Tiger Global and Accel Partners, the funds that made millions off early investments in Facebook Inc (FB:US)., are betting on a surge in online shopping in India.
They’re going to need a lot of patience.
Indian shoppers shy away from credit cards, demand hefty discounts, and occasionally never pay up for online purchases. An unreliable postal system also means Web retailers have to bear the costs of funding an army of delivery personnel.
Online sales account for about 0.1 percent of India’s retail market, compared to 3.8 percent in China and 8 percent in the U.S., according New Delhi-based consultancy Technopak Advisors Pvt.
Tiger, Accel and others see that as an opportunity.
“This is an industry with a long-term horizon, and customer acquisition costs in India are still quite high,” said Alok Mittal, managing director at the Indian unit of Menlo Park, California-based Canaan Partners, which has also invested in Indian e-commerce businesses. “In order to be successful, you have to stay in the business and be capable of sustaining many years of losses.”
None of the major e-commerce retailers are profitable right now because ad expenses and costs to draw customers are at “very high” levels, he said.
Accel and Tiger have invested in firms including Flipkart, an online retailer that sells everything from books to mobile phones, and apparel retailer Myntra.com. Among the most recent investments, Web apparel marketer Zovi.com received $10 million from SAIF Partners and Tiger Global on Feb. 1, according to Manish Chopra, chief executive officer of Zovi.
London-based researcher Euromonitor estimates India’s Internet retailing industry has expanded at an average 44 percent annually from 2006 to 2011 and will be worth 114 billion rupees ($2.1 billion) in 2016.
The Internet “will produce the next generation of Indian consumer franchises,” Sameer Gandhi, a partner at Accel’s office in Silicon Valley said in a Aug. 23 statement that announced his firm was investing 1 billion rupees in the country’s bookmyshow.com.
Sales at online retailers are still rising faster than the country’s brick-and-mortar industry, which Euromonitor estimates expanded 13 percent last year.
Flipkart’s revenues rose to $100 million in 2012 from $15 million in 2011, according to Technopak. Revenue for Yebhi.com, which sells everything from shoes to mobile phones, tripled to $30 million in 2012 from $10 million in 2011, the researcher estimates.
Sales at department store operator Shoppers Stop Ltd. rose 28 percent to 27.9 billion rupees in the fiscal year ended March 2012, according to data compiled by Bloomberg.
The Indian sites have so far faced limited competition form the world’s largest online retailer, Amazon.com Inc (AMZN:US). Rules prohibit foreign-owned companies from directly operating e- commerce operations. Amazon has climbed 5.7 percent this year.
Amazon’s Indian operations began last year with Junglee.com, which has links that take potential buyers to other sites that sell products from mobile phones to toys.
The Enforcement Directorate, an Indian agency that investigates violations of rules relating to foreign investment, is probing whether Flipkart violated any rules pertaining to ownership of e-commerce companies, Commerce Minister Anand Sharma told parliament in December. Flipkart declined to comment on the report.
Waiting for Payout
It can take seven to eight years to “build out” an online retailer in India selling a single category of goods, while a similar firm might be developed in under five years in the U.S., said Prashanth Prakash, a Bangalore-based partner at Accel India, who handles its e-commerce investments. Accel has invested $250 million in e-commerce deals in India since 2006, he said.
“India is a much more challenging environment to make investments work,” said Prakash. “I don’t think anybody will disagree.” Some of the ventures Accel has invested in may turn profitable in the next eighteen months, he said.
Accel has invested $250 million in e-commerce deals in India since 2006, Prashanth said.
Only about two percent of the South Asian nation’s adult population has a credit card, compared to eight percent in China, according to an April 2012 World Bank report.
Flipkart and its competitors allow buyers to pay cash when their order arrives at their doorstep. The risk: Shoppers can refuse to pay when the delivery guy shows up.
“With cash-on-delivery, changing your mind is very easy and at the end of the day that is a reality,” said Pinakiranjan Mishra, national leader for retail and consumer products at Ernst & Young. There are higher rejections or returns of products when customers order through the cash on delivery system, he said.
Retailers have a so-called acquisition costs of up to 1,000 rupees for each new customer and need purchases of three or four times that amount to make a profit from that shopper, Pragya Singh, associate director at Technopak Advisors said.
Most of the major online retailers have resorted to hiring hundreds or thousands of delivery personnel to reduce reliance on the country’s slow and unreliable postal system, Shabori Das, a Bangalore-based analyst at Euromonitor, said.
Second- and third-round funding for e-commerce companies has become “very difficult to come by” and that is leading to a wave of consolidation in the industry, Accel’s Prakash said. Zovi.com said this month it was merging with custom T-shirt designer Inkfruit.com, Flipkart bought rival electronics seller Letsbuy.com in February last year, and HomeShop18 bought bookseller Coinjoos.com in 2011.
“It’s the survival of the biggest now,” Zovi’s Chopra said.
Winning With Facebook
Accel won on its Facebook investments after the social networking website went public last year. After investing about $18 million in the site in 2005 and 2006, Accel earned almost $6 billion by later selling stock, according to data from PrivCo, a New York-based financial information provider.
Tiger Global has made about $1.2 billion, PrivCo estimates.
Carolyn Sargent, a spokeswoman for Tiger Global with Rubenstein Associates Inc. declined to comment on Tiger’s Indian investments in an e-mail.
Options for existing investors in India’s e-commerce industry are “hardly there right now,” Canaan’s Mittal said.
In 2010, travel site MakeMyTrip Ltd. (MMYT:US) became the first Indian e-commerce company to go public by listing itself on the Nasdaq ten years after it was founded. The stock has gained 14 percent so far this year. Facebook closed 0.6 percent lower at $28.32 in New York trading on Feb. 15.
There have been no other listings to date because companies need to demonstrate profitability before going to stock markets, Ernst & Young’s Mishra said.
India’s “very different from Palo Alto,” said Accel’s Prakash.
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