Oct 28, 2014

Losses too can be profitable. E-retail shows the way.

This is baffling. The world's online retail business is growing leaps and bounds, and yet it is sinking in losses. But despite the losses, the business continues to grow. Although this strange new business phenomenon has upset the textbook definition of a business enterprise, no one is questioning. Economists are conspicuously quiet, and business leaders are turning the other way around.

That means losses can be profitable !

Well, don't blame me if I am saying something that doesn't exist in Economics 201 textbook. The fact is that the world's biggest e-retail giant Amazon has only last week posted its financial results for the US market. For the third quarter ending September 2014, it posted a 'gigantic' $544 million losses. And Amazon has already announced that the losses will continue for the fourth quarter also. In India, "our own e-commerce outfits are just through with our own holiday season, and they have turned up no surprises. They're not publicly listed so we don't know the numbers, but one can safely say that they would have lost huge sums of money because that's what they intended to do. Each one of them is making large losses and they all routinely go and get fresh rounds of money from venture funds or, as in Amazon's case, from a parent company." (No surprise: The plot thickens in country's e-retail story. Hindustan Timeshttp://bit.ly/1wD9AHT).

As per the latest balance sheet, Flipkart has accumulated losses of Rs 281-crore.

I tried to look deeper. Amazon, the world's biggest e-retail giant has been in business for some 20 years and has never made money. This means that losses are not only profitable, but are also sustainable. In a 3-part series International Business Times did look at various business practices being adopted by Amazon. I am particularly sharing this chart which tells you that while the revenues have continued to skyrocket, the net profit has remained more or less static thereby bringing in huge losses. How can any business remain business in such a depressing scenario? Well, certainly the plot thickens.

This chart gives you Amazon.com's revenue and profits between 2004-2014. 
Source: International Business Times

I asked economists and economic writers about this strange phenomenon. Everyone I asked told me it is a bubble that will soon burst. Some say that Amazon is surviving because the venture capitalists are funding it. The same holds true for Flipkart and Snapdeal. But this too defies any economic logic. Why should venture capitalists be funding a losing business enterprise? After all, no one has money to throw.

I am not sure about the future of Flipkart or Snapdeal, but the fact remains that if Amazon could survive with losses for nearly 20 years now, I see no reason why its Indian versions would not succeed. And if Flipkart also continues to be in business for even half the period that Amazon has been, and that too with huge losses year after year, it shows that the new business model successfully crafted by Amazon goes beyond what the likes of Adam Smith, John Maynard Keynes and the tribe could have ever imagined.

It's time therefore to rethink the very concept of business. Business is not only about profits, a loss too is an asset. If this is true, it challenges the popular perception of what constitutes a successful business. In other words, if Amazon can demonstrate that losses are profitable and that too for 20 years, why shouldn't the other business follow the trend? Why do traditional businesses go bankrupt while e-retail continues to grow and expand? Have economists been hiding the real truth from us all these years? Whatever be it, the plot only thickens with every passing day. #


Anil Sharma said...

It is true that no business can sustain for twenty years with losses unless has huge expansion in it operations through out all the twenty years. Normally we understand that in trading one has margin from 2% to 10% depending upon the products, market and volume. In said case we can know the true story by having critical analysis of its cost records through activity based costing .

Arvind said...

Amazon core business is IT Infrastructure, where they make huge money. Amazon.com is just a testing ground for their IT innovations.

shade said...

E-commerce business's can run with losses.......this refers to the concept of negative working capital wherein a business's current liabilities are greater than its current assets.These Business's can generate cash so quickly and hold out on paying money to others till the credit period given to the business is expired.That is to say these business's are good at raising funds(cash) from its customers and hold out on payment to there vendors and instead use the fund for further expansion. When the credit period given by the vendors is about to expire they immediately make payment to the vendor for avoiding extra payments(interest on late payments).