With e-commerce coffers full, GMV is no longer ‘vanity’ metric

E-tailers stopped talking about Gross Merchandise Value when they realised the targets were not achievable’

Gross Merchandise Value (GMV) as a key metric of the e-commerce industry’s valuation and performance is set to stage a come back after a two-year break, on the back of strong industry growth numbers.

Flipkart owned fashion e-tailer Myntra will be among the first to announce that it has achieved $1.2 billion in GMV this fiscal.

GMV or gross revenue in e-commerce jargon, refers to the sale price charged to the customer multiplied by the number of items sold, and does not include discounts, cost of returns and other costs.

Three years ago, e-tailers who were flush with funds from global investors, deep discounted their way to brisk sales quarter on quarter. However, after the money in the bank dried up and the funding environment turned hostile, leading to declining sales month-on-month, Snapdeal’s co-founder CEO Kunal Bahl was the first to label GMV a “vanity” metric, in April 2016, and said he preferred to chase profit, which he referred to as “sanity”. This, coming from a man who claimed Snapdeal’s $4-billion GMV in September 2015 was set to overtake Flipkart’s GMV by March 2016.

Even Flipkart, which took on Snapdeal’s claim and revised its earlier target of $8-billion GMV to $10 billion by March 2016, dropped out of the GMV game in mid-2016 as it struggled to raise fresh funding as growth tapered off. Instead, it turned its focus to cost cutting, profitability and customer retention.

Amazon quotes customer traffic on desktops and mobile browsers, and app downloads as key metrics to determine its leadership. It recently hit the 3 lakh seller milestone vs Flipkart’s 1 lakh seller count, and claims to have acquired over 1 million new customers, of which 85 per cent are from tier II and II towns, during its January sale.

“E-tailers stopped talking about GMV when they realised their targets were far from achievable,” said Anil Kumar, CEO, RedSeer Consulting. “Companies, as a basic principle, will only talk about the metric that project them in the best light. As long as their GMV was on the fast track, they openly talked about it as a key metric of performance. If they achieve operational profits, they will choose to talk about that and when they have nothing else to talk about, they will talk about a new business model.”

Stating that all that is about to change, Kumar said GMV will be back as a key performance metric this year because the e-commerce market has bounced back to tremendous growth in the second half of calendar year 2017 with annualised GMV for Q3 at $20.8 billion and Q4 at $19.9 billion vs $14.7 billion and $15.6 billion in Q1 and Q2, respectively.

The growth is fuelled largely by the top two e-tailers — Flipkart which has become aggressive backed by its huge fund raise of $4 billion and Amazon which continues to keep investing.

RedSeer expects the $55-billion e-commerce market which registered 22 per cent growth in calendar year 2017 to register 30 per cent growth this year to hit $72 billion.

“GMV was always a vanity metric that e-tailers used when they had money in the bank from investors. When there is no money in the bank, they start talking about achieving profitability,” said K Vaitheeswaran, co-founder of India’s first e-commerce company Indiaplaza.com and author of Failing to Succeed: The Story of India’s First E-Commerce Company.

The only financial metric that matters, according to him, is a company’s gross margins. “If a company’s gross margins are growing faster than the company’s losses for the last four quarters, it indicates that at some stage, gross margins will overtake losses, revealing that the company is doing well.”

Anil Talreja, Partner, Deloitte India, feels it is okay for e-tailers to drive sales by deep discounts, promotions, etc, provided it results in positive gross margins.