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E-commerce: Funding Driven Cos Vs Efficiency Aimed Cos

To scale up and build the online business, why it's important to have efficiency driven e-commerce business management

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The Indian economy has been consistently showing good signs of growth with the average Gross Domestic Product (GDP) growth rate at 7.5 per cent in 2015-16. The retail sector is showing a promising trend of 11 per cent CAGR, growing from estimated current market size of $600 Billion to an expected $1 Trillion, by 2020.

Although, the current total e-commerce spent in India accounts to less than 2 per cent of the total retail spending, the e-commerce industry has become a key driver to create new markets in erstwhile unreachable geographies. The Indian consumers are rapidly advancing towards adopting technology. This is evident from the fact that India surpasses the United States of America to become the 2nd largest market for smart phones only after China, with 220 Million smart phone users. This was attributable to the availability of highly affordable smart phones, and to the significant growth in internet penetration with 354 Million internet users till September, 2015. India's rank for ease of doing business went up by 12 in just one year due to an improved regulatory framework, thus creating a conducive business-friendly environment. These factors have positively impacted Private Equity and Venture Capital investments into the country touching $20 Billion in 2015. Majority of these investments have been in e-commerce industry. The e-commerce industry is expected to form the largest part of the Indian Internet market with a value of approximately $100 Billion by 2020.

The majority of B2C e-commerce companies in the world, despite being operational for 5-20 years, report low profitability. The situation in India is no different, e-commerce companies establishing themselves with a growing Gross Merchandise Values (GMV) at an overall loss. The GMV for B2C segment in India was approximately $16 Billion in 2015.

E-commerce Funding Environment In India
From an investment perspective, considerable funding in the e-Commerce ecosystem has led to emergence of new business models across B2B, B2C, Logistics Service Providers, Payment Wallets, Digital Advertising and Analytics. These investments have enabled the e-commerce companies to leverage leading technology and related practices to reach out to millions of new online customers by delivering services more effectively and efficiently. It is estimated that a total of 930 M&A deals with a cumulative value of $26 Billion took place in India in 2015, of which 259 deals worth $2.43 Billion pertained to the e-Commerce industry. In yet another record of sorts, the PE/VC investments reached an all-time high in 2015 at USD 20 Billion. The key sectors in which investments were seen were Information Technology with 666 deals of value $4.5 Billion, followed by Consumer Goods with 280 deals worth $4.7 Billion. The majority of these investments have been concentrated in e-tailing (70 per cent of investment), followed by online classifieds (17 per cent) and lastly online travel & taxi (9 per cent). However, with growing importance and push from investors for profitability and early break-evens, the leading e-Commerce companies are aiming to cut down their burn rates by as high as 50 per cent. This aggressive drive comes at a point when capital is becoming scarce for top venture-backed online retail companies. There is also a reduction in the dependence on discounts as a growth strategy. Recent corrections in valuation is a sign that investors not only want continuous market penetration but also want e-commerce companies to focus on profitable growth. Flipkart, Snapdeal and Paytm had a combined loss of $557 Million. Therefore, e-Commerce companies need to leverage continuous innovation, analytics, technology and digitization to realize profitable orders for a sustainable growth.

Pros and cons of funding driven VS efficiency driven e-commerce companies
Funding driven e-Commerce companies will spend heavily on offline and online advertisement to create brand hype in order to get visitors to their website. However, not creating any value addition to the business. Urban consumers will shop online to avoid going out, avoid heavy traffic but for rural consumers its a need due to lack of offline retail channels. Many e-Commerce companies with deep pockets try to create brand value by spending huge amount of money on advertisement and deep discounts. There are few which will sell sub-standard products and then there are companies which believe in value addition to the business. Efficiency of the companies should not be measured by ad spend and high discounts. The right way to gauge companies efficiency is by number of visitors on the website, how many products purchased and delivered from e-Commerce platform, website speed on desktop/mobile, website ranking etc. Funding driven companies, with or without efficiency, can both show these attributes. Example, yepme, jabong, fab-furbish, foodpanda, yebhi, etc. Ultimately, e-Commerce funding driven inefficient companies will have to spend irrationally on ads and discounts, however will not add any value to the business but will manage to survive. Such companies will not show profitability for decades. Efficiency driven companies will have higher probability of showing profits. LatestOne.com is an appropriate example of efficiency driven e-Commerce portal in mobile and tech accessories niche vertical. That is what will differentiate unicorns vs cockroaches.

To scale up and build the online business, why it's important to have efficiency driven e-commerce business management
Efficiency driven e-Commerce business, is the key for building a sustainable value addition business. There should be efficiency in all aspects of the business like: superior front-end technology, faster page load time, ease to navigate, render good quality product images on desktop and mobile. Other aspects include realtime inventory sync and accept orders that can be serviced. Efficient systems, processes, warehouse operations, end to end integration will have greater impact on scalability and low unit cost. The overall efficiency is directly propionate to value addition. Value addition is revenue minus cost of goods sold. For example, revenue earned is INR 100.00 but cost of good is Rs 80.00, there is value addition of INR 20.00. If cost of good is Rs 100.00 and revenue earned is Rs 80.00, there is no value addition here, infact it is negative.

E-commerce companies with the backing of strong investors will continue to survive, but shall show profit after 10-15 years. Both Amazon and Snapdeal posted individual revenue growths of 500 per cent, and hit GMV of $2 billion each. However Flipkart, Snapdeal and Amazon, posted a massive combined loss of Rs 4,984 crore. The survival of some e-Commerce companies with less funding or no funding , in-spite of being efficiency driven, may be attributed to lack of good fortune. Localbaniya, peppertap, jabong etc., are some of the Inefficient and funding driven e-commerce companies that could not survive for long. On the other hand, the efficiency driven companies with funding will survive and show profitability in 3-5 years. I think LatestOne.com is a right example for efficiency driven e-Commerce business. It raised only Rs 25 crore and operates on 60 per cent gross margin. It delivered one million products till date, ranked at 1800 in alexa. The website is technically superior to many large e-commerce players, gross revenue of Rs 60 crore and net revenue of Rs 40 crore for FY 15-16.

Efficiently running back-end systems like inventory management, supply chain, finance/accounts, CRM, ERP etc are quintessential to get the maximum benefit from e-commerce business

To be efficient and successful in the e-commerce world, it is very essential to have the right technology, to sustain in the business. But getting technology right is not just about having a bug-free website. It is also about using technology to achieve business ends such as Supply Chain Management, Inventory Management, Finance/Accounts, ERP etc.

Self-owned inventory is a model where the e-commerce player owns the inventory. The model provides better post-purchase customer experience and fulfillment. It provides smoother operations due to ready information on the inventory, location, supply chain and shipments, effectively leading to better control over the inventory.

If you take a look at the order fulfillment process, it actually happens behind the scene, but the consequences are felt by the customers and hurt the business drastically. In order to manage this order fulfillment process efficiently, you should have either your own supply chain services or outsourcing to a vendor should be a strategic choice.

Given the complexity of day-to-day business operations, it becomes vital to select an excellent software or technology that supports all the elements involved in the running of the e-commerce business. We use a very robust software in LatestOne.com to fulfill the needs of the business; like Microsoft Dynamics AX for inventory management, finance/accounts, and order fulfillment process.

Things that e-commerce companies need to do to accelerate growth in the competitive market space
In my opinion, to build a brand, just depending on funding is not a way forward. There has to be a balanced mix of funding as well as operational efficiency. In the current scenario, investors are no more interested in valuation game, they want to see value addition and profits. Brand building should be a continuous program wherein innovation should play a crucial role to accelerate growth, digitization & integration of processes, high-end & disruptive data analytics to spot real-time opportunities, agility to scale up and sustain , and technological advancement.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Palem Srikanth Reddy

The author is Technocrat, Entrepreneur, Political Leader and founder & chairman of LatestOne.com

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