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BW Businessworld

BW Edit: Trading Places

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It remains mystery as to why industrialist and the Chairman Emeritus of the Tata Group, Ratan Tata, would put in money in SnapDeal, whose underlying business is trade arbitrage rather than adding any value in terms of technology. Yes, there is some technology in the online market place model, which aggregates small and medium businesses, allowing them to participate via mobile and internet channels. This is basically a “mandi” model and regulations in India support this model rather than break down state barriers and taxes for the small and medium businesses so that they can reach consumers within a 500 km radius.
 
Certainly a mobile seller in Delhi need not worry about his product being sold in Bangalore. It makes far better sense if it reached Rajasthan or  Punjab or Uttar Pradesh. Today e-commerce companies scramble to apportion these products to each state and only ship the product to a destination if the gross value of the sum of all products being shipped to that destination is high. They are in fact burning a lot of money in handling the reverse logistics. The product returns are high, at least 23 per cent of the Rs 18,000-crore industry, which is very high and ideally shouldn’t be more than 12 per cent. But unlike the Mandi system, there is price transparency and assurance that a product can be returned if the consumer does not like it. The logistics cost is borne by the seller and not the online business which aggregates them. Therefore, the business makes perfect sense and will evolve over time.

Now, if the government allowed small businesses to use logistics to ship to states closest to their towns, then each kirana store can have its own website and since cash-on-delivery has always existed with local kirana business models, they can reach scale locally, instead of depending on e-commerce to reach national market. National shipments can be made by large distributors of brands. The real small store can never participate in an e-commerce boom because his business is hyper local. The model of shipping nationally is simply dependent on the gross value of the total products that have to be shipped to a city 1,000 km away. It simply does not make sense to sell one single product by a seller in Delhi to a buyer in Chennai because the buyer has to wait for that period of delivery from the e-commerce company from one seller and it will never make a business case for the small store in Delhi.

Historically, India is built on local markets and scale of business is dependent on local reach and logistics. This is true for every product category. BigBasket.com, a primarily food and FMCG online department store, is one business model that is trying to be hyper local with their leased warehouses and trucks. They too are bleeding because the small store has no overheads to bleed and they do not carry inventory. The marketplace e-commerce model will have to maintain inventory for the returns because the product needs to be tested before being sent back to the seller. This by itself is a big cost which is borne by the market place company and the SMB associate. Let us not worry about whether investing in online businesses is a good thing or a bad thing because in a sense it has captured the imagination of every high net worth investor (HNI) in India. There will be 245 million internet users in a couple of years in India.
The mystery, about the investments, lies in a very simple problem. A country producing 500,000 engineers each year, on an average, has not been able to create home grown engineering companies capable of drawing investments for solving problems such as water distribution, power consumption, component light weighting, tapping solar energy, plant efficiency and basic tooling skills. We have let ourselves become a consumerist society, using technology to sell products rather than building machines. While China and Taiwan invested in embedded engineering capabilities 30 years ago, we veered to consumerism. “We are a nation of traders,” retail CEOs would tell BW when the organised retailing industry was unable to source FDI because of the tax laws in the country and many blamed central policy decisions which left it to the states to decide on allowing foreign investment for retailers.

Effectively this protected the small businesses from the large retailers and ironically allowed large e-commerce companies to sell on their behalf across the country. It simply does not add up because globally small retail businesses have always been dependent on local markets and not national ones. However, investors believe so. But that said there have been in investments in businesses catering to the long tail by businessmen. Azim Premji invested Rs 230 crore in the now defunct Subhiksha, a retailer which had 1,500 stores across the country. N R Narayana Murthy’s investment fund Catamaran Ventures invested and exited from SKS Microfinance. Now Catamaran is partnering with Amazon Asia to help small businesses use technology to sell their items online. If only regulation and tax laws were simplified, Kirana stores would thrive. E-commerce businesses need to build a “market place” halo by connecting small retailers to a buyer thousands of miles away, which benefits the larger trader or distributor only.