"The biggest impact of this adverse market condition was faced by the established players like Flipkart and Snapdeal, whose growth remained flat, if not worsened. Whereas, new entrants like Amazon have succeeded in altering the market share game and captured a big portion of the aggressively-contested industry," said RedSeer on Monday.
Amazon's aggression and huge promised investments into its India business made it harder for local rivals to attract new investment. This forced them to cut on discounting to conserve cash. Further, new foreign direct investment norms restricted undercutting on costs of products on e-commerce marketplaces, which led to slower sales growth.
Coupled with the impact of demonetisation during the last quarter of 2016, e-retail growth for the entire year slowed, despite strong business during the October festive season that was estimated at $2 bn. While the overall market share controlled by the three large e-commerce players remains close to 85 per cent, the split between the three has changed drastically in favour of Amazon, according to RedSeer.
The dire need for the local incumbents to protect their turf against Amazon is now seen in calls for protection against foreign companies, which they accuse of "capital dumping". Indian start-up posterboys Sachin Bansal, co-founder of Flipkart, and Bhavish Aggarwal, co-founder of taxi service aggregator Ola, made a public plea in December for the government to say no to foreign companies but yes to foreign capital -- which has largely fuelled their own growth.
Last week, Vani Kola, co-founder of Kalaari Capital and an influential venture capitalist, spoke similarly, asking the government to protect the interests of local companies. Kola is an investor in Snapdeal and Myntra, bought by Flipkart in May 2014 for $300 million.
However, RedSeer says the sector has the potential to grow at a compounded annual rate of 45 per cent for the next four years. It estimates the country's e-retail market could hit $80 bn (nearly Rs 5.5 lakh crore) by 2020, a conservative estimate in comparison to earlier estimates that it would exceed $100 bn by then.
"Indian e-tailing players faced a lot of challenge in 2016 but fundamentally this sector is expected to grow four-five times in the next four years. (The year) 2017 will be hotly contested," said Anil Kumar, founder and chief executive of RedSeer.
Despite estimates for future growth remaining positive, Flipkart and Snapdeal continue to face falling valuations and pressure from investors to turn profitable. Recently, Fidelity, a mutual fund investor in Flipkart, marked down the company's valuation to $5.58 bn, a third from its peak of $15.2 bn. Snapdeal is said to be in talks to raise fresh funds at a valuation of $3-4 bn, down from a peak of $6.5 bn.
Experts say the e-retail sector has become a two-horse race, Snapdeal falling far behind the two leaders. While Flipkart continues to lead, it entered 2017 with flat growth and unless it's able to stage a mammoth turnaround this year, will most likely give up its first position to Amazon.
E-retail market growth was 12% in 2016 compared to 180% growth of 2015
The slowdown was largely attributed to Flipkart and Snapdeal being unable to grow their base
US giant Amazon, on the other hand, grew massively by cannibalising market share of Indian players
Investors in Flipkart and Snapdeal have sharply marked down the valuations of both companies