Why eCommerce in India will meld into Local Commerce

It is no secret that e-retail in India has been growing at a dramatic pace. It is expected to exceed $22B in three years (from a negligible size five years back) after attracting billions of dollars in venture investment. Several unicorns have been created in this space. 40M+ users already shop online in the country, and this number is expected to rise rapidly towards the 100M mark.

The classic eCommerce model entails a small number of large efficient warehouses built across the country, coupled with a well-oiled logistics network that can deliver merchandise to consumers anywhere within a few days. However, this model has three basic constraints that will lead to its disruption and evolution:

First, the big centralized warehouse eCommerce model is economically sub-optimal in India. Shipping one package across the country and into smaller towns costs significantly more on a unit basis than ‘caching’ goods closer to where the demand is. This issue is more pronounced in India than it is in many other markets – the ASPs in India are typically low, while the logistics (shipping, warehousing) costs are not proportionately low. E.g. for a generic retailer, the AOV in India may be Rs 1000 ($16) vs $50 in the US (i.e. a third) for a retailer with a similar category mix, but the unit logistics cost at scale may only be 40% lower in India. Return shipping and logistics increases unit costs further. The marketplace model with platform fulfillment could add in yet another leg of shipping. Shipping and logistics can cost 8-10% of the gross merchandise value for many e-retailers and marketplaces, and this cost item appropriates much of the gross margin/platform fee for several e-retail categories. In fact, classic eCommerce in India may not have the structural cost advantage over traditional brick and mortar retail that it has enjoyed in many other markets. Charging separately for delivery on a widespread basis will always be hard in a highly competitive market like India. In order to drive towards profitability and better unit economics, eCommerce companies will need to find disruptive ways to optimize their shipping and logistics expenses.

Second, as the consumer gets used to instant on-demand services such as food delivery and taxi services, waiting say three days to receive the USB drive s/he ordered from a distant seller will become increasingly unacceptable even to consumers in smaller towns. With the traditional eCommerce model, delivery to various parts of the country could take several days on average. This is further impacted by additional areas of friction such as inter-state taxes and state border check-posts. Many large eCommerce companies are already racing to build next day and same day (in larger cities) delivery, often via a combination of local warehouses in larger cities and overnight air shipping. Instant gratification is a key advantage of local purchase at offline retail stores, which needs to be countered or offset by eCommerce platforms. Thus the natural pressure is for eCommerce to move towards more instant models, such that consumers can receive goods they ordered within a few hours or less. Amazon, JD and others are looking to achieve this by building a chain of metro area warehouses across their respective geographies of focus. Leading Indian marketplaces have also set off on this path. However, this model is highly capital intensive, and by itself, may not be ideal in the Indian context where unit real estate/rental costs are high. Additionally, while it may work for some categories such as consumer electronics, it could be cost prohibitive for other categories such as appliances, furniture or home goods. Further, this approach does not work as well with the marketplace model which is predominant in India.

Third, the eCommerce model doesn’t lend itself to instant returns and exchanges e.g. consumers do not have the option of taking a defective product back to a nearby store and exchanging it immediately for a functioning one. For many consumers, this is a significant mental barrier to ordering some categories of goods online, and a big psychological advantage of shopping locally.

Most large eCommerce platforms in India function as marketplaces with tens or hundreds of thousands of merchants. Many of these merchants are local shopkeepers who have begun to sell online via these platforms. These merchants already stock the goods at their own premises in local neighborhoods.

The Evolution to Local Commerce

Several of the above constraints could be addressed by scale marketplaces with sufficient density of local merchants such that a reasonable volume of transactions is fulfilled locally. This would bring down unit shipping costs, provide significantly faster delivery, and provide consumers the comfort to return/exchange merchandise more expeditiously when needed.

This model makes imminent sense for categories where local availability of merchandise is high, and the logistics cost form a relatively high proportion of net revenue, e.g. appliances & furniture (where shipping long distance is cost prohibitive and time consuming), groceries (which constitute 60% of overall retail sales in India), home goods and books. We are already starting to see various leading horizontal marketplaces launch the grocery category via a local fulfillment model, e.g. Amazon’s recently soft-launched Kirana Now service, which aims to deliver groceries locally within 2-4 hours via tie-ups with local stores.

This local commerce model will expand to several other major e-retailing categories.  The LCD television, microwave, book or even smartphone could be conveniently delivered in an hour from the nearby electronics or book store rather than making its way across the country via various modes of transport.

The eventual optimal model may be a hybrid one with a reasonable bulk of demand being fulfilled locally via neighborhood merchants or fulfillment centers, and only long tail products (or those more readily available in other regions) being shipped individually to the customer from a centralized warehouse.  As eCommerce/marketplace platforms push ahead in their quest for profitability and compete on faster delivery times, they will push harder into local commerce, and converge with various other startups already building out the local delivery model.

Capitalizing on opportunities in local commerce

Wrote the following guest post recently for Techcircle/VCCircle:

The retail commerce market in India is estimated to be worth nearly $500 billion per year. Despite several years of rapid growth, e-commerce still constitutes well under 1% of the retail market. The remaining 99% of retail is still offline and mostly local, which represents a large business opportunity. As a larger number of consumers in India are getting digitally connected, they are making use of online platforms like mobiles, smartphones and tablets to influence their offline purchase decisions, opening up massive new market opportunities.

Global disruption in local commerce

Globally, significant value has been created in the local commerce space by platforms that help buyers connect with local sellers and service providers. The last decade has seen the rise of B2C local commerce companies such as Angie’s List, Yelp, Groupon, Zillow, Trulia, RetailMeNot and Opentable – each a public company with over $1 billion in market capitalisation. These platforms help small merchants get discovered or chosen by consumers using various models such as listings, reviews and recommendations, deals, deep information and table reservations. Each of these models succeeded by aggregating a large number of local merchants on one side, and consumers on the other.

Over the last few years ubiquity of mobile, local and social has enabled a new class of collaborative consumption platforms, exemplified by AirBnB and Uber. These models have successfully opened up new forms of supply beyond traditional local merchants as well as transformed consumer behaviour meaningfully via the use of a social layer to create trust, the use of mobile, better UX and analytics to increase convenience as well as reduce information asymmetries between buyers and sellers. Innovative companies in this genre are beginning to disrupt large existing industries such as car rental and sharing (GetAround, RelayRides), local services (Thumbtack, TaskRabbit), ride sharing (Zimride, Ridejoy), car repair (Your Mechanic), local freelance work (Gigwalk), local experiences (Zozi, Sidetour) and even food consumption (Grubly). While the collaborative consumption space is still young, several of these companies will transform the way people discover and consume local services and products.

Local commerce in India

In India, the local commerce space is starting to see meaningful traction. JustDial has gone public and commands an impressive valuation. redBus built a valuable business by painstakingly aggregating numerous small bus operators to give the consumer a unified platform for bus bookings. BookMyShow and Zomato are growing rapidly with their vertical specialisation on entertainment and F&B industries. At NGP, we focus on this space and are investors in Quikr, a leading classifieds platform, DealsAndYou, a local deals and couponing platform, and several other companies globally.

The local commerce space in India is large and its digital intermediation is still in an early phase. The rapid penetration of internet and mobile internet along with consumers’ increasing propensity to transact online enables rapid future growth. There are 45 million small merchants in the country, of which under1% are estimated to currently have an online presence beyond basic listings. A growing number of merchants are looking to leverage online platforms in order to get discovered more effectively by consumers. Local merchants, especially those that sell higher margin services, spend a significant percentage of revenues directly or indirectly on various forms of marketing and customer acquisition. A substantial part of that spend will move online over the next several years.

Opportunities come with challenges

A brief way to summarise the key challenges in the Indian local commerce space is that there are limited barriers to entry, but tremendous barriers to scale. Creating a basic local commerce platform and getting it to market is not very hard. But getting and retaining a large number of merchants and consumers onto the platform in tandem is. Let’s summarise some key challenges and decision points associated with scaling local commerce platforms.

1. Developing a clear value proposition

There are already many types of digital platforms that help consumers connect with local businesses—search advertising, social pages, listings, classifieds, merchant websites, mobile apps, vertical specific content sites, deal platforms, ticketing and booking engines and much more. It is increasingly harder and more expensive to get consumers’ attention with yet another local commerce platform—unless it solves a large unmet need, enables a new experience, saves money or significantly reduces friction in an existing activity. Similarly, urban local merchants are confused by the large variety of platforms that they could potentially promote their businesses on. They may not typically understand technology or complex marketing terms, but implicitly look for good, demonstrable ROI on their spend and repeat business.

It is imperative to have a clear, compelling and ideally measurable proposition for both consumers and merchants. Eventually, for a local commerce business to sustain, there needs to be a natural pull from both consumers and merchants for the service. Aggregating merchants via large sales forces and aggregating consumers via marketing are otherwise likely to be ineffectual.

2. Creating the sales machinery

In India, convincing small local merchants of the value proposition of a new platform often involves multiple face-to-face meetings with the right decision maker, typically the proprietor. Moreover, small businesses are notoriously hard to collect payments from. Self-serve models are ideal, but will only work once the market reaches a higher level of maturity. Telesales and channel sales, which predominate in Western markets, only work in selected cases in India and often only in combination with own feet-on-the-street sales.

Creating and managing a well-oiled feet-on-the-street sales force is thus one of the key challenges to scaling a local commerce business in India, especially in the near to medium term.

For instance, JustDial has a team of thousands of sales people, and spends a significant percentage of its revenues on selling activities. The local sales infrastructure is one of the key barriers to entry for its competitors.

It is important to get the dynamics and unit economics of the sales team right. This involves careful, continuous planning and refinement around key areas such as: what type of sales persons to hire, which localities to focus sales efforts on, how to incentivise sales persons, what the up-selling strategy is, how to improve cash collection cycles, what the right target for ROI on sales costs is, and much more.

These questions don’t have any stock answers and each organisation must evolve its own set of answers.

3. Customer acquisition

On the other side of the demand and supply equation is customer acquisition. Getting consumers onto a platform is a slow and hard process—organic methods typically call for a great product with strong value proposition, and a long baking period for network effects, high search rankings and social virality to kick in. Trying to scale platforms any faster than the natural viral/SEO growth process entails higher spends on customer acquisition which is capital intensive.

Many local commerce models have strong network effects (i.e. scale provides disproportionate value to both buyers and sellers), and are consequently “winner-take-most” businesses. Therefore, unless a business has the luxury of limited competition for a long period of time (like what Craigslist did in the late 90s and early 2000s in the US), there is a compelling argument for ramping up customer traction rapidly.

The key is ensuring visibility into the right unit economics before investing heavily in customer acquisition. That is, can the customer acquisition costs be realistically offset by the customer lifetime value? It is here that many daily-deals oriented models faltered when they indulged in expensive marketing too soon.

4. Balancing marketplace dynamics

In local marketplace businesses, demand and supply need to be scaled in lockstep, locality by locality. The marketplace needs to have sufficient liquidity at the locality level in order for it to be relevant and valuable to both consumers and merchants.

The key questions then are: Given finite resources, do you go deep in a few localities (and risk leaving other markets to the competition), or do you go after a wide footprint and risk low liquidity and poor customer/merchant experience? Do you focus on one vertical or do you enter multiple verticals in an effort to expand more quickly? What metrics and proof points do you need to see in order to trigger expansion to additional cities?

Here, different platforms have taken varying strategies. Yelp grew organically for a number of years. It initially focused on a few cities, developed a set of processes for starting and scaling a new city, and then methodically rolled its platform out market by market, with a clear model to reach critical mass within a few months of entering a new city. Groupon, on the other hand, expanded across markets rapidly via heavy spending on its sales force and marketing, and additionally made a number of acquisitions in markets it hadn’t already entered.

5. Scaling operations and customer experience

Local commerce businesses can range from being purely informational to highly transactional. Typically, the closer a platform is to the transaction, the deeper the monetisation potential and ability to ‘own the customer’, but the more operationally intense it is.

For many local commerce businesses, the transaction (or merchant discovery/selection) happens in the digital layer, but the fulfillment happens offline, often by a merchant who may not directly own the customer. The presence of multiple parties in the transaction chain makes operations challenging. Moreover, customers tend to implicitly expect a higher level of customer service from online/mobile platforms than from local offline merchants. The online taxi dispatch and food delivery spaces are examples of local commerce businesses with high operational complexity due to the above reasons.

It is imperative to invest early in creating the team, culture and processes to put in place an operations function that not only supports the business, but also becomes a source of differentiation by creating customer delight.

It is challenging to build and scale up a local commerce platform, especially in emerging markets such as India. However, the opportunity is large and well worth the effort. Businesses which are able to overcome the aforementioned challenges create natural barriers to entry and are hard to replicate once at scale with defensible margins.

In this series of blog posts, we will take a deeper look at some of these opportunities, challenges and strategies related to scaling local commerce businesses.

The future of (online) retail?

The digital and traditional commerce worlds have been colliding.  Look no further than Amazon’s recent offer to award retail shoppers with small discounts for walking into and out of retail stores. There has been an inherent tension between traditional retail players and eCommerce players, as eCommerce  disrupted retail and traditional retailers largely took to eCommerce as a defensive measure. Moreover the DNA of the two industries has been vastly different.

There is tremendous innovation possible at the intersection of online and offline commerce if it were driven by an innovator in alliance with B&M retailers. However, since traditional retailers perceivedly have more to lose from this in the short term and have large stores to run, this innovation is currently driven outside-in by eCommerce companies and startups.

What if we were to design commerce from the grounds up, ignoring the above market pressures, and design instead for optimal economics and consumer experience? Today’s technologies could enable a very different and much more efficient system than the one we have today. Consider this scenario: Large traditional stores in expensive locations get replaced by smaller ‘showrooms’ that display sample merchandise or their holograms using the latest technology. You browse through lots of merchandise without having to hike through a maze of aisles. You scan  merchandise you like with your smartphone, compare product features and read online reviews. Perhaps you even ask a few friends on social networks and chat with them. You decide on a product you like. Finally after selecting everything you need,  you ‘checkout’ at the spot by just tapping your phone at a counter and head back home. Just after you reach home, the products you ordered are delivered at your doorstep from a nearby warehouse.

For many consumers, this solution is a better experience than traditional retail (don’t have to hunt through aisles or carry back large bags; better product information) or eCommerce (can see/touch/try products, shorter lag to product delivery). It is also economically more efficient than traditional retail since it requires lesser use of expensive commerce space. The cost base for such an offering should be more comparable to that of eCommerce. This would imply lower prices for consumers than traditional retail.

The exciting part is that all the technologies for this setup are available today, and we are seeking some early steps in this direction. Walmart and Amazon are clearly fighting towards a piece of this opportunity. So when do we actually see the world move towards a showroom and warehouse model?

eCommerce in India

Recently started answering a question on Quora about the future eCommerce in India, and realized that it was turning into an article. So I thought I’d share it here.

Question: What is the future of eCommerce in India? And who’s going to lead the pack in terms of profitability by 2012?

My Answer:

Very broad question, but I’ll take a stab. Let’s divide eCommerce into three categories:
1) eCommerce for physical services
Already taking off in a big way – e.g. travel ticketing, jobs, matrimony, events etc. Some leaders already visible in various categories. Larger number of consumers are becoming comfortable paying online (or are finding someone to do it for them). This category was helped by the fact that fulfillment of digital orders is not a logistical nightmare, and the alternative (standing in line) is a royal pain. This category has opened the path for the following two categories by generating consumer awareness and creating the enabling layer (payments, analytics, support/logistics software). This category appears set for continued success and perhaps accelerating growth rates as the whole ecosystem grows, payment mechanism bottlenecks are reduced, and consumer awareness increases. The market is really betting on this category with MMYT trading at 30X real revenues.

2) eCommerce for physical goods
This is the category that is currently riding way up the hype cycle, with new startups/stores launched every day. First avatar of this category was a relative non-starter with players like Indiaplaza and even eBay India remaining at limited scale. However, v2.0 disrupted here in true Clayton Christensen fashion.
Apart from early leaders such as Flipkart, Infibeam, Homeshop18, Indiatimes etc, expect to see slew of additional horizontal and vertical retailers over next couple of years selling everything from mobile phones to pet food. Expect price wars, shakeouts, extensive warehouse buildouts, monster fund-raises in this space, but not profits. Great for consumers, but I’d personally stay away from investing here at the current point. Remember, it took Amazon a decade to turn its first profit – in a much larger market.
I’d expect there to be some successful smaller players in this space that come from the left field with innovative models around delivery, or niche product sales, or as providers of enabling services.

3) eCommerce for virtual goods (Music, Software, Movies, In-game etc)
Has been a relative non-starter in India so far, largely due to piracy issues and perhaps social mindset (“who pays for virtual stuff”)?. The only green shoot in paid digital content is the anachronistic operator MVAS model. Expect significant changes in that equation over the next few years. Looking for someone to disrupt this space, by getting some Category 1 customers above to start paying for virtual goods as well. Let me know if you find such a company 🙂

So to answer your second question, I expect a company from the first category to lead in profits (or be closest to profitability) in a couple of years. A few large player from category 2 might have respectable revenues, but are likely to be far from profitability. Also likely to be some smaller interesting players from category 3.

Note: I have not touched upon the local commerce (couponing, LBS, checkins, yellow pages, classifieds etc) space in this answer, which is starting to have significant overlaps with eCommerce. The local commerce space can be a topic for a PhD thesis in itself!

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