Saturday, May 28, 2016

Insights on Tech Bubble Bursts from Top PGDM Colleges in Delhi NCR

At Ishan Institute of Management & Technology, the top PGDM college in Delhi NCR, the academicians are still trying to come to terms with the reality of a possible bursting of the Indian ecommerce bubble. Given that there had been a mad rush of venture capitalists towards ecommerce companies over the last five years it was a bolt from the blue when the faculty and students of the top business school in Greater Noida woke up to the unfortunate pieces of news flowing in from the print, electronic and digital media. The incident that we are talking about is the deferring of joining of fresh hires from IIM A by a renowned Indian ecommerce company.  Yet this is not an isolated event and is preceded by a trail of events that has led to this mishap. In fact very recently Morgan Stanley has downgraded the company valuation of an Indian ecommerce firm from USD 80 million to USD 58 million in its filings submitted to the Securities and Exchanges Commission (SEC).  In April 2016 there was top talent flight from a major Indian ecommerce company who had been hired from Google for managing product development. Amidst the flurry of all the bad news pouring there has been an euphoria over the boom in the Indian ecommerce vertical for some time now and it seems that euphoria is finally over and people have begun to wake up and smell the coffee.

The faculty team at Ishan Institute of Management & Technology, one of the top MBA colleges in Delhi NCR have got into the act of data collection and analysis. While it is too early to make concrete statements on the debacle in the absence of reliable sources of information on the functioning of many ecommerce companies operating in India, we have observed the following as the prima facie evidence and reasons behind the debacle. Take a look.

User Experience

Ever since Steve Jobs, the late Apple founder had emphasised on user experience it had become the buzzword for product based companies. Some of the big names in the ecommerce business vertical in India let go user experience and traded it for price competition, making the user extremely price sensitive and a bargain hunter. When a user replaces user experience with bargain hunting, customer loyalty goes for a toss and sales volumes from repeat purchases of existing customers goes down. It shall not be an exaggeration to assert that many Indian ecommerce firms were actually delivering best bargains on specifically one product line- smart phones. Focus on a single product line while selling online, offline, on the web or through app is a crime. The user is guaranteed to leave the company once he has had the best bargain and move over to another online shop that offers him a better bargain. More over the levels of product range, product quality and customer satisfaction were compromised upon for a long time. Some Indian ecommerce enterprises used to splash their names for all reasons like crowd funding, investment from VCs, IPO and on boarding of top management level talent from Silicon Valley firms but not for user experience. The product reviews on the websites of Indian companies and those on the websites of its global competitors are poles apart. Need we say anything more?

App Only Strategy

In continuation of the anecdotal evidence furnished above, the app only strategy of the top Indian ecommerce firm also comes out as yet another recipe for disaster. The app only strategy does work well in matured ecommerce markets like South Korea, USA, United Kingdom and China, but certainly not in an emerging economy like India that was until few months back debating on the utility of freebies like “Free Basics” from Facebook. While the smart phone revolution in India is a reality, there are other metrics that tell the complete story. There are some key technological drivers for an app only strategy to succeed like high downloading speed, high surfing speed, coverage of 3G network, density of payment gateway development and usage among smart phone users for cashless transactions. These technological drivers hold the key to an app only strategy to gain traction and critical mass. Sadly the realities of India are not on the same page.

Gross Merchandise Value

Perhaps the mother of sins was hidden in the revenue model of major Indian ecommerce firms that stuck with gross merchandise value (GMV) as a revenue parameter. While GMV has been a favourite with many ecommerce firms in the recent past, there are serious flaws in the usage of this metric. GMV uses the selling price as the revenue equivalent while overlooking selling costs, advertisement and promotional costs, etc. This has the effect of inflating the revenue side of the balance sheet and correspondingly the profit margin. While this may work well in the short run to allure FIIs, PNs, and VCs, people are smart enough to see through it as is evident from the actions of Morgan Stanley and Fidelity investments. One year back when the top PGDM and MBA colleges in Delhi NCR were busy doing case studies on the investment boom little did they notice that the seeds of self destruction had been sown and that these ecommerce companies were sitting on a time bomb of “deep discounting” to compensate for the losses arising out of discounted sales with VC funds.

In the final conclusion, it makes enormous good sense to assert that the days of honeymoon and partying are over and as India transcends from being a beginner level ecommerce market to a more matured one, supernormal profit will be sized up and companies will have to focus on creating brand equity through the practice of innovation, new product development and a multichannel business development framework without abandoning frugality. At Ishan Institute of Management & Technology, one of the top PGDM colleges in Delhi NCR the final word of the academic team is that of cautious optimism rather than euphoria. The party is over. Let’s not panic, but let’s get to work.