With just 4% contribution to Adex in 2016, have ecommerce lavish spends been cut to size?

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According to the recently released Pitch Madison Ad Report, in 2016, the advertising industry grew by 12.5%. As per the finding of the report, 2017 promises to be the year of remonetisation, with the market expected to grow 13.5%, adding Rs 6,672 crore to Adex to reach a total size of Rs 56,152 crore.

The categories that have contributed most to the overall growth in 2016 are the FMCG players followed by Telecom and Auto. FMCG continues to be the most dominant sector with a 32% share of the total Indian advertising industry, followed by Auto at 10% and Telecom at 8%.

Ecommerce Adex 2016

Surprisingly, ecommerce that had taken the media market by storm in 2015 contributed only 4% to the total pie in 2016. In fact, investment by e-commerce category decreased by more than Rs 500 crore across TV, Print and Radio in 2016.  It must be mentioned that in 2015 ecommerce companies spent heavily on advertising to target wider customer base and for brand building. The advertising amount was spent across channels – TV, Print and Digital, with TV ad spends getting the maximum pie. According to experts in the  advertising and e-commerce business, the top 15 e-commerce brands spent close to Rs.2,100 crore on ads in 2015.

However 2016 has been a different story. Firstly, the major ecommerce players such as Snapdeal, Amazon and Flipkart have largely focused on profitable growth, and secondly and most importantly, with decreasing investor sentiment, the ecommerce player, especially Snapdeal and Flipkart, are finding it hard to raise fresh round of capital, which has impacted ad spends and also resulted in instances of downsizing and closing existing operations in certain verticals. Moreover, Flipkart, Amazon and Snapdeal collectively reported losses to the tune of Rs 11,754 crore in 2015-16.  Flipkart posted loss of Rs 5,223 crore, Amazon loss stood at Rs 3,571 crore loss while Snapdeal’s loss was estimated at Rs 2,960 crore.

Demonetisation, downsizing and new competition

Though chasing profits has always been a big challenge for the ecommerce players, the impact of demonetisation has further complicated the situation. With more than 80 per cent of ecommerce transactions dependent on Cash on Delivery (COD) mode, the ecommerce players are still battling the adverse dip in sales that demonetisation has resulted in. Some companies like Snapdeal and Flipkart are resorting to extreme measures like downsizing to tide over the situation. With fresh round of funds nowhere in sight, this has forced them to converse cash. The combined pull of factors like demonetisation, lack of fresh funds and increasing competition has compelled ecommerce players to cut down their ad spends considerably and hence explains their low contribution to Adex in 2016.

According to Harish Bijoor, Brand Expert & Founder, Harish Bijoor Consults Inc, ecommerce players are increasingly focussing on customer management processes, logistics and channel-management issues, “Yes, the days of irrational exuberance and indeed irrational expenditure by ecommerce companies in India is over. The early days of ecommerce in India were typified by a gung-ho feel that burnt VC moneys on advertising more than anything else. Today, the very same monies are being channelled on customer management processes, logistics and channel-management issues. The next phase of advertising expenditure will be with the Alibaba entry and of course the repartee from those at the other end of the competitive spectrum. Even here, there will be efforts to woo and retain old customers with much more than advertising alone. Therefore, I do not expect the ad-pie to balloon in the terrain of ecommerce,” says Bijoor.

Speaking about how the ecommerce players are now in a self-correction mode and adopting the wait and watch policy like other small and large corporates, Sumit Bedi, VP, Marketing, IndiaMART, said, “In my view, there are two main reasons for the reduction in ad expenditure by e-commerce players. First, as funding dried up, the overall number of players that were advertising went down and hence 2016 saw lesser start-ups and e-commerce companies adopting mass marketing. Secondly, post demonetisation the marketing budgets fell heavily. And this trend isn’t specific to only e-commerce. Both, small and large corporates are now in a self-correction and wait and watch mode. 2016 has been the year of execution for the Indian e-commerce industry where there has been more focus on return of investment and performance driven marketing.”

Pointing out that ecommerce players need to adopt a sustainable model for growth, Himanshu Arya, Founder & CEO, Grapes Digital, commented, “Ecommerce found favour with the masses majorly due to discounts. Convenience was a factor but not the driving reason and there have been innumerable instances where people prefer making the purchase online vis-a-vis offline simply because they are getting a better deal. Who is funding these discounts; is an interesting question. It’s not the brands, but the investors who have been making this trend rise.  Year on year, online brands today have grown on the top line revenue metric but the profits were minimal. This is not a sustainable model and the investors realise this.”

Explaining how ecommerce investors are increasingly looking for maximum bang for their buck and why there is need for long term vision on returns and not on the customer database, Arya further added, “Last year was a clear example of investors asking smart questions on ROI till the last rupee spent. The result is a decline in ecommerce ad spends. So today all small and mid players are shutting or pacing down, giants like Alibaba and Amazon who are coming with global spend pockets will be the one who will survive. The ad spends in these cases will increase but yes with a long term vision on returns and not on the customer database.”