2011: An e-com odyssey

With 2011 marked by a steadily rising inflation rate, a political and economic climate that was hostile to big business, labour unrest, and rising prices of raw materials, it was hard to find any optimism in the market. Most of India Inc. struggled through the difficult period, and companies began preparing for worse times ahead. Enter the e-commerce entrepreneur, who seemed to have found the silver lining in an otherwise dark cloud.

At a time when big business was making moves to deal with a slowdown, these entrepreneurs were spending on consolidating their companies. They took the bad times into account, but most were able to see that with smart planning, even a recession could be turned to their advantage. That’s why we call them the visionaries of 2011.

Although few online businesses were set up in 2011, the year saw some big investments; $324 million (Rs 1,622.6 crore) of private equity and venture capital was raised by e-commerce ventures in 2011. Last year, chipmaker Intel’s investing arm parked over 20% of its $250 million India Technology Fund across 17 companies. Three of these were in e-commerce. “Consumer Internet was the No. 1 sector last year,” says Sudheer Kuppam, managing director for Intel Capital in Asia-Pacific. “We expect it to be active this year too, along with education, smartphones, and tablets, as 3G services keep getting deployed. It will changehow Indians consume.” Then there was $40 million invested in designerwear e-retailer Fashion and You last November; $6 million in consumer electronics e-retailer LetsBuy; and some $16 million in fashion retailer Exclusively.in.

The performance of online ventures underlined the reason for investors’ confidence. Info Edge, a classifieds portal, is now a listed entity that earned Rs 322 crore in the year ended April 2011. Word on the street is how Flipkart and Snapdeal can make millions selling out to Amazon and Groupon, and valuations have soared as a result.

The fact that the biggest e-retailer of them all, Amazon, is planning to enter India is testimony to the potential of e-commerce in the country. Last year, retail giants Macy’s and Bloomingdale’s began shipping to India, a move that highlights the possibilities of the market here. Valuations could skyrocket if the floodgates open for multi-brand retailing. This is among the few pro-reforms signals that the United Progressive Alliance government has sent out in recent months. If and when multi-brand retail opens up, the global giants would have a ready and low-cost supply chain network and knowledge repositories in India, especially in non-metros, because of the e-commerce entrepreneur. These players have seen the future, and for them, it’s in retail.

K. Vaitheeswaran, head of Indiaplaza.com, and among the earliest movers in the e-commerce space (he co-founded one of India’s first online stores, Fabmart.com, in 1999, which later acquired Indiaplaza), agrees. “The tipping point of e-commerce will not be reached by any of us,” he says. “It will be reached only when offline retailers such as Shoppers Stop, Croma, and E-Zone go online successfully.”

It might take some time to happen, but the signs are already there. The Aditya Birla Group has taken its retail brand More online, and reports say that Kishore Biyani’s Future Group expects some 10% of revenue to come from the Future Bazaar e-commerce site. Reliance Entertainment has converted its social networking site into an online store.

“Irrespective of whether it is at the operational or boardroom level, e-commerce is the topic of every strategy discussion across forums. It is simple: Retail is about the consumer, and he is engaging in online shopping. So there is no choice for us but to look at e-commerce,” says B.S. Nagesh, vice chairman of retail chain Shoppers Stop.

But the point is not just about big retail going online. “The real power of e-commerce will come from small- and mid-sized players from all cities being able to sell online,” says Sachin Bansal, co-founder and CEO of Flipkart, an online portal for books, music, and consumer electronics.

Globally, e-commerce is a strong component of billion-dollar retail giants such as Tesco, Wal-Mart, Target, and Nordstrom. In 2011, Tesco recorded a 15.2% growth in online sales; Wal-Mart announced its plan to acquire Kosmix, a social media company, as part of its move to strengthen its digital sales division.

Retail in India is tiny in comparison, largely because more than 90% of the $550 billion industry is unorganised. The big retail chains such as Big Bazaar have a presence in small towns, but this is not enough to meet the growing demand. To understand ‘middle India’, in 2011 market research firm Nielsen surveyed 390 Indian towns with population ranging between 1 lakh and 10 lakh to study the offline demand for consumer goods.

These towns accounted for 100 million Indians and $5.74 billion (or 21%) of the $28 billion domestic market for these products. The problem for consumer goods companies is that to serve this huge demand, they had to increase their presence in over 250 shops in each town. It’s a huge investment for such players, which is why niche products are rarely offered on that scale. But there’s an increasing demand for these products too, since aspirations have been fuelled by the ubiquitous reach of TV.

This is the opportunity that e-commerce entrepreneurs have seen. “Buyers in small cities are going after brands they don’t have access to otherwise, whereas buyers in tier I cities are shopping online for convenience,” says Mukesh Bansal, co-founder and CEO of Myntra. He adds that customers in tier II and tier III cities buy more expensive stuff and price is not a deterrent.

Serving the needs of small-town India is something that national bookseller Landmark finds increasingly important. The company generates about Rs 300 crore from its brick-and-mortar stores; less than 5% of its revenue comes from online sales, but close to half that comes from non-metros. To give these customers a better shopping experience, Landmark knows it needs to beef up its online presence. Industry buzz says this is why the company wanted to buy out a large e-commerce player last year, but the valuation far exceeded the price Landmark was willing to pay.

E-commerce has also come to be seen as the face of a standalone private label in a niche space. “It is about forecasting trends, giving your brands a unique identity and positioning, and then building merchandise around it,” says Prashanth Prakash, partner at venture fund Accel India. “You need deep knowledge of that space. You can’t just trade in it.”

It is why family-promoted businesses, such as Jaipur Gems which has been in the solitaire business for five generations, spread across Chennai and Coimbatore, are entering this space. Mithun Sacheti, scion of that business, started CaratLane in 2008 to sell diamonds and diamond jewellery online. It received $6 million from the U.S.-based Tiger Global, an investment fund, last year.

On their part, e-commerce entrepreneurs have focussed completely on expansion as capital streamed in. “A lot of this involves working in spite of the system in the real world, both at the front- and back-end,” says Prakash. Twelve of Accel’s 38 investments in India are e-commerce businesses. “The number of problems that have to be dealt with in an e-commerce business is about three or four times what a typical tech-entrepreneur has to encounter. It is not just about product and marketing.”

One of the biggest challenges for an e-commerce player is managing inventory. “The e-com entrepreneur must have a sharp understanding of his category, its supply chain and the backend,” says V. Rajesh, former vice president of Reliance Retail’s home business.

Sachin Bansal of Flipkart says that his company currently has a logistics team in 30 cities; this will double in the next two years, he says. “Logistics will then have to be a mixed model, where we will work closely with the locals—some people from our team and people who are from local courier companies,” he adds. Other e-commerce companies are following the Flipkart model of setting up independent delivery mechanisms.

Going ahead, this could create some problems for the industry. So far, e-commerce ventures have been seen as natural off-shoots of technology companies, and tech was the great differentiator.

However, with the Flipkart model (independent warehouses and transportation), e-commerce is seen as entering the retail space. And questions are being asked about the millions of dollars of private equity funding such ventures. “Carrying inventory and raising an invoice on the customer makes such businesses part of the retail business,” says a Bangalore-based private equity investor. “As per law, they should not be able to raise capital from outside India to do business. Isn’t that FDI in retail? They are skating on thin ice.”

As long as these questions are not asked too loudly and too often, investments are likely to continue. But will investors back non-profit-making companies endlessly? While most players claim to be operationally profitable, they are yet to break even after 2011, which was a watershed year in terms of additional capital coming in. Warehousing and logistics entail large overheads. It calls for large volumes and scale, with the slow but steady growth of online demand. Then, there are low margins because of the attractive deals and discounts that is associated with e-commerce.

“A lot of them are still loss-making, and it is not clear when the profitability switch will come on,” says Amit Chander, head — health care, IT and education investments, Baring Private Equity Partners India. “It is a risk profile we are not comfortable with because it’s hard to tell how many will survive and make money.”

Some venture funds are getting around this by organising themselves in syndicates. For instance, the $40 million invested in Fashion and You in November came from a consortium—Norwest Venture Partners, Intel Capital, Sequoia, and Nokia Growth. What investors are banking on is that there will be continuity in the growing Internet consumer base and usage in the next decade. This makes India a fertile ground for e-commerce, and this is the opportunity that the e-commerce entrepreneur is tapping.