admin
April 5, 2015
Sunitha
Natti, The New Indian Express
Chennai,
5 April 2015
Moving
out of town, but don’t want to take along your fully functional
fridge and ac? Eyeing a 42-inch HD TV but don’t want to shell
out a thousand rupees per inch? Or, perhaps, itching to get an
iPhone 6 Plus but don’t want to cough up that exorbitant
asking price? Don’t worry. Trade portals like Olx, Quikr,
eBay and Junglee have not only come to the rescue of price-sensitive
Indians, looking for a good bargain in villas as much as veggies,
they’ve also made second-hand buying and selling of goods
fashionable. It’s a win-win situation, with online buyer-seller
platforms convincing consumers of both product quality, and affordability.
“The Indian market always had a healthy second-hand sales culture. But online marketplaces are driving the social acceptability of used goods and have wider and more persistent accessibility than the traditional classified ads,” observes Devangshu Dutta, chief executive of market research firm Third Eyesight. Everything is available at negotiable prices. The only difference between then and now-the once-used products on sale these days are in good working condition, with some even commanding premium prices for their quality.
“The market for used goods is growing. We foresee new types of products being transacted online. Person-to-person sales are on the rise as more individuals understand and transact with ease online,” says Mahendra Nerurkar, general manager and director, Junglee.com, which is part of the world’s largest online retailer Amazon. With acceptability of second-hand goods rising, Amazon entered India in 2012—14 years after it purchased Junglee.
India’s used goods market is likely to touch Rs 1,15,000
crore in 2015 from Rs 80,000 crore in 2014, says Assocham. “Notwithstanding
the market appetite, there was a significant trust deficit earlier
regarding quality of the goods and reliability of the seller/buyer.
Organized players like us and online shopping aggregators are
reviving sales of re-used goods,” says Nagendra Palle, CEO,
Mahindra First Choice Wheels Ltd, which also use online marketplaces
like Olx and Quikr to sell re-used cars. “Currently, 20-25
per cent of our inventory is sold through these online platforms,”
Palle explains.
According to a recent OLX CRUST Research, in 2014-15, goods worth Rs 56,200 crore, up from Rs 22,000 crore last year, are lying locked at people’s homes in the urban areas alone. These goods are no longer in use and have the potential to create a sustainable market for second-hand goods market if put on sale. “We have coined the term ‘Brown Money’ to refer to the money locked in goods gathering dust in our homes,” explains Amarjit Singh Batra, CEO, Olx India. Interestingly, one-fifth of the goods being stocked in urban Indian homes have ceased to be relevant to them, he notes.
According to Batra, platforms like Olx, are helping users unlock the money hidden in used items. “From a country of scarcity, we are moving towards a country of abundance, for at least some people. People are buying more, consuming more, and, in the process, wasting more. We want to help people waste less through collaborative consumption and extending the life-cycle of the products,” says Batra.
Interestingly, one out of every two of the 200 million Internet users in India, as per ComScore research, access retail services (websites) online. “The growing Internet base increases visibility, makes trading faster and importantly, improves accessibility,” says Dutta. Another motivational factor for buying used goods is that these products are less expensive than new goods, and yet meet product quality requirements.
For instance, Arvind from Ranchi wanted to sell his two-year-old one tonne Samsung split AC for Rs 13,500, it was viewed 16 times within 10 minutes of posting the ad online.
Considering the used goods market is still evolving, the industry is yet to overcome some challenges. With several classifieds, there is often poor due diligence of the type of advertisement, availability of picture, authenticity of classified, much to the annoyance of genuine customers.This is something, online market aggregators like Junglee, Olx and Quikr are trying to bridge, maintaining site-wide standardization with verification of seller, availability of pictures to ensure reliability of the product.
“All local sellers are verified through a phone verification process. All used product classifieds are screened for pictures and relevance. Thus, customers who may have not originally intended to buy used goods are also exposed to the used goods classifieds,” says Nerurkar.
Currently, automobiles and mobile phones are the widely bought and sold, but of late computer software, consumer electronics, kitchen appliances, clothing, books, mobile phones/smartphones, home appliances, watches, baby & children products, bicycles/two-wheelers, furniture, musical instruments, camera, sporting goods, car accessories and computer hardware are finding traction.
Trading is being actively pursued in cities like Delhi, Mumbai, Chennai, Bengaluru, Hyderabad, Kolkata, Patna, Guwahati, Ahmedabad, Lucknow, Jaipur, Chandigarh, Indore, Kochi, Bhubaneswar and Pune. “Mobile phones have enabled more Tier II and III cities to buy/sell and transact online with ease,” says Mahendra.
(Published in The New Indian Express.)
admin
March 31, 2015
Samar
Srivastava, Forbes India
Mumbai,
31 March 2015
At
the age of 54, Kishore Biyani is ready for change. The founder
and CEO of Future Group, one of India’s largest retail conglomerates,
is dramatically altering the way he does business. “By 2020,
we need to transform Future Group into a technology company. We
will be more of an analytics company than a retail one,”
he tells Forbes India. This doesn’t mean that he has lost
sight of his customer. Just the opposite: Biyani wants to know
more about each and every person who visits his stores, including
38-year-old Chandrakant Dhawan (name changed).
Every month, Dhawan and his family visit the Big Bazaar outlet
in Mumbai’s Vile Parle to stock up on groceries and other
household commodities. During the festive season, his shopping
basket includes a few gifts, and at the start of the academic
year, he buys stationery for his children. In all, he spends about
Rs 60,000 a year at Big Bazaar, which is owned by the Future Group.
Biyani, however, is not satisfied with Dhawan’s spends. He
wants more.
He’s determined to get the one crore loyal customers—whom
he already has—to spend at least Rs 1 lakh annually in either
one or across all 14 retail formats that the Future Group owns.
If he succeeds, he would end up making revenues of Rs 1 lakh crore,
a more than six-fold jump from what his retail businesses earn
today.
Biyani spent the last two decades building a sprawling empire
across India with millions of square feet of retail space. Through
his Big Bazaar format, he has created the country’s best-known
hypermarket, and has enjoyed success with affordable apparel labels
like Pantaloons (since sold) and Central. The group has also developed
smaller brands that retail everything from electronics (eZone)
to furniture (Home Town).
Now, he is seeking to take his company in a direction that many
traditional international retailers like American giant Target
and Tesco in the UK have already adopted: First, using customer
analytics to predict what consumers want even before they realise
it themselves. And second, taking a bite out of the ecommerce
pie.
Both moves, say experts, is a natural step in the conglomerate’s
evolution to stay on the top. Biyani’s vision for the Future
Group as an analytics company is hardly surprising; he has continuously
upended the rules of the game and challenged conventional wisdom.
In the early 2000s, for instance, he started the Sabse Sasta Din
campaign, which promised the lowest prices in all Big Bazaar outlets
across the country for three days around January 26 (Republic
Day) and August 15 (Independence Day). They became, and remain
to date, some of the most important sales days in the country.
The question is whether the Future Group will be able to build
on the highs of the previous decade. Can it replicate this success
across all its formats and not just Big Bazaar? If he accomplishes
what he has set out to do, Biyani will be able to widen the narrowing
gap with one its biggest competitors, Reliance Retail, a subsidiary
of Mukesh Ambani’s Reliance Industries Ltd (RIL). Last year,
Reliance Retail reported revenues of Rs 14,496 crore. The Future
Group with Rs 15,500 crore in revenues has managed to retain its
lead, but only by a whisker. (RIL owns Network 18 which publishes
Forbes India.)
Industry experts point out that data alone will not guarantee increased sales.
“The Future Group is not the first to adopt this strategy, but it certainly has the most ambitious target,” says Devangshu Dutta, chief executive officer of retail consultancy Third Eyesight.
(Smaller retailers like Shoppers Stop are already using data analytics to boost sales.)
According to Dutta, to have a team running analytics solutions
is the relatively easier part. “What is harder is getting
the organisation to react to the insights. If there is a short-term
opportunity, but the retailer is unable to source the goods from
the supplier, it is as good as not having the data,” he says.
Manoj Agarwal, chief information officer at Future Group, while aware of the pitfalls, is excited about the direction the company is taking. “It’s a journey that will take us from brick to click,” he says.
Tailor-made for a customer
The first step in this journey is to strengthen the group’s
loyalty programme. And the core of Biyani’s plan is the confluence
of real-time analytics, real-time personalisation and real-time
shopping. At a lab in his Vikhroli office, Forbes India gets a
peek into the granularity of the data the company has been able
to collect. It is now able to get very specific information about
a customer, and based on past consumption patterns, can predict
future buying trends. How many bars of soap will a particular
customer buy in a year? Is a family taking advantage of the deals
on vegetables? Is a person buying larger pack sizes more frequently
or does he/she prefer smaller sizes?
It’s called predictive data. “What this does is allow
us to specifically tailor deals and discounts for individual customers.
This is something we couldn’t have done before,” says
Dupindera Sandhu, who runs the Future Group’s loyalty programme,
which, incidentally, has already been revamped. Customers can
now use one card to avail of discounts and rewards across all
the 12 brands, including Food Bazaar, Planet Sports, Central,
Home Town, eZone, Brand Factory and Future Bazaar.
In addition, Future Group has tied up with Payback, a multi-brand
loyalty programme, which allows a customer to avail of offers
from services outside the Future Group. While this benefits consumers,
it also gives the company access to a rich trove of data on a
person’s travel habits, dining preferences and so on. The
lab has also developed a new set of tools to create a social media
profile of a customer based on information he or she has publicly
shared online on sites such as Twitter, Instagram, Facebook and
so on.
And from this information, Biyani knows that Dhawan from Vile
Parle, who shops at Big Bazaar, likes hiking, prefers Samsung
to Apple, and takes one international vacation every year. Agarwal
says all this data is now easily available, and it is in “the
slicing and dicing of information” that retailers have their
task cut out. If done efficiently, a retailer can meet an individual
customer’s needs. For instance, in Dhawan’s case, when
he is due for a phone upgrade, the company can send him a discount
coupon from eZone. When social media chatter picks up that he
is planning a hiking trip, he could be enticed to purchase some
outdoor gear that Planet Sports can offer at a discount.
Biyani has budgeted Rs 100 crore for this analytics overhaul,
but it’s not money which is the issue as much as it is rewiring
the organisation to think and function in a manner that prioritises
data. The advantage of such an initiative is that after the initial
investment and installation of computers and software, they cost
little to run. But the benefits can be disproportionate. “The
moment Dhawan buys a single phone costing Rs 30,000 from me, he
is that much closer to spending Rs 1 lakh a year,” says Biyani.
And while he’s convinced that this is the new face of retail,
he acknowledges that there is a fine line between using data for
marketing purposes and invading a customer’s privacy. The
solution is to ensure that consumers have the power to decide
how much information they’d like retailers to have.
To sweeten the pot, Biyani has also made sure to up his offerings
with excellent results. His electronics store, eZone, was a format
that had been hit hard by competition. Online players had taken
away the mobile phone market and nimbler rivals like Croma with
stronger private labels had managed to grab a larger market share.
“We have now managed to make this a Rs 2,000-crore business
from Rs 800 crore [a couple of years ago],” says Rajan Malhotra,
president eZone. He claims to have done this by offering customers
assured buyback plans and service contracts. But there’s
no denying that Future Group has been hit by the etailers.
Tackling the ecommerce threat
The market is a very different place from 2001, the year Biyani
launched Big Bazaar. With 230 stores across the country, it is
India’s largest hypermarket, but gone are the days when a
retailer can count on physical footfalls to do the job. With competition
from ecommerce rising, the Future Group is fighting to retain
customers. It doesn’t help that the ecommerce industry, which
is flush with private equity and venture capital funds, can afford
to lose money while acquiring new consumers. Meanwhile, traditional
retail has seen valuations plummet. Future Group is no exception:
Its share price on the Bombay Stock Exchange has dropped from
Rs 480 in 2010 to Rs 102 as of March 9, 2015.
“Discounting below price is not an option,” says Biyani,
referring to the low prices that many ecommerce platforms are
offering to grab customers. He believes that this trend of selling
goods at very low prices will settle down in 12-18 months when
private equity players stop funding losses. “At this point,
my physical stores will be at an advantage.”
At the same time, the Future Group is getting ready to grab a
bite of the ecommerce pie. In six months, most of Future Group’s
brands will be available online. For instance, customers will
be able to order online on Bigbazaar.com and have the products
they buy delivered to their homes. Those dissatisfied can return
them to the nearest physical store and get their refund immediately.
This will significantly cut down return costs that are the bane
of online retailers.
Biyani calls this initiative the Omni channel (online and offline)
push. With a network of stores in 102 cities, he knows that he
has a huge advantage over online retailers: A well-developed and
efficient logistics arm. Goods ordered online need not be shipped
to a customer from a warehouse in a distant location. Instead
they can be shipped to stores, after which the company can tie
up with a local partner for the last mile—from the store
to the consumer. Think of Biyani as an online retailer with a
significant offline presence.
His pan-India delivery network will allow him to save significantly
on logistics costs. His nephew Vivek Biyani, who is director of
Future Group and is leading the online push, adds: “Our trucks,
in any case, deliver across the country. It shouldn’t be
too hard adding specific customer orders to that.” Future
Group is also making a big bet on in-store kiosks, which will
allow customers on the store floor to order products that are
not in stock. These will be delivered directly to the person’s
home. Even small measures like these will go a long way in reducing
the inventory a store needs to keep. At a Big Bazaar outlet in
Mumbai, a customer used a kiosk to order a tea set online. Products
like mugs and dinnerware are also offered with a small 10 percent
discount. These kiosks will be rolled out in Big Bazaar outlets
all through the year.
The precedent for Biyani’s ‘Omni push’ has been
set by international brands such as Wal-Mart which, along with
a physical presence, has an ecommerce platform that contributes
about $12.5 billion in sales every year, according to a company
press release. This is about 2.5 percent of the retail giant’s
annual sales. While these initiatives have not been roaring successes—it
is best to describe them as work in progress—they have contributed
to that bump in top-line for traditional retailers.
In remaking the Future Group to compete effectively with his
online rivals, Biyani has shown that he is a retailer who is thinking
of the future. And as always, he’s made a big audacious bet.
Global rivals have had a tough time pulling it off and there is
no doubt that his journey will be equally challenging.
In 1997, when he rolled out his first Pantaloons store in Kolkata,
the odds were stacked against him. He was an unknown player with
very little capital. He built the brand into a household name
before selling it to the Aditya Birla Group in 2012. In 2001,
his first Big Bazaar changed the way Indians shopped. Now, once
again, Biyani has shown that he’s capable of thinking big.
The future of his company may well depend on this.
(Published in Forbes India.)
admin
March 30, 2015
Varun
Jain, The Economic Times
New
Delhi, 30 March 2015
Jawed Habib Hair and Beauty Pvt. Ltd, which runs a chain of 480 salons in India, has licensed Jawed Habib brand name to launch hair cosmetic products. The company is also looking to introduce two salon brands this year, according to its founder, taking the brands tally to seven.
The company runs Jawed Habib Academy and salon and parlour brands Bevels, Hair Yoga, Jawed Habib Hair & Beauty and Hair Xpresso.
The licence for the hair cosmetic range, which will be known as “Jawed Habib Hair Yoga products”, has been given to a retail company, Urban Life. The initial range would include a shampoo, conditioner, hair mask, serum and henna (mehendi), said Jawed Habib, founder of Jawed Habib Hair and Beauty.
The company is in the pre-production process and is expected to launch the products, which are likely to be in the Rs 350-500 price range, by May this year, he added.
Habib, who was once associated with Sunsilk as its brand ambassador, feels it is the right time to launch the hair cosmetics range.
“All Jawed Habib business models have received high consumer traffic, following which we thought of introducing something from our own label into cosmetic products”, Habib said, adding that daily interaction with customers at the company’s salons has provided valuable inputs on what clients expect.
All of Jawed Habib Hair Yoga products will initially target salons, but in the second phase, they will be available at retail outlets, either through marketing offices or strategic tie-ups, Habib said.
The company is also looking to launch two new salon brands this year, which, according to Habib, could help the company reach 5,000 outlets in the next five years. For expansion, the company will have state-wise franchisees in the country, the founder added.
We are going to launch “Jawed Habib Beauty Parlour” and “Jawed Habib Barber Shop,” this year, Habib said.
These two brands will be the neighbourhood beauty parlours and barber shops which will be converted into “Jawed Habib Beauty Parlour and Jawed Habib Barber Shop.”
“Our study says there are 5 lakh unorganised salons in the country. Out of which, 3 lakh would be the barber shops and 2 lakh would be beauty parlours. Our research says that they are looking to be associated with a brand, but have no money. We are approaching these 5 lakh salons and asking if they are interested in becoming a part of Jawed Habib,” the founder said.
The franchisee fee for this conversion model will be Rs 49,000 and it will be a one-year contract. Salon owners wanting to join will have to complete eight training sessions in order to renew the contract.
Sounding optimistic about the new venture, Habib said, “Though we are talking to convert 5,000 salons to Jawed Habib’s salon in five years, I am sure that this number is going to be much higher. And that is going to change the whole hair dressing scenario in the country.”
Devangshu Dutta, chief executive of retail consultancy at Third Eyesight, said that launching hair cosmetic products will allow the company to penetrate the brand into customer’s home, as the product will not be limited to salons. He said the Indian market has a lot of growth opportunities for existing as well as new and upcoming brands.
“The market is growing and we are at a stage where sometimes availability drives consumption and growth. We are not in a mature-state economy where every growth opportunity has been pretty much taken. Due to the fact that our per capita consumption of most products are significantly lower than most of the markets around the world, I feel there is room for new brands to do well and create their own identity,” Dutta added.
The company also plans to launch a range of hair care appliances, including hair dryers, hair straightening rods and scissors, among others. The range is expected to make its debut in the market by the first quarter of next year.
(Published in The Economic Times.)
admin
March 25, 2015
Written By: Devangshu Dutta
The Netherlands is the second largest exporter of agricultural and food products in the world. The processed food sector has grown about 35 per cent over the last 10 years, with investments in research growing 75 per cent. The sector’s share in total production value is 21 per cent making it largest industrial sector in the Netherlands.
In spite of this, the share of Dutch processed food products in total imports in this sector India is limited. Keeping the immense growth potential of the Indian market in mind, the Embassy of the Netherlands commissioned a study of the processed food market in India.
As stated by Mr. Wouter Verhey, agricultural counsellor of the Embassy of the Kingdom of the Netherlands in India, in his Foreword to the report: “Netherlands is the second largest exporter of agricultural and food products in the world. For decades, the Dutch agriculture sector has succeeded in maintaining its lead over international competitors through continual investment in innovation in agri-food value chains. In May 2012 an extensive Indo-Dutch Agriculture Action-plan was signed between the Central Government of India and Government of the Kingdom of the Netherlands. Within this broad agreement, several areas of cooperation in the agriculture/food sector are defined. This study is a tool in implementing the projects being identified in the processing sector under the Action Plan.”
The report was commissioned in order to develop an understanding of India as a market for processed food products and uncover opportunities for Dutch companies. The report provides an overview of the economic growth in India, the consumer base and its key characteristics, the food retail and services environment, market structure of various food product categories, their growth potential and areas of opportunity for imported products within these categories, the regulatory framework governing imports and domestic production and possible routes to the market for the Dutch organisations.
India is the largest democracy on the globe, the second largest country by population, one of the top-10 when measured by the size of its GDP, and one of the fastest growing economies in the world. The ethnic, linguistic and cultural diversity of India’s 29 states and 7 Union Territories makes it more like the diversity of the European Union than like that of any other single nation-state. And yet, in political and legal terms, these diversities are managed within one constitutional framework, which possibly makes India unique among the nations around the world.
India has wide variations in the income and tastes which are important for consumer product companies to understand if they are looking to cater to mainstream meal habits. India is the second largest populated country in the world with almost two third of the population living in the villages. The urban population has dramatically been growing from last two decades. Though average income of the urban is higher than the rural average income but there exists a rural rich section who is consumers of premium branded products.
India with the youngest population in the world and a large urban population in the age group 20-34 years of age has observed changes in the consumption pattern. India has been consuming products from multinationals for several decades now and with the growing young population who is well educated and travelled across the globe; the tastes and the choices have been changing.
The number of middle class households is rising and approaching 30 million households or over 150 million individuals, with increasing numbers of nuclear families and double income households. This also is creating a socio-economic class across the country, especially in the larger cities, which has some commonality in consumption patterns irrespective of the city the family has originated from or is now staying in. This is the group of consumers who are driving the consumption growth of processed and semi-processed food products.
As Mr. Devangshu Dutta, chief executive of Third Eyesight, states in his introduction to the report: “On the demand side, as Indian consumer households and lifestyles change from the traditional joint- family structure, consumers’ needs as well as the means at their disposal have changed dramatically. With nuclear households, less time is available for both shopping as well as preparation, leading consumers to consider a whole range of processed and semi-processed food options. Therefore, both Indian and international companies can be beneficiaries as Indian consumers are “outsourcing” their food preparation and cooking activities. It is also worth mentioning a key advantage of the Indian market: that the already significant base of consumers is also growing rapidly. This is true regardless of whether you are targeting a consumer base of 5 million or 500 million. Companies that work with the consumer sector are as yet at the early stages of an expanding opportunity, as incomes grow and lifestyles change. Therefore, any company looking at addressing the Indian market must view it as a long-term opportunity, rather than a short-term win.”
Some major trends which aid the development of processed, semi-prepared and packaged food options include new consumption occasions, growth in dining out opportunities, the willingness to experiment with unfamiliar cuisines, the growth of convenience options and the need for predictability (quality as well as hygiene).
The evolution of food retail and services is playing a significant role in the growth in consumption of the processed food products.
The retail sector in India comprises of a large majority of traditional retail formats and a small (but growing) slice of modern retail formats. The share of modern retail is estimated to be less than 2 per cent in food and grocery. Both, traditional retail stores as well as modern store formats such as supermarket, hypermarket ad convenience stores chains are growing, and both are platforms for launching and growing processed food products in the Indian market. The Hotels, Restaurant and Catering sector is also a major driver of food processing in the country, due to its need for significant consistency of products, predictability of supplies, and larger-scale requirements.
Although India is an abundant producer of dairy products, meat products, fruits and vegetables and sugar, the value-added processed products in all these categories present a growing market. India is also growing as a market for new products such as breakfast cereals, pasta, infant food, bakery products, foreign liquor and different types of oils and sauces. Many international organisations have engaged with the India market by setting up manufacturing infrastructure here itself and understanding the market in depth. This approach has not only enabled them to offer their international range of products at competitive prices and but also became very powerful brands in India. Others are taking a more cautious, trading-led approach to the market. This report presentsthe opportunities and challenges in 20 selected product sectors, and also an assessment of different routes to market.
Although imports account for a relatively small share of the total consumption of food products, in some products such as dairy like cheese and whey, processed fruits and vegetables especially processed potatoes, poultry and swine meat, beer, infant food and sauces, Netherland occupies an important position as a source of import.
Regulations are an intrinsic part of the food industry anywhere in the world, and India is no different. Due to the stress placed on domestic production, import duties are fairly high for finished products. A specific agency related to Food Safety and Standards has also been established by the government in 2006, which consolidates various acts and orders for food-related issues previously handled by various Ministries and Departments. The report describes some of the key regulatory aspects related to imports and distribution of food products in India.
It is important to note that the government has introduced several schemes favouring domestic production in the food processing sector such as providing financial assistance in the form of grants and subsidies for the setting up and modernization of food processing units, the creation of infrastructure, support for research and development and human resource development as well as other promotional measures to encourage growth within the processed food sector. In order to promote faster establishment of food processing industries in the country, the government provides various tax and other incentives to businesses which have been detailed in the report.
To conclude, the market for processed and semi-processed food products is growing in India, and there is significant opportunity for value-added and differentiated products. We hope this report will present a well-rounded view of the market, and serve as a first step for Dutch organisations to productively engage with the Indian industry and Indian customers.
About Third Eyesight
Third Eyesight is a consulting and management solutions firm focussed on sectors retailer to retail and consumer products. Clients who have benefited from our experience and expertise include retailers, brands and manufacturers, technology suppliers, private equity & venture investors, educational institutions and organisations servicing the consumer products and retail sectors.
Third Eyesight has worked with companies that are market leaders (with sizes up to USD 80 billion in annual sales) to early-stage and start-up businesses, on engagements of strategic significance to the top management.
Strategy and operations support provided by Third Eyesight include: identifying and evaluating new business areas, market and industry research, business strategy and business plan development, development of sales and distribution networks, including support with acquiring key client relationships, business due diligence, partner evaluation, strategic alliances, mergers & acquisitions, sourcing and supply chain strategy, merchandising support, operational audits & assessment and a variety of other operational support.
Source: Kingdom of Netherlands
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admin
March 20, 2015
Manu Balachandran, Madhura Karnik, Quartz India
Mumbai, 20 March 2015
On
March 18, one of India’s most celebrated startups received
a huge blow.
Alibaba Group Holding, promoted by Jack Ma, China’s third-richest
man, backed off from buying a stake in Snapdeal, one of India’s
largest online marketplaces.
This would have been the Chinese e-commerce giant’s first
direct investment in India.
The deal stalled after Snapdeal apparently sought a valuation
of between $6 billion and $7 billion (Rs37,500 crore-Rs43,800
crore) while Alibaba was looking at valuing the company at under
$5 billion (Rs31,200 crore).
The breakdown in negotiations has raised questions about the huge valuations of India’s e-commerce giants—essentially, are these massive numbers justified and sustainable?
Alongside that, there is an even bigger question: Why exactly are investors still drawn to these firms?
“Of recent, the valuation game has turned into a ‘black magic art’ more than a science,” Ravi Gururaj, chairman of India’s National Association of Software and Services Companies (Nasscom) product council, told Quartz. Nasscom is a trade association representing the Indian software industry.
Founders and investors, felt Gururaj, are rationalising and defending these extraordinary valuations by arguing that they see some exceptional promise in these startups. “The more grounded among us read that as ample evidence of a frothy bubble-like environment,” he said.
High, higher, highest
In all, the Indian startup sector received more than $5 billion (Rs25,000 crore) in funding in 2014, compared to $1.6 billion (Rs10,000 crore) in 2013 and $760 million (Rs4,755 crore) in 2012.
Of this, in 2014, Flipkart raised some $1.9 billion(Rs11,900 crore), while Snapdeal found about $1 billion (Rs6,257 crore) in funding, including a deal with SoftBank for $627 million. And most of this money came from a few big investors including Accel Partners, Tiger Global, SoftBank and Helion Venture Partners.
Now, as these firms head out to raise even more money, valuations are going through the roof. Flipkart, for instance, is valued at about $11 billion, and Snapdeal could be at least worth $5 billion.
Together, these two online shopping firms are now valued much, much higher than the total market capitalisation of India’s major brick-and-mortar retailers, which have dozens or even hundreds of physical shops.
The phenomenal valuations for India’s e-commerce companies are based on the premise that Asia’s third-largest economy presents a vast opportunity for online retailers. Economic growth looks to be back, the country’s middle-class is steadily expanding and, powered by a smartphone revolution, the number of internet users is skyrocketing.
“The e-commerce sector has created new markets, and since many of these are addressing a large untapped potential, investors think they can grow at a rapid pace,” Ashish Basil, partner at consulting firm EY, told Quartz.
Some argue that offline retailers in India do not have the bandwidth
to expand as much—and as quickly—as online retailers.
And this in itself is a huge opportunity for online companies
to reach areas that modern retailers cannot. Brick-and-mortar
retail chains have also been facing stiff competition from the
local kirana, or mom-and-pop stores, especially in the hinterland.
“Due to fragmentation, infrastructure challenges and high real estate costs, offline retail will never be able to achieve the scale that e-commerce can,” explained Sandeep Murthy, a partner at Lightbox Ventures, an early stage venture capital fund. “Entrepreneurs and investors have recognised this and believe that they are playing in a game with a massive prize for the winner.”
Investor trap
Still, the prospects of a massive, unexplored marketplace doesn’t quite explain the hyper valuations that Indian e-commerce companies are landing.
After all, India’s e-tail channels are forecast to account for about 10% of the overall retail market in 2025.
“I frankly do not understand the basis of these valuations,” Arvind Singhal, chairman of Technopak, a retail consultancy, said last year. “It defies logic. Looking at potential is fine, but valuations have to be sane.”
There are two big reasons for this seeming insanity.
One, investors are lining up before e-commerce firms influenced by their competitors; and two, fundamental problems in the business models of these companies are being overshadowed as the industry blindly chases growth.
“Investors tend to behave like a herd and since e-commerce
is the flavour of the day, many investors are rushing there,”
Santosh Kanekar, an independent consultant who advises financial
firms on investing in Indian companies, said last year.
Most of the e-commerce valuations in India, argued Kanekar, are
driven by investor demand rather than by a significant improvement
in the e-tailer’s financial performance. “The reality
is that there’s a lot of froth in the global M&A (mergers
and acquisitions) market in general, and emerging markets, particularly
India, are no different,” he said.
And he isn’t alone.
“Nobody looks at the fundamentals of valuations anymore,” Karthik Reddy, managing partner of Blume Ventures, a venture capital firm, told Quartz. “Three or four big players have emerged in India and most of the other startups now feed off that eco-system. But there is an inflexion point that is going to come soon.”
Where’s the money?
Although these are early days for a fast-growing industry, the combined losses of India’s e-tailing companies now stand at almost (pdf) Rs1,000 crore.
Much of this is because of the discounting strategies that these firms use to lure consumers. These discounts—along with massive advertising and marketing campaigns—are bank-rolled by the investors, who are now beginning to worry.
Since the last year, there is growing pressure on Indian e-commerce companies to to cut down on discounts—and concentrate on making profits. But this isn’t going to be easy.
“E-commerce has not reached a stable level where it can
become sustainable by itself,” Praveen Sinha, founder of
Jabong, an online fashion retailer, said earlier this month. “So,
if the whole margin is 10% and the market operates at 15%
discount, e-commerce companies can never become profitable.”
In the past, industry observers like venture capitalist Mahesh Murthy had also publicly expressed their disapproval about the business models.
“I don’t hate Flipkart,” Murthy wrote in 2013. “I just don’t think it’s the right way to build a business. My preference is always for a new business to start with a clear, sustainable competitive benefit to consumers, differentiate sharply, grow organically from the ground up, take money if needed to grow—not survive, and build a real business, that makes more money than it spends.”
Murthy is not the only one to complain about the business models of Indian e-commerce companies.
“If a company is losing money on every transaction, then the business model is not sustainable,” Devangshu Dutta, chief executive of Third Eyesight, a retail consulting firm, told Quartz.
And it doesn’t help that companies aren’t putting out strong statements on their business models, Dutta added, because there is a need to bolster confidence about these business eventually turning profitable.
Perception and sentiment aside, India’s e-commerce firms have to stop bleeding money for other reasons. In the next five years, the industry will need to spend anywhere between $950 million and $1.9 billion on logistics and warehousing as it expands.
Sure, that isn’t a lot of money compared to what the likes of Flipkart and Snapdeal are being able raise currently, but the fight for funds is also likely to get tougher. By 2020, India’s tech startup ecosystem will have some 11,000 firms, more than three times the current number.
The focus, therefore, needs to shift from rapid expansion and capturing market share to building sustainable businesses.
And while that may take some time, for now everybody seems happy about the massive amounts of money pouring into India’s e-commerce industry.
(Published in Quartz India.)
