Foreign investors funding online shopping discount bonanza

Behind the flurry of discounts offered by India's e-retailers in their attempt to grab the top spot, are  the foreign funds they have managed to attract.

This year has seen a frenzy of fund-raising. In May, Flipkart raised $210 million on a valuation of $3 billion, with a further $1 billion following in August when its valuation had risen to $7 billion. It is now reported to be seeking a third round of financing at a valuation of $10bn.

Big internet investors like Yuri Milner's DST Global and Masayoshi Son's SoftBank Corp have fuelled billions of dollars in India's online shopping market. This means that Indian consumers have been subsidized by Wall Street investors.

Japan's Softbank has invested significant amounts in Snapdeal, which also raised $627 million recently (See: SoftBank invests $627 mn in Snapdeal).  And Amazon has announced $2 billion of investment in its Indian operations (Amazon to outdo Flipkart with fresh $2-bn investment in India) 

A report in The Economic Times noted how these three alone had "guzzled about half a billion dollars of investor money doling out lavish discounts during their much publicised Diwali promotions" and argued that Indian consumers were in effect being subsidised by investors on Wall Street.

According to one media planner, the top six ecommerce businesses have together spent around $200 million on advertising, a figure that puts them among the top 25 advertisers in the country.

Nor is it just the big names that are chasing investment and custom. Business Standard listed a number of niche players who had raised between $100,000 and $10 million in multiple rounds of funding. And an ecommerce portal for personalised invitations and stationery business launched in October has just picked up $1.5 million in seed funding as it targets the $1bn event invitation market.

The use of heavily-promoted discounts to attract new consumers is fuelling growth at the expense of profitability, a situation few expect to last longer than two or three years before there is some consolidation within the sector.

Arvind Singhal, chairman of retail consultancy firm Technopak, said the current valuations of ecommerce companies defied logic. But he thought that "three years from now, the dust will have settled with fewer players and a return to normalcy".