We can no longer apprehend the reality because we have been perfectly conditioned to perceive things in a certain way. Today, in India, the e-commerce model in inventory management is facing a painful reality: that of its failure. Every year, it kills hundreds of small businesses, leaving a field of ruins, as we are unable to find a solution to the entrepreneurial chaos it leaves behind. Yet, before reaching this situation and paradoxically all these failures, the e-commerce market has never been so vibrant when it comes to growth, suggesting the better year after year. Therefore, there have never been so many e-commerce creations in India than this year and the market leaders have never raised so much capital to pursue their development and face the competition.
India’s e-commerce market
Since 2009, the e-commerce market is growing at an average annual rate of 34 percent; just for the year 2013, it jumped up by more than 80 percent and the momentum continues in 2014. Indeed, with a market worth $13 billion in 2013, it remains far behind the e-commerce market in the US with $224 billion and in China with $220 billion. The e-commerce market in India is expecting to reach $70 billion by 2020. Moreover, if you compare the 540 million Internet users and 270 million online buyers in China with the 220 million Internet users and 25 million online buyers in India, it suggests the huge potential the e-commerce market will develop in the near future.
Potential
Investors have understood the potential of the market for several years. While initially, for start-ups, investments have been executed in a disorderly manner, with the failures and successes known to all, since 2013, raising funds have been more focused on market leaders than on young companies that have just started. Thus, in the first 6 months of 2014, more than $500 million has been invested by private equity companies with the leading e-commerce leader Flipkart, which raised $210 million during Q2’14 and Snapdeal, which didn’t get left behind in the e-commerce fund raising game and collected another $100 million.In comparison, 2013 saw 57 deals worth $602 million in the space!
Operations
Even though the food and grocery segment is the largest within the retail sector, currently estimated at around $490 billion, the e-commerce is still very underdeveloped, with a clear demarcation between the leaders and the small e-commerces. The leaders have developed themselves on the basis of an inventory management model with different characteristics. For example, LocalBanya aggregates orders for a day, buy goods in the evening, and delivers them next day. Instead, Bangalore-based BigBasket.com purchases goods everyday and takes pride in the “same day delivery” of his products.
Raising funds
The operating model of retail e-commerce is still the same regardless of the exploited segment:reaching a critical threshold of orders per day and of registered clients in order to attract potential investors before the cash flow is completely exhausted by the unprofitability of the inventory-led model. You can also note that these leaders have all been pioneers in the market of the F&G segment distributed through an online platform. Therefore, BigBasket.com has raised a Series A Funding of $10 million in 2012 and the Series B should be closed in the next 3-4 months for $40-$50 million. In the same register, LocalBaniya has raised funds from Bennet, Coleman & Co. Lts’s Springboard fund and Zopnow.com from Accel and Qualcomm for its Series A.
What is there to say about e-commerces in the F&G segment, which began at the same time but have not been able to raise capital and are now lacking cash flow due to the unprofitability caused by the inventory management model! Today, over 80 percent of e-commerces in India are financially hanging on a thread, just a wind away from falling.
Changing model
While entrepreneurs launching their first online platform continue to use the classic management inventory model, like most e-commerces in the world, market leaders have made a 180-degree turn by changing their model with the marketplace’s one. The classic inventory management model for an e-commerce is for the platform to first buy products from its suppliers, stock them and deliver them to the customers who order.
The debate which has set in revolves mainly around the following question: what is the best model for e-commerce in India; i.e. which one is more profitable? Assuming that the marketplace is the ideal one, is it possible for an entrepreneur to start with this model to launch an e-commerce? The marketplace’s model consists of establishing a platform for buyers and sellers so as to allow them to interact with each other in an effective, transparent and trusted environment.
With the marketplace model, it is possible to find a new balance between optimizing capital management to the extent that there is no need to buy the products in advance and therefore, no need to draw on one’s cash flow; maximizing customer satisfaction by prioritizing customer management, meaning no longer having to handle the process of the product and delivery management; and minimizing logistics management since it is directly the supplier who will deliver to the final customer.This model requires that both buyers and sellers find themselves on this platform so that the attraction meets their mutual expectations. This will be very difficult to materialize for a startup!
Thus, when an entrepreneur wants to launch an e-commerce, the inventory-led model seems most appropriate. However, the said entrepreneur will face issues seeing as the business practiced today is not profitable.
Challenges
The first problem is the inventory risk which weighs on unsold products. Most e-commerces buy their products in advance and the more they sell, the more they increase their purchase amount. Assuming that the e-retailer is making comfortable profits of around 30 percent, he cannot escape the operational expenditures and the unsold stocks which are often between 10 and 15 percent of the total stock purchased, and which pushes the e-commerce towards its shutdown.
The second profitability issue of inventory-led model revolves around the marketing costs to sustain the store. These costs can represent 25, 35 or 50 percent of the shop’s gross revenue and may quickly jeopardize it and never allow it to reach the desired profitability.
Delivery services to customers can also be a thorn in the entrepreneur’s side. Most e-commerces offer their own delivery service. Entrepreneurs who have just started their business often use rickshaws or buy a motorcycle or even a small van with the company’s colours to deliver to customers. If you consider that the average delivery cost is around 15 percent of the order price, profitability will never be possible with FMCG products at low cost and low margin as is the case with food products. That is why many e-commerce players in the F&G segment diversify their product categories with beauty, apparels or fashion to increase their gross margin for a better management of their operational expenditures.
Finally, free shipping remains something that batters with the entrepreneur’s cash flow. Whether it is in the United States, Europe or China, free shipping is a privilege offered to customers and not a right! In India, it is a right which makes entrepreneurs lose an average of 6 percent of their gross margin for each order.
All these pitfalls, which directly affect the profitability of the e-commerce adopting an inventory-led model, have strongly challenged this type of model. Even so, this type of e-commerce will allow entrepreneurs from all backgrounds to launch their platform and start their business.
Ensuring profitability
The most important question is: how to create e-commerce profitability with the inventory-led model in India? To quote John Maynard Keynes, “The difficulty lies not so much in developing new ideas as in escaping from old ones”. This will be your biggest challenge, keep an open mind to imagine what will be the result of your entrepreneurial adventure.
To rethink the e-commerce, when it comes to inventory-led model, is to apprehend a global system approach to optimize the evolution of the model to achieve profitability. Never forget that to understand a system; it is necessary to get the most out of it. You must be able, at first, to adopt a global approach on three fundamental components of your business’ launch; namely the market, the customers and the products that you will sell.
First is the market. You have to analyze it in order to understand its evolution and answer the fundamental question: “How did the market end up here and what will it become in the future?” If this question seems simple to you at first, know that its answer is actually a very tricky one to understand. In fact, whatever industry you analyze in India, the figures will show you a steady growth from 8-10 years with prospects that are as enticing as they are attracting. The conveyed image is your biggest enemy because it will prevent you from further analyzing what you must do to understand the future and achieve your market position.
The second study element is that of the consumers. You must dispose of the classical dichotomy made by the National Council of Applied Economic Research which categorizes the Indian consumers in five distinctive groups according to their consumption patterns: namely, the Rich Class, the Consuming Class, the Climbers, the Aspirants, and the Destitutes. Indeed, this classification is more economical than structuring for the possible targeting of a consumer group for your e-commerce. You can use it as a basis of understanding so as to enable you to get a global view, but you will not be able to forsake an operational study to know how consumers evolve in their consumption universe to target your future clients.
You must also keep a distance when it comes to analysis based on the Maslow pyramid typology (or Maslow’s need hierarchy theorem that motivates behavior), and even the Murray classification (Henry Murray developed a theory of personality based upon needs and motives as a reflexion of consumers’behaviors) which would omit a complex aspect in the understanding of this consumer, including the mutation that it is going through because of its overexposure to the radiations of advertisements, showcases, displays and information.
The third component of your preparation is the one concerning the products that you are going to sell in your e-commerce. The entrepreneur who is launching his business for the first time in the Indian market, assuming that whatever the products offered, success will be waiting and most importantly, will be gained fast. This entrepreneur compares his offer to the ones of international companies and believes that if their products are sold in millions, his will follow the same way. Whether they are large international groups or small production companies, conquering a small market share in India is as difficult as a climber who decides to climb Mount Everest.
The real question is not about fate but about operationality, namely: why is a market product better than another, and what are the keys to success if you want your product to be accepted by the market, and therefore, by the consumers? Every product has a chance in the Indian market though it is necessary to deal with it in an intelligent manner and with a lot of rationality without mistaking one’s vision of the market and trying to have an accurate perception of it.
These three preparatory elements are fundamental to decide the evolution of your e-commerce and to orient it towards profitability. Remember that your business’ most solid stone is the lowest of the foundation!
Being flexible
You are going to have to transform your business into a format which is more adapted to the constraints of the market in order to advance your e-commerce’s internal and external management so as to provide appropriate responses for its development. This new kind of format will maintain the inventory management but will also evolve into a mix of e-store/e-showroom based on the recipients.
This model is based on the interaction of both the consumers and the suppliers’ needs. Customers are looking for low prices, quality products, reliable service and consistency in the service offered. Due to the unorganization of the retail market, suppliers are seeking areas of distribution for their products and a marketing space enhancing their brand and image. How can this model have an impact on the profitability of your e-commerce? Through the implementation of a changing Back Margins strategy, which will favourably impact both the marketing costs and the shipping costs, allowing each order that you have on your platform to be profitable.
Based on the construction of an internal system, the e-store will produce predictable results for your clients. The expected results will no longer be random since they will consistently be made in your business. This will allow you to have faithful customers so long as they receive the service that they expect. The e-showroom will be the backbone of your relationship with your suppliers. It is by building this relationship that you will be able to optimize your marketing financial costs, your cost of delivery, and tilt your e-commerce towards profitability.
This innovative model meets the needs of the suppliers when it comes to promoting and selling their products, satisfying the needs of consumers through an efficient service revolving around a System, answering your marketing investment issue while being able to produce, in minimum time, the profitability of your business.
Experience is the sedimentation of a past that allows you to better execute and faster execute what you used to accomplish painfully in the past. In India, the e-commerce market answers to its own codes, its own rules and its own evolution. It is a world unto itself and just like the Universe, it keeps on evolving. It is up to you to take a step into this evolution. Also, in the way that Kant was able to define, give your experience a sensitive character when it comes to perception in order to make it into a knowledge that will later take the form of a concept that will work in the future.
David Abikzir, Chairman, Nymex Consulting, has experience in Private Equity and Private Banking Business in France in the Group CDC. He entered the Indian market with the F&B group, Luxe Corporation, and was CEO of Yzury.com
