Indian Small Town Marketplace ShopClues Looking Shaky

Currently, the Indian e-commerce market is primarily a two-horse race between Flipkart and Amazon, especially in the larger cities. As Internet penetration is getting better across the country, they have started expanding to small towns, which has been the niche of Billion Dollar Unicorn ShopClues.

ShopClues’ Journey

Gurgaon, India-based ShopClues was founded in 2011 in the Silicon Valley by Washington University alumnus Sandeep Aggarwal, eBay’s former Global Product Head Sanjay Sethi, and IIT alumnus Radhika Agarwal. At that time, eBay was the only online marketplace in India. However, eBay was an open marketplace while ShopClues allows only merchants and not individuals to sell through its site. It also offers merchants business management and marketing tools along with analytics.

ShopClues charges a selling fee, which depending on the category ranges from 4% for Pendrives & Memory Cards to 20% for Home Décor and Garden. The selling fee is charged only after a successful sale. It also offers a fulfillment service.

ShopClues is more of an online flea market that focuses on the fragmented and unstructured retail in the smaller Tier II and Tier III cities. It focuses on high-margin unbranded products rather than branded goods. Its niche is the Indian middle-class, small town consumer. It has over 600,000 sellers on its platform and over 100 million visitors per month.

Two of its strongest categories are refurbished phones and unbranded fashion. The company estimates that it has about 40% of the refurbished phone market and is the fourth-largest player in the lifestyle and fashion market in India.

Amazon and Flipkart are now encroaching on ShopClues’ niche of small towns. For the recent festival sale, Flipkart extended its services to over 250 new towns and villages in India and claims that about 40% of its customers are from tier-2,3, and 4 towns and villages. For Amazon India, about 86% of its new customers come from small towns.

ShopClues has a fleshed out delivery system. It works with 40 delivery companies, which in turn work with a bunch of other local transport vendors to deliver in a cost effective manner. It delivers to 36,000 pin codes, out of 40,000 while Flipkart and Amazon deliver in about 20,000 pin codes. But it might not be long before Amazon figures out the small town market. ShopClues needs to figure out some other strategy to secure exclusive positions that would keep a loyal customer base coming back to them.

ShopClues’ Financials

ShopClues recorded just a 5% growth in revenue to INR 188 crore ($29 million) in FY17 while losses declined 13% to INR 332 crore ($51 million). Revenue rose 150% in 2015 to INR 79.23 crore ($12 million), and 125% in 2016 to INR 178.61 crore ($27 million) while losses tripled to INR 101 crore ($15 million) in 2015 and to INR 383 crore ($59 million) in 2016.

Total expenses in FY17 reduced from $86 million to $80 million, with advertising and promotional expenditure declining from $36 million to $29 million. However, salary expenses almost doubled from to $15 million.

ShopClues claims that its largest businesses of lifestyle and fashion are already profitable.

ShopClues is venture funded so far. Overall, it has raised close to $265 million in funding from investors including GIC, Tiger Global Management, Nexus Venture Partners, Helion Venture Partners, and LionBird. They were formed using the $250,000 seed fund that the founders had put in. In January 2016, they raised close to $150 million from GIC and existing investors Tiger Global Management and Nexus Venture Partners at a valuation of $1.1 billion. Their previous round of funding for $100 million in January 2015 valued them at $350 million. In May, it raised $7.7 million in venture debt from InnoVen Capital.

It expects to turn profitable in a couple of quarters and would be ready for an IPO in 2018. Being profitable is a prerequisite for going public in India and as even its small town niche gets crowded, an IPO could be difficult and a merger or acquisition is more likely. Flipkart, Alibaba’s Paytm, and Amazon could benefit from its stronghold in small towns. However, valuation will take a significant haircut for sure. The company simply doesn’t have the metrics with which to defend a Unicorn valuation at this stage.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

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