Valuation of E-Commerce companies is beyond logic and bubble will burst soon
Valuation is a tricky thing. Whole set of numbers are imagination from a favorable future environment.
Remember last decade when investors went crazy for offline retailers. Big Bazaar, Subhiksha and many more had higher valuation and today some of these do not exist.
This decade is all about E-Commerce. E-Retailers are favorite of investors. Many E-retailers already shut their shop.
Valuation of a Business is estimation of its future cash inflow. If we see the investors investing in E-Commerce companies, our financial or investing knowledge gets challenged.
Value of Flipkart, Snapdeal or Paytm is amazing, it seems if they are selling items over which they have monopoly. Is valuation of Flipkart justified looking at the business they do.
They are no different than Big Bazaar or bigger Wal-Mart. They are selling ITEMS or products, only difference being they take sale orders online.
Then what makes Flipkart more valuable then Big Bazaar or any other retail store. We saw this trend during last decade when offline retailers were first choice of investors and finaly everyone lost their money.
Though profit margin should be more when one sells online saving infrastructure and real estate cost. But, E-Commerce companies are losing money and there is no end to it.
Do these companies even forecast when they will have positive cash flow from their operating activities, I doubt.
I do not see even a rare possibility of positive cash flow from these E-Retailers in a near or far future. Understanding basic economics one break even or start earning profit when competition dies and price elasticity plays the major role or one have monopoly.
E-Retailers are not out of competition and they can never be out of it. Everyday a new portal starts selling. Problem for these highly funded companies is not that offline retailers will sell cheaper, they can never sell. Offline retailers have to cover their operating cost such as rent and inventory holding cost.
One may argue that E-Retailers will start generating positive cash flow once everyone starts buying online. These companies will form a cartel and will have same margins to cut the losses on discounts. I do not agree with it. If offline retail business dies, we will E-Retailers dying faster.
Competition is from small E-Retailers is big concern. For example, suppose Flipkart has a competitor Nokart.com and has a sale of 1crore per month with a profit margin or 5%. Will Nokart.com die, it will never die. It was started by an Ex-IT employee. He is happy with that profit margin.
Another big concern which is fatal to these E-Retailers is from brand owners who as of now sell in malls and through offline retail chains. If everyone starts buying online, I do not see a reason to stop these companies selling online. This challenge should be perfectly understood that brand owners will never use E-Retailer platforms once everyone starts buying online. Why Reebok, Apple or any other brand owner share profit margin with E-Retailers if they can sell directly.
Price comparison apps or sites are the real culprits in long run. People will never use E-Retailers sites, instead they will use these price comparison tools and place order where they get highest discounts, it does not matter whether order goes to a single portal or different, for example if a buyer wants to buy 10 things and he find that 8 are cheaper on Flipkart and 2 on Nokart.com, he will buy 2 from Nokart.com and 8 from Flipkart thus saving Nokart.com from dying. Customers are not loyal if discount is the attraction.
The discussion is open.
The BUBBLE is getting bigger and bigger. Even I support your view on Brand owners and offline retailers. We buy online because we get discounts, it does not matter whether Amazon gives it or Flipkart.
It is golden time for side lookers to profit out from this funding game.
Here is how each of us can benefit from this ongoing game.
Affiliate Income or Commission Income
Amazon gives better commission compared to Flipkart. Open a website or start a blog. Create an account on Amazon, Flipkart and every other portal.
Earn commission using the affilliate links and ask your friends to do same. You earn big in commissions, Amazon and Flipkart lose.
Buy and Sale
I bought a shoe from Myntra in just Rs. 1550 which was selling in showroom at 2999. Just buy it and sell to someone at 1800. You can do 10 such transaction in a month to earn some pocket money.
No one like to wait once they place order, people will buy from you since your have advantage of let them touch and feel your products.
Become a Seller
In long run, E-Retailers will sale their own branded goods. Walmart did the same thing in offline business. It will happen soon, once FDI is approved. Till then make profit by selling online. Big thing, E-Retailers are doing great with marketing budget.
Definitely I agree with the above thread that e-commerce companies are booming beyond the logic. Most of the business owners are approaching the e-commerce business and creating their own online store for selling the stuffs. From latest updates I found that most of the e-commerce companies like flipkart, Sanpdeal on "acquihiring" for spree for best talents. In e-commerce field you can also saw a huge section of top young technology talent who have their own startups. The shares of logistic providers of e-commmerce such as Blue Dart Express and Transport Corporation of india is having more than doubled in the past two years. The popularity of e-commerce of online shopping has raised because they are providing the variations in the product with great deals and discount offers. We all will seen soon the burst of e-commerce bubble.