becoming the new norm.Reuters[/caption]

In the last one year alone, several mergers have taken place.

Recently, Zovi.com acquired Inkfruit. Flipkart acquired electronics retail firm Letsbuy.com for $25 million last year. Lifestyle retailer Fashionandyou.com acquired cosmetics retailer Urban Touch in August 2012 but shut it down in March this year. Rumours have been doing the rounds that it is in talks with Pepperfry.com for a merger as the two are in the same products space and a merger would have a better chance of success in a market led by Jabong and Myntra. Yebhi.com bought Gurgaon-based lifestyle and fashion retailer Stylishyou.in, and Myntra acquired online fashion brand SherSingh. Last month, baby product-seller Babyoye.com reportedly merged with Bangalore-based Hoopos.com, which also sells baby products.

According to Mahesh Murthy, managing director of the early-stage investor Seedfund, overfunding the sector is the reason for such a ‘merge or purge’ scenario.

In an interview with VCCircle, he says , “It’s our own fault. We have overfunded the sector… larger companies, which have a bit of cash at disposal, will buy smaller companies for virtually nothing. Companies will shut down or will have to merge for no money. The equity they (investors in the smaller firms) will get in return would also be valueless.”

India’s two big online retailers -Flipkart and Myntra- have guzzled millions but have still not been able to profit.

So clearly, just raising and spending a lot of money without understanding the complexities of e-commerce has resulted in a crash and burn-like situation in an industry that is still very nascent in India.