End of Road for Indian eTail?

Dream Run

The last 10 years, and in particular, the last 5 have witnessed significant change in the fabric of the online retail in India. We have noticed the startups burgeoning across all formats - horizontal marketplace, to grocery, to food delivery, to home services, pharmacy, real estate, travel, taxi services, rental, hotel booking – you name it and you'd find dozens! Every other day you hear of another half dozen adding to the already crowded market. Nobody could raise a question on the credibility, given the snowballing valuations, and kind of funding they are in the middle of. The party had just begun!

The total funding pumped into Indian startups between 2010 and 2015 is $ 18B, of which 2015 alone accounted for $9B, which is 80% higher than the preceding year. That's the good news. Rather, great news! Going by the latest account, the investors' excitement is on a high, and only expected to get better. 

Indian startups have arrived, you thought. That's if startups were about etail only.

Late 2015/ Early 2016

Jabong, the apparel etailer funded by Rocket Internet has been up for sale with no deal in sight for over six months. In fact Rocket Internet is planning to sell off all their properties - Jabong, Fabfurnish and Foodpanda. On February 29, media reported Morgan Stanley marking down of the valuation of Flipkart by 27% down to $11B. Many online service providers/ marketplaces are being hauled up by investors to tighten the strings and demonstrate results. 

There was something that made me uncomfortable all the while. The news on devaluation only confirmed that. You don’t have to go too far to evaluate the sanity of the business models.

1. Inventing wants: Homemakers would order wide array of items from kitchen ware, to apparel, accessories, grocery, etc. Electronic goods, accessories, sportswear etc. were the other categories which competed for attention. The size of bags kept growing and often had many things which otherwise wouldn’t have made it. Growing needs is too soft to express the behavior. Inventing wants may be closer to reality
2. Time on shopping: Around the same time, people were spending significantly more time on smart devices for shopping. The key to the incremental time on these portals/ apps was discount.
3. Returns: Every other day, there is someone at the door to pick up returned items. I’d wonder if I were to buy something worth Rs 500 from a brick-and-mortar shop, would I have been as magnanimous with myself!

The above three traits, that may not be an exhaustive list, are clearly counter-intuitive. 

Everybody suddenly became a somebody in the revered Startup world! From carting books, to shipping glasses, to delivering burgers, to laundry, to providing make-ups at home – eCommerce has come a big way! So much that everyone who had put together an app and integrated to payment engine on one side and a logistics provider on the other was selling a story – too enticing on a powerpoint deck, and hence for practical purposes was entitled to funding. There has been a mad rush among the VCs and angels to fund these mushrooming e-age kiranas.

I grew up in Cuttack, a small town in Eastern coast of India. My father used to work in a senior academic administration role. One assignment of his was to publish results of the Matriculation Board exams. At that point he used to frequently tour Chennai (then Madras) and Kolkata (Calcutta) purportedly for "computerization" of results. For starters, computerization is data entry of the from a manual format into a computers. A certain format was defined and then the results were printed using a Dot Matrix Printer. At some stage much later, the Board emblemed certificates were printed as an outcome of computerization.

I can’t help tracing analogies of mundaneness between etaling and computerization.

Thanks to some weary venture capitalists, the funding market has started drying up. Growth strategies are being questioned. Spend has come under rigorous scrutiny. As a consequence, in many instances valuations have crashed.

Many of my friends opine all the fizz about etail would vanish once discounts are withdrawn. Some even question if they can be profitable if they continued with free delivery. The logical next would be if they can entertain returns – for free.

So, are the etail operators on a death knell?

January 2005

I was baptized into retail this year. While it is a fancy thing to get a kick out of shopping, the experience of being within a retail enterprise was anything but fancy! You realize the nuts and bolts of retail which broadly summarized can be

1. The stores are in prime space of malls, high streets etc – and hence come for a premium
2. Across most formats of retail, there is a critical dependency on visual merchandizing (VM). Hence the need for premium space for display.
3. The merchandize often needs to be localized to the specific area, and hence there is need for large captive warehouse in the store itself. 
4. They focus on in-store experience which gets the customer a touch and feel of the product and hence either create aspiration or precipitate a decision. Either way, by rotating TVs on the walls retailers ensure return of shoppers
5. Many retailers employ specialists who engage in technical and insightful discussion – helping the customer decide
6. Presence of an in-store financing partner ensures that the customer gets and end-to-end solution under one roof
7. Private label makes the killing – in contribution to both - topline as well as bottomline.
8. Leakage is a major concern across all formats for every retail chain. Given the human hand-offs, and the high price of bringing in controls this is a risk most retailers put up with – to varied extents

As a consequence, traditional retail has been known to be a business with wafer thin margins.

Given the characteristics of the model, the key growth inhibitor for Retail enterprises is operating expenses, overheads, geographic limitation (limited catchment for stores), physical store space, expanding catalogs, supply chain limitation, and controls. Aren't there opportunities to optimize? 

Consider the following data. The Indian Retail industry is $ 600B today, and is expected to be in excess of 1.3T by 2020. [Source IBEF] While the Retail industry itself is expected to grow at a staggering pace, online sales would continue to be an insignificant part of the eco-system [graph courtesy Statista]. 

While the online platforms contribute to 8% of overall retail sales globally [courtesy PwC report], the figures are extremely skewed at almost a tenth of that impact in India. While there have been some setbacks in recent times, how the industry deals with them will determine what to expect of the future.

Let’s go back to the question – Are etail operators on a death knell? 

What do you think? 

• Did the etailers get it all wrong! Why are they in the tight spot, they are? What would constitute the building blocks of the Indian etail 2.0?
• Are investors already feeling the heat, and if so, what would they do differently?
• What about brick-and-mortar retail? Is it now about timing the opportunity to unleash their war chest?

With Retail contributing 10% of contribution to India's GDP, and digital ruling the roost in the boardroom, whether etail is here to stay, only time will tell. For now, one thing is sure – there is a strong tailwind.