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E-Tailing Wars

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You have to wade through piles of apparel, some strewn on the floor, to hit the office of Vivek Gaur, chief executive, in a non-descript building at the far end of Gurgaon. But unmindful of a power failure and lack of air-conditioning in the stuffy room, Gaur is in high spirits. Business on his private-label fashion site has jumped to Rs 2.5 crore a month from mere thousands six months ago. Who needs air-conditioning when the spirit is cool?

At the other end of the National Capital Region, on the 4th floor of a building in Noida's industrial area, electronics seller Timtara's co-founder Arindam Bose and team are nestled in their barebones office-cum-warehouse. Branded electronics are selling fine, but his fat margin (30 per cent) private label ‘Buzz' mobiles are doing way beyond his imagination, clocking 15 per cent of Rs 5 crore a month sales. In Bangalore, multi-products e-tailing site Indiaplaza's founder K. Vaitheeswaran is rubbing his hands in glee at the 67 per cent growth his business recorded last year. And in Chennai, a five-year-old, yet not-much-heard-of site, Smartshoppers, is making Rs 50 lakh a month by selling electronics with margins as high as 10 per cent against the market average of 2-5 per cent.

SACHIN BANSAL (L), CEO, FLIPKART "Inventory is the strength of our supply chain and distribution makes us different from others" (BW pic by Jagadeesh NV)

Hundreds of such entrepreneurs are delighted at the sudden turn in the fortunes of India's e-tailers in 2011. Easy availability of broadband, patchy rollout of 3G and growing aspirations of non-metro youth, coupled with economic uncertainty, are driving traffic for shopping and bargain hunting. While the industry grew to over Rs 4,000 crore in 2011, large players grew 100-150 per cent. "The e-commerce traffic has grown some 100 per cent since 2010," says Muralikrishnan B., country manager of eBay India. As 3G and broadband wireless come this year and smartphones and tablets population rises, Web-based businesses will hit a tipping point. New-age entrepreneurs are trying out everything from full-fledged e-tailing sites such as Flipkart by Binny and Sachin Bansal to specialist ones such as Firstcry for babycare products, founded by Supam Maheshwari and Amitava Saha. Or footwear-only Bestylish from Gurgaon-based Shailen Amin. After all, the race to the top of India's e-tailing industry is still wide open.

Leader Flipkart is likely to close 2011-12 at about Rs 550 crore in revenues. The acquisition of Letsbuy will take its consolidated revenues to Rs 700-odd crore. That enhances its lead against eBay India (about Rs 108 crore), Futurebazaar (over Rs 175 crore), Yebhi (about Rs 125 crore) and Indiatimes Shopping (Rs 80 crore as on March 2011). Those numbers look anaemic compared to Amazon's $48.1 billion, eBay's $11.7 billion, Chinese Taobao's $15.7 billion and 360buy's $4.4 billion. But with the market growing at 35 per cent year-on-year, each one of them rightfully dreams to be India's Amazon. Even in these times of uncertainty, inflated expectations and some unrealistic valuations, e-tailing has guzzled $650 million of venture capital funds in 2011 alone as firms pump money into technology, user interfaces, logistics and customer care.

Model ‘Manthan'
Three global models are at the heart of India's e-tailing wars (every e-tailer is either a clone or a hybrid of one or the other of these). The aggregator or the marketplace model propounded by eBay in 1995 is now used by its followers to bring buyers and sellers together on their platform. They, however, do not have control over inventory or delivery of products. The second is the stock-and-sell model from Amazon (also founded in 1995). This is the most asset- and capex-heavy model as ready-to-ship inventory is kept at own warehouses and shipped and delivered in tight time spans. The third, favoured by the $16-billion Groupon (gross billings), began in 2008 selling discounted coupons for services such as spa treatment, yoga or food, but has morphed into a coupons-plus-products-selling platform.

While the eBay model works on — crudely put — a margin or a commission of 2-5 per cent for bringing the buyer and the seller together, the Amazon model offers margins up to 20-22 per cent, the firm has to bear the cost of warehousing and logistics. The Groupon model delivers margins of up to 45 per cent on services and 20 per cent on goods. Interestingly, with the arrival of Amazon in India through in January, the flagbearers of all the three models now have a base here. eBay through eBay India and Groupon — which had a disastrous India entry in January 2011 via a tie-up with SoSasta — has regrouped under a new brand Crazeal (its India website is cyber-squatted).

And they have all joined the race — along with clones and hybrids — to be India's next e-tailing king. Consider this: Flipkart idolises Amazon. Sachin and Binny began selling books as Amazon's Jeff Bezos did to start with. Its inventory-stocking strategy at company-owned fulfilment centres mimics Amazon's. Hitesh Dhingra and Amanpreet Bajaj- founded Letsbuy, too, followed Amazon. Manmohan Agarwal's Yebhi; the four-month-old, Rs 1.5 crore-e-tailer of kids products, Hoopos; and footwear seller Rs 70-crore Bestylish also stock inventory at own warehouses. Infibeam, with about Rs 125-crore revenues, even has a logo similar to Amazon's.

eBay India has company in Rs 50 crore Indiaplaza, the Rs 35-45 crore Rediff and the Rs 60-crore 99labels. They believe investing in warehouses, stocking inventory or building own logistics serve no purpose bigger than burning cash. Crazeal has co-flagbearers such as the Rs 250-crore Snapdeal, and small players such as Timesdeal and Dealface.

Then there are a host of e-tailers that have tried to build hybrid models by taking the best of two models. For instance, Tradus is an aggregator like eBay, but also handles logistics like Amazon. Timtara is an aggregator, but stocks about 20 per cent of the products it sells. Similarly, Homeshop18 is a hybrid of Amazon and eBay.

Why Burn Cash?
Behind each of these models, some warring philosophies are at work. To Snapdeal, Amazon's or Flipkart's warehouse model does not make sense. Co-founder and CEO Kunal Bahl is happy procuring products from the vendor after the orders are placed and delivering them directly from vendor's warehouse. "I would rather invest capital in building a strong technology backend to speed up procuring and delivery rather than take inventory risk on my books," says Bahl. "If you look at Amazon or Flipkart, they might be able to provide you the best user experience, but that impacts gross margins and, maybe, their ability to scale. Our customer experience might not be as good, but we have better margins and let's not discount the potential of the small entrepreneur on eBay," says Muralikrishnan. He believes stocking inventory like electronics can be brutal due to massive price fluctuation.
Crazeal's CEO Ankur Warikoo feels companies such as Flipkart are successful not because they have logistics and inventory under control, but because they have systems to manage the backend. "Why would someone like to take control of logistics? Logistics is infrastructure and it is a different ballgame," says Warikoo.

According to Mahendra Swarup, president of India Venture Capital Association: "The cost of doing business is lower in the marketplace model. The model will succeed. Keep costs minimal. Volumes, not high margins, will drive bottom line."  "It takes time to build a profitable business. If this is just a rat race for customer acquisition, it is not worth it," says Muralikrishnan, who believes most of the traffic is paid for. Agrees Mangrove Capital Partners' managing partner Mark Tluszcz. "The problem with cash is that it generally makes you stupid as a startup and there is a fine line between having enough and having too much cash," says Tluszcz who has invested in Bestylish and Nimbuzz. "Most firms have a TV commercial, which costs half a million dollars. A young company should not worry about all this but build a profitable business."

1 TIGER GLOBAL MANAGEMENT $60-70 MILLION Invested in Flipkart, Letsbuy, Myntra, Babyoye, Caratlane, MotorExchange, Exclusively, etc.

2 SEQUOIA CAPITAL $30-35 MILLION Invested in Via, Fashionandyou, Freecultr, etc.

Hop, Skip And Jump...
As investors keep a close watch on investee firms' financials, at least some of the entrepreneurs are hopping from model to model. Among the earliest entrants into e-tailing,  Indiatimes Shopping, which followed eBay for 12 years, is the biggest convert to the Amazon model. "People do not trust sellers who are not established brands. We see a warehousing model work as customer experience is better," says Indiatimes Shopping director of technology and ecommerce, Gautam Sinha. If Indiatimes failed to make the marketplace model work, Letsbuy was burning cash so fast following Amazon that its investors Tiger Global Management and Helion Venture Partners managed to convince it to sell-out to Flipkart.

KUNAL BAHL, CEO, SNAPDEAL "We had to listen to what our customers were looking for and start selling products." (BW pic by Sanjay Sakaria)

Among the biggest transitions has been by Reliance Entertainment's Bigadda, which converted into an e-tailing platform last year. Movies rental site Seventymm converted to an aggregator in 2011 and Koovs, a specialised deal site, not only had a change of ownership, but also strategy by moving to selling products as an aggregator.

In August 2011, Snapdeal got 90 per cent of its business from discounted services and was certain it wanted to stick to its image of being a provider of discount coupons for services such as spas and restaurants. By December, it had a makeover. Bahl has now flooded his website with products. "We had to listen to what our customers were looking for," smiles Bahl. Services are now less than 50 per cent of its business. Futurebazaar, which has seen four CEOs in five years and so far failed to create a distinct identity, has become an online retailer of selected categories such as home and lifestyle and fashion after experimenting with the model thrice. Bigshoebazaar, which started as an online shoe retailer jumped to a horizontal business by transforming its business to Yebhi selling all products.

To Delight Or Not To Delight...
...the customer, that is. The industry is torn between those who believe they have done their job if the customer is ‘happy' and those who say it is essential to ‘delight' the customer. The difference between the two is — 8 per cent. ‘Happiness' seekers are in quest of 92 per cent of the customers, who they believe are happy if the products are delivered, even if slightly late, provided they work tightly with logistics providers. ‘Delight' seekers not only want to make the 92 per cent customers happy, but also the remaining 8 per cent by stocking inventory in own warehouses and delivering them through their own delivery boys, mostly before time. They believe a delighted customer creates the buzz around the website by word of mouth.

SHAILEN AMIN, CEO, BESTYLISH "If we have to meet the delivery promise to our customers we have to take charge of inventory."
(BW pic by Sanjay Sakaria)

On the ground, however, logisticsshipment problems may be higher than anticipated by most opponents of the warehousing-logistics model. An exclusive e-tailing consumer survey conducted for BW by during January-October 2011 found that a shocking 45 per cent consumers had a shipment-related complaint. Another 19 per cent complained of poor service and bad customer support.

Industry watchers say the biggest reason behind the stunning revenue ramp-up at the four-year-old Flipkart, and the two-and-a-half-year-old Letsbuy and Yebhi has been their ability to ship the product from warehouses within hours of receiving the order. Flipkart and Yebhi, in particular, went further by controlling the last mile through its own delivery boys. Homeshop18 is doing the same with over 500 delivery boys, as is Indiatimes.

They also hope to capitalise on the online buyers' apprehension of timely delivery. Because e-tailers banking on courier firms have been largely disappointed. "Courier firms Blue Dart, Aramex, First Flight are oriented towards documents and not packages. For them, delivering in 72 hours was not happening for the past three years. Finally, everyone has started taking control of last mile delivery as we have not seen any improvement," says Indiatimes' Sinha.

Flipkart has built eight fulfilment centres with 250,000 sq. ft of space across the country and has 1,500 employees on its rolls delivering products in 30 cities. "Inventory is the strength of our supply chain and distribution makes us different from others. Our research found people who are served through our delivery network come back to us much faster," says Sachin Bansal. About 70 per cent of the 30,000 orders Flipkart processes daily are delivered by its own team. Flipkart will ramp up to more than 2,000 delivery personnel in 50 cities by 2013 to create a same-day-delivery experience that China's 360buy promises. "E-commerce firms have to take end-to-end delivery responsibility. E-retailing is an execution business and getting all these things right is important for success," says Rajan Anandan, managing director of Google India.

MURALIKRISHNAN B. COUNTRY MANAGER, EBAY INDIA "It takes time to be profitable. If this is a rat race for garnering customers, it is not worth it" (BW pic by Tribhuwan Sharma)

Hoopos has one warehouse in Bangalore and plans to open one each in Mumbai and Delhi. "We get orders even from the Northeast where delivery is a challenge. With a distribution centre or warehouse in multiple cities, we can deliver faster in and around that city," says Vijay Jumani, co-founder and CEO of Hoopos.

When Amazon began in the US, it marked one of the fastest growth stories in the Internet space. In five years, it touched revenues of $2.8 billion, while eBay had merely grown to $0.4 billion. Amazon built a service that continues to be addictive and unbeatable, thanks to a secretive network of 52 fulfillment centres or warehouses with 26 million sq. ft in six countries. Its marketcap is almost two times that of eBay's.

While Amazon ties up with couriers such as Fedex and USP, it even employs bicycle couriers in, say, China where logistics is unreliable. The logic is simple: capex-heavy ‘fulfilment centres' coupled with own logistics and delivery teams create entry barriers and differentiators that are hard to replicate. The bigger these firms get, the tougher it becomes for a newbie to dislodge them. "For the first generation of Internet successes in India, you better know how to do delivery systems, payment methods or you can't succeed," says Tluszcz. "Building a delivery system, any other logistics or payment methods is worth every penny as that is an entry barrier for anybody else. That will be a big differentiator." He adds: "We are heavily invested in Russia too and we have seen similar issues in logistics. So you have to have your own delivery and you have to control the customer relationship."
On the other hand, a disruptive technology or platform can pose a threat to the marketplace model, even though proponents of this model such as eBay have over the years built strong links with suppliers, banks and logistics firms that would be hard to replicate. Yet, experts say, theoretically, the marketplace model is on a sticky wicket. "There are not many opportunities. A few aggregators will continue to survive but, mostly, online retailers (with own warehouses) will define Indian e-commerce," says Ankur Dinesh, CEO, Wirefoot, an online research firm. He says aggregators will eventually have just 20 per cent of the overall business.

3 NEXUS VENTURE PARTNERS $20-25 million Invested in Snapdeal, Yebhi, Craftsvilla, etc.

4 HELION VENTURE PARTNERS $15-20 MILLION Invested in Exclusively, Letsbuy, Redbus, Hoopos, etc.

Whither Profits?
It may be premature to ask who will take home the trophy, but investors are already placing big bets on firms who are busy building assets on the ground rather than on the Cloud. In other words, the Amazon model, or its close hybrid. Notwithstanding the Letsbuy blowout, while Flipkart is still to turn profitable. Of the $650 million invested last year, 38 per cent has gone to those who are building their own warehouses and logistics teams, 38 per cent to pureplay marketplace players and 24 per cent to the coupon-products firms. Naukri founder and vice-chairman Sanjeev Bikhchandani, who has invested in 99labels believes the success mantra for any e-tailer in India would be building deep and reliable supply chain and strong logistics. Bikhchandani has company in Subho Ray, president of lobby group Internet & Mobile Association of India, who feels companies investing in building real e-commerce will go a long way.

ISHITA SWARUP CEO, 99LABELS "The business is scaling fast, but we need to manage back-end to keep pace" (BW pic by Bivash Banerjee)

Ask the e-tailing entrepreneurs about profits and every Amazon follower points to their inspiration — which took nearly nine years to declare its first fiscal profits. The assumption is that when volumes become large, profits will come. "Profitability will happen with big scale," says Sachin Bansal. But investors are observing the cash burn with trepidation.

Accel Partners and Tiger Global Management, which have funded Flipkart with about $30 million through three rounds in four years, are believed to have facilitated the buyout of Letsbuy. They pressed the panic button on Letsbuy founders Dhingra and Bajaj to sell out once the cash burn got unbearable. "Investors do not want to get caught at the wrong side with a wrong foot," says Sabeer Bhatia, founder of Hotmail. Swarup disagrees: "Venture capitalists in the country will play a long-term game, at least for 5-7 years."

Says Bikhchandani: "Investment from outside the business will be restricted and this year some companies will go under." Muralikrishnan says that companies (read Snapdeal and Flipkart) are spending enormous amount of money on advertising at this stage of the business when the target should be to build a sustainable and profitable model first. Companies following the eBay or Groupon models are not making profits either. Given that every firm is in an investment mode, net profits are far on the horizon.

Besides, online shopping has been a boon for bargain-hunters, forcing e-tailers to offer rock-bottom discounts. According to a TCS whitepaper, ‘Bricks, Clicks and More', the "battle is becoming more intense, with players across channels targeting the same customer". Websites are taking a beating with depleting margins, discounts and free services, it notes.

Those who shut shop or have changed to the times

TAGGLE gave into the price war in the past few months of 2011
INDATIMES, a marketplace earlier, became an asset-heavy Amazon model
SNAPDEAL, started in February 2010 as a couponing website, ventured into online retailing in September 2011
SEVENTYMM, started in 2005 as movie rental service and selling business, expanded into online shopping
EXCLUSIVELY, online luxury lifestyle store, is said to be up for sale as the company is unable to sustain its high cost business
BIGADDA, social networking platform, converted to e-tailing in 2011

But some hope specialised verticals (where margins are slightly better) could keep them in the black. Yebhi, for instance, focuses on lifestyle products (margins: 25-30 per cent), rather than electronics (2-10 per cent), since it believes the maximum share of a consumer's wallet in India is focused on the former rather than the global trend of electronics. "Strong businesses are not built with heavy top lines, but strong profit and loss accounts," says Agarwal. But pure-play players such as Letsbuy disagree. Dhingra says even though the margins are higher in fashion, the fact that average ticket size of the transaction and the number of daily transactions is much lower. Electronics end up generating similar or higher overall margins.

5 ACCEL PARTNERS $10-15 MILLION Invested in Exclusively, Letsbuy, Babyoye, Freshdesk, etc.

But advocates of the Amazon model feel the way to make it work is by moving fast to private labels where margins can be as high as 40-45 per cent. Take Tata Croma. It gets 7 per cent of revenues (about Rs 130 crore) from inhouse brand Croma and is expected to go online this year. But for the crown princes of e-tailing, the chant is getting louder: Where the mind is without fear, and the customers buy/ We will overcome the losses, provided the volumes are high.


(This story was published in Businessworld Issue Dated 27-02-2012)