E-Commerce In India - The Second Coming

Nobody saw it coming. Nobody wanted to. It was, after all, the summer of 1999. The spirit of the times was heady and a thousand entrepreneurs had bloomed. Fabmart and Firstandsecond.com wanted to be the Amazon — the giant book store — of India. Rediff was selling knick-knacks on its e-commerce channel. Sify too had joined the bandwagon. Apnaloan was promising to ‘sell’ loans online. Shaadi.com wanted to find your dream “other”. And then on April 4, 2000,  Nasdaq crashed.

K. Vaitheeswaran, the CEO of Indiaplaza, remembers the moment vividly. Many venture funds of that vintage perished. Entrepreneurs were worse off. “There were almost 1,000 e-commerce businesses in India at that time. All of them closed down,” says Vaitheeswaran. In the space of six months, ‘dotcom’ had gone from meaning ‘hip, cool; inheritors’ to ‘naïve, paper tigers; lambs to the slaughter’. Hell had frozen over. But so much chaos, so much life had been unleashed.

Could something have survived — spirit, derring-do — the carnage?

Kapadvanj, a small settlement of 50,000 people, is an hour’s drive from Ahmedabad. It hasn’t changed much in the last 10 years. Yes, there are a few more cars and thanks to DTH and pay-per-view, the latest movies get screened much faster, but life moves at an easy pace. Of course, the Internet connection is much more reliable. And Rinkal Shah is all grown up now.

This 26-year-old Web designer’s house in Triveni Park has all the things you would find in a modern house: LCD TV, DTH set top box, laptop, refrigerator and of course Shah’s favourite, Nikon D5000 digital SLR.

Shah bought all these things without setting foot inside an electronics store. He just ordered all of it online. All put together, it must have cost at least Rs. 2 lakh. “I get most of the products on the fourth or fifth day after ordering, at prices lower than physical stores. Free home delivery is a given. And the products are always box packed unlike physical stores like Croma, which have offered me products in open boxes saying it was their ‘last piece’,” says Shah.

In the age of the ever ubiquitous World Wide Web it is hard to shock people, but when a 26-year-old guy in a small town starts buying stuff worth a couple of lakhs without touching the products or without asking the salesman 101 questions, it is time to ask oneself what Marvin Gaye, the singer, asked: “What’s going on?”.

Hitesh Dhingra, the founder and CEO of Letsbuy.com, the online store from where Shah bought his Nikon D500, would simply say: “e-commerce” is what’s going on. Dhingra started Letsbuy in 2009, quitting his job at Tyroo, a digital advertising firm.

By December 2010, Dhingra was selling between Rs. 75 lakh and Rs. 1 crore of electronics every month, causing three venture capital firms to invest $6 million into his company. Today, sitting in his three-storey building off Aurobindo Marg in Delhi, Dhingra says his site has grown to 10 times over the last six months and expects to be doing monthly sales of Rs. 25 crore by December this year. If you thought that was fast, wait till you hear Dhingra’s ambition: Rs. 2,000 crore in revenue over the next three years.

Where honeybees go, the bears follow. Led by an aggressive charge from a New York-based investment fund, Tiger Global, venture capitalists are virtually stampeding to invest in e-commerce startups. Publicly, they have invested nearly $140 million into these companies in just the last six months, compared with just $48 million in all of 2010. Add deals that haven’t yet been reported or are close to being signed, and the number shoots northward of $200 million. Suvir Sujan, partner, Nexus Venture Partners and former co-founder of Baazee, says: “If not two, we must have met at least one e-commerce entrepreneur a day in the last six months who are looking for financing.”

Entrepreneurs and investors had stopped thinking really big over the last decade, says Rajesh Reddy, the founder and CEO of July Systems, a mobile solutions company based in Bangalore. “But big-sized ambitions — ‘hyper growth’ — is back today!” he adds. Reddy is also one of those few entrepreneurs who have been doggedly managing and growing online businesses in India during the last decade.

In the last 10 years, China has created giant e-commerce companies like 360buy, TaoBao and Tencent. Russia has Yandex and Mail. Brazil has Mercado Libre and BuscaPé. And these companies came about because funding sources in these geographies did not dry up the way they did in India. Indian e-commerce is playing catch up.

So, could something have survived the carnage of 2000? It sure looks like the spirit of e-commerce has shot through a wormhole and appeared in a different place and time: Bigger and hopefully better than before.

Now that you are excited, let’s cool things down a little bit. The retailing sector in India is worth Rs. 500,000 crore. Out of this, Rs. 30,000 crore annually comes through that child of the Noughties, modern retail. When the Internet entrepreneurship and venture capital sector were dying in 2000, modern retail — Big Bazaar, Hypercity, Croma, Mobile Store — was coming to life. Shopper’s Stop and Crossword too acquired the form they sport today. And frankly, the entire online retailing sector of today — Flipkart, Yebhi, Letsbuy, Myntra, Cbazaar amongst many — put together don’t even add up to Rs. 1,500 crore in sales.

So this second coming of e-commerce — is it even important? Globally, both the world’s largest retailer Walmart and world’s largest online retailer Amazon have the same net margins of 4 percent. It isn’t the money that makes e-commerce important.

Infographic: Sameer Pawar

The rise of e-commerce is significant because it shows the limitations of physical retailing and the rise of aspirations of small town India. Between the large unorganised retail (kiranas and unbranded supermarkets) that serves the masses and modern retail that serves the aspirational class in large cities, there lies a thin wedge of aspirational classes who live in dusty towns. The economics of physical retailing have always left them short changed.

Indiaplaza’s Vaitheeswaran recounts a letter he got from a lady customer in Mysore 10 years ago, in which she thanked him for shipping her a book of her choice. “I would never have found this book even in Mysore’s largest book store, which is why I would reserve my major book purchases for my trips to my cousin in Bangalore. But you have removed the discrimination between my privileged cousin in Bangalore and me. We now have access to the same books,” she wrote.

“The word she used — ‘discrimination’ — is a very powerful one, but one just as relevant today,” he says.

Consider the case of Manish Khattry and Shailaja S. [not her real name]. Khattry, a commercial artist and owner of a local ad agency in Varanasi, had never thought much of buying online. Each time he did make an attempt, late deliveries turned him off.

Then, in January this year, he came across an ad on Facebook for a Web site that offered customised, branded apparel. A big cricket fan, Khattry was taken in by the site’s offer of a Nike Team India t-shirt, complete with the ability to get his own name rubber-printed on the back “just like the actual players”. He decided to give it a shot. He got the t-shirt in time.

Since then he has spent over Rs. 50,000 online buying brands like Nike, Adidas and Puma. “Though most of these brands have stores in Varanasi, their stock is usually very limited. With online stores, I have access to their entire range at the same prices,” he says.

Shailaja, who is in her thirties, stays in Tirupati. She recently shopped on Cbazaar, a specialty women’s wear online store. She bought an embroidered shimmer georgette sari. A sari like that needs a blouse that can match the shimmer. The team of designers at Cbazaar mailed her a list of the latest blouse patterns which were made after analysing her preferences and physical measurements. She spent almost as much on the blouse as she did on the sari, because such customised design and tailoring services would not be available at her local sari store.

To serve customers in outback places one requires a different way of procuring and distributing goods. To succeed in online retailing today an entrepreneur actually needs to be able to design a supply chain. “And the founding team needs to have this. You cannot graft it into the company,” says Sujan of Nexus Ventures. This is where the online retailers of today are different and better. They are creating brand new supply chains from day one like any hard-nosed businessman would. “The current crop of entrepreneurs has a much better combination of business and technical judgement compared to the ones from the first dotcom boom. In terms of maturity too, they’re worlds apart,” says Ashish Gupta, a partner with Helion Venture Partners.

To deliver orders into these towns, there is today a fairly decent logistics network, albeit one that covers only about “2,000 out of 9,000 PIN codes” according to Myntra’s founder and CEO, Mukesh Bansal, 36. Which is what Sachin Bansal, 29, assumed when he founded Flipkart in 2007 together with his childhood friend and colleague at Amazon’s Indian outsourcing centre, Binny Bansal (the two are not related). Their aim was to replicate the success of Amazon in India. They started with books, because that’s what Amazon too earned its spurs on.

“We thought our biggest challenges would be to create a good Web site, provide a wide selection of books and provide excellent customer service,” says Binny Bansal, 28. Today their secret sauce is their in-house, delivery network. The scale is massive — 400 delivery employees at present and with a plan to scale that to 1,000 by the year-end. Of course, they can afford it thanks to the $31 million in venture capital they drew!

 But some are choosing to play it safer. Fashion and You started out in early 2010 as a “private shopping club” where a select group of members could take part in “flash sales” where high fashion ‘distress inventory’ (usually off-season products) would be available at discounts of up to 70 percent to 80 percent. The CEO and co-founder Pearl Uppal, 36, has expanded the site’s product range to include mobile phones and gadgets, but does not stock inventory. This does mean four-week deliveries and irate first time customers. But even the customers seem to be a bit more forgiving. “We’re today adding over five new subscribers every minute and shipping over 3,500 orders every day to over 350 towns across India. Our revenue by December should be nearly Rs. 150 crore,” she says. But even she is now building a 100,000 square feet warehouse.

BigshoeBazaar is an online cash and carry wholesaler for hundreds of small shoe stores across the country and is using a single 25,000 square feet warehouse, which will be enhanced to 100,000 square feet in a few months, to service shoe stores as far away as Dimapur in Nagaland and Katihar in Bihar. “The conventional supply chain uses up 20 percent of goods cost in inventory lying at various places — stores, warehouses, and in-transit. Using a single warehouse frees that capital and allows us to invest on marketing,” says Manmohan Agarwala, CEO, BigshoeBazaar. While a conventional wholesale network would need about two weeks to deliver a new order to a place like Dimapur, Bigshoebazaar says it is able to fulfil the order in three days.

It is this supply chain thinking that has allowed most online retailers to win a following in small town India. It is precisely this specially configured approach that conventional retailers will find hard to match because they are geared to serve the customer inside their stores. This can be considered a form of complementary offering.

Actually the complementary nature of online retailing goes a step further.

For that, take a look at Snapdeal.com. Part serendipitous discovery, part Groupon (the US-based Web site behind the insane group buying frenzy) clone, it was started 16 months ago by Wharton Business School grad Kunal Bahl, 27. Bahl sells online discount coupons that enable customers to purchase products and services ranging from spa treatments to restaurant lunches to dental sessions at discounts of up to 80-90 percent. Snapdeal keeps 30-35 percent of each discount coupon, giving the rest away to the merchant who then provides the underlying product or service to the customer. Snapdeal has capitalised upon the high levels of distress inventory among small and local merchants in India. Bahl says he is on track to crossing Rs. 100 crore in revenue soon, just 16 months after starting out and in spite of stocking or delivering no products of its own. The catch is a significant outlay on sales and marketing to ensure enough new customers and businesses.

While there may be significant differences in their business models, there are common factors that connect together most of these entrepreneurs: Millions of dollars in the bank from venture capitalists, impatience bordering on disdain for the speed and efficiency of the physical word, the belief that the Internet is the model for commerce in India and that the only real competition is the size of their own ambition.

It’s a story we’ve heard before, almost a decade back. But there are some factors that have changed. “Traction is real because 100 million Internet users are buying things,” says Alok Mittal, managing director of venture capital firm Canaan Partners India.

Even that 100 million is set to shoot up exponentially as Indian telecom operators expand their 3G networks across the country. Then there are new players, like Reliance, which is reportedly set to spend billions on a wireless 4G broadband rollout across India.

“Three hundred million new subscribers will be added between 3G and LTE [4G] by 2015,” says P. Balaji, the erstwhile head of marketing and strategy for India at wireless equipment maker Ericsson. In comparison, there were between 2 million and 3 million Internet users in India in 2000, says Vaitheeswaran.

The rapid growth and maturity of cloud-based, pay-as-you-go Web hosting solutions from Amazon, Microsoft and Google means Internet startups don’t need to worry about the technology infrastructure at all. “Today it is almost like a non-item and doesn’t even figure in board meetings,” says July Systems’ Rajesh Reddy.

Over the past few years, travel Web sites like MakeMyTrip, Cleartrip and Yatra, together with the Indian Railways’ IRCTC Web site, have also disproved the hypothesis that Indian consumers are wary of transacting online. Travel alone accounts for over 80 percent of the Rs. 32,000 crore e-commerce market in India, according to the Internet and Mobile Association of India. With small town India taking to e-commerce, the VCs hope this will allow certain online retailers to completely dominate certain categories the way online companies dominate travel, matrimony and recruitment sectors.

As it stands today, there appear to be two venture capital camps with funds like Accel, IndoUS and Helion being the die-hard e-commerce believers, while Matrix, Canaan and DFJ are relatively restrained in their investments into a still nascent sector.

But both camps, after successive rounds of investments into these e-commerce companies, are starting to raise red flags on a bubble.

“The amount of money that is being raised and the rate at which valuations are soaring — in some companies’ cases, shooting up four-six times within a period of just six to nine months — is reminiscent of 1999. Can a company really create so much value in just six months?” says Gupta of Helion.
Startups are being valued at 8-10 times their gross sales, and at times even higher. With estimated revenues of Rs. 100 crore currently, Flipkart is reportedly valued at nearly $250 million, meaning 11-12 times gross sales compared to 2.5 times for Amazon.

“It’s fear and greed by those who don’t have an e-commerce play and don’t want to miss the boat, that is driving it,” says Mohanjit Jolly, managing director of VC firm Draper Fisher Jurvetson (DFJ) India.

Of course VCs, burnt once, may be doing the right thing raising the flag. Most e-commerce players aren’t making money yet. Being still young, none of them make profits as a company, but in categories like books or mobile phones, many don’t even make money on a transaction level (see graphic).
Blame free shipping, cash on delivery and a severe deep-discounting price war for much of that. In addition, as they go about adding warehouses, hiring their own delivery agents and stockpiling inventory, Kanwal Singh, partner, Helion Venture Partners says their “cost of operations and inventory is way ahead of current revenue.”

While companies spend anywhere from Rs. 500 to Rs. 2,000 on search engine marketing to acquire new customers, Mittal of Canaan says, “It’s a leap of faith to believe they will come back for repeat purchases, thereby becoming profitable eventually.”

But, says Flipkart’s Sachin Bansal, “Asking us about profits right now is absurd. It’s like going back to 2000 and asking Airtel to become profitable instead of investing for the future. We are growing at more than 100 percent. When growth rates fall below 100 percent then we will look at profits.”

Myntra’s Mukesh Bansal says he will start making net profits when his monthly revenue hits $4-5 million. While both Flipkart and Myntra, with $31 million and $20 million in venture funding respectively, may be able to wait it out till then, less funded companies will find it much harder.

Entrepreneurs being blasé about profits may not change, says Subrata Mitra of Accel, “till people are throwing money to undercut each other [on prices]”. VCs are aware of this trend but are powerless to do anything about it, because doing so would mean reducing the rate of growth for their companies.

Legendary US investor Warren Buffet is a global favourite among investors because of his belief in long-term value-driven investing. The cornerstone of his philosophy was his following quote: “In business, I look for economic castles protected by unbreachable ‘moats’.”

“I still struggle to understand if by burning VC money you’re creating a moat, or merely a pile of ash,” says Gupta. Nonetheless, many venture capitalists feel that there can be three-four $1 billion valuation e-commerce companies from India over the next five years, in turn implying that these companies will have sales of about $200 million. The rest? Well, most will either close down or be acquired by a larger, better funded rival.

The ultimate beneficiaries will be the customers, who’ll enjoy deep discounts, free shipping and cash on delivery for the foreseeable future as companies fight to win their loyalty.

“At the end of the day, e-commerce is just a business. And a business has to make money,” says Vaitheeswaran. This time they better. Nobody has ever heard of getting a third chance at shooting glory.

(Additional reporting by Shishir Prasad)

Tiger’s Fearful Symmetry

The biggest backer of the Indian Internet story is a fund that has no home or office in India or even a Web site. It doesn’t publish any information on the companies it has invested in nor does it speak to the press. Its name is Tiger Global.

It is one of the many ‘tiger seed’ or ‘tiger cub’ funds that sprang forth following the 2000 demise of Tiger Management, a legendary hedge fund managed by Julian Robertson. Started by Chase Coleman in New York in 2001, Tiger Global today manages over $8 billion across various hedge, PE and venture capital funds. But much of its present aggression around early stage venture investing is being driven by Lee Fixel, the fund’s managing director.

Tiger Global has been one of the most gung-ho investors in the Internet space. It has invested in Facebook and LinkedIn in the US, Youko.com and Dang Dang in China, Digital Sky Technologies in Russia and many more in Brazil and Mexico. In India too, it has emerged as the largest investor in the e-commerce space with $82 million invested since 2009. “Tiger Global has called this ride in China, Brazil and the Middle East. It’s not something all VCs can execute because they don’t have the same corpus or conviction. Lee is more aggressive than most of the people out there,” says Ashish Gupta of Helion Ventures.

An Indian entrepreneur currently in talks with it feels Tiger Global, along with Russia’s DST, represent a new wave of venture investors who unlike most VCs saw the glaring mismatch between the market opportunities and fundamentals of companies vis-à-vis their valuation. “Tiger’s is a binary play — either they lose everything or they win. Therefore, it doesn’t matter if they invest $15 million into a company at a $30 million or $60 million valuation. Other VCs may bicker and moan [but] it’s great for entrepreneurs!” says Mohanjit Jolly of DFJ India.