Indian Ecommerce Industry At Present Is Only A Discount Bazaar!

[postashish 3]

Guys, I have been wondering for a while has Indian Ecommerce Industry become only a deal market? Our most happening thread with more than 135000 views focusses on online deals.(no disregard to rajan ji,you have done a superb job, I love your findings).But don't you guys think we'll not shop online had we not been getting these discounts?

I believe that the online retail industry is hampering its own growth by becoming a discount bazaar.

Let's face it we are definitely called one of the fastest growing e-commerce space in the world, but do we actually shop online until and unless we get a (fairly good) bargain.

I keep wondering How is Letsbuy.com offering cellphones cheaper than even the (big) retailers in your city. How is yebhi.com giving Rs 1000 off on Rs 1500/Rs 2000 coupons regularly. How is Flipkart offering 20-40 % discounts on almost all books.

Lets take an E.g of a BB 9780 selling at Letsbuy 21299 With icicilb you get it at 20099 (21299-1200). Check out with any of the retailers if they can match this price. I don't think they will be able to atleast they couldn't in my city.

Add to this a transaction cost of approx 4 %(even higher in COD) . Letsbuy gets 20099-4 %= Rs 19295.

We have still not accounted for Letsbuy's operational expense(office,staff, packaging etc) let it be a minimalistic just 2 % = 19295-2% = Rs 18909

Net discount which Letsbuy had to offer to the customer is Rs (21299-18909)*100/21299 = >11 %.

Do you thinks a company with so much overheads can give a discount of more than 11 % on a BB phone?? My retailer offered me after every negotiation trick applied Rs 2100

You can very well call it as a part of Promotion, they are selling it lower than the market rates. They say they want customers to repeat,but with the pace that new Indian Retail portals are opening do you even think you will need to repeat in the near future?

These were just my observations, but guys I am also sharing an article published today in The Economic Times which says a lot about the dire state of the Indian Ecommerce Industry. Its a must read to understand these portals methodology of selling at losses and still SHOWING huge profits!

Dotcom Bubble 2.0 in the works as E-retailers cook up profits

The first Six months of the 2011 calendar has seen 9 deals worth $ 108 million in the online retail space in India.

Beneath the gloss of scorching growth and valuations of Indian e-commerce companies, there are nagging questions about their accounting practices and ownership patterns that recall the Internet bubble of 2000. These two questions are central to the operations of the poster boy of e-commerce in India: flipkart.com, the 70-crore online retailer of books and electronics that is reportedly close to bagging a private equity investment at a valuation of $1 billion (about 4,500 crore). They also have a bearing on a clutch of other companies, including Flipkart, Myntra and Snapdeal.

According to Grant Thornton, in the first six months of calendar 2011, private equity firms invested $108 million in nine e-commerce companies (see table). Valuations, though, are a concern. "I think it (valuations in general) is a bubble, though I hope it is not," says K Vaitheeswaran, founder of Indiaplaza.com, who has lived through two crashes in his 12 years in this business.

Adds Mahesh Murthy, a venture capitalist: "In these cases of high Indian valuation, the number seems to be driven by the 'find a greater fool theory' - where you believe it is okay to value someone at $1 billion because you think you can find a fool who will buy it from you at $3 billion in a few years."

The first issue relates to the credibility of the net profit number that some e-commerce players are putting out. This question arises from how they account for the discounts they offer - substantial in many cases. Several companies are reportedly indulging in creative accounting of marketing expenses, including discounts.

Inflating Profits in Current Year

The net effect of this creative accounting is to postpone expenses to later years and inflate profits in the current one. The issue was first flagged in the Indian media by Murthy, who, in a column in Tehelka magazine, dated August 2, termed it "nonsense accounting practices at some of these e-commerce firms".

It works like this. Say, the cost price of a book for an e-commerce firm is 100. It offers it for sale for 120, but also offers a 30 discount, be it in the form of cash or a gift certificate. A customer buys the book at an effective price of 90.

But XYZ does not record 90 as revenue and 10 as loss. It breaks it down into two entries. The first entry records 120 as revenue and 20 ( 120- 100) as profit. The second entry records the 30 discount as an expense. But this is not expensed the same year. Instead, it is capitalised and written off over many years, thus inflating profits in the current year.

The annual reports of Flipkart and group entity WS Retail for 2009-10 - the latest available with the corporate affairs ministry (MCA) and the year before its growth took off - do not show such write-offs. "I am not aware of such a practice in Flipkart," says Sachin Bansal, the company's co-founder.

When asked specifically if any current expense was being capitalised, he replied: "I will not comment." Most e-commerce players have taken off in the past 18 months, gaining traction with the online consumer.

Aided by cash from PE and VC firms, e-commerce companies have rolled out aggressive pricing and deals to drive revenues. Profits, though, are another matter. In 2009-10, Flipkart reported a loss of 90 lakh on sales of 11.6 crore. It has not submitted its 2010-11 annual report to the MCA yet (it has time till September 30 to do so), but Bansal says the company posted 70 crore in sales; he declined to give the profit figure.

In 2009-10, Ghatalia & Associates, a Bangalore-based chartered accountancy firm, audited both Flipkart and WS Retail. A look at the Flipkart website shows it offers discounts of up to 40% on the maximum retail price (MRP) of books, its main sales category, and free shipping.

Bansal says the company offers such high discounts on only a few books where it has struck special deals with publishing houses. "We are not selling any items at a loss. We have direct tie-ups with publishers because of our volume, which is more than the largest offline player," he says. "In most books, the discount is 15-20%. At the operating level, we are still positive."

The head of a Bangalore-based e-commerce site, on the condition of anonymity, says e-commerce firms are capitalising, rather than expensing, their promotional or marketing costs. Their justification, he says, is that customers acquired through this expenditure are going to yield revenues over many years. "But there is no logic," he says.

Jamil Khatri of KPMG, an accounting and consulting firm, says accounting for intangible assets is generally the same under Indian accounting rules and the new international rules countries are converging towards. "An important condition for amortising expenditure is the presence of legal rights," says Khatri, executive director, KPMG. "If there are no enforceable legal rights between the seller and the buyer, it generally cannot be amortised." In the case of e-commerce firms, a transaction is not an assurance that a customer will make repeat transactions, and hence no intangibles arise from a current transaction, he adds.

"Such accounting seems to be happening across many e-commerce websites in India and globally," says Murthy. ET could not test other e-commerce companies for this claim at the primary source - their annual reports - because most of them have either been set up or taken off in the past 18 months or so; therefore, they have either not filed their documents with the MCA or their numbers available are too minuscule. For example, Infibeam, which competes against Flipkart, was set up in 2010.

However, in the US, Groupon is facing analyst ire and regulator scrutiny, ahead of its IPO, for converting a $420-million loss from operations to a $61-million profit through such accounting. Groupon has capitalised three categories of expenses: $241.5 million of online-marketing costs; $36.2 million of stock-based compensation; and $203.2 million of non-cash acquisition-related costs.

VIOLATION OF OWNERSHIP RULES

The second issue relates to ownership rules. In the way its operations are structured, Flipkart may be violating the foreign direct investment rules (FDI) for retailers; some other e-commerce players might also be doing so.

Flipkart's operations are organised under two entities: Flipkart Online Retail Services Private Limited and WS Retail Services Private Limited. Although Flipkart Online tags the name of its website, it works only as a wholesale distributor, selling to WS Retail. When a customer orders, say, books from flipkart.com, WS Retail makes the sale.

The current rules for multi-brand retailers, offline and online, disallow them from having any FDI. However, in wholesale trade, 100% FDI is allowed, but with a rider: the wholesale company cannot make more than 25% of its sales to a group company. Flipkart Online - which has FDI from two Mauritius-based PE firms, Tiger Global and Accel Partners - slots in as a wholesale company. This means its sales to WS Retail cannot exceed 25%.

However, the 2009-10 annual reports of the two companies show this condition is not met. In 2009-10, 8.1 crore of the 11.6 crore sales of Flipkart Online - or 70% - were to WS Retail. This share might have been higher, but for the fact that Flipkart Online did retail sales for four months till July 2009. When asked by ET whether Flipkart violated foreign ownership norms, Sachin Bansal, the company's co-founder, said: "From our perspective, we comply with all guidelines."