Profitability still out of reach for internet consumer companies

After almost a decade of operations almost all major companies in every sector are still in growth mode.

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While venture Capitalists (VCs) continue to fund Indian startups as they still see value in their offerings, the financial results of major companies reek of mounting losses.

Startups across e-commerce, logistics, food tech, and media, are still in the investment phase. According to Satish Meena, an analyst at Forrester, there are about 110 million online buyers in 2019, who have at least purchased one item in the last 12 months, and as digital companies tap in Bharat—India beyond tier 1 cities—the number is projected to grow to around 275 million by 2023.

Meena says even with these many online buyers, it will take a long time before internet companies can start making money.

The reason is simple: India is not growing the way China grew five to seven years ago, which everyone believes is the case.

Meena believes since disposable income is not rising as expected, transactions on the internet will not see a meteoric rise. According to him the biggest bottleneck of consumer internet companies’ growth is slow rise in income.

We at KrASIA, decided to take a stock of financial results and ascertain what picture they paint about Indian startups.

E-commerce

It should come as no surprise to anyone that major e-tailers in India have posted losses for FY19. According to a recent report by the consulting firm RedSeer, Indian retail opportunity is projected to be USD 1 trillion by 2020, of which online retail is expected to account for 4.6% or USD 46 billion of the total. To grab the growing opportunity in the South Asian country with almost half a billion internet users, e-commerce companies continue to invest in acquiring and retaining customers, as well as expanding their reach in newer markets.

A quick glance at the major players:

Amazon India: Amazon Seller Services, the marketplace entity of Amazon India saw revenues from operations jump 54.07 %  to USD 1.05 billion in the fiscal year-end March 2019 compared to the previous fiscal. At USD 791.9 million, the losses reduced 9.5% in the last fiscal over FY 18.

Flipkart India: The Walmart-owned etailer giant, posted an increase of loss amounting to USD 226.4 million in FY19 from USD 161.7 million in FY18. Its operational revenue stood at USD 589.8 million, a 52% increase over a year-ago period.

Snapdeal: On a standalone basis, Snapdeal, which is into pure marketplace play, posted revenue of USD 125.2 million for FY19, from USD 73.5 million a year ago. Its losses, meanwhile, narrowed by more than 71% to USD 26.1 million over FY18.

Seeing the current market dynamics, analysts believe losses are not going to go away for at least five years.

“The USD 30 billion e-commerce-market in India is not big enough for companies to make a profit. So in the next five years, the losses are going to be in the same range,” said Meena.

According to him, despite losses, companies will continue to invest more for the next five years to reach out to customers beyond metros and top 10 cities.

“Even though people in smaller towns are coming online after (the entry of) Jio, the frequency of shopping and the purchasing amount are very low. That’s something which will take a lot of time to grow.”

He believes Amazon and Walmart are in no hurry as they are in India for a long haul.

“India is the biggest opportunity for them. If they go beyond the US, they can’t go to China. There are limited opportunities in the European market and Africa is still going to take time. So there is no market equivalent to India. Hence, they are going to keep investing in India for at least 5 to 10 years.”

However, they are diversifying their investment from just retail to grocery and other verticals as well.

“In India, 60% of household spending is food. And that’s not being catered by e-commerce companies as of now fully. To increase volumes and frequency, they have to solve the grocery problem,” said Meena. “So a lot of investment is going to be there.”

Logistics

Last-mile delivery startups have grown on the back of the rise of online retail companies. Investors are also not backing away from investing in these startups as they very well know the interlinked opportunities between them. In the meantime, logistics players continue to increase their warehouses and fleet size, in the hopes of cutting down the delivery cost.

Here is a look at their financials for FY19.

Delhivery: The Gurgaon-based company reported a revenue of USD 236.1 million for the year ended March 2019, a 58% jump over last year. Losses, however, were more than their earnings at USD 248.1 million, up 2.6x from FY18. Total expenses rose to USD 482.4 million, almost double of what it reported the year before.

Ecom Express: The logistics startup posted USD 141.9 million in total revenue in FY19, a 76% rise over the last year. Net loss also reduced sharply to USD 18.1 million in the last fiscal from USD 73.4 million in FY18.

Ekart Logistics: The logistics arm of Walmart-owned Flipkart saw a 78% hike in operating revenue to USD 616 million in FY19 from USD 346.6 million a year ago. The e-tailer has been investing heavily in infrastructure, giving third-party logistics startups a tough competition. Their focus of growing infrastructural capabilities, quite evidently reflects in their expenses, which grew to USD 675.5 million in FY19 from USD 422.7 million a year before. Meanwhile, losses went down to USD 40.9 million from USD 69.6 million in FY18.

According to analysts, although delivery companies are investing to pump their growth, quite similar to what e-tailers are doing, the former has a better chance at monetization.

“It’s because ultimately they’re not going to be in the discounting game and they will charge for their services with the infrastructure they have built,” explained Forrester’s Meena.

However, the biggest challenge for them is Flipkart and Amazon’s in-house delivery arms. As logistic startups compete with e-commerce firms’ delivery arm for the business, they have to quote competitive prices. Since the delivery cost is high at present, the margins are pretty low.

“As and when they build more warehouses and fleet, they will be able to increase the margins on these deliveries. Only then they will be in a position to show profits,” said Meena, adding that it would take a good few years.

There is a silver lining though. As Amazon and Flipkart get deeper into e-grocery, they will need to have distributed warehouses located closer to customers as centrally located warehouses in major cities won’t help. They will grow this in-house as well as work with delivery companies.

Once the e-commerce and e-grocery markets grow there is going to be enough opportunity for multiple companies to grow. Last-mile delivery companies will then be at a better place to rake money.

Streaming and content

India is fast becoming an emerging battleground for global media and entertainment giants like Disney, Netflix, and Amazon which are fighting for India’s USD 500-million-plus video-on-demand market, which is projected to touch USD 5 billion by 2023. These giants are pouring in money in the local content which has become the holy grail for them.

On the other end of the spectrum are the new-age companies which are riding high on user-generated vernacular video content. Short video and content sharing apps like ShareChat, TikTok, Helo, Vigo, and Like among others have got Indians hooked.

Here is a cursory glance at how some of them have fared in FY19.

Netflix India: Netflix saw its India revenue jump eight-fold to USD 65 million for the financial year ending March 2019 over a year ago. Meanwhile, its profit soared over 25 times to reach USD 0.713 million from a mere USD 27,972 in FY 2018.

Hotstar: Disney-owned Indian streaming platform Hotstar saw its revenue from operations surged 95% to USD 155.2 million in the financial year ended March 2019 from USD 79.7 million in FY18. As its total expenses shot up to USD 233.9 million in FY19, from USD 134.7 million in FY18, the losses ballooned 42.50% to USD 77.3 million from USD 54.2 million in the same time period.

ShareChat: The home-grown social media channel ShareChat has posted a loss of USD 58.3 million—12 times more than the losses it posted a year ago. Its revenue rose 15-folds to USD 3.6 million in the corresponding period, thanks to the earnings from interest on investments and gains on the sale of investments.

ByteDance: The Chinese internet giant, which owns and runs content sharing apps TikTok, Helo, and Vigo clocked a profit of USD 479,000 on revenue of USD 6.1 million in India for the financial year ended March 2019. This is the first year when ByteDance has recorded any revenue in India.

According to a recent report by research firm Boston Consulting Group (BCG), India’s appetite for digital videos is increasing rapidly. In the country of 1.3 billion people, BCG estimates, video consumption per capita, has more than doubled over the past two years from 11 minutes per day to 24 minutes. The Indian SVOD (Short Video-On-Demand) market is expected to touch USD 1.5 billion by 2023 from USD 0.1 billion in 2018, the report said.

Tapping the potential opportunity,  there are about 50 online video platforms, making India a hyper-competitive market. However, online video revenue monetization remains concentrated among the top four platforms, Mihir Shah, vice president, India at the consulting firm Media Partners Asia told KrASIA.

“In 2019, our analysis indicates that YouTube, Hotstar, Netflix, and Amazon Prime Video will have an aggregate 80% share of total online video sector revenues, which will reach USD 1.2 billion,” said Shah.

On the flip side, ShareChat and Chinese apps like Helo, Vigo, and TikTok are targeting users beyond metro ciities with snackable social video content. Shah believes these companies “pose a real challenge for incumbents YouTube and Facebook” as they will now have to “attract and retain the new wave of content influencers, which are gravitating towards short-video UGC (user generated content) platforms.”

“These platforms have done well to secure rapid scale but are yet to make any meaningful monetization on their audience reach and engagement,” Shah said, adding that TikTok has recently sharpened its focus on India having made several senior-level hires, including appointing a new India head.

Most advertisers continue to prefer YouTube for performance-based campaigns, Shah said, though recently some categories of advertisers have opened up to allocate a small portion of their branding ad budgets towards these emerging platforms. Still, this new wave of social video platforms would take some time to catch up with YouTube, which continues to grow on engagement and reach which now has crossed 300 million monthly active users, he said.

Food-tech

Last month, American food delivery giant GrubHub Inc., while announcing its disappointing quarterly results, said that food delivery is only a means to an end and is unlikely to ever be profitable on its own. Same holds true for Indian food tech startups, which are reeling under losses even as the delivery volumes are increasing. Here is a quick glance at the top players’ financials.

Zomato: The Gurgaon-based food delivery company posted a revenue of USD 194.8 million in FY19, a 188% hike from USD 67.6 million a year earlier. The company’s losses, however, went up by 9.4x to USD 139.6 million last fiscal from USD 14.8 million.

Rebel Foods: Mumbai-based Rebel Foods, which provides cloud kitchens to over 2,100 online restaurants and brands including Faaso’s, Behrouz, Lunchbox, Slay, and Oven Story, doubled its revenue to USD 43.3 million in financial year March 2019 from USD 20.8 million in a year-ago period. While the company invested in increasing its footprints in Indonesia and Dubai, its losses swelled up to USD 18.2 million in FY19 from USD 10.4 million in FY18.

Due to the dynamics of the business and the cost involved, food-tech startups may never be able to make money just on food delivery.

“Food delivery is not a business where you can make money. So you have to find other ways of making money,” said Meena. “To make up for the delivery cost and earn money, companies like Zomato and Swiggy are trying to diversify their revenues. But they have faced issues with restaurants in the past in trying to do so.”

Meena said the bigger opportunity for food delivery companies is to provide cloud kitchens—infrastructure for online restaurants—and create private labels. Uber co-founder Travis Kalanick has already begun preparations to seize the opportunity with his new venture City Storage Systems, which operates delivery-only kitchens CloudKitchens.

“Empowering more and more restaurants to offer food categories and food varieties in new markets is going to be the focus of food delivery companies,” said Meena adding that once the market expands, there will be enough headroom for these companies to grow.

The Indian online food ordering market is likely to grow to USD 17.02 billion by 2023, a recent report by business consultancy firm Market Research Future has projected, from the USD 2 billion in 2018. Of the total, the market size of cloud kitchens is expected to reach USD 1.05 Bn over the next four years.