In one of our previous issues, we focused upon the fact that discounts cannot be the USP of any e-commerce firm. Why? Let us now understand.
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Sweat it out, but don’t bleed to death.
First let us ask ourselves, “Why e-commerce? Was there anything wrong with the traditional brick and mortar stores?” No, nothing was wrong. As disposable income increases, so does the number of work hours involved and the fatigue that comes with it. Thus e-commerce was an option for people who wanted to have their requirements delivered at their doorstep, in a hassle-free manner. As compared to e-commerce (mainly e-tail), brick and mortar retailers have to pay certain extra costs like maintenance of the store, products and inventory and the wages of those involved in selling the goods at the store. Thus inherently, e-tail prices should be somewhat 15%-20% cheaper than the brick and mortar retail prices.
This discount is surely an order qualifier, but is it correct to make it your sole order winner? In my opinion, it isn’t. Because it not only bleeds your business dry (read as the cash burn to afford these discounts) but also creates a very flimsy customer base, which is loyal to your discounts, and not your brand. If your competitor still gives discounts beyond that, do not panic. Focus on your USP, which needs to be built around an efficient delivery service, excellent customer experience and satisfactory customer care. At such a time, you can also consider concentrating on some other product category. This again is in line with the specialization concept we discussed in our previous issues. Also with the Indian government recently tightening the noose around these online marketplaces by prohibiting them from impacting the prices of the goods sold on their platform, it is clear that this wasteful deep–discount model is nearing its end. It not only harms these firms but also distorts the market. Let there be fair competition.
Search for new profit centers.
Having spent sufficient time in the e-commerce ecosystem, firms like Flipkart and Snapdeal now need to focus on breaking even and generate returns for their investors. They should be looking for new revenue and profit centers within their business models and setups. They need to start entering the services market, bringing the unorganized sector to the mainframe. This unorganized sector in India (across various services and products like refurbished electronics and household services) is astonishingly large. The home services market alone is pegged at close to $100 billion. To tap into these unorganized sectors and convert them into organized ones should be their next growth strategy. But this requires a drastic restructuring of their current business models and the market itself. The top brass at these firms have always acknowledged that the real market potential lies in the Tier II and III cities. Given the right kind of logistics and distribution network, their business volumes can be increased manifold.
Here is where the role of logistics as an alternative and reliable profit center comes into play. Even in brick and mortar retail, he who wins the distribution battle, wins the market. Look at HUL for instance. The FMCG giant has an excellent distribution system and consequently is the mightiest FMCG brand in India. HUL can also teach the e-tailors how alternative revenue streams can be generated from the existing business models. It has recently decided to offer its large warehouses on lease to these online retailers, a two pronged strategy to enhance the top line, by bringing revenue and increasing the presence of its goods in the online space.
Implications? Own it- lock, stock and barrel.
In China, logistics startups are the ones drawing most investments. Look at Amazon and how beautifully they are working on designing a global supply chain. The magnitude is so huge that it will put them up for direct competition with the global logistics giants UPS and FedEx. It plans to counter Alibaba by building a logistics network to sell Chinese (and Indian) goods in the US market. The amount invested in it seems ridiculous, especially after a failed stint in China. Figure out the strategy behind it, and then it won’t, given the fact that it has the potential to give them access to a market worth $400 billion globally, having crossed the $100 billion mark for the first time in 2015. With its cloud services already profitable, Amazon is all set to enter both the ocean and air freight industries. It is ready to “own it” as they say, both literally and figuratively!
Similarly, Flipkart using Ekart to secure third party delivery orders via Paytm is an excellent example of how to synergize your existing businesses to enhance profitability. Had it not shut down its payment gateway PayZippy in 2014, then the profit from this endeavor would have been even more.
If you own the entire system completely, you can easily leverage it to offer services to third party vendors also, adding an alternate revenue source. At the same time they will also be able to help smaller startups scale up, thus benefitting the ecosystem on the whole. This justifies their role as holding companies as we mentioned in our previous issue.
Organizing the Un-organized.
A well laid out logistics system can in turn go a long way in tapping into the unorganized sector. Because what makes the unorganized sector that way is mostly the lack of an efficient distribution network which in turn causes the products and services coming out of a region to remain localized in that area.
For instance, let us build upon our example of the market for refurbished phones and laptops in India. Currently estimated to command a market worth $20 billion, the number of merchandise in this market is increasing day by day as technology’s average age keeps on decreasing, advancing in line with Moore’s law. Due to high income disparity between the rich and the poor, the demand is huge as we are an overly price-sensitive nation. This and the fact that our annual e-waste generation exceeds 1.5 lakh tonnes should make this market a rage in India. But the resale value of such goods is as low as ever today. Then there are always trust issues with us Indians (warranted though, I must say). The complexities and uncertainties that come along with re-selling it on portals like Quikr or OLX don’t quite make it any easy either. Thus instead of entering this unorganized market for refurbished goods, we prefer to just pass on our old gadgets to someone who may or may not need it and purchase a new one for ourselves.
Enter re-commerce. An extension of e-commerce, this model has a lot of scope in India, where it can also help in providing technology access to the society on a larger scale. However, re-commerce is too risky a venture to be forayed into exclusively, given the uncertain present state of the Indian e-commerce ecosystem. But if it can be merged synergistically with the existing e-commerce models, then it means serious business.
What to take away from all this?
So what can the Flipkarts and Snapdeals make out of it? Think about this. In 2015, out of every 3 smartphones sold, 1 was sold online. 47.5% of these online mobile sales belonged to Flipkart. Why not get into the refurbished smartphones business? Today, affluent people change their phones in every 2-3 months. As you move down the income index, smartphones still continue to be changed at least once in every 6-10 months. With buyers available for these, all Flipkart needs to do is to come up with a time and quality based model to determine the resale value at which it can buy back a phone. Then it needs to examine it, and refurbish it accordingly. It can be resold in the market at reduced prices, maybe via an auction-based model, along with an exclusive seller (Flipkart, in this case) guarantee that can vary based on the condition of the gadget. They can even tie up with the mobile phone manufacturers for easy refurbishment, strengthening their mutual business ties in return.
The problem of trust and security will automatically be resolved if an organized entity like Flipkart enters this business. Having a robust last mile delivery and reverse logistics setup is again paramount for a model like this to thrive. But Flipkart’s logistics arm, Ekart is already taking the right steps in this direction. Having provided delivery service for Paytm, Shopclues and Jabong, it has bagged a delivery contract for Aditya Birla Group’s Madura Fashion and Lifestyle (MFL), its first offline retail customer. With plans to rope in around 50 major offline clients by the end of this year, it will surely be a revenue-boost for Flipkart if achieved. According to market research firm Novonous, India’s 3PL (third party logistics) industry will be worth $300 billion in 2020. Thus, the potential is huge.
Another takeaway that arises from this solution is the symbiotic relationship between these offline retailers and online marketplaces. Considered each other’s competition up till now, this Ekart-MFL deal shows that a synergized relationship between these two is possible. With the capability of serving five lakh daily orders, a warehouse space of 1.6-million square feet and 17 fulfillment centers across the country, Ekart has built an enviable capacity. Now it needs to secure clients to utilize and scale up this capacity in an optimized manner. With other e-commerce giants Snapdeal and Amazon having their own logistics setups, Ekart’s major target will have to be the offline retailers. Another pointer to the importance of the growing offline to online (O2O) market. With the delivery for third party customers being provided under the “Fulfilled by Ekart” (FBE) initiative, it also supports Flipkart’s attempts at building a reliable omni-channel experience for its customers via the recently opened experience stores.
Thus, time has come for these established firms to relook at their business models, identify and extract new profit centers and look to enter into services to take the lion’s share of the unorganized and untapped markets still available. As for the unorganized household services sector, it is all set to be disrupted by a new wave of tech-startups. In 2014 alone, 69 startups came up, catering to home services. In the end, consolidation is bound to happen. Even this niche will have two-three runaway winners like the e-commerce domain. So, with new “cockroaches” like UrbanClap and Zimmber already having made some inroads into this highly fragmented market, the e-commerce firms need to move quicker. In this niche, scaling up will be an issue, but a deep knowledge of the logistics network will definitely work in their favor. Having established themselves, profitability should be their aim now. Blue ocean, anyone?
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