Flipkart, Amazon, Ola... Who will survive India's e-commerce wars?
The e-commerce sector began to pick up in India five years after the dot-com bust. From the pioneers of e-commerce platforms across market segments to social commerce and mobile commerce - the industry has since come a very, very long way. Those who were unable to adapt to the dizzying changes in the e-commerce sector have been relegated to the sidelines.
For the ones that have stayed in tune with changing trends and remained part of the game, however, the battleground has begun to generate a lot of heat. The battle lines are drawn, with each of the surviving players trying to claim the largest share of the e-commerce pie.
E-commerce Hunger Games
It's like a scene out of The Hunger Games; only the fittest will survive.
With the evolution of the e-commerce space in India, a few key segments have emerged. Broadly, one could segregate these into classifi eds, online travel, the financial segment and e-retail.
The classifieds domain boasts of players like Naukri, Sulekha, Justdial and OLX. The online travel sector has solid representation from the likes of MakeMyTrip, Cleartrip, Yatra and Expedia, among others.
Paytm has evolved as one of the major players in the financial space. Flipkart was the leader in the e-retailing sector in India, closely followed by Snapdeal until Amazon entered the market.
 |
| Snapdeal, which started even later than Flipkart, was valued at approximately $7 billion in 2015. Photo: Reuters |
One thing that defines the players in all these segments is how they have replicated the offline model in the online space, in some cases rendering offline formats nearly redundant.
Brick-and-mortar businesses have woken up to the reality of competition from their online counterparts, with the overall scenario translating into better deals for the end-user.
Consider the case of a customer who walks into a large-format bookstore and spots a book that he likes. Once the decision to purchase it is made, more often than not the customer will flip out a mobile and check for the availability of the book online.
Spotting the book, quite likely at a discounted price since the one available at the large-format bookstore will almost never be sold for cheaper than the marked price, the potential customer is quite likely to just click on the "buy" button and make an online purchase.
Customer service is king
It is not just the discounts that are driving the customers online, it is the overall experience. When they check an item at an e-store, the recommender engine on the portal will suggest similar products they may want to buy and even allow them to see what other customers are buying.
The customer also gets to see ratings and reviews of the products by other buyers, thereby helping him make an informed decision on the purchase. This kind of personalised feedback and recommendation service is one that will not be available to them except in very select brick-and-mortar stores where sellers take care to hand-sell products.
Such limitations extend to other categories, too. Whether it is booking a hotel, purchasing clothes, buying an electronic appliance or a camera or phone, an online user simply has access to more utilities that aid effective decision-making.
In a few cases, traditional establishments have been compelled to shut shop because it has become unviable for them to try to keep pace with online players, both in terms of the range of products and the price.
Take the case of an offline retailer stocking consumer durables. If it is a small outlet, there will not be enough space to stock all the options and a customer will fi nd more to choose from online.
This, coupled with the deep discounts online players offer, makes online shopping attractive to the buyer. Even if the retail outlet is significantly large, it would still not succeed in matching the limitless catalogue available online.
Further, floor and shelf space entails an exorbitant cost for the retailer and compels the retailer to stay away from very competitive pricing of products.
Additionally, in the retail outlet, customers are dependent on sales executives of particular brands to tell them how a product is doing, which may not be the most objective source of information. Online, the feedback on a product is varied and personalised and can be filtered to a large extent.
Smooth ride online
Not only have many offline businesses moved online, but in many cases e-commerce players have also changed the paradigm to a degree where the traditional method of marketing and selling a product has changed entirely. Take the instance of players like Uber and Ola.
They have transformed the lives of thousands of drivers all over the country. A driver who earlier had to be content making Rs 10,000 a month is now able to take home anywhere between Rs 50,000 and Rs 80,000 a month.
For car owners who employ drivers, the consolidated cost of fuel, the driver's salary and the on-going maintenance of a private vehicle often works out to be more than a cab ride and comes with the added nuisance of maintaining a depreciating asset.
Perhaps in the future car manufacturers, too, will need to be cognisant of the fact that a large percentage of their cars might be used for these services rather than by private individuals. That this transformation has happened in India in just about three years is testament to the power of such technology-driven ventures.
 |
| Ola has received more than $700 million in funding, while Uber has more than $1 billion earmarked for the Indian market |
On the business side, players like Ola, Uber and Meru are slowly but surely making traditional taxi services irrelevant.
With customers screaming for discounts even in this space, the hugely funded aggregators have deep enough pockets for them to build leadership positions in the market.
Ola has received more than $700 million in funding, while Uber has more than $1 billion earmarked for the Indian market. As of now, the organized market for taxi services is just under $1 billion.
The fact that this is a mere five per cent of the overall market and is growing at a rate of 25 per cent every year means that it will touch $7 billion as early as the end of 2020.
To give another example, if you want to shop for groceries today, you have the option of ordering discounted items from multiple providers like BigBasket, Aaramshop, Zopnow and Local Banya as well as relatively new entrants like Grofers, PepperTap and Jugnoo.
Selling groceries online is a business that hasn't worked very well in countries like the US owing, among other factors, to the entrenched buying habits of customers. Surprisingly, in India, a large number of players are getting traction in the space.
The same holds true for the hyper-local home-services domain. This includes any home service that you can think of, including hiring a plumber, an electrician or a driver, among scores of other services, on demand. A few years ago, to imagine someone calling a plumber through a mobile app would have seemed a flight of fancy.
2016: The year of the churn
Today it is a reality, and one that customers in different cities across India are increasingly subscribing to. The hyper-local segment gained prominence in 2015 as more than 60 start-ups were funded within the fi rst six months of the year. Nearly half the funding went to a little less than 25 per cent of the companies.
However, in 2016, the number of start-ups in this space dropped by more than 90 per cent. Additionally, a quarter of the existing hyper-local start-ups shut down in the first half of 2016.
A few were merged with or taken over by other larger players. For instance, Zimmber acquired its smaller rival FindYahan, while UrbanClap acquired rival HandyHome.
A predominantly unstructured market until recently, this space has been monetised by players like Taskbob, UrbanClap, Doormint, Timesaverz, LocalOye, Zimmber, Housejoy and HomeTriangle.
However, not all have been successful. In a few cases, the shut-downs have happened because the founders were not able to pivot in time, while in other instances the pivot has not been thought through adequately. Take the case of Doormint.
The Mumbai-based company offered various services to customers, including providing electricians, laundry services, plumbers, carpenters, pest control and so on. However, they eventually decided to focus exclusively on laundry services. This decision proved costly for them. In India, the supply network of companies providing laundry services is not yet developed.
This was bound to lead to customer dissatisfaction and it did. The inconsistent service discouraged returning customers and, over a period of time, negative word of mouth destroyed their business. The company shut down in September 2016, two years after inception.
On the other hand, UrbanClap, one of the most well-funded start-ups in this space, provides a classic example of getting the pivot right. Unlike Doormint, instead of focusing on laundry services, UrbanClap actually did the reverse.
They recognised the inherent issues with the supplier network in this service category and heeded their customer's feedback when the latter voiced their unhappiness with service providers.
As a result, they were quick to shut down their laundry services till such a time that the service providers within that category developed further. They do continue to offer 75 other categories of services to their customers, including dry-cleaning services.
LocalOye, another start-up that was up against the challenge of too much cash burn appeared to be in trouble in early 2016. Several employees were laid off and e-commerce pundits had begun to forecast doom.
However, the company exhibited an interesting change in strategy. They realised their B2C model was using up too much cash too soon and a considerable amount of the money was being spent on marketing initiatives to attract retail customers.
They realised that a B2B model would help attract customers in a more cost-effective manner and lead to better monetisation.
Consequently, they began to tie up with various clients in order to generate more revenue streams. The pivot in their business model appears to be working for them and, shortly after the change in their business strategy, in June 2016, they received some additional funding.
This sector is a lucrative space for start-ups and is attracting investments from the likes of UTV (Timesaverz) and Amazon (who funded Housejoy with Rs 150 crore). The ones that focus on customer experience and constantly refine their supply network are the ones that will survive.
The question of valuation
There is no easy answer to the question of valuation; any response will have its share of detractors. After the dot-com crash of the late 1990s and its fallout on economies across the world for the ensuing five years, the growing concern that we might be sitting on the cusp of a new bubble is understandable. A lot of this has to do with the immensely high valuations that companies like Flipkart, Snapdeal, Paytm, InMobi and several other e-commerce ventures arrived at in a relatively short span of time.
Consider the valuations of Flipkart and Tata Motors. The former was started in 2007 and in May 2015 was valued at $15.5 billion, whereas the veteran Tata company was valued at $14 billion in the same year.
Surprised? Snapdeal, which started even later than Flipkart, was valued at approximately $7 billion in 2015, which was higher than the valuation of Jet Airways at $1 billion at the same time.
For that matter, Ola, the taxi rental company, too, was declared to be worth more than the premier airline and was valued at $4.5 billion. This mirrors the trend in developed markets like the US, where, in 2015, Amazon was valued at $260 billion which is more than the valuation of the much older Walmart, which was valued at $30 billion less than Amazon.
As in the case of Ola in India, Uber in the US was valued at $50 billion, which is $6 billion more than the legendary General Motors.
Most of these e-commerce companies post revenues that are a fraction of their valuation. Flipkart, for instance, has a revenue of $0.5 billion whereas its GMV is about $6 billion. (GMV is the value of products sold on the platform, whereas revenue is normally calculated as a percentage of the GMV.
In most cases this would be within the range of 5 per cent.) The fact that most of these e-commerce companies have been posting losses makes it even more baffling to fathom the dizzying valuations ascribed to them, therefore raising the question of a valuation bubble.
Why then are highly savvy investors persisting in funding these ventures? One of the key reasons is that each of these businesses is, in some way or the other, disrupting a paradigm; their business model intends to change the way people consume products and services, or the manner in which a particular business is conducted.
In fact, most of these businesses end up transforming how we go about doing our daily tasks. The last 10 to 15 years of e-commerce in India have seen the advent of businesses which do just this. Start-up ventures have shown steep growth curves, and the requirement for growth capital coupled with the potential of scale in the business has had investors chasing deals in an unprecedented manner.
There are various reasons - and not all of them are financial - for investors to be valuing businesses the way they have. First, despite the thousands of ventures sprouting up almost daily, there is a dearth of good business models and credible founders.
Even the ones that satisfy these criteria have mostly started with seed capital and angel investment. By the time they become really attractive for investors, they are already at a certain size.
While this is good for investors (as pre-existing scale mitigates future risk to an extent), it is still a double-edged sword because by the time a business has achieved that kind of scale, it has become lucrative to the majority of investors.
 |
| Flipkart was the leader in the e-retailing sector in India, closely followed by Snapdeal until Amazon entered the market. Photo: Indiatoday.in |
This leads to a multitude of private equity firms chasing the same set of companies and consequently pushing up their value.
Second, although the growth that has happened in this sector so far is phenomenal, we have barely seen the tip of the iceberg as far as the potential of the market is concerned.
Not more than three per cent of the e-commerce market has really been exploited yet and there is a huge section of the Indian population that is not even on Internet-enabled smartphones or desktops as of now. This is the as-yet-invisible part of the e-commerce growth story in India.
A favourable demographic scenario can only help matters. The contribution from Tier 2 and Tier 3 cities, where a lot of potential buyers are concentrated, hasn't been harnessed yet.
Once internet connectivity and logistics in these zones have been ramped up, it will add significantly to the growth of the players in the e-commerce domain.
Demographic is king too
The demographic dividend is yet another thing to bear in mind. "Demographic dividend" refers to the potential for economic growth that follows from shifts in a country's population age structure, usually when the percentage of the working population is greater than that of the non-working population.
India's demographic dividend is growing and it will add up to 2 per cent per annum to the country's per capita GDP over the next 20 years. To put this in context, right now there are 605 million Indians under the age of 25.
By the year 2020, there will be 116 million Indians in the working age group compared to 94 million in China.
By the same time, the average age of the population will be 29, compared to developed countries where the same would be in the forties.
Moreover, in another 20 years the labour force in industrialized countries will be declining while in India it will possibly rise by 32 per cent.
What this means is that not only will it be easier for e-commerce companies to find working talent for their businesses, but also that there will be that many more people who will be contributing towards the country's economic growth and productivity.
This implies that a larger percentage of the country's population will be making purchases. Given the demographic shift, it is this segment of the population that is increasingly exhibiting greater comfort transacting over the Internet. Handled well, the demographic dividend in India could be a game changer for the e-commerce sector.
The most pertinent point here is that investors have demonstrated great confidence in their investments in various companies so far.
There is a healthy spread of investors - including the homegrown variety as well as blue-chip international private equity firms - and each firm, whether private equity or venture capital, has made investments in multiple e-commerce companies, displaying the confidence they have in the sector.
Accel Partners, for instance, has funded more than 18 companies so far. Sequoia has financed about 16 ventures, while both SAIF Partners and Helion have invested in more than 14.
Keeping the faith
There are several others, like IDG, Tiger Global, Nexus, Kalaari, NVP, Lightspeed and Naspers, that have also financed multiple deals in this sector. What is interesting is that so far there haven't been any notable exits from among investors.
More than anything else, this at least, is indicative of investors placing their faith in the e-commerce sector in India and the manner in which its chief participants are valued today.
Adoption of mobile commerce, and supporting 3G and 4G technologies, have provided an added boost to the sector, and while the Chinese and Indian e-commerce markets have their differences, there are some trends that are similar.
In 2012, China had 242 million Internet users that purchased online. India, in 2015, had about 243 million Internet users of which 106 million were active users.
This is expected to go up further over the next two to three years. In 2012 the online growth in China was largely driven through mobile usage. About 40 per cent of users in China were using their mobiles to browse for products online.
India, too, has seen a surge in mobile usage, as discussed earlier, and the preference of customers is to browse on smartphones.
Companies like MakeMyTrip analysed in 2015 that at least 40 per cent of their user traffic comes through mobile and the phenomenon was true for other key e-commerce players too.
It was certain that if things continued the way they were, and the various constituents in the game (government and e-commerce players included) ramped up logistics and technology in smaller towns and cities, India could well have reflected the situation in China in 2012 by the year 2018.
Given the size of the e-commerce market in China, and what the marketplace model there has yielded, this in itself justifies the way companies were being valued in 2015 in India.
The year 2016 proved to be taxing for big players such as Flipkart and Snapdeal. Flipkart saw its valuation fall to $5.37 billion in December 2016 and Snapdeal is reported to have reached a cash crisis after one of its major investors refrained from re-investing in it in a follow-up funding round in 2016.
Realigning for a leaner structure, efficiency and profitability seem to be the new buzzwords of the e-commerce sector that seemed, until the beginning of 2016, to be all about exorbitant recruitments, size and growth.
The message from investors seems to be clear - they will continue to invest in the e-commerce sector which holds endless potential for growth, but it is profitability that will drive their decisions.
(Excerpted with permission from Hachette Book Publishing India.)
Watch: