Online retailing in trouble?

Two weeks ago, popular music streaming services player Dhingana.com posted a message on its site. It read: “Goodbye! All good things must come to an end. We thank you from the bottom of our hearts for letting us be a part of your musical moments.”

The “Goodbye” message paints a grim picture of the e-commerce space in India, backed by venture capital (VCs) and seed investors.

Dhingana, founded in 2007, reportedly had about nine million users globally. It was funded by Inventus Capital Partners and Helion Venture Partners in 2011. In October 2012, it further secured $7 million in series B funding, led by Lightspeed Venture Partners. Existing investors, Inventus and Helion, also participated in that round.

The closure of Dhingana is the first casualty in e-commerce space in 2014. The cash-strapped firms, which are unable to raise a second round of funding, is left with no options but to close down the operations.

Most of the shops were shut in the e-tailing space, which holds about 16 per cent of the total market. Online travel industry, which consists of players such as MakeMyTrip, Cleartrip and Yatra.com, holds 71 per cent of the market size.

The VC/seed investors believe a strategy of giving huge discounts while earning wafer-thin margins is spoiling the e-commerce game in India.

Mahesh Murthy, founding partner of Seedfund, said: “Most firms, from the biggest to the smallest, seem to have no differentiator other than discounts and discounts cannot be a long-term strategy. The challenge is to find a reason why the consumer will buy from you at a non-discounted price, one that allows you, the merchant, to make a living. Very few e-commerce firms have figured this out.”

Men’s fashion apparels e-shop Fetise.com, funded by Seedfund, was another retailer to shut shop in 2013. “Fetise had started with a fantastic niche for men but ended up doing everything, confusing its customer offering,” said the founder of a competing fashion retail firm.

The issues among e-commerce firms include bad business model (low margins, high customer acquisition costs, hugely discounted), extremely low levels of differentiation (selling same brands as available on all places, competing on price) and internal issues (conflicts among management, investors and promoters).

Sumant Kasliwal, founder and CEO of 20dresses.com, said: “Regular deep discount is a near-fatal self-inflicted wound that e-commerce firms have inflicted upon themselves. Companies that used discount as a strategy to scale up now find themselves riding a tiger from which they cannot dismount.”

Popular sites that were closed down last year due to fund crunch include fashion retailer Urban Touch, Koolkart, Rock.in, Hushbabies, Aporv.com, movie rental platform SeventyMM, Blume Venture-backed app platform Adepto, financial services platform Investopresto, SAIF Partners-backed online video-steaming platform iStream, and personal care retailer GoodLife.

“So far, e-commerce discounts have been funded by VCs. But those VCs are no longer happy to subsidise consumers. With no alternative strategy, or funding, we will see more extinctions,” Murthy added.

Experts believe the industry will witness the closure of more popular sites in 2014 due to fund crunch. “Except two or three top players, none of the other in each category will manage second or third round of funding. Others will be forced to stop business in the near future,” said Alok Mittal of Canaan Partners.

Most of the companies that raised huge funding during 2009-2010 are struggling to raise their next rounds. While there is absolutely no further interest left in plain-vanilla multi-brand e-commerce businesses, industry is seeing a renewed interest in emerging business models such as niche and single-branded e-commerce companies and market places.

“The spread of this wound is so extreme that it is hurting those businesses, as well where discounting is not core to the business model, because the customers have got used to discounts and investors are questioning the viability of the industry model,” adds Kasliwal, a former fund manager at private equity firm ICICI Venture.

According to a Macquarie report, the Indian e-commerce industry has witnessed an incredible compounded annual growth rate in excess of 30 per cent plus annually in the past four years. According to Internet & Mobile Association of India estimates, the industry has increased from Rs 19,200 crore ($3.8 billion) in 2009 to Rs 63,000 crore ($9.5 billion) in 2013E.