Bubble Trouble
The first dot-com bubble emerged between the years 1997–2001 with NASDAQ reaching an intra-day high of 5132.52 on 10 March, 2000. What caused this bubble to emerge?
NASDAQ defines a bubble as a market phenomenon characterised by surges in asset prices to levels which are significantly above the fundamental value of that asset. The period of 1990s was marked by the establishment of several internet based companies (dot-coms) and strengthening of tech industry in general. This resulted in the proliferation of the number of internet users, who were then beginning to form a large potential market. This further attracted even more internet based startups to come into the picture. Low interest rates during this period encouraged these startups to increase their capital amounts. These startups were willing to incur losses in order to grab maximum possible market share, as they believed that they could later charge desired rates. For instance, Amazon and Google suffered huge losses during their initial years. Despite constant losses, shares of most of the promising dot-com companies who made an IPO during that period became grossly overpriced. All these factors together contributed in formation of a large dot-com bubble.
Now, let’s take a look at the current scenario of dot-com industry. As per a report by Deloitte in collaboration with Competition Commission of India in April 2015, the current size of the Indian E-Commerce industry is US$ 15 billion and it has grown at a CAGR of 34% during the past 3 years. Online travel is the largest segment in India, constituting 60% of the total Ecommerce market, followed by E-Tailing, financial services and classifieds which constitute 30%, 4% and 2% respectively. Though, E-Commerce industry in India is experiencing stupendous growth since past few years, real question still remains unanswered: Whether the industry can sustain this high growth momentum or not?
The Indian E-commerce industry is believed to be heading towards a new bubble. Situation is quite similar to the 1997–2001 American dot-com bubble. Indian E-commerce firms are yet to make their first profit, and billions of bucks are still being pumped into the sector. Yes, the sector is growing at astounding pace but with negative cash flows and a 1990s resembling ‘GET BIG FAST’ model which hardly seems sustainable. The industry is going through a consolidation phase. In 2012 when Flipkart acquired letsbuy.com, Snapdeal.com acquired esportsbuy.com. In 2013 Ibibo acquired Redbus; then in 2014 Flipkart acquired Myntra and last year Ola acquired Taxi For Sure, Snapdeal acquired Freecharge. Recently Flipkart owned Myntra went on to acquire Jabong. This phase, which apparently started in 2012, is the key to avoid the industry from being developed into a bubble ready to burst. The consolidation phase is expected to continue for next few years, and several small e-commerce players will perish. So it seems the Darwinian Theory of survival of the fittest applies to this industry as well.
In India customer have become habitual of shopping online to exploit high discounts and prefer brick and mortar stores to the former to buy products when such discounts are not available. This makes the lives of E-commerce firms, E-tailers in particular, a tad more difficult. Selling goods at Trade Price and taking a hit can certainly not be a sustainable model for any E-commerce firm. Therefore, constant innovation and efforts to retain customers and change their traditional perception are necessary to ensure long term survival of the industry. Now the only option left with firms is to continue spending money, within reasons, else the amazing growth which the industry had hitherto been enjoying will be hampered and the industry will fall head over heels. It is expected that high growth infused through this reasonable spending will make up for moderate short term losses.