How the Rise of Third Party Marketplaces can Alter Indian E-Commerce
Image: Heide Benser / Corbis
ijay Sales, a privately-held electronics retail chain that started out from Mumbai in 1967, is an unlikely poster child for the next phase of ecommerce in India. Most Mumbaikars swear by its product range and deep discounts. “But who walks into stores anymore?” most armchair ecommerce diehards are likely to retort. They may even view Vijay Sales, with its 50-odd stores and over Rs 1,500 crore annual revenue, as a ripe fruit waiting to be digitally disrupted by the likes of Flipkart. But over the next few months, many leading ecommerce companies, including possibly Flipkart itself, are likely to be courting Vijay Sales instead of figuring out how to steal its sales. ➼
“Over the last 12-18 months there has been a maturing of suppliers, from electronics retailers like Vijay Sales to brands like Samsung and Benetton. They are now willing to invest more time and effort so that a product that was earlier going from Vijay Sales to Flipkart and then to the consumer, can now go directly to the consumer,” says Alok Mittal, managing director of venture capital firm Canaan India.
The mega trend that is sweeping across the ecommerce landscape, that could turn Vijay Sales and Flipkart from competitors to partners, is the rise of “third-party marketplaces” (3P)—ecommerce platforms where retailers and brands can sell to customers directly.
In Chennai, Sathish Babu, the founder and CEO of Univercell, a 450-store mobile phone chain that claims to be doing over Rs 1,000 crore in revenue, is being wooed too.
“We’ve been approached by Flipkart, Amazon and many others to join their marketplaces,” he says. Though Univercell has been selling phones online for the last seven years, the volumes weren’t all that big because their focus was on store sales. But that will change with the entry of marketplaces, says Babu.
“While marketplaces may seem only evolutionary from the consumer end, at some level it could be revolutionary from the supplier side,” says Mittal.
Ecommerce marketplaces aren’t a new concept. eBay has been running exactly those since 1995 inter-nationally and since 2005 in India.
And while eBay has been successful in India, its scale has been dwarfed by the runaway success of inventory-led “first-party” (1P) ecommerce sites like Flipkart, Jabong, Myntra and Homeshop18 (disclaimer: Homeshop18 is part of the Network 18 group that also publishes Forbes India) who burnt through tens of millions of dollars in venture funding to offer customers a more easy, predictable and consistent experience.
Some of those companies now reckon Indian consumers are ready for a better alternative to eBay: A “managed marketplace” where they control the marketing, look and feel, logistics, shipping and customer service, leaving only sales to third-party sellers. eBay in contrast adopts a more hands-off approach on those counts, letting suppliers figure out their own respective strategy for each.
“India has nearly 35 million SMEs who are not able to leverage the power of the internet because they lack the critical mass to attract customers online. If marketplaces can harness them, this would be the second coming of ecommerce in India,” says Sanjeev Aggarwal, co-founder and senior managing director at Helion Venture Capital.
The Lights at the End of the Tunnel
Why are so many ecommerce companies hitching themselves to the marketplace model so rapidly? To understand that, imagine them crossing a long, dark tunnel at the end of which lie untold riches.
They see a light at the end of the tunnel, the marketplace model, which allows them to scale sales dramatically by becoming the platform where millions of buyers and sellers meet and transact. Each sale leads to a fat commission ranging from 6 percent to as high as 20 percent of its overall value. A lot of this can go straight to the bottom line because significantly less of their cash needs to be used up in marketing, fulfilment (the need to stock inventory to better fulfil orders) and customer service.
“The shift to marketplaces is a positive sign for Indian ecommerce. In the present model where the cost of operations is high, unit economics don’t necessarily lend themselves to scale. So the more you grow, the more you can lose. Marketplaces will allow platforms and third-parties to jointly solve for scale and thus shift focus from valuation to sustainability,” says Muralikrishnan B, the country manager for eBay India.
Marketplaces are the dominant ecommerce life forms across most countries in Asia. For instance, Alibaba’s Taobao and Tmall marketplaces account for 90 percent and 51 percent of all consumer-to-consumer (C2C) and business-to-consumer (B2C) ecommerce in China. eBay-owned marketplaces Gmarket and Auction together control 70 percent of South Korean ecommerce. In Japan, Rakuten has a share of nearly 30 percent of all ecommerce.
In most big countries in Latin-America, the largest ecommerce player is MercadoLibre, again a marketplace. In the US, eBay is of course the largest example, but even Amazon’s revenue mix is rapidly shifting towards its marketplace: Though it accounts for only around 9-12 percent of the company’s overall revenue, analysts estimate that it makes up 40 percent of Amazon’s gross profit. Moreover, its marketplace business is estimated to be growing at 80 percent annually versus 30 percent for its direct ecommerce retail.