5 Reasons Why There Is No E-commerce Bubble in India [Hint:Women Have Yet To Begin Shopping Online]


5 Reasons Why There Is No E-commerce Bubble in India [Hint:Women Have Yet To Begin Shopping Online]

For months we’ve been hearing whispers of an E-commerce bubble in India. But with the failure of VC-backed Taggle in December, those whispers exploded into a roar (see here and here). The failure of that single startup somehow provided evidence to critics that the whole segment was in serious danger. One year earlier, e-commerce was considered the most promising online category by the tech community, investors, and the media alike. Sentiment has flipped so dramatically that the new conventional wisdom is that 2012 will be a year of reckoning and major consolidation for e-commerce merchants.
But the race to jump off the e-commerce bandwagon is unnecessary. Here are 5 under-looked reasons for why we are not in an e-commerce bubble

REASON #1: A Few Failures Does Not Make a Bubble

It is absolutely normal for there to be a few failures in new markets. VCs don’t have or expect a 100% success rate. There will be at least a few spectacular e-commerce failures but as long as it is balanced out by an even greater number of successes, we’ll continue to see valuations near where they are now. Yes, each failure will naturally send valuations downward, but it’s going to take a fundamental weakness for one to come to the conclusion that valuations are at a bubble level.

A bubble implies that the underlying financial assumptions of the industry as a whole, both present and future, are unreasonable. Taggle raised money with the assumption that becoming a leader in the Daily Deal space would make for a highly valuable company. That assumption was correct but Taggle failed due to bad execution. So let’s not make Taggle out to be Bear Stearns or Lehman Brothers.

REASON #2: Daily Deals Is Not E-commerce

Many have rightly identified Daily Deals as a saturated market that is dominated by the existing 2-3 big players such as Snapdeal and Mydala with no room for new entrants. But, the Daily Deal segment is not real e-commerce. Let’s not extrapolate the saturation of a sub-segment of e-commerce to come to conclusions about e-commerce as a whole. Daily Deals has declined in popularity because of audience fatigue. Who can really put up with offers for facials and yoga day after day? It was a novel concept but one with a short shelf life.

But selling products to consumers is a time-tested business. Users have not tired of buying online. They have tired of buying useless coupons online. Taggle’s failure was indicative of the saturation of the daily deal market ONLY. Taggle was unable to create any type of differentiation or scale compared to their competitors. Yes, they pivoted to selling products but that was a case of too little, too late. Once again, don’t read too much into Taggle’s failure. They executed poorly within a declining sub-segment of e-commerce.

To that, some of you might say “but even the retail e-commerce merchants are not profitable.” However…

REASON #3: We’ve Learnt From the Dot Com Crash

The doubters compare the current e-commerce market in India to the dot com boom era in the USA in the late 1990s. During the boom, a whole new set of metrics was created to evaluate the worth of a businesses such as “eyeballs” or “mindshare.” Profitability in the near or even midterm was ignored because investors and executives believed the Internet would grow so substantially it would make up for astonishing levels of spending. This thought process created an environment of epic failures such as eToys.com which raised $220 million, went public, reached a market cap of $11 billion, and then went bankrupt two years later.

So what makes India different in 2012? Well for one we have the above as an example to learn from. Most investors and founders are weary of spending of their startups spending cash too quickly because of lessons learnt from the dot com era. Yes founders are looking for money to accelerate their growth and improve their tech, logistics, and supply chain. But the scale of these investments is nowhere like it was in the USA in the late 1990s.

The examples of Amazon.com, NewEgg.com, Drugstore.com, and BlueNile.com are proof of success from the same period. They go to show that if a merchant follows a reasonable financial model that it can survive for years without being profitable. As long as revenue is following a similar trajectory to spending and the company is making a healthy gross profit (revenue minus cost of goods), it will be in a position for a safe landing if the market goes south. Management can reduce its investments and overhead to turn itself profitable or at least conserve cash (albeit doing so will sacrifice future growth during the down period). The four mentioned merchants have vastly different stories but all show that putting growth before profitability in e-commerce is viable when done in an intelligent fashion.

REASON #4: Women Have Yet To Begin Shopping Online

The most significant aspect of why valuations of e-commerce startups are priced at high multiples is because of the huge growth that is expected. If that growth does not materialize, then it certainly would be a bubble. To estimate the future e-commerce market, most look at indicators such as the growth in online penetration, growth in income, improvements in reliability and coverage of couriers, easier payment methods, etc. These are all important metrics and will contribute greatly to the e-commerce story. But, there is one important angle that no one is talking about:

Women love to shop (sorry for stereotyping!). Are shopping malls full of men or are they full of women? It’s the ladies who drive the offline shopping market. So then why is it that the online shopping world is dominated by male shoppers to the point that our internal statistics indicate that online shoppers are at least 80% men? That discrepancy is because women tend to lag behind men when it comes to adopting new technology. Online shopping is still at a nascent stage in India, so it’s to be expected that not many women currently shop online.

But it’s only a matter of time until Indian women start to become comfortable with shopping online. As that process begins, a whole new wave of growth in the e-commerce market will begin. It will effectively double the reach of e-commerce merchants within a few years. In the USA, more women shop online then do men. India may not reach that point for years, but there’s absolutely no reason why women will not start to shop online in large numbers in the near future which will be a boon for the e-commerce market.

REASON #5: Organic Growth Makes Up For Any Bubble “Burst”

Let’s pretend that six months or a year from now it turns out the e-commerce bubble theorists were right. Valuations were too high and many more e-commerce merchants fail because they burnt through their money and couldn’t convince VC’s to invest in their subsequent down-round.

Okay now what? Well if it’s a bubble, you won’t see further investment in the space for years because of the scars of losing money. But what will happen, even in this worst case scenario, is that the failure of those startups will leave a void. Demand for online shopping from consumers will vastly outgrow the number of quality e-commerce startups in a very short time. Entrepreneurs will continue to jump into the e-commerce space. Investors will be unable to ignore the staggering amount of growth in e-commerce and will resume making investments

You just don’t have real bubbles in categories with extreme growth. You have a few failures and a correction of valuations. The bad startups and unwise investors are weeded out, but then investment activity will continue in that same space to service the amazing growth you’ll see. It’s just not a bubble if we can safely predict we’re going to see investments and growth in that sector for the next ten years. If some of the me-too investors in that category get burnt, then call it a slowdown or correction if you must, but it’s no bubble.

A real bubble is one in which there is no impetus to restart growth. For example, once the US housing market bubble burst, the only thing that would have saved the future of the market was sudden new demand for housing. And of course that did not materialize because there was no population growth or wealth growth in the US. But in this case, if e-commerce valuations do crash, its effects will be minimal. The increasing demand Indians have to shop online is in no way tied to the valuations of these companies and in no way would be affected by a drop in valuation. The continued growth in e-commerce would revitalize the market and spur new VC investments into e-commerce very shortly after any crash. Let’s not call it a bubble if the “bursting” of that bubble isn’t even going to cause lasting damage.


E-commerce in India is healthy. Taggle failed but it was not indicative of a systematic problem. A few other VC backed e-commerce startups may even fail, but we are seeing and will continue to see many success stories. As long as those startups continue to spend money within reason, the amazing growth in online shopping will make up for moderate short term losses. If anything, we may see a correction, but that will be short-lived as demand from consumers for quality online merchants will push money back into the e-commerce space.

[Sameer Parwani is the founder of CouponDunia which provides free coupon codes users can avail for discounts at online merchants.]

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