With big competitors like Flipkart, Amazon, and Tata dominating the industry, the Indian e-commerce scene has experienced exponential expansion in recent years. Nevertheless, under the surface of prosperity, there is a troubling pattern as most of these business giants are struggling with losses year after year. To understand the cause behind the consecutive losses registered by the major e-commerce companies and to understand the strategies followed by unicorn e-commerce businesses in India, this article will explore the causes of these organizations' financial difficulties, considering the impact of exorbitant marketing costs and rising customer acquisition fees.
Understanding the Losses Faced by Major Indian E-commerce Companies
Major e-commerce joints such as Amazon, Flipkart, and Tata, among others, have reported losses in recent years. For Instance, despite being one of the early pioneers in the Indian e-commerce space, Flipkart has consistently reported losses since its inception. In the fiscal year 2021, Flipkart's losses widened to Rs 4,362 crore ($588.9 million), primarily attributed to increased expenses in technology and marketing. The loss is continuously growing as even in FY23, the company reported loss and struggled to manage to break even irrespective of high turnover and sales. E-commerce major Flipkart recorded a loss of Rs 4,890.6 crore ($621.1 million) in FY 2022-23.
Amazon, a global e-commerce giant, has been no stranger to losses in its Indian operations. While the company's revenue has steadily increased, the losses have also mounted. However, the biggest e-commerce marketplace managed to cut net losses by almost 23.0% to Rs 3,649.0 crore ($463.4 million) in FY22 from a loss of Rs 4,748 crore in FY21 ($640.9 million). Tata’s e-commerce brands (Tata Digital, Big Basket, Tata 1 mg, Infiniti Retail (Croma), and Tata Unistore) collectively recorded a loss of Rs 5,516.08 crore ($700.5 million) in FY22.
However, Meesho one of the newest e-commerce companies in India, and e-commerce unicorn said, that it had turned profitable for the first time on a consolidated profit after tax (PAT) level in July 2023.
It is important to understand the factors affecting the profitability of the major e-commerce giants even after such high revenue and sales. Factors such as high marketing expenses and customer acquisition costs have been major contributors to the losses.
1. Growing Marketing Expenses Reducing Profit Margins.
One of the primary factors contributing to the losses of major Indian e-commerce companies is the exorbitant marketing expenses they incur. In a bid to outshine competitors and gain a larger market share, companies often engage in aggressive marketing campaigns, offering discounts and promotions that result in a significant dent in their profit margins.
Advertising spending on e-commerce platforms in India surpassed $1.0 billion in 2022 and is likely to expand faster than the whole digital advertising ecosystem in the coming years. For instance, Amazon-owned Indian firms spent a total of Rs 5957.9 crore ($756.6 million) on advertising in FY22. Whereas Flipkart spent Rs 1,945.9 crore ($247.1 million) on advertising, which was 36.0% more than the previous year. E-commerce unicorn in India, Meesho In 2022, spent Rs 2,579.3 crore ($327.5 million) on advertising and sales promotion.
The marketing expenses of leading e-commerce companies in India have witnessed a sharp increase over the past five years, with some companies spending up to 30.0% of their revenue on marketing. While these strategies may boost short-term sales, the long-term sustainability of such an approach remains questionable.
2. Growing Customer Acquisition Cost (CAC) Woes Profit.
Customer acquisition cost, the expense associated with convincing a consumer to buy a product or service, is another critical aspect impacting the profitability of e-commerce giants. The intense competition in the Indian market has led to a surge in CAC, as companies strive to lure customers away from their rivals.
Offering large discounts and offers, and spending extra on marketing and advertisement to lure new customers are the key factors growing CAC of e-commerce companies in India. The CAC for e-commerce companies in India has risen by nearly 60.0% in the last five years. This increase, combined with the high churn rate in the industry, poses a substantial challenge to achieving profitability.
For Instance, Swiggy, one of the top business unicorns in India registered a loss of $545.5 million in FY 2022-23, 80.0% higher than the previous year due to expansion and increased customer acquisition cost.
Recommendations for a Profitable Pivot for E-commerce Players
1. Strategic Marketing Investment: Quality over Quantity.
Rather than squandering money on marketing, businesses should concentrate on strategic, targeted efforts that appeal to their target demographic. Gaining insight into the behavior and preferences of customers can help maximize marketing efforts and increase return on investment.
Amazon, for instance, is consistently evolving its product portfolio, leading to decreasing return on investment and continuous losses despite recording the highest sales. However, Naykaa, one of the leading e-commerce companies in the online retail market has registered a profit of Rs 41.3 crore ($49.5 million) in FY 22 because of its marketing investment policy of delivering quality over quantity.
2. Find Innovative Cost-Efficient Marketing Channels To Reduce Marketing Costs.
A better long-term strategy for acquiring customers can be found by investigating creative and economical marketing channels like influencer collaborations, content marketing, and referral schemes. Comparing these approaches to traditional advertising, they frequently produce superior outcomes at a much lower cost.
Meesho, a unicorn of Indian e-commerce informed profit in June 2023 when big companies were facing huge losses. Meesho’s spokesperson informed about the profit in a press release attributing to their innovative cost-efficient marketing strategy.
3. Enhanced Customer Loyalty Programs to Improve Customer Retention Rate.
Personalized experiences and loyalty programs can help retain customers at a lower cost than continuously bringing in new ones. Not only can loyal consumers boost sales, but they also act as brand promoters, which lessens the need for intensive marketing campaigns.
For instance, Amazon after recording losses for consecutive years, finally cut down the losses in 2022 by reducing CAC costs yet it is a long road for Amazon to attain profitability.
However, OfBusiness, a technology-enabled platform that provides financing and procurement services to small and medium enterprises (SMEs) registered a profit of Rs 463 Crore ($55.5 million) in FY23 with the help of their improved customer retention strategy.
Cut Down Expenses and Get Back on the Road to Attain Profitability!
The losses incurred by major Indian e-commerce companies are indicative of the challenges posed by the highly competitive market and the aggressive strategies employed to stay ahead. While the path to profitability may be challenging, a shift towards strategic marketing, innovative customer acquisition approaches, and operational efficiency can pave the way for sustained success. The key lies in striking a balance between growth and profitability, ensuring that the foundations laid today lead to a sustainable and prosperous future for the Indian e-commerce industry. Unicorns and minicorns are creating a competitive environment in India and where market leaders are troubled registering break-even, these start-ups are not just registering the profit but removing traditional high-costing marketing methods.