What funding crunch and pressure for profits? It’s India’s biggest festive season and, as usual, e-commerce players are splurging.
Between September and December, the cash burn – the amount companies spend to run their businesses – is estimated to reach up to $400 million, according to research firm RedSeer Consulting. This is up to 60% higher than the $250 million spent last year.
The good news, however, is that it may result in more business. RedSeer estimates the total GMV (gross merchandise value, or the total value of goods sold from a marketplace) of the Indian e-commerce sector this festival season to be about 60% higher than a year ago at $1.7 billion (Rs 11,309 crore).
Festive season sales make for a huge share of the total annual sales in segments like apparel, consumer goods, and home decor. So companies go on advertising sprees during this time.
Ahead of this year’s season, India’s e-commerce posterboy Flipkart raised its biggest-ever funding round of $2.5 billion.
The cash burn “could pay off if the industry is able to deliver a top-class experience to the millions of new shoppers this time around and retain them going forward,” Anil Kumar, CEO of RedSeer Consulting, said.
Where’s the cash going?
Like every year, companies are likely to spend on discounts. It will be higher than the previous year, RedSeer Consulting said, without putting any figure to it.
Price-sensitive Indians love discounts and lower prices have been key to online shopping. According to a 2015 report by Goldman Sachs, 30% of an Indian e-commerce company’s expenses go towards discounts.
“With the latest funding firepower, this time around, market leader Flipkart would most likely increase discounting spends to acquire new customers as well as to gain momentum over rival Amazon,” RedSeer Consulting said in the report. Amazon India and Paytm Mall are likely to follow suit, it said.
The other area where online retailers will spend more than last year is logistics and supply chain management.
“Customer demographics have changed compared to (the) past year with tier-II becoming a more important share (of the customer base)…E-tailers are more dependent on third-party logistics players for delivery (to tier II areas) which adds to the overall expenses,” RedSeer said.
The one area where spending is seen flat or marginally lower this year is advertising. For companies are now increasingly spending on low-cost channels such as digital marketing.
Flipkart is focusing on “personalised digital push,” Moneycontrol.com reported earlier this month. “The Big Billion Days sale was the only big sale event online when we started. Now it is more of festive season sale, given many other players offer the same. In this scenario, we need to cut through the clutter and innovate ways to reach out to our potential users,” Flipkart’s director for marketing, Kartikeya Bhandari, told the news portal.
This article first appeared on Quartz.