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Indian E-commerce: Moving on from GMV

It has been a nervous month for the professionals working for internet and e-commerce companies in India. Shutdowns and layoffs have been the flavour of the month, and business models have come under scrutiny. The effects of recent events at Stayzilla and Snapdeal have not been limited to job losses only. Weighed down by these developments in the sector, Rakuten, the Japanese e-tailer, has puts its India plans on the back-burner.

Stayzilla, an alternate and homestay aggregator, has shut operations. Investors including Nexus Venture Partners and Matrix Partners have invested USD 33 million across multiple rounds in the company. The founders have promised to bounce back ‘with a different business model’.

Snapdeal, announced that it will lay-off about 600 employees from the company including from its Vulcan (logistics) and Freecharge (payments) business divisions. The company has so far raised USD 1.75 billion from investors which include global heavyweights such as Softbank, Kalaari Capital, Temasek, Alibaba Group and eBay. However, Snapdeal reportedly is left with less than enough cash to survive the next 12 months. The merger talks with Paytm, facilitated by the common investor Alibaba, are not murmurs anymore and seem to be the logical next step in many ways. A very honest and important insight on the business model emerged from this episode, in which the founders admitted to ‘doing too many things’ and ‘diversifying and starting new projects while we still hadn’t perfected the first or made it profitable’.

The above incidents highlight the fact that Indian e-commerce in 2016 has been significantly different from its ‘glory days’ in 2015. GMV growth in 2016 was flat, even though long term prospects remain intact for now. The year-end sales were also impacted due to the demonetisation exercise carried out by the government. The cash on delivery (CoD) transactions, which account for approximately 50% of total GMV, were severely impacted due to the lack of availability of the new currency notes.

Figure 1: India e-tailing GMV (USD mn)

Source: Company data, IAMAI, Euromonitor, Credit Suisse

AHHHGMV, as the supreme emperor of metrics, has lost its sheen and the challengers which have come to the fore include revenue per customer (function of number of orders per year, value per order and commission), net promoter score (a measure of customer satisfaction) and overall user monetisation (including alternative sources such as advertising as well as new service offerings such as hyperlocal services).

The sustainability of business model is back in focus as a tool to evaluate potential winners and losers. Throwing money at the customers as discounts has not worked out very well for a lot of players. There has been a definite move towards trying to find other means of retaining customers. Going forward, winners are most likely to be companies that provide a differentiated customer experience. An obvious example is Amazon Prime which now brings more personalized experience to the company’s customers. Flipkart (Flipkart Assured) and Snapdeal (Snapdeal Gold) have similar offerings to enhance the stickiness of their customers. While ‘Flipkart Assured’ has seen limited success so far, Amazon Prime, launched at a very attractive price point of INR 499 per year, seems to be more suited for success going forward. Amazon has also clubbed its Netflix challenge – Prime Video offering with Amazon Prime subscription. With these offerings, the companies are trying to take focus away from discounts and towards customisation, quick delivery, consistency and reliability of shopping experience.

The control over supply side is a key element of constructing an enhanced and consistent experience for customers. Logistics is one of most prominent cost items for ecommerce firms, and depending on the category and value of the goods being delivered, could be 10% to 20% of GMV.

In India, the number of Amazon fulfilment centres has grown to 27 by the end of 2016. Shipping from stores is less efficient than from dedicated fulfilment centres. Amazon is looking to replicate their success in North America where they have invested billions in network of fulfilment centres. It has more than 75 such centres in North America, covering 25 US states. This gives Amazon an easy two-day reach over the entire US. Snapdeal has opened 6 logistics hub during 2016, with an estimated investment of USD 300 million. Paytm, flush with a USD 200 million funding from Alibaba, is reportedly firming up plans for a significant strategic investment in a logistics firm to improve its deliveries process.

The key growth drivers for e-commerce in India remain in place. There is a large aspirational population, faster and wider internet access, a never before push on digital payments and an opportunity to further penetrate the offline organised retail market. Nevertheless, the year 2016 has been a reality check. The Indian players have had to review their business models and take some tough calls to focus on sustainability. While the market may continue to be volatile in the short term, with more potential shutdowns and/or consolidation in the offing, we can now be more confident that the firms that do survive will turn profitable soon.

arvind-yadav

This is a guest post by Arvind Yadav,

Principal at Aurum Equity Partners LLP.

 

Building a sustainable B2C Business by Mithun Sacheti, CaratLane

There isn’t a single consumer-facing startup that is profitable today. The losses of most companies are attributed towards the skyrocketed marketing costs that startups face in reaching to the Indian consumer today. You might counter that reality by saying that consumer-focused (B2C) companies continue to raise money – and boat loads of it. But there is a hypothesis that everyone seems to be working towards – get in on that secret!

Sustainable-eCommerce-by-CaratLane-Mithun-Sacheti-1-300x300

In this playbook, Mithun Sacheti the founder of Caratlane (India’s biggest player in the online jewellery space) will share insights from his playbook on how he is building Caratlane towards being a profitable enterprise. Insights will also include some of the painful (and expensive) snafus committed that cost the company both time, money and energy perhaps in the wrong direction.

Things you can hope to learn during this Playbook session:

1. Quick Introduction to the B2C Landscape in India
2. When to Start your marketing engine
3. Understanding the economics of B2C Marketing
4. How to build a sustainable marketing plan that keeps a B2C business not just afloat, but also helps scale.

Apply for this playbook by 1st May, 2016 and we will confirm your participation.

The Playbook roundtable is a format of event organized by iSPiRT (an association for Product Startups in India) that picks a specific topic that is vague or requires indepth understanding, anchors a few key entrepreneurs who have key insights on that topic, and invites hand-picked entrepreneurs who would benefit the most from the conversation for the roundtable. Each roundtable is no more than 12 participants. The anchor(s) kickstart the discussion, which evolves to a conversational format around best practices and key insights around the topic. Each session lasts approximately six hours. The insights are recorded, and shared as Playbooks to the community.

More details : http://www.ispirt.in/what-we-do/Playbook

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Can e-commerce be price competitive…always?

While everyone is talking about the lower price points on online stores, people in the business understand that a lot of that price competitiveness is coming due to venture capital (VC) money, which is being used to offer further discounts on the purchase price of the e-tailers. The question to ask is – whether e-tailing, which is based on a marketplace model, can be truly price competitive vis-a-vis physical retail.

By the very nature of the marketplace model, which is being driven due to regulatory conditions, etailers can’t directly buy the goods from the manufacturers’ store and sell them. So, they have adopted the marketplace model, wherein, some wholesalers or retailers are the actual sellers using etail portal to complete the transaction with the buyer. In the accounting books, the goods stay under the individual sellers name, until the transaction is completed; while the etailer may provide logistic support in terms of warehousing, delivery and payment collection.

So you could have a situation, wherein, you ordered something on Amazon/Flipkart, which is actually being shipped by your neighbourhood retailer! The products do the round trip from retailer to some remote warehouse and back to you. This is like catching your nose by placing your arm around the neck!! How can this chain of product delivery be more price-competitive than you visiting the shop and buying the goods directly from the local seller!!

People will argue that it is the wholesalers/distributors that are selling online and, thereby, cutting out the local retailer margins and passing the cost savings to the end consumer. While it sounds convincing on paper, but the reality is very different. In the evening, if you visit the local market area in any city, you can see the courier boys of the e-tailers picking up goods from retailers in the same market. I see this regularly when visiting my local market once or twice a week. These are the very same shops from where I buy that are now selling on e-tail portals.

Also, the current effort from the likes of Flipkart, Snapdeal, Paytm, and Shopclues etc., to increase their seller base, clearly shows that they want to engage all mom-and-pop stores (and not just wholesalers/distributors) to sell online. If they were to work on the model of selling by wholesalers only and passing the cost benefit to the end consumer by cutting out the end retailer, simple maths will show you that their seller count can’t exceed 40k-50k sellers.

If the end product is coming from a retailer in your local city market, where are the additional margins to pay for the logistics of product pick-up, delivery, payment collection, payouts and handle returns? Who is coughing up that money? The retailer can do it partially, incentivised by increased volumes and being able to ship to remote corners of the country. But factually, even they don’t know where they are shipping! Also, a small cut in retailer margins can’t lead to the steep double digit discounting, which we see on almost all etail portals.

Fundamentally, the marketplace model works for shipping into remote areas, where physical stores for many brands don’t even exist, but there is a definite demand. However, for such services, the etailers should ideally be charging a premium and not discounts. In the metropolitan cities, the numbers just don’t up. And, buying from a local retailer will always be more cost-effective than buying from e-tailers, especially after the VC money-based subsidizing phase is over.

Our view has been validated by PriceMap customers, who are able to find local retailers offering the same product at lesser prices, which they were contemplating buying online.

This is a healthy debate and I look forward to your comments and views.

Guest Post by Suresh Kabra, Founder of PriceMap

Image Courtesy.

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The Other E-commerce Guys

“Fifty years ago the nice housewife still prided herself on knowing the right place for everything. There was a little man in a back street who imported just the coffee she wanted, another who blended tea to perfection, a third who could smoke a ham as a ham should be smoked. All have vanished now; and the housewife betakes herself to the stores.” – Clive Bell, English Critic and Writer, in Civilization 

Bell, one of the finest art critics, wrote this in the 1920s . Though he did not use the word consumerism anywhere—probably it had not been coined by then—Bell’s words exactly describes what we today call mindless consumerism. 

Now, just try to gauge how much more we have progressd on that path in these 90 odd years since Bell wrote this? Instead of the local stores, now the housewife “betake herself” to the superstores, large format retailers, where she even gets discounts if she buys more and is spoilt for choice of brands. And she is happy! Or so she shows. 

Of course, it is not just the housewife. It is all of us. 

But how many of us can say honestly that we don’t crave for something that we have grown up with and something that we do not get anywhere in the superstores? Remember the banana cake that the bakery next to your house in Kollam made so perfectly? Or the auromatic curry powder that the man in the street behind your housing colony in Berhampur sold from his home?  

We know the superstores, despite their 20 plus brands in offering, can never match that. Yet, we cannot do anything about it. We are too busy in our everyday lives to do anything beyond craving. 

But a few passionate individuals are doing something about it. Realizing that many of us would love to, as Clive Bell puts it elsewhere, “get what we like rather than like what we get”, they are trying to ensure that they deliver those products to us. And they have turned to something that we are only too familiar with us: e-commrce. 

E-commerce? Hasn’t it taken us a little farther in that path of consumerism, offering heavy discounts on big brands—foreign fashion brands we may not have heard of six months back but now do not leave a single chance to boast about them after we bought them with 70% discount? 

Yes, it has, if we define e-commerce narrowly as one business segment, characterized by big funding ($900 million, according to Juxt research), big acquisitions, and bigger discounts. Not if we define e-commerce as a way of doing business. The basic value proposition of e-commerce—removing the constraints of space and time from shopping—is a powerful one and is here to stay. 

These new generation e-commerce companies are not about big money and scalability; they are about a passion. I am so gung-ho about them not because they are different or innovative, but because they bring us things for which many of us have long craved for. They are about reaching out to people with a taste, without having to worry about huge capital investments. They are about—and this is my reason for writing this piece—making people look beyond the malls and superstores to appreciate something made/procured with care and love—almost a movement against the mindless consumerism that all of us are becoming slave to. 

Here are a few such efforts. The list is neither a work of research by Juxt (or anyone else) nor have they been selected by any business parameters. But if you are dying for some criteria, you can take this: they are fairly focused. And as many of you would be quick to point out—are not really scalable.

Blue Tokai Coffee (http://www.bluetokaicoffee.com)

According to the promoters, they started  Blue Tokai Coffee, “figuring that there were many others like us who would enjoy a good cup of freshly roasted coffee”. “The coffee we roast is the coffee we like to drink.” they say. 

Choko la (http://www.chokola.in)

This initiative is from Vasudha Munjal from the family of Munjals, promoters of the Hero Group.  A hybrid offline-online chocolate store, Choco la aspires to “create a chocolate culture in India”. The goal is lofty; the offerings are good. But unlike others such as Blue Tokai, it has good competition. It still has to create a good differentiation and some real buzz on social media. 

Darjeeling TeaXpress (http://www.darjeelingteaxpress.com)

With an aim “to reach as many customers, consumers and tea connoisseurs as we can all around the world”, Darjeeling TeaXpress is all about choicest tea. You can but based on type (green tea, black tea…), plantations, flush and speciality. You should see the varieties on offer to belive it.    

Goosebumps Pickles (http://www.goosebumpspickles.com)

Creating a pickle of your own choice of ingredients and that too made for you at home and it arrives straight at your home—raise your hands who does not get excited by this? And I can almost see no hands. The concept and the website have been appreciated by many. It even got a mention in the IAMAI awards. 

KashmirBox (http://www.kashmirbox.com)

Kashmir is many things to many people. But most of them having different political opinion about Kashmir agree when it comes to their appreciation of the food and clothes—be it chilis or saffron; pashmina shawls or bags. The site ofers authentic Kashmiri stuff which you can buy sitting at your own home. 

The list is neither comprehensive nor does it claim to be a roll call of honour in the category. They are presented here as illustrations of the bigger point. So, feel free to add your favorite mithai shop online  or online bakery to the list, if you think they are doing a good job. And if you cannot absolutely resist it, create business plans for them. And maybe, think of your own such dream venture.

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Who are the “early adopter” Venture Capitalists in India

Like you, I assumed that all VC’s are risk takers. I mean as an asset class if you have to provide the highest returns over the long term, I would suspect you have to take big risks to get big returns. The average Indian bank has been giving around 8% annual returns on FD (source), real estate returns about 13%, and gold loan providers will give you close to 15% I am told. So, VC as an investment class should offer higher returns given how ill-liquid they are and how risky they tend to be.

So, how do you really measure if a VC is an early adopter versus a late adopter? (lets keep it simple and only put them into 2 categories).

My thinking is the only way you can do that is to look at their investments (portfolio companies) and find out the categories of companies they invested in. Then find out if any other VC’s invested in another company in that category after the “first” VC did. There are other ways to do that, like ask entrepreneurs who responded the fastest when they were looking for funds, but those dont evaluate who puts their money where their mouth is.

Why is this question useful to answer?

For entrepreneurs who are innovating in a new area, this list of early adopters will help you determine who you should go to first versus who should you expect will fund a possible competitor.

Lets define our methodology and assumptions:

1. We will look at all their websites and make a list of the Indian VC portfolio. Fortunately we have that list of over 50 VC’s in India.

Flaw: Many dont update their website as frequently so there may be a 20% (or higher) error, but I have tried to be comprehensive.

2. We will then categorize their investment into 5 buckets – Media and content, eCommerce, Business to Business, Mobile and other (Education, Healthcare, etc). This is important so we know not only which VC’s are early adopters but we can also try to find that out by sector.

3. Then we will look at the announcement dates of their funded companies from press releases, Unpluggd, YourStory, ET and VCCircle. We will give them 2 points for every investment done in a sector before any other VC did.

Flaw: Most (I suspect over 50%) of companies report their funding 3-6 months after they have raised the money, so this will be a large flaw, but lets do the analysis anyway.

4. Finally look at stage of investment. If a VC puts money in the series A, I would give them two points in the early adopter bucket. If, however they participated in series B or later, they get one point in the late adopter bucket.

First let me give you the results (not in any order other than early adopters vs. late adopters).

Early adopters VC’s.

  • Accel (eCommerce, B2B) – 78 points
  • Indo US Venture Partners (B2B) – 56 points
  • Saif partners (Mobile, eCommerce), but they are late adopters in B2B – 49 points
  • Venture East (B2B) – 45 points
  • Sequoia (Media) – 46 points
  • Seedfund (Scored enough, but dont have a clear winning category) 42 points

In the middle

  • Blume ventures – 40 points
  • Nexus Venture partners – 36 points
  • Helion – 36 points
  • Ojas ventures – 34 points

Later adopter VC’s – all scored less than 30

  • Bessemer Venture Partners
  • DFJ
  • Cannan partners
  • India Innovation fund
  • Inventus Capital
  • Footprint ventures
  • IDG ventures
  • India Internet Fund
  • Lightspeed partners (but have done well in Education)
  • Norwest
  • Sherpalo

What I hope this list will do?

1. Make Indian VC’s think about being innovation catalysts rather than ambulance chasers. I understand you have a responsibility to provide returns, but you also have a responsibility to grow the Indian startup ecosystem. Might I suggest a 5-10% of your portfolio towards risky, “first time this is going to happen” investments?

2. Make Indian company founders announce their funding. Unlike the US, here entrepreneurs are loathe to do so. I can understand the competitive pressures, but not doing any announcement is just lame.

3. Educate Indian entrepreneurs on their target VC list. Depending on the opportunity you are trying to pursue, please target the right VC firm. The only thing you have (and dont have) on your side is time. Use it judiciously.

P.S. I have confidence in the methodology but I would be the first to admit its neither comprehensive nor scientific. If you are an eager MBA / Engineer / analyst and would like to help make this methodology and analysis more robust, I’d love your help. You can take all the credit. In fact, I can convince many publications to give you credit for the work if you desire and if you keep it updated every 3-6 months.

P.P.S. If you are a VC and not in the early adopter list, or you are not happy with the analysis I’d also welcome your associate’s help in making this analysis robust.