e-Com Companies Have No Intention to Make Profits: K. Vaitheeswaran, Father of Indian e-Com

Back before e-commerce became as common as mobile phones, K. Vaitheeswaran looked around him and decided that e-commerce was exactly what urban India needed. He founded Indiaplaza.com, among India’s first, if not the first, e-commerce sites.

For that he’s been christened the father of Indian e-commerce.

Vaitheeswaran says he saw the need for e-commerce because of a perfect storm of events. This included the start of the rapid growth of the service industry, the great migration to urban areas, and the poor levels of urban infrastructure.

“The sum of all of this was that the convenience of an e-commerce business would be welcome,” he says.

In the coming days, we’re going to need some of that foresight. Many people, including Vaitheeswaran, believe that it’s only a matter of time before the start-up bubble bursts.

Given the foresight you’ve always had, do you see the current start-up bubble bursting? And when?

Is a bubble waiting to happen? Yes, definitely. In terms of timing, I thought it would have happened already. I’m surprised it hasn’t.

It’s hard to predict when it will happen. With these type of bubbles it’s always an external trigger that leads to a burst.

So what external trigger will cause a burst and when do you think these events will take place?

There are two or three possible triggers. First, India is probably the only country where both American and Chinese money are chasing investment opportunities. Anything happening in those countries that could impact the availability of funds could cause an event here.

Right now, for instance, interest rates in the US are low. That’s likely to change, whether it takes three or nine months. That means that money that was heading here could move elsewhere. Or take what’s happening in Greece. That could create ripple effects here.

The second potential trigger is investors getting impatient with the companies they have invested in. I’m surprised this hasn’t happened, or maybe it has and we aren’t aware of it.

It’s already been a couple of years since investors made these investments. And a lot of these companies are not making profits.

The issue isn’t that they are making profits. To me, e-commerce companies may or may not make profits. But they need to have an intention to make profits. My view is that they are not even planning on making a profit.

E-commerce is a hard business. You need time and scale to make money. But at some stage there must be an intention to make money. I think there is no plan to make money because of the infinite supply of investment capital. I’m not surprised they are not making money because they are not even planning on making money.

They have no intention to make money. That’s a bold statement.

If you intend to make money, then you would take steps. These include controlling costs, for example. Why I say there is no intention to make money is because they probably realize that given their business models, it’s almost impossible to make money.

This is what I mean: By its nature retail margins in India are very low. Offline retail struggles to make money. Online players are discounting and selling lower than off-line players to acquire customers. The premise of that strategy is fine because, supposedly, the costs of online players is lower than offline retailers –because they don’t pay rent and don’t have so many employees. Based on that logic you can give discounts and still build profitable scale.

But that logic doesn’t work if you hire thousands of people. The moment you hire thousands of people, the logic that my costs are low is thrown out of the window. The moment you start supporting sales growth with people growth you are making a mistake.

I’m sure they want to make money, I don’t doubt that. But I think they have reached a stage in their models where it is almost impossible to make money. All they require is someone with deep pockets who will say I will fund deep discounting.

A lot of these companies have hoped that they will build a great number of customers who will be loyal to them because they offer great customer experience. But clearly in the last 12-18 months, you can see a clear deterioration in quality–exactly at a time when Amazon has upped the bar on great customer experience.

Other players now realize they need to invest a lot more to match Amazon’s experience and still keep discounting to ensure sales go up.

The problem is that they have taken so much money that they have to show investors scale. They can’t show profits; the only scale they can show is growth. And sales growth is based on discounting. And to support that they have a high cost model. It’s a big problem they have got themselves into.

The entire conundrum has put them between a rock and a hard place.

If you were among these investors, how many years would it take before you started asking questions about making money?

Given that growing for scale is good, I’d probably be patient for the first four years, provided there is sales growth. By the fifth year I’d start getting worried. By the seventh year I’d have sleepless nights.

Who’s to blame for the bubble: Investors or entrepreneurs?

There are two parties responsible for the bubble but I would certainly put the blame more at the investors’ doors. The investors should have been more discriminate.  Encouraging or allowing their companies to spend massive amounts on mass media is incredible.

It’s incredible that they have spent hundreds or thousands of crores on mass media in the last two or three years and yet less and 20-25 million shop online. That’s incredible. If you look at the top three e-commerce companies, each claim they have 20 million customers. But the total number of online shoppers is about 30 million, which means the same people shop everywhere.

What worries you about the imminent bubble?

I’d be worried for the new start-ups. When a bubble does burst, all the new starts will be impacted.

The other thing we need to do so separate the non-bubble sectors from the e-commerce sector. The tendency is to paint them all with the same brush. I’m worried that a bubble will significantly impact the entire start up community and environment in India. That would be an unfortunate fall out.

I wouldn’t worry too much about investors losing their money because that’s part of their game and they created the bubble in the first place. 

Sunil Shah is deputy editor editor at CIO India. You can contact him at sunil_shah@idgindia.com or follow @sunilshares