Why e-commerce consolidation is no panacea

The euphoria around Flipkart’s recent acquisition of Jabong may be a tad misplaced. After all, there are far bigger competitive issues at stake that could define the next phase of growth of Indian e-commerce

Haresh Chawla

[Photograph by Chunky Rice under Creative Commons]

It’s all about execution, they say. And that’s truer nowhere else than in the consumer internet business. Multiple firms attack the market with the same idea. Some get lucky with timing, follow up with great execution and attract disproportionate capital to distort market dynamics in their favour. That’s how the winners are decided.

So no matter how sound an idea may be or how rational a decision may appear, what really matters are these.

  • How well were things executed?
  • Was a seamless customer experience delivered?
  • Did the customer feel delighted?
  • From the vendor’s standpoint, was the transaction economically viable and sustainable in the long run? 

Consider Flipkart’s $70 million in cash to acquire Jabong. Everybody talks of how Flipkart “pipped its rivals”. But if you step back and think about it for a moment, players were negotiating to buy a haemorrhaging asset at the lowest possible price and best terms.

Everybody who bid for Jabong would have tried to minimise their bids. For instance, offer a combination of stock and cash, or deferred stock, or alternatively ask for several indemnities and warranties on the state of the business which kick in post the deal (unfortunately, this fine print never makes it to the news and everyone touts the big headline valuation number). Presumably, Flipkart has negotiated these protections even in the all-cash deal that Jabong accepted.

This acquisition can play out in several ways:

The Optimistic Scenario: Competitive Intensity Lowers, Good Execution

At worst, Flipkart would have knocked out a competitor in Jabong which would have been dangerous in the hands of Snapdeal; for that matter even in the hands of an offline major like the Future Group or Aditya Birla Group, both of whom were in the reckoning—if they had gotten their hands on it at $70 million. This allows Myntra, a Flipkart group company, the breathing room to build an even larger lead, with Jabong being assimilated in some form as a brand within Myntra.

At best, Flipkart can craft distinctive positions for Myntra and Jabong, fuel both businesses to sustainability and build a position as the largest online apparel destination with commanding market share. 

The Pessimistic Scenario: Competitive Intensity Doesn’t Wane, Poor Execution

In this scenario, Flipkart could burn anywhere between $120 million and $130 million on this acquisition. Which includes the cost of acquiring Jabong and attempting the turnaround (Jabong burns about Rs 250 crore per annum, Myntra about thrice that—give or take a few million dollars!) but fails to master the costs and complexities involved in running two online destinations with independent overheads and customer acquisition costs. (Actually, make that three destinations—since apparel is a large category for Flipkart too.) Supporting multiple independent entities could be unsustainable because of heavy customer acquisition and retention costs and it could discover that it has opened up two fronts on which it can potentially bleed.

In this scenario, Jabong can well turn out to be a distraction Flipkart cannot afford to have at this point—and it may come to the conclusion that integrating the business back into Myntra is its best bet.

It’s too early to declare a winner in the online apparel game. India is not a market Alibaba or Amazon will leave uncontested. And this move, I suspect, will unleash a new war. The team at Flipkart has its work cut out once it moves beyond the euphoria that has surrounded this announcement and begins to grapple with the real task of turning around Jabong. It is a wait and watch on how things play out on this front.

The Bigger Battle

What Flipkart has on hand right now is a bigger battle actually. As serendipity would have it, Amazon unleashed Amazon Prime in India with no-price-cap free delivery in over a 100 cities on the same day that Flipkart announced its acquisition of Jabong.

Amazon Prime has been a killer app for Amazon in the US and a few other markets. Though it remains to be seen how Prime will fare in India, until now this is the Howitzer missile Amazon has used to move its customers beyond electronics and gadgets to make buying on Amazon a daily habit. 

And that elusive habit is what Flipkart needs to be wary of. That is the Holy Grail. Not selling more phones or gadgets. How to become an invisible part of its consumer’s lives, where they simply order daily use stuff online without thinking too much about it or wondering if they have to search for a coupon or an offer for it.

Amazon has been laser-focused on this habit creation and Prime, Echo and same day delivery are initiatives that are all driven towards making it a default and invisible choice for the consumer. Once this happens, the Prime phenomenon has shown that Amazon is able to shift consumers from deal seeking to buying on account of the sheer convenience of online shopping.

Since the time I wrote Saving Private Flipkart, we’ve seen Flipkart make several bold moves. It cleaned its management decks, shut down side initiatives like Ping and Nearby, brought focus back to the desktop and mobile web, discarded its obsession with gross merchandise value as the singular driving metric, announced a multimillion dollar push on mobile payments, launched “pay later” and other financing options for consumers.

I had talked about some more initiatives in my article—the key among them was the idea that Flipkart needs to bring customer experience front and centre and it has to win back the trust and loyalty of consumers who shifted away over the last couple of years as the company diluted its early mover advantage by focusing on growth via discounts and deals.

Now, Amazon Prime may not make a big noise and dent today. But it can be a silent killer which lulls Indian consumers into making Amazon a habit. Amazon has already started putting together content for Prime Video (an audio/video streaming service akin to Netflix that it bundles along with free delivery in Amazon Prime). The immediate impact of Prime Video given the state of our broadband infrastructure will be limited—but you never know if it conjures up a blockbuster series on the platform in partnership with a TV channel.

Flipkart has to come up with a credible alternative to Prime if it wants to fight the habit war. Selling more television sets is not habit forming. People will shop for the lowest price before they pick up their 42-inch screens and they buy one such set perhaps in three years at most. 

What we’re witnessing is an enormous reset that’s going on across the entire e-commerce market. Players have been forced to stop discount-fuelled customer acquisition sprees and are now finding out where business stands after they’ve turned these taps off.

Proverbially, some had fooled themselves into believing they were wearing clothes and now that the tide is going out, discovering they actually aren’t. The pecking order has changed over the last few months.

I have said this earlier—that public announcements and data from the e-commerce companies is designed to confuse. Recent shipments show that over the last two months, Amazon is virtually neck and neck (or even a little ahead) in shipments per day versus Flipkart. Snapdeal and others have fallen even further behind.

Mid-tier and vertical e-commerce players (the likes of Pepperfry, Limeroad and others) are facing bigger existential challenges since their volumes have dropped off, but costs haven’t. And their traffic is plummeting. They are facing the prospect of running out of runway soon.  On the other side of the table, investors are cagey and the ones with deep pockets are dragging deals since they know that the pickings will get cheaper as time passes. The Chinese trio—Alibaba, Tencent and Baidu—are biding their time, as they wait to get some more visibility on which team navigates this downturn. They will enter the fray once some of our players have cleaned up their overheads, written off their inventories and sharpened their businesses—and that will give any strategic investor more visibility on who could be a winner—and the bets will appear a lot safer.

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Vedant Desai on Jul 31, 2016 5:06 p.m. said

Thanks for your reply , sir. However , to bring clarity I was not comparing telecom sector and online retail but rather merely mentioning that in both business it is very difficult to generate profit despite very high level of revenue. However, It is still too early to ascribe recent increase in profit with prime customers or to state whether recent signs of profit is going to be permanent feature of business as it is merely 2nd quarter with profit and that too very marginal and further Amazon has historically shown profits in some quarter only to show loss in others. I am not saying profit is impossible but rather that it is a very tough business. As regarding to scale , I believe 100 billion dollars in revenue is very large scale and scaling from 100 billion to 150 billion is much more difficult than from 50 to 100 billion and difficulty increases with each additional billion. Further expansion in new countries for revenue growth diminishes benifit of scale. Hence I am very eager to see how amazon achieves sustainable profitability in retail business considering amazon is already one of the most lean company of the world.

Haresh Chawla on Jul 30, 2016 12:29 p.m. said

Hi Apurva, I think every player did a lot of irrational and silly things in the drive to get GMV and the ensuing valuation. What you describe has been a function of that behaviour. With the recent setbacks, the firms have reset their models - and we'll see some pain as they overhaul their fixed costs, margin structures and headcount, and start focusing on customer experience and retention.

Haresh Chawla on Jul 30, 2016 12:24 p.m. said

Hi Vedant, Amazon has started posting profits in its retail business - driven by the high usage rate of Prime customers. Agree that online retail is a wafer-thin margin business and thus will need very sharp and lean companies to win. However, it is entirely possible to build mega-scale which is why it's attractive in every market. Telecom has different business dynamics and capex cycles - so I wouldn't compare them. The ecomm firms which fail to win on BOTH customer experience AND operational excellence will suffer.

Apurva Narang on Jul 29, 2016 7:55 p.m. said

Great article and analysis. As seller we gave a sigh of relief that Jabong did not go into the hands of Snapdeal. One thing that can add to ecom sites profitbility is to start selling at Most Viable Price rather than Least Market Price. Many products are either not available in certain geographies offline or are sold by retailers at max 10 % discount but still we have WS retail , Cloudtail etc. selling at less the distributor price. If they just take away these guerilla discounting practice and let the true marketplace pricing prevail , the ecom co.'s will earn more in terms of commissions. The orders will not go down just because they stop unrealistic discounts.. small example : we sell a product across all marketplaces .. flipkart and Amazon at the least market price and Snapdeal , eBay , shopclues , paytm at higher price.. and still we get orders from all the websites.. of course reach of F&A is more than the rest .. but still paytm ends up earning more in terms of commissions even for fraction of the orders. Unlike popular notion Customers do not necessarily check pricing at all sites before buying as they also consider other factors like ease of buying, shipping durations etc. In fact a particular Brand is being sold at above MRP by most sellers on snapdeal .. even after we have repeatedly pointed out this fact to snapdeal officials. A move towards profitbility requires some tough decisions which none of them are wiling to take because of their myopic goals.

Vedant Desai on Jul 29, 2016 1:49 p.m. said

I believe the biggest challenge for all online retailers,whoever survives this war, will be to generate profitability. Even after all this efforts like Amazon Prime etc. and being sole player in US, Amazon is still making loss on its retail business. Its margin are paper thin and its inventory turnover ratio is decreasing despite squeezing last drop of hardwork from it's employees. Right now amazon's investors are being patient due to success of AWS and high share price, However amazon will find things difficult when investors will demand results in bottomline. All these problems are faced by Amazon despite being a major player in developed markets. The same will be exacerbated in India where infrastructure is poor and ,despite India being a very large market, purchasing power of individual customer is low. I believe reaching profitability will be much more bigger challenge than being "last man standing" in war, just like that for telecom sector players in India. It seems e-retailers have taken profitability for granted which is going to be a costly mistake.

About the author

Haresh Chawla
Haresh Chawla

Partner

True North (formerly India Value Fund)

Haresh Chawla is currently a Partner at True North (formerly India Value Fund Advisors). True North is one of India's most experienced and respected private equity funds, with over $1.5 billion under management. At True North, he focuses on investments in the food and consumer sectors where he identifies and helps transform mid-size businesses.

He is best known though for his leadership in transforming the Network18 Group into a formidable media network. Under his watch as Founding CEO, Network 18 became India's fastest growing Media and Entertainment network.

In his dual leadership roles at Network18 and Viacom18, he built a media conglomerate that reached over 300 million households across platforms including television, print, films, mobile and internet.

His career at Network18 spanned 12 years, and he grew revenues from $3 million in 1999 to $500 million in 2012. He transformed the company from a TV production house to India's leading multi-media house with over 11 TV channels including Colors, CNBC-TV18, CNN IBN, MTV India and Nick India. He forged joint ventures and long-term partnerships with the world's largest media companies including NBC (Comcast), CNN, Viacom, Forbes, A&E Networks.

Haresh has also been keenly engaged in the consumer internet revolution in India from the early nineties. He is credited with building India's largest most well-known internet businesses like Moneycontrol, Bookmyshow, Yatra, Firstpost and Homeshop18. He continues as a successful investor and mentor to several internet and consumer start-ups today.

Earlier, Haresh has been part of founding teams at the HCL Comnet; ABCL, where he set up the Film Distribution Business, and at the Times of India Group where he launched Times Music.
 
Haresh holds a Bachelor's degree in Engineering from IIT Bombay and a Master's degree in Business Management from IIM Calcutta. He lives with his wife and two children in Mumbai.

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