The Evolution of Ecommerce Business Models in India [Going back to where it started?]

A report by The Telegraph

“There is a slow but noticeable change in the way ecommerce players are operating. The business model of the Indian ecommerce is taking a full circle flip to go back to where it started, though this time the infrastructure has changed and along with that the size and understanding of the market as well.”

In the last couple of years, we saw the Indian ecommerce industry making it to news for all the funds it raised. In the past few months, funding news has been slow but nonetheless ecommerce has had its fair share of media limelight with pundits talking about lack of profitability in companies that value growth and mocking small profit making ecommerce players for their lack of investment in infrastructure and growth.

Amidst all this, there is a slow but noticeable change in the way ecommerce players are operating. The business model of the Indian ecommerce is taking a full circle flip to go back to where it started, though this time the infrastructure has changed and along with that the size and understanding of the market as well.

Last year, at an industry body’s panel, we saw about 5, then prominent, ecommerce players each with a distinguishable business model.

1.Ebay – Marketplace

2.Flipkart – Inventory owned Retail

3.HomeShop18 – TV Shopping extended to ecommerce.

4.VIA – Store in Store model through there offline network of franchisees.

5.Smile Group – Vertical play through fashion&You, Deals&You, Bestylish, Freecultr, Juvalia&You.

6.Optima Kart – Yet to come, but business model sounds good.

The debate was mostly around which model works best for ecommerce and is sustainable in the long run. Today of course, everyone is leaning towards the marketplace model. Part of which is to do with the regulations around foreign direct investment in retail in India and the rest around capital efficiency. One credible point is that this time the players are moving towards a model that they did not originally start with, hence the belief is that they have definite answers to the intricacies of the model and not just a me-too jump.

Let’s take a look at how the full circle of change has evolved and how things are moving towards the better.

The Pre boom era – Rediff / Indiatimes/ Indiaplaza – Ecommerce, as was introduced in India, was more skewed towards sellers than consumers. The focus was on getting the user to transact without worrying about order fulfillment and post purchase support. Add to that the payment collection woes; the ecommerce ecosystem was only a blue link on the web for most consumers.  Most of these sites catered to non resident Indian audience who wanted to send something back home. The time/quality/pricing mattered very little. A good instance of this could still be seen through the prices at some sweets and flowers delivery sites.

The players were more of a tech/media company with little to no exposure to retail (Indiaplaza is an exception and infact was powering the shopping section at a lot of news/media sites). The actual inventory owners were responsible for shipping but did not have a direct interface with the user. A lot of this still exists.

If you draw an analogy of this model to the offline world, it’s more like a megastore that has a single interface for billing and checkout but each department, floor and label has its own service levels. This was skewed indeed and the incumbent players realised the gap only in the past couple of years.

Marketplace – Through the acquisition of Baazee, Ebay entered India and gave a marketplace model to the user. The initial positioning was around enabling every consumer to be a seller and give them a platform to dispose-off their un-used products. This is very similar to the OLX/Quikr positioning of today. That positioning is still hurting Ebay India as there still exists a perception about ebay being second hand products store.

Ebay has acted well to bring in more trust and security for buyer and seller. Though it has been restricted a lot due to the FDI regulation and having to follow its international model in India as well. The buyers on Ebay are still limited to the savvy audience of the web. Others, who got introduced to ecommerce in the past couple of years through TV ads are yet to figure out why “IndiaTech99” or “Gadget4Sale” is mentioned as seller for a product.

The Flipkart Model – Until Flipkart entered the market, most ecommerce players acted more like an interface between the sellers, who were the actual inventory owner, and the buyers. Back then “Own the inventory” model was rarely seen, as this model is considered to be cash in-efficient. Large warehouses, limited credit time from vendors and added liability of dead stock have not worked in favour of this model and brought in new set of problems to solve. Though, the control over the complete value chain that this model offers has a lot of benefits as it means greater bargaining power with suppliers, higher gross margins and most importantly you become the single interface to the user. User does not have to worry about who the real inventory owner is.

This model, though, has been very costly but has helped Flipkart develop trust and service credibility amongst its users. That kind of intangible value creation for its brand would not have come through any amount of marketing spend.

TV Shopping – Homeshop18 /StarCJ – TeleShopping or TV shopping has been in India for over a decade now. It started with products that one would never get at a regular store and would never think of buying otherwise. Loaded with surprises and offers that sounded too good to be true, white skin humans with dubbed voice promo videos with lots of testimonials – that was the key to those transactions. I remember ordering some “mathemagic” course back in school days from one such network; the books came in English and the videos in dubbed Hindi. It was that bad.

With time, we saw Indian/Chinese products being sold by Indian celebrities targeting the gullible afternoon or late night audience. HomeShop18 fought that perception has made a mark in TV shopping. StarCJ followed but hasn’t been as much popular although backed by GEC (General Entertainment Channel) network. HS18 is good. The transaction process is smooth, delivery is on time and ordering on phone isn’t painful.

The pain with HS18 as a TV only model is that the catalogue size will be limited by airtime. Also, the cost of producing promo video is justified only for high margin products like apparels or imitation jewellery. The limitations are similar to that of a-deal-a-day model of WooT. For the user, though, this is as good as inventory owned retail. The brand extension on web has been executed well and it has the advantage of being an As-Seen-On-TV brand which does bring a lot of trust with Indian users.

I would expect Indiatimes Shopping to pull off something similar with TV being replaced by newspaper or may be both together. The problem with Indiatimes’ current usage of print media space in their bouquet of publications is that the same spot earlier showed Chinese products from Naaptol or some e-phone or blackcherry (sic) phone under the Reader’s Offers. Indiatimes isn’t using its print space enough for brand building but only for announcing coupon codes. When you turn pages, you jump from one offer to another between Naaptol, Reader’s Offers and Indiatimes Shopping. It is faciong the same perception problem that HS18 had to fight due to incumbent players in the TV shopping space. Timesdeal did try a little brand building through print but that just isn’t enough, specially when competitors like FlipKart, Infibeam etc. have earlier enticed readers with full page ads in the same publication.

Pro cheapskate tip – use FLASH<today’s date> as coupon code on Indiatimes Shopping anyday, eg. FLASH3101 for Jan 31. [That is all that the ToI ad of Indiatimes Shopping says.]

Store in Store model – Via.com, through its network of offline franchisee stores, has been selling travel services, telecom services, movie bookings etc. Though I haven’t tried but I have heard of Via trying their hands at selling physical goods such as books through the ViaWorld network. That is a powerful proposition in India. It is enabling “assisted” online shopping. Anyone who has ever sold anything offline in India knows how important “assisted” shopping is. We are a country where coin operated coke vending machines and ticket vending machines are also manned. In the long run, this network of retail points can become a delivery hub for neighborhood orders and in turn increase footfalls in the store.

Vertically Integrated Retail – India is yet to see an aggressive vertically integrated retail play on web.  The advantage of VIR shouldn’t be viewed as an ecommerce company starting to manufacture but a manufacturer getting direct access to consumers. Some large brands have deployed their own stores using Martjack, Zepo, BuildaBazaar etc. though the marketing for their ecommerce store hasn’t been that aggressive. As the market matures, single brand VIR would need to depend on marketplace and their ecommerce setup would be reduced to an order fulfilment department. Private labels are a different game than VIR. There is no manufacturing in private label. The analogy of Private label vs. VIR is same as Marketplace vs. inventory owned retail. Zovi, for example, is a private label. The Zovi shirts are manufactured by a Delhi based manufacturer called TN’G, amongst others, which also serves private labels for large stores like Lifestyle. Same is the story with most private label brands, online and offline.

So where are we going from here?

The 2 important points to consider from over a decade of action are:

      1.   E-Commerce needs greater control over each process in the service   chain for maintaining brand credibility.

      2.        Owning the inventory is cash in-efficient. While a marketplace model allows for greater catalogue coverage without the risk of maintaining stock but owning the inventory also allows for higher margins.

A hybrid model of the 2 is best suited. Which takes us to what Amazon is doing in US. It is a retailer itself and it provides each process of the service chain as a service to its marketplace sellers. This way the service quality will be checked at all levels and there will be known/well communicated reasons for failure.

Again, the important point here is that the players are making a conscious move towards this model and it is (hopefully) not a blind jump.

Please note I am suggesting a hybrid model with power of direct retail and efficiency of marketplace. This is not a standalone marketplace model like Ebay with only web infrastructure.

E-Commerce is a New Dream for India Inc

Name a business segment which is a decade old, all players, big or small, are losing money and yet investors are ready to pump in more and more funds.

Confused? It is the online retail business or online retail e-commerce (e-com). The 50-player retail e-com is growing at over 40 per cent a year, every month around five new ones jump on to the bandwagon and investors keep cutting cheques with a hope that there is a pot of gold at the end of the road.

Take the case of India’s largest retail e-com company Flipkart.com which recently raised $20 million in its third round of funding from a venture capital (VC), valuing it in excess of Rs 1,000 crore. Though the company has already raised $31 million, there are rumours that a very large VC fund is planning to invest another $150 million in the company raising its valuations to $1 billion or Rs 5,000 crore.

Then there are others like Myntra.com which raised $40 million, Indiaplaza that raised $8 million so far, and daily deals site Snapdeal.com’s parent Jasper Infotech that recently raised $40 million from VCs. Even global majors like eBay.com (entered six years ago) and Amazon.com are present in the Indian space.

Large Indian off-line groups like Future and Times of India are also in the fray. It is estimated that even after investing $300 million in the Indian retail e-com space, VCs are looking out for more exciting ideas with a bagful of money. It is estimated that around 20,000 deal transactions and 50,000 product transactions happen every day from the top 10 retail e-com sites.   

Why are VCs so bullish on e-com? Will it be another bubble like the burst of dot.com companies in the early 2000s? Early stage venture funding company Accel Partners, which has invested in half-a-dozen e-com companies does not think so. “We are very bullish on the future potential of the Indian retail e-com market. Buying online is catching up fast and all our funded companies are gaining traction as planned,” said Accel Partners Partner Prashanth Prakash. 

Drivers of growth
E-com companies and experts believe that several factors will drive e-retailing growth in India. According to a recent report from Internet and Mobile Association of India (IAMAI), total Indian market for e-com is around Rs 50,000 crore, of which 80 per cent or Rs 40,000 crore is captured by travel e-commerce (online train, bus and airline tickets) while non-travel or retail e-com is only 20 per cent or Rs 10,000 crore.

Experts hope that by the year 2025, the total e-com market will reach at least Rs 4,00,000 crore and the share of retail will be half at Rs 2,00,000 crore. “It is this kind of market predictions that is making everyone sit up and make a note,” said Indiaplaza Founder and CEO K Vaitheeswaran. 

Indiaplaza, now one of the top 10 e-com companies in the country, has been around for nearly a decade and re-invented its business model to become a pure play e-retailer. One of the major reasons why e-com has grown very fast in the last 2 to 3 years, Vaitheeswaran believes, is the tremendous growth in internet penetration which has now reached 100 million as against only 3 million in 2001. “Earlier only around 1 per cent of internet users were shopping online, now about 8 per cent or 8 million shop online,” said Vaitheeswaran. 

With the phenomenal spread of mobile telephony and the advent of 3G in the country, buyers from small towns and cities are also buying online in large numbers. It is a fact that internet has dissolved the discrimination factor between the small and the big cities enabling buyers from small towns to have access to the same branded goods, and quality products which earlier was a privilege of large city buyers.

As the economic boom has enhanced purchasing power of the people and competition has pushed prices of manufactured products down, presently, a huge number of shoppers are buying many aspirational products like cameras, mobiles, computers & accessories, apparels, jewellery, home & kitchen appliances, toys, gift items etc online. Till about five years ago, books and music were the largest selling categories online, but not any more. 

Says Myntra.com CEO Mukesh Bansal, “Thanks to the spread of internet, even small town buyers are shopping online for branded products from us. Normally big brands don’t have outlets in small towns, and even if they do, stocks and varieties are limited.” Myntra’s online store, on the other hand, sells all top branded apparels and sports shoes with a wide variation in style, size and price. 

Around 60 per cent of online buying now comes from the top 10 cities and 40 per cent from smaller towns, said Prakash of Accel Partners. This ratio earlier was 80:20.  Travel portals and classifieds (like job search and matrimony), however, have laid the basic foundation of e-commerce, in India. As people started using them, their fear about security and possible fraud in online shopping have largely dwindled. Says sulekha.com CEO and Founder Satya Prabhakar, “Buying tickets online has given people confidence that it is absolutely safe and worthwhile to go online for shopping. The ‘no-questions-asked’ return policy in many portals also helped creating the ecosystem.” 

According to Prabhakar, Sulekha has transformed itself from being an online classified company to a ‘digital market place’ fulfilling users needs in every aspect. It now has a local search with 20 lakh entries for well-rated business, about 1 crore classified advertisements on its site and an e-com vertical for a wide range of consumer products. 

At the virtual market place, it is easier to change a business model depending on how the demand evolves and competition hottens up. While some niche players changed to offer a wider range of products, some ‘sell all’ players changed to niche. BeStylish.com, for instance, claims to be the largest online shoe retailer in the country with 90 brands and 3,000 styles on offer for men, women and children. 

Apart from value-for-money brands, it sells shoes by many exclusive brands. “The huge expected growth in shoes can be attributed to the increased affluence and raised consciousness of Indian consumers about their footwear,” said BeStylish.com CEO Shailen Amin, who added that by 2015, there will be nearly 40 million people transacting online.

Different models
Then there are online specialised retailers like LetsBuy.com (watches, consumer electronic items and home appliances), Caratlane (jewellery), babeezworld.com and babyoye.com (both selling baby products, going up to 120 brands and 1,00,000 products), etc.

Then there are specialised lifestyle brands like ‘Sher Singh’, the first online retailer of fashion for men and women inspired by the rich heritage of the classic cricket style. E-com companies also follow different distribution models for their services. While companies like Flipkart.com, Naaptol.com and Myntra.com are investing heavily in building own warehouse (the former two have six warehouses each) and supply chain logistics, portals like Indiaplaza work only with third party suppliers.
 
E-com survival
“All players are losing money now. For the e-commerce business to survive and make a turnaround, it is important to keep the fixed cost as low as possible. That’s why we work on a lean and mean model,” says Vaitheeswaran. 

Though both have their pros and cons, all e-com players know that the ultimate proof of the right strategy is that they must start making money after the first seven or eight years. In this context, many point to the fact that the global e-retailing giant Amazon.com took 8 years to breakeven. Surely, e-com is a long-haul, volume-driven game.

But operating in a fiercely competitive environment on wafer-thin margins will certainly not be a cakewalk for many. For the venture capitalists too, the gamble is fine: If even two out of ten companies do survive, they will make their money.