Ecommerce : The keys to success

If there is one sector that is impossible to keep away from the news, it must be Ecommerce. 

For all the euphoria around the ubiquity of Ecommerce today, not all of the news is particularly positive. 

Take the case of the Rocket-Internet backed Jabong, reportedly unable to find buyers at a price of $100 Million, a price that is a tenth of the $1 Billion it solicited in 2015. While another Rocket Internet company, FabFurnish, did eventually find a buyer in the Future Group, it was at a price of Rs. 20 Crore, a sum that is widely believed to be a small fraction of the total amount invested in to the firm since its inception in 2011.

When we choose to look at the market leaders in India, it would seem that the picture becomes even scarier. Amazon, FlipKart & Snapdeal are locked in a bitter battle to the end, one where they might well have to also deal with Alibaba, sooner rather than later.

Does that mean then that all is gloom & doom for Ecommerce ?

Certainly not.

In fact, over the last decade, no other sector has created as many large companies, directly or indirectly, and redefined consumer behavior the way Ecommerce has. In the magnitude of its impact on the rising urban middle class of India, Ecommerce is probably second only to the rise of the IT industry at the turn of the 21st century.

No other sector has taken so many different forms to tap into a large market, and a large market is the starting prerequisite for us at Kae Capital, just as it is with most VCs around the world.

However, with so many heavily-funded competitors and business models around, the odds of success in Ecommerce are also not particularly encouraging.

What then, do we feel are the keys to success in Ecommerce ?

Differentiation

The 1st generation of successful e-commerce businesses were horizontal platforms across categories such as Amazon & Flipkart (Even though neither of them started as such). 

We then saw firms taking up specialized vertical niches in categories that were underpenetrated by the horizontal businesses, such as furniture (Pepperfry & UrbanLadder), groceries (Big Basket & Grofers), eyewear (LensKart), jewellery (CaratLane & Bluestone)and baby products (First Cry & BabyOye) etc.

Other companies have found interesting angles to facilitate the buyer’s purchase decision : By focusing on second-hand products (Quikr & OLX), through social validation (Limeroad & Roposo)or even by emphasizing on speed of delivery (Grofers).

And it would seem like there is room for many more models with their own USP. 

A few months ago, my colleague Amit walked in with a rather fancy set of earphones and asked me to guess the price. My guess was Rs. 2000, almost ten times the Rs. 225 he paid for it.

When I asked Amit about how he got it for so cheap, he told me he had bought it on Wish, a cross-border shopping app hailed by many as the newest disruptor to E-commerce. 

Wish - The newest Ecommerce killer app ?

The catch ? He had to wait a month for the delivery.

There is always room for Ecommerce companies to find their own defensible niche, and Wish’s example shows that a USP can also be built on a trade-off.

Profitable Moats

Ah, Profitability !

Perhaps every VC’s favourite word this season. But no, I do not mean profitability in the context of Unit Economics (Perhaps every VC’s favourite two-word phrase this season).

What I am referring to is an Ecommerce business’ ability to create anciliary revenue streams that are highly defensible and highly profitable and Amazon is undoubtedly the best example of this.

In addition to its Ecommerce platform, Amazon also offers Amazon Web Services (AWS), an enterprise cloud infrastructure service. In the final quarter of 2015, AWS scored revenues of $2.4 Billion and an operating profit of $687 Million. 

AWS delivers an operating margin of nearly 30%

I suspect that Amazon’s other non e-commerce businesses such as Twitch & the Kindle ecosystem will deliver similar financial gains in due time.

These ancillary businesses have been able to become (or promise to become) so profitable because of the scale and growth that Amazon’s Ecommerce business has achieved.

Scale is beautiful for Ecommerce. Even in 2016.

Execution & Flexibility

The Department of Industrial Policy & Promotion recently mandated that Ecommerce marketplaces would not be able to sell more than 25% of their aggregate numbers through a single vendor or other group companies. Many believe that this regulation will cripple Amazon & FlipKart in the short-term, since a much more significant proportion of their sales can be attributed to vendors that they are affiliated to.

However, this isn’t the first time either FlipKart or Amazon have faced similar regulatory hurdles. 

In early 2014, the Enforcement Directorate was considering levying a penalty of Rs. 1400 Crore on FlipKart for allegedly violating the prevailing FDI norms. Later that same year, the Karnataka government prohibited Amazon from selling certain products from its warehouse over its interpretation of the type of business Amazon is, and the taxation laws that should apply to it.

The new norms on Ecommerce marketplaces might well be a blessing in disguise and might help on-board the long-tail of merchants, the merchants who have thus far stayed away due to fears of predatory pricing killing their margins. 

But even if that isn’t the case, history suggests that Ecommerce demands entrepreneurs who are prepared to deal with legal ambiguities and the ramifications that come as a result of such ambiguities, and can ride them through.

Ambition

Most Ecommerce entrepreneurs pitching to me justify their case by using arguments such as “The market is large enough” and “There is room for one more player”. 

I can identify with them, I have used these lines myself while pitching to VCs.

What time has revealed though is that in Ecommerce, like most other internet-enabled businesses, there is room for only one, maybe two, dominant market leaders in each category.

As an entrepreneur, the only way you can get Ecommerce’s massive market potential to yield to you is if you enter with the objective of becoming that dominant market leader.

This is not to say that most entrepreneurs do not want to succeed. 

However, becoming a market leader in Ecommerce requires someone who is especially driven, maybe even maniacal when it comes to beating fierce competition in order to succeed.

Ecommerce makes for an exciting sector, one where the stakes are always very high. Even though it is categorized by dominant leaders, it is also a space where a new entrant can always disrupt existing players using a better model or superior technology.

In so many ways, Ecommerce seems like a dangerous gamble. Perhaps that is also why it is a game so hard to resist.

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