Why no one talks much about GMV now

VIJAY SHEKHAR Sharma, the founder and CEO of Paytm, has an analogy to explain why GMV (gross merchandise volume) is not talked about as much as it used to be. “What are our concerns when a child is born?” asks Sharma. The first cry, the first smile, etc. Then we start thinking about the first baby steps, onset of speech, and toilet training. Later it is about school admission, homework, and report cards.

GMV was the first cry and first smile of the infant that was Indian e-commerce. We are past the stage where we should be obsessing over it.

Obsess we did, without caring to give the common folk the foggiest idea what it was. GMV is the total value of all transactions carried out on an e-commerce site, calculated on the maximum retail price without factoring in discounts. Naturally, the figure ballooned for online marketplaces.

A true online marketplace does not own anything. It has a group of sellers who offer their goods and services on the marketplace. The buyers who come looking for those goods and services place their orders and pay either before or after the delivery. The marketplace plays a role in organising the delivery and keeps a commission before passing on the payment to the seller.

An online marketplace brings together thousands of merchants selling millions of items in contact with millions of potential buyers. The number of daily transactions can range from 75,000 to 150,000 and more on any of the bigger marketplaces. Since the deep and rampant discounts they offer are not factored in, the GMV – calculated on the MRP – can be a fairly large amount.

And it is. A few months ago there were frequent skirmishes in print and digital media among e-commerce companies claiming that either they were already or were going to become the largest online marketplace. All their claims were pegged on the same metric: GMV. Even deals were done based on the GMV, with the valuation being worked out as a multiple of it, instead of as a multiple of earnings or income, as it is done in the offline world.

Then the e-commerce infant began to grow up, its growth probably spurted by their frequent stumbles short of the target. Mint, our sister publication, compiled the stumbles: Flipkart managed just about half of its $10 billion GMV target by March this year; Myntra, the fashion retailer owned by Flipkart, pushed back its $1 billion target by a year; Snapdeal did not overtake Flipkart on GMV as it had said it will; and Paytm fell short of its December 2015 target by $1 billion.

Apart from the companies missing their targets, there were two other issues with GMV. First, it can be shored up artificially by choosing items of high MRP. To take an example from the offline world, jewellery shops, selling gold, diamonds, and other precious items, would have very high GMVs. But — and this is the second issue with GMV — its correlation with revenue can be low. To take the jeweller example, if the shop buys gold from others and its earning is just the making charges on the jewellery, it will earn a small fraction of its sale price as revenue.

So it happened with online marketplaces. If you are merely a platform earning a commission, and, at the same time, persuading your merchants to give deep discounts, how much can you really charge as commission? That commission is your revenue, which is bound to be just a fraction of the GMV. The final wake-up call when e-commerce sites began to show losses between Rs 1,000 crore and Rs 2,000 crore.

This may have something to do with what happened to Flipkart. At the end of February, a mutual fund managed by Morgan Stanley marked down the value of its holding in Flipkart by 27%. In April, T Rowe Price reduced the value of its holding in the e-commerce star by 15%. In May, two more of its mutual fund investors marked their holdings down by more than 20%.

As investors woke up to the truth behind the GMV, its link with valuations became tenuous. Thus, even as the GMVs rose, the valuations became just two to four times this figure, instead of 15 to 20 times as they used to be.

One hopes that the eroding obsession with GMV will make e-commerce firms more rational in their expenditure. That instead of burning cash on advertising, marketing, and discounts to shore up the GMV they will pay more attention to cash flow, margins, revenues, and profits. Those are the metrics that make or break a company.

They won’t have much choice. Investors are now looking at their report card, not their first baby steps.