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.

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Big ‘unsolved’ problems in the Internet world

Thought I’d take a moment to jot down a few big problems/opportunity areas in the Internet world. The technologies to solve each of these exist today, but an elegant solution that scales massively still seems to elude us on each of these.

Here are some such areas that come to mind (in no particular order):

  • Linear TV. Why do we still use remote controls from the sixties to look for content? In the era of search, discovery, AI, predictive analytics, social, mobile we surely have better solutions, but haven’t yet found a scalable way to mass adoption. Till we do, happy channel-flipping.
  • Personal Information Management. We live in the age of information explosion, from all directions – twitter, blogs, news sites, pictures, videos, email, facebook, calendar items, youtube, deals, sms, chats, iTunes, yada yada. Too many passwords. Too much useful information. Too much content. Too much news. Too much personal data. More than one can manage. Dropbox, Evernote and Flipboard are addressing various pieces of this problem, and have  built spectacular businesses already. I think we’ll see immense further innovation in this space
  • Digital payments. Beyond the Paypal variety. Pulling out your credit card and entering the digits and your address, and/or your password is so 20th century. How about if there were a system that you could use from any device anywhere, using biometrics, and transfer any amount however big or small to anyone else? No passwords. No credit card numbers. No addresses. No minimum amounts. Just a swipe of a finger or an iris scan. Just imagine the kind of consumption this would fuel.
  • Online content monetization. There is so much great content being created all over the world, but how does it get paid for? Advertising is great, but its not the one-size-fits-all for monetizing all content. A couple of years back, I wrote about the huge opportunity in micropayments. Micropayments have indeed continued to take off significantly since, but I believe we are still in the early phase. There is still no good model to universally purchase content. Movies, news, books, TV shows, music, games, whatever. On one platform seamlessly, from any device. Amazon, Apple, Netflix are all moving in that direction, but we aren’t quite there yet. Consumers are consuming content voraciously online, and sometimes willing to pay for it. And content owners (ask the studios or publishers) are desperately searching for models that help them better monetize their efforts online. There just isn’t any good universal platform yet to connect this demand and supply.

The case for a new telecom operator in India

Yes, the title of this post sounds a bit crazy, given the intensely competitive telecom industry in India. Allow me to explain.

Large telecom operators in India are still focused primarily on new customer acquisition. New customers acquired in the market today are marginal, and must be lured using rock bottom pricing. Rock bottom pricing means rock bottom costing, which means low quality customer service, deprioritzation of network investments, and a generally poor experience for all customers. That’s why you and I can’t make a 15-minute call without dropping it or having connection issues. While operators struggle to maintain profitability.

Now imagine a telcom operator that doesn’t drop calls, delivers fast data downloads, respects you when you call in, and resolves your issues efficiently and politely. In other words, the AmEx of telcos. I am willing to pay more for such an operator, and my back of the envelope estimate is that there are at least 10M other such customers in India, and growing faster than market.

Most other services get segmented, and you see consumers willing to pay more for higher quality experiences. Think hotels, airlines, credit cards, retail, restaurants and real estate. Think Taj, Kingfisher, AmEx, Spencers..  You can choose to pay more and you generally get a better experience. Not so in telecom. There you only have the option of rock bottom pricing with rock bottom service.

One reason is that Indian telecom industry has till recently been focused solely on new customer acquisition for growth. This should change now, given that the market has been virtually exhausted. Another reason is that telecom is a scale business and  larger operators have a significant advantage over smaller ones. However, given that these 10M+ consumers are mostly concentrated in a few geographical areas, it may be viable to run a smaller, but highly profitable telecom operator in India that focuses on quality rather than quantity. Any takers?

Micropayments – huge opportunity ahead?

Micropayments are creating a brand new revenue stream for digital media, mobile and technology companies. An easy payment mechanism such as automatic billing significantly lowers the bar for making small purchases (up to a few dollars) on the web. For such small payments, it turns out, the bar is oftentimes not the users’ willing to pay. Rather, the showstoppers have been the overhead (pulling out credit card, filling up digits into the form, and the transaction processors’ minimum fee) and uncertainty associated with such transactions. Systems that remove these overheads and uncertainities by giving the user a seamless, trustworthy payment and billing mechanism are well positioned to unleash a huge new revenue stream on the web.

Apple’s iTunes and iPhone apps are the best examples of this. The seamless purchase mechanism and small amounts involved transform the user’s software purchase decision from a meditated one into an impulse purchase. The result is the ongoing “Gold Rush” where thousands of paid apps are being downloaded hundreds of thousands of times for a few dollars each. What does this signify for similar platforms on the web?

There is an immense potential to monetize online media and content through micropayments. Online micropayment systems have been around for almost as long as the Internet. However, several factors prevented first generation micropayment systems from taking off, including a) Lack of differentiated short-form content and applications that users would pay small amounts of money for b) Lower comfort with online credit card transactions c) Lack of trustworthy micropayment systems that presented a seamless experience to the user and were widely adopted.

However, with the wave of online apps (including those on social networking platforms) and the iTunes-iPhone mindset, all of the three factors above seem to be changing substantially. There is a large variety of apps, music, videos that is now legally available. And customers are more comfortable using their credit cards online, thanks to the increasingly high adoption rates of online ticketing and travel. 

Players to watch out

Besides Apple, there are a number of players who are positioned to take advantage of this trend. Here is an attempt to capture some of the categories:

  • Startups such as Spare Change and Tinker which are enabling monetization of social network apps and blogs. Space Changeis apparently already processing $30M of micropayments annually. Expect to see social networks such as Facebook and MySpace start their own competing micro payment systems, or buy some of these small players.
  • Mobile phone companies, which already have billing relationships with customers are really well positioned to build micropayment systems of their own. Indeed, Apple is eating what could have been AT&T and Verizon’s lunch, had they given up their walled-garden approach as the times evolved.
  • Similarly, ISPs and Cable companies such as Comcast/CIM have an opportunity to create or integrate micropayments into their broadband customer sites, use micropayments to monetize some of the premium content on their new media sites, and charge customers directly through their monthly bills. 
  • Other usual suspects who have customer relationships and/or customers’ credit card numbers include Internet giants Google, Yahoo, Microsoft, Amazon and Ebay/Paypal, and eCommerce providers.
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