Flipkart
CEO Sachin Bansal's recent announcement that the online retailer could
achieve about Rs 75,000 crore in gross merchandise value (GMV) has once
again brought into focus a measure that brick and mortar chains regard
as highly inflated.
Kishore Biyani of Future Group, which runs chains such as Big Bazaar, said actual sales is about a fourth of GMV. "At the end of the day, it should be about how much cash has been collected. The real revenues are always just 25% of the GMV," he said. Those on Biyani's side of the debate say online retailers should declare net sales or actual amount of audited invoices as GMV does not include discounts and costs involved.
Govind Srikhande, managing director of Shoppers Stop, calls it "gross miscalculated value," adding, "It is something that can drive valuations but not the bottom line." Bansal expects to boost GMV to $10-12 billion (Rs 64,000-76,000 crore) in nine months to a year against an earlier forecast of $8 billion for the year to March 2016. Rival Snapdeal has said that it is targeting $10 billion (about Rs 62,000 crore) in GMV.
Mahesh Murthy, managing partner of venture capital firm Seed Fund, is scathing about GMV. "I am happy to go on record that GMV is a bullshit norm," he said. "It does not reflect the cost of product, what it was sold at and the loss made on it. It does not also reflect the circular sales between two or three related parties, where they are buying and selling from each other. I have not seen anything like this with other credible global online retailers like Amazon which talks about transactions and not GMV."
Amazon states net sales as an indicator of business conducted. Bansal did not reply to an ET query on the subject.
Arvind Singhal, chairman of consultant Technopak, said online retailers should declare audited invoiced numbers. "I don't understand the usage of GMV as a credible business metric. I want to know what is the gross operation margin and the net sales after the cost of customer acquisition," he said.
Snapdeal was estimated as having the highest GMV in a Bank of America Merrill Lynch report. "We estimate close to 30% of Flipkart's GMV comes from marketplace and expect this to move to 80% in next two years," it said.
"The company is holding inventory instead of merchants, thus leading to faster delivery. We estimate Snapdeal's GMV on market place is currently the highest, as it had a head start in terms of market place model." It pegs industry GMV at $7 billion, which is expected to grow at a compounded annual growth rate of 36% to $200 billion by 2025.
"Flipkart, Snapdeal and Amazon together have around 90% of the GMV share," the report added.
E-commerce in India is at an early stage. Companies have to go through years of operating losses, given high initial investments as well as the incentives they provide in the form of discounting to attract consumers. For instance, lifestyle online retailer Jabong more than doubled its revenue to Rs 811 crore in calendar year 2014 but deep discounting led to a fivefold increase in losses to Rs 160 crore.
With an earnings before interest, taxes, depreciation, and amortization (Ebidta) loss of Rs 454 crore, the company spent about 55 paise to get one rupee of sales. The hunt for buyers is seen as having cost Flipkart, Amazon and Snapdeal a total of Rs 1,000 crore in FY14.
A leading private equity executive defended the accounting practices of online retailers.
"E-commerce companies have been able to reach consumers across India in markets where many have been unable to reach," the person said. "They have given consumers convenience at the tip of their fingers and value options. They are valued by investors who see the long term and the valuations could be high but that is a market-led economy. There is too much unjustified criticism."
Some experts said GMV is akin to the way in which global retailers advertise how much consumers have saved by shopping at their stores.
"Quoting GMV is as good as saying how much money has been transacted through them and it is a fair thing," said Shivanandan Pare, head of e-commerce at Madura, which has brands such as Louis Philippe, Van Heusen and Allen Solly. "It may have no relevance on the balance sheet but it surely indicates the size of the business."
While GMV figures are ostensibly seen as a justification for high valuations, it may not be the number that canny investors necessarily look for first.
"Three very basic answers are needed in order to gauge whether the business is achieving that objective. What are the real revenues, profitability (free cash flow and/or net profit) and capital required to achieve that profitability (the return on equity)," said Sameer Sain, managing director of Everstone Capital.
"If we cannot get either or see the potential to get decent answers to these questions, we tend to stay away. We think online retail is, and will continue to be, huge, but we still feel that the businesses have to, in the long run, point to the same metrics and focus on the same value-creation process. I'm not sure if GMV answers any of those questions." Despite that, this is one battle that doesn't seem likely to end anytime soon.
Kishore Biyani of Future Group, which runs chains such as Big Bazaar, said actual sales is about a fourth of GMV. "At the end of the day, it should be about how much cash has been collected. The real revenues are always just 25% of the GMV," he said. Those on Biyani's side of the debate say online retailers should declare net sales or actual amount of audited invoices as GMV does not include discounts and costs involved.
Govind Srikhande, managing director of Shoppers Stop, calls it "gross miscalculated value," adding, "It is something that can drive valuations but not the bottom line." Bansal expects to boost GMV to $10-12 billion (Rs 64,000-76,000 crore) in nine months to a year against an earlier forecast of $8 billion for the year to March 2016. Rival Snapdeal has said that it is targeting $10 billion (about Rs 62,000 crore) in GMV.
Mahesh Murthy, managing partner of venture capital firm Seed Fund, is scathing about GMV. "I am happy to go on record that GMV is a bullshit norm," he said. "It does not reflect the cost of product, what it was sold at and the loss made on it. It does not also reflect the circular sales between two or three related parties, where they are buying and selling from each other. I have not seen anything like this with other credible global online retailers like Amazon which talks about transactions and not GMV."
Amazon states net sales as an indicator of business conducted. Bansal did not reply to an ET query on the subject.
Arvind Singhal, chairman of consultant Technopak, said online retailers should declare audited invoiced numbers. "I don't understand the usage of GMV as a credible business metric. I want to know what is the gross operation margin and the net sales after the cost of customer acquisition," he said.
Snapdeal was estimated as having the highest GMV in a Bank of America Merrill Lynch report. "We estimate close to 30% of Flipkart's GMV comes from marketplace and expect this to move to 80% in next two years," it said.
"The company is holding inventory instead of merchants, thus leading to faster delivery. We estimate Snapdeal's GMV on market place is currently the highest, as it had a head start in terms of market place model." It pegs industry GMV at $7 billion, which is expected to grow at a compounded annual growth rate of 36% to $200 billion by 2025.
"Flipkart, Snapdeal and Amazon together have around 90% of the GMV share," the report added.
E-commerce in India is at an early stage. Companies have to go through years of operating losses, given high initial investments as well as the incentives they provide in the form of discounting to attract consumers. For instance, lifestyle online retailer Jabong more than doubled its revenue to Rs 811 crore in calendar year 2014 but deep discounting led to a fivefold increase in losses to Rs 160 crore.
With an earnings before interest, taxes, depreciation, and amortization (Ebidta) loss of Rs 454 crore, the company spent about 55 paise to get one rupee of sales. The hunt for buyers is seen as having cost Flipkart, Amazon and Snapdeal a total of Rs 1,000 crore in FY14.
A leading private equity executive defended the accounting practices of online retailers.
"E-commerce companies have been able to reach consumers across India in markets where many have been unable to reach," the person said. "They have given consumers convenience at the tip of their fingers and value options. They are valued by investors who see the long term and the valuations could be high but that is a market-led economy. There is too much unjustified criticism."
Some experts said GMV is akin to the way in which global retailers advertise how much consumers have saved by shopping at their stores.
"Quoting GMV is as good as saying how much money has been transacted through them and it is a fair thing," said Shivanandan Pare, head of e-commerce at Madura, which has brands such as Louis Philippe, Van Heusen and Allen Solly. "It may have no relevance on the balance sheet but it surely indicates the size of the business."
While GMV figures are ostensibly seen as a justification for high valuations, it may not be the number that canny investors necessarily look for first.
"Three very basic answers are needed in order to gauge whether the business is achieving that objective. What are the real revenues, profitability (free cash flow and/or net profit) and capital required to achieve that profitability (the return on equity)," said Sameer Sain, managing director of Everstone Capital.
"If we cannot get either or see the potential to get decent answers to these questions, we tend to stay away. We think online retail is, and will continue to be, huge, but we still feel that the businesses have to, in the long run, point to the same metrics and focus on the same value-creation process. I'm not sure if GMV answers any of those questions." Despite that, this is one battle that doesn't seem likely to end anytime soon.
Comments
Post a Comment