Skyrocking valuation of marketplace portals – “Aabhi to party shuru hui hai”

The other day – we were into a high voltage debate over the valuation of e-commerce market places such as flipkart and Amazon. Most of the participants opined that the valuations were a farce and already gone to the crazy levels. The valuation models being brought in were as disruptive as the so called new trading platforms. It was also argued that the PE and Fund investors were playing a valuation game whereby a stake is valued by reverse working of the price that it can be sold after one or two years. And in the process none was actually looking at the true revenue and profit potential of these ventures. The talks of flipkart preparing for an IPO further proved the point that the investor funds were finally in the process of putting their cap into the heads of common mass investors.

While the overheat in the valuation is quite visible and reminiscent of the dotcom bubble of early 20th Century, the point is whether the market place model can generate lasting value for the stakeholders, and if yes, to what extent and by what means. Everyone agrees that e-commerce has disruptive potential as it radically reduces the distribution costs by providing a new form of supply chain and logistics arrangement. It basically replaces the retail outlet space and maintenance cost to a delivery cost. While there is substantial reduction in the outlet expenses, the delivery cost increases as every customers needs to be delivered a packet of his choice separately. Second cost reduction is at the level of inventory, as the stock variety that was required to be kept at each one store can now cater to the catchment area of a thousand stores.

The other value maker for the market place model is the user experience and user addiction. As people like to play more and more with their fingers on the handheld devices and get addicted to them, definite competitive edge is being created for the disruptive distribution model. In fact, this is the dominant factor in the minds of believers in the e-commerce story. With advancements in the mobile technology and user experience, it is felt that the customers at large will be inclined and addicted to shop online and the online channel will gradually contribute substantially to the global sales of consumer products. Earlier, there was a feeling that people would be inclined to insist on having a look at the product in their hand before they put money out of their pockets and this will hinder the growth of online sales, but after looking at the trends in last 12-18 months, that logic has actually been defeated. Now, people are buying things like furniture and specticals just by looking at the pictures and comments of the users. It may be interesting to further look into the reasons for this happening, but there is little doubt that this is happening and this will continue being so for a considerable period ahead.

The biggest concern over the ambitious valuations is coming from the profitability front. It is believed that the growth of e-commerce is largely driven by discounts to an extent which is not viable in long run and is counter productive. The actual fear is that once the portals start withdrawing the discounts and freebies, the top line growth will be seriously jeopardised. It is also a matter of concern that delivery costs will largely counter the savings made on outlet and inventory costs in long run, and the price differential will be minimal. The consumers are likely to smell the change and again drift away from the online channel as they realise that the price advantage is vanishing.

In our opinion, the sky rocking valuations being given to market places will be realisable in near future if, and only if, the market places are able to transform themselves into a kind of launch pad for new products and branding platforms for existing ones. Striking examples to highlight this phenomenon are the launch of Xiomi smartphones on flipkart and launch of Tata Housing projects on in recent months. The portals would have to think beyond just being online shops and delivery companies if they have to generate the kind of value that has already been assigned to them. At Softpillar Technologies, we are of the opinion that, it will be a very interesting area to look at, as these companies adopt innovative techniques to engage customers in a more purposeful manner and devise new disruptive ways of monetising their brand enhancement potential. We are likely to see several kinds of mix and match models of joint Initiatives by the online portals and the product companies with elements of co-ownership of companies and brands, exclusive distribution rights, shared revenue streams and advertisement options. To get deeper insights into the future shape of e-commerce,

Don’t forget to view our next blog on:
“Disrupting the disruption – what lies ahead in the e-commerce cinematography”