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| The Optima Kart, C.E.O. |
I have been
closely following the progress of the Indian eCommerce industry for the last
two years.
I have attended multiple seminars and forums where
the entrepreneurs and investors have been seen networking with
potential partners. According to VCCedge, in 2011, there had been 87
private equity/venture capital deals in the Internet/mobile Internet space
worth $750 million, double the amount in 2010. One would expect the party to
continue but recently when I went to a seminar on eCommerce, the venture
capitalists were almost absent (or represented by junior employees) and the
mood was much more somber and realistic. The issues that were being
discussed were not about the size of opportunity but were about profitable
growth which in my opinion is much more grounded.
I myself have
been evaluating options to take a plunge in the eCommerce space and hence have
analyzed the sector very closely. I believe that the opportunity is
large (larger than what analysts currently project!!!) but there are issues
that require urgent attention. The top five concerns of the eCommerce market in
India are as follows:
1. High Customer Acquisition
Cost
One area that most of the entrepreneurs consistently underestimate in
their business plans is the cost of acquiring a customer. Most business plan
assume heavy reliance on social media and internet advertising. The general
myth is that the cost of acquisition on internet is very low. However, in my
opinion, it is even higher than that of television advertising. Today cost per
click is around Rs 15 and if the conversion rate (buyers to visitors) on the
site is 1-2%, the cost of customer acquisition comes out to be Rs 750-1500.
This is very high and requires repetitive purchases from the customer to
recover the cost. Another way of validating the customer acquisition cost is
the sops being doled out by existing sites on the member get member schemes.
Overtime, when the customers start coming directly to the site, the cost of
customer acquisition falls significantly but till that time, the business
owners need to cover the cost.
2. High Churn/ Low Loyalty
I have heard multiple times that the Indian market is very large and we
have just hit the tip of the iceberg in terms of customer adoption. I have no
doubts on the size of Indian market but the problem is low loyalty. The big
brands are yet to be created on the internet and hence the brand loyalty is
very low. Consumers are currently bargain hunters on the internet.
In the high acquisition cost scenario, it is important to retain the
customers for a long time. If the average ticket size on the internet is Rs
1000 with 10% margin, then the customer needs to buy at least 15 times to
recover the cost of acquisition (assumed to be Rs 1500). Currently this is not
happening. Most of the sites are getting high number of new customers every
month camouflaging the high churn. The eCommerce companies are measuring the
gross profitability and not the customer lifetime value. The moment the new
customer addition drops, the profitability goes for a toss. This is what has
struck the group buying sites like Snapdeal which saw fast adoption in the
past. This is not limited to group buying sites and other eCommerce formats are
also witnessing the high churn and low loyalty problems.
3. Cash on Delivery
Cash on Delivery (COD) has been touted as the innovation to counter the
low credit card penetration and payment security issues on the internet.
COD is a substantial proportion of the sales today contributing to
anywhere between 11% (for Perperfry) to 60% in most of the cases.
The COD is unsustainable as it pushes up the cost of transaction by Rs
30-60 per transaction. Given the low profitability and small ticket size on
eCommerce sites, the entire gross margin gets erased by COD. On top of this the
problem is that of high returns as the consumers often change their mind by the
time the goods arrive. The returns are as high as 40-45% of all the COD
shipments. COD also poses scalability issues for the eCommerce sites in the
long term as the logistics companies would find it hard to scale to the
required levels. The other problems associated with COD are long lead times
before the revenue can be booked, fraud risks and higher working capital
requirements.
What amazes me is the fact that there is no incentive for the customers
to use electronic payment on sites like Flipkart. Why would I take any risk
with electronic payment if I can get cash on delivery at the same price.
4. High Cash Burn Rate
The capital requirement for any eCommerce venture is very high contrary
to the popular belief that it is easy to set up an electronic shop. At a recent
conference, a venture capitalist mentioned that a niche vertical eCommerce
venture needs $50 million of funding over time while a horizontal player would
need $300-400 million funds. Leaders in the e-commerce space (ones that
have raised money, have large teams and are aggressively pursuing growth) are
spending $1-2 million (Rs 5-10 crore) a month, including on marketing,
overheads and salaries. At this rate of burn, smaller firms with scant
capital are unable to cope. In my back of the envelop calculations, a company
would need to spend at least Rs 1 million per month in the first six months of
existence even if it is bootstrapping. Therefore it is important to raise money
early in the game.
5. High Inventory/ Poor Supply
Chains
Most of the eCommerce venture are complaining of the excess inventory and
absence of liquidation market in India. The poor supply chain compounds
inventory problems due to unpredictability of the supply. The cost of carrying
the inventory is very high and successful ventures would need to tackle the
supply chain issues if they really want to run a scale business. The other
problem is in unpredictability of delivery to the customers leading to higher
returns.
Summary
I do not think any of the above mentioned issues are insurmountable.
The opportunity is huge to let it go. Entrepreneurs need to be disciplined
sticking to the basics of business without getting carried away by the rush of
capturing the opportunity. Venture Capitalists would always push the companies
to grow fast and faster but it is upto the entrepreneurs to focus on the long
term growth.
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