Why Profitability is a challenge in India's inventory led E-retail
An Indian E-retailer has, on an average, a gross profit margin of around 30%. The e-retailer has to incur following costs:
Marketing - 12%
Operations - 3%
Technology - 1%
G&A - 1%
Shipping - 6%
| Gross Revenue | ₹ 1000 |
| -COGS @ 70% | -₹700 |
| Gross Profit @ 30% | ₹300 |
| -Marketing @ 12% | -₹120 |
| -Operations @ 3% | -₹30 |
| -Technology @ 1% | -₹10 |
| -G&A @ 1% | -₹10 |
| -Shipping @ 6% | -₹60 |
| Operating profit @ 7% | ₹70 |
Now to achieve this operating profit of even 7%, the retailer has to have an inventory turnover ratio of 10-12 times. This coupled with losses incurred because of unsold inventory (which hasn't been accounted yet in calculation of the operating profit) makes running an inventory led e-retailing in India a daunting task.
Such a huge cost pressure is forcing Indian e-retailers to switch to either a marketplace model (recent example – Flipkart) or a hybrid (inventory + marketplace) model (example – Jabong). Myntra.com is among rarest of rare e-retailers who have been able to see the silver lining in an inventory-led business model. Part of the reason is that Myntra primarily operates in fashion and apparels category which has a gross profit margin of 40%!
Regards,
Sushant Aggarwal
12DM-148 -- E-Business Section B
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