Gross Merchandise Value is No Value for Retailers

VALUE OR NOT? Brick & mortar cos view the concept of gross merchandise value or GMV merely as a move on behalf of ecommerce firms to inflate figures. Some say actual sales are about a quarter of GMV while others don’t consider it a credible business metric. On the other hand are those who rue the unjustified critique
Flipkart CEO Sachin Bansal’s recent announcement hat the online retailer could achieve about `. 75,000 crore in gross merchandise value (GMV) has once again brought into focus a measure that brick and mortar chains regard as highly inflated.Kishore Biyani of Future Group, which runs chains such as Big Bazaar, said actual sales is about a ourth of GMV . “At the end of the day, it should be about how much cash has been collected. The real revenues are always just 25% of the GMV ,“ he said. Those on Biyani’s side of the debate say online retailers should declare net sales or ac ual amount of audited invoices as GMV does not include discounts and costs involved.

Govind Srikhande, managing director of Shoppers Stop, calls it “gross miscalculated value,“ add ng, “It is something that can drive valuations but not the bottom line.“

Bansal expects to boost GMV to `64,000-76,000 crore) $10-12 billion (. in nine months to a year against an earlier forecast of $8 billion for the year to March 2016. Rival Snapdeal has said that it is targeting $10 bil Rs 62,000 crore) in GMV lion (about .

Mahesh Murthy , managing partner of venture capital firm Seed Fund, is scathing about GMV . “I am happy to go on record that GMV is a bullshit norm,“ he said. “It does not reflect the cost of product, what it was sold at and the loss made on it.It does not also reflect the circular sales between two or three related parties, where they are buying and selling from each other. I have not seen anything like this with other credible global online retailers like Amazon which talks about transactions and not GMV .“

Amazon states net sales as an indicator of business conducted.

Bansal did not reply to an ET query on the subject.

Arvind Singhal, chairman of consultant Technopak, said online retailers should declare audited invoiced numbers. “I don’t understand the usage of GMV as a credible business metric. I want to know what is the gross operation margin and the net sales after the cost of customer acquisition,“ he said.

Snapdeal was estimated as having the highest GMV in a Bank of America Merrill Lynch report.

“We estimate close to 30% of Flip kart’s GMV comes from marketplace and expect this to move to 80% in next two years,“ it said.“The company is holding inventory instead of merchants, thus leading to faster delivery. We estimate Snapdeal’s GMV on market place is currently the highest, as it had a head start in terms of market place model.“ It pegs industry GMV at $7 billion, which is expected to grow at a compounded annual growth rate of 36% to $200 billion by 2025.“Flipkart, Snapdeal and Amazon together have around 90% of the GMV share,“ the report added.

Ecommerce in India is at an early stage. Companies have to go through years of operating losses, given high initial investments as well as the incentives they provide in the form of discounting to attract consumers. For instance, lifestyle online retailer Jabong more than doubled its revenue to ` . 811 crore in calendar year 2014 but deep discounting led to a fivefold . 160 crore.increase in losses to ` With an earnings before interest, taxes, depreciation, and amortization (Ebidta) loss of `. 454 crore, the company spent about 55 paise to get one rupee of sales. The hunt for buyers is seen as having cost Flipkart, Amazon and Snapdeal a total . 1,000 crore in FY14.of ` A leading private equity execu tive defended the accounting practices of online retailers. v “Ecommerce companies have s been able to reach consumers b across India in markets where many have been unable to reach,“ s the person said. “They have given a consumers convenience at the tip t of their fingers and value options. l They are valued by investors who see the long term and the valuations could be high but that is a t market-led economy . There is too much unjustified criticism.“

Some experts said GMV is akin to the way in which global retailers advertise how much consumers have saved by shopping at their stores.

“Quoting GMV is as good as saying how much money has been transacted through them and it is a fair thing,“ said Shivanandan Pare, head of ecommerce at Madura, which has brands such as Louis Philippe, Van Heusen and Allen Solly . “It may have no relevance on the balance sheet but it surely indicates the size of the business.“

While GMV figures are ostensibly seen as a justification for high valuations, it may not be the number that canny investors necessarily look for first.

“Three very basic answers are needed in order to gauge whether the business is achieving that objective. What are the real revenues, profitability (free cash flow andor net profit) and capital required to achieve that profitability (the return on equity),“ said Sameer Sain, managing director of Everstone Capital. “If we cannot get either or see the potential to get decent answers to these questions, we tend to stay away . We think online retail is, and will continue to be, huge, but we still feel that the businesses have to, in the long run, point to the same metrics and focus on the same value-creation process. I’m not sure if GMV answers any of those questions.“ Despite that, this is one battle that doesn’t seem likely to end anytime soon.

Source: The Economic Times

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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