The coming e-commerce shakeout (?)

Sameer

There's a new e-commerce company every other week. Differentiation is melting away, and giving way to the common denominator of "better pricing" alone. Many have non-existent backends, some are using VC cash to grab (a very non-sticky) market share with lossy discounting.

For a while, anyone who was "pivoting" switched to ecommerce, like it was an easy way out. Taggle figured out the smart thing to do early and shut shop. Many others persist.

Whither Indian ecommerce? Shakeout coming?

Edit:

Found a good report on e-tailing : http://www.slideshare.net/Knowledgefaber/kf-e-tailingreport

sameerparwani

The problem has been that merchants crowd into the most common spaces like electronics, books, and daily deals. But there are so many niche angles available in the e-commerce market that there is no industry wide "shakeout" coming. Some of the "me too" websites will die but its by no means too late for hundreds of new e-commerce merchants to start.

Just be a niche site! Go to Internet Retailer's list of top 500 and you'll see that in the USA some of the largest online merchants are in specific niches. Visit http://www.internetretailer.com/top500/list/ and you'll find lots of ideas for niche online e-commerce markets that may grow large in India over time. Here's an example few

44. Musicians Friend (no similar successful music store in India)
60. Blue Nile (there are online jewelers like caratlane but none have it it huge).
80. Build.com (Home Improvement - nothing like that in India)
98. Football Fanactics (Sporting Apparel - no similar successful site in India).

And there are many more, especially as you continue down the list. Don't tell me people in India only buy a few key products online such as electronics or books. In 2007 they weren't even buying those online. But those with the foresight to realize it was just a matter of time are the ones who are the most successful right now.

So, go out there and build an awesome site selling musical gear or whatever niche product it may be. You might start out slow but you're way better off doing that then trying to be next Amazon, because you're way too late to the game for that. (I don't believe every American e-commerce niche will work in India, but given time, many will work).

And.... very very importantly... the 2nd major reason there is no impending long-lasting shakeout is because... WOMEN don't shop online yet. Women love to shop. So, you just wait till they start shopping online and you see how things take off. Right now all this crazyness related to online e-commerce is based on men shopping online. In western E-commerce market more than 50% of online shopping is done by woman. In India its like 90% men. When more and more women get online to shop, you're going to see a second huge growth wave. This may be be 5 years away, but when it happens, it's going to have a huge and lasting impact.

abhispra

Just noticed while browsing

And the sad part - these fly by night companies get humongous funding.

sinha

Frankly, its a case of fundamentals (or rather the lack of it). Look at some of the companies who have raised money and have just not spent enough on technology (looks like 70% of funds went to buying adwords).
Are ecommerce companies trying to build long term technology system or a flip-buy-me-in-2-years service? A very well funded company (more than $25mn) boasts of 200 columns in a database table. And they are advertising everywhere (TVC/online/print etc etc).
Why are VCs not worried? Because they are hedging the risk and sincerely praying that someday Amazon (or other US etailer) will come and acquire these companies to penetrate the Indian market. But again, why would anybody acquire such comapanies when these startups haven't got any fundamental right (I call it 'soul').

My take is that 2012 will be a year of bloodbath and finger-pointing ("hey! why the eff did you guys not invest in technology? where did the fund go?").

Sagar

Just read this: Investors turn sceptical on e-commerce space
An excerpt:E-commerce firms are focused on being the last three or four players alive in their category. “If one company has $20 million and another has $6 million, the one which has a larger corpus can burn more cash and survive for a longer time. When the one with lesser capital dies, it means one competitor less for the other one,” Jolly said.Also, companies that have more money in hand will have the time and the liberty to tweak their business models, if needed.Yet, investors continue to bet on reports of increasing Internet usage and a rising number of online shoppers. According to the Internet and Mobile Association of India, Internet users in the country have crossed the 100-million mark, of which 17 million are online shoppers. It estimates that the number of Internet users in India will triple by 2015, as will the number of online shoppers.

HemanPatel

Agree with @sameerparwani, there are so many niches wide open. I'll repeat what I mentioned in the "2012 prediction" thread, now is the time for entrepreneurs to get in on the market and OWN it.

rebelpreneur

You know what guys? Ever since I saw this thread, my head is reeling under the weight of thoughts haunting me. I want to dabble with an e-commerce project. I have been online for a long time and I have been working for clients abroad ( some of them have beautiful, profitable e-commerce sites).

There's this thought gnawing away at me mercilessly. I read what @sameer said again and again and one cursory look at the Indian online retail space tells me exactly what @sameer mentioned here -- almost every retailer is into electronics and/or books or travel. I guess there's a flower delivery service somewhere too.

Plenty of other niches out there, really. Now, I had a few questions because I became ever more determined to start another business. Trying to shift from services to products.

1. Unlike American Consumers, I guess even the keyword research tools will not do much to gauge the interest levels ( buying triggers?) as to what Indians want to buy online?

2. Any niche -- apart from the popular ones where everyone jostles for space -- you might think of is based on hunch?

3. How about picking up a hugely popular niche and drilling down into an equally popular sub-niche?

4. Finally, for someone like me who isn't into a family with a business background, just how the heck do you establish supply chains, logistics, and operations?

I am loving this forum. I am so happy just to be here and talk to you guys.

sinha

One of the most well funded co. was recently blocked by a big consumer electronics brand for selling below the allowed discounted rate.
In general, the dealers/distributors have the luxury to go below 3% (max), but this online brand went to 6% (thanks to VC funding). Immediately, the company blocked this website from selling its product.

That's a bigger worry for ecommerce market - i.e. when brands start losing trust in them and their distributors/retailers start to look at ecommerce as a BIG competition (such discounts, we all know isn't sustainable in the long run).

Sameer

@rebelpreneur, you gotta have a clear reason why you're better at selling Playstations than everyone else out there, and why people are better off buying through you. You're not just competing with online stores. if there's an answer to that, there's a niche to explore. Most of those answers will come from some back-end legwork in exploting/improving some part of the food chain you have a better handle of, not the site/front-end/features.

Valuation

Let's analyze this from a valuation standpoint, tying valuation to sales of a company.

When an eCom wannabe gets $5 million funding, assume that that company divested 20% equity (minimum) for that money. So its valued at $25 million. Fair enough.

Now, to justify the VC's exit at 3x to 5x (at a minimum), the company would need to have a turnover of at least 3x to 5x of $25 million (assuming a terrible valuation at only 1x Sales). That means a sales of ~ $100 million in the next 3 years.

Thats 500 crores Rs per annum ... selling what ... exotic furniture / ear-rings / men's wallets. Give me a break. This is difficult to achieve, even with a loss leader strategy. And the big daddy that will come from Seattle can only acquire so many of these dot coms.

The joke finale of this funding spillathon was when one very prolific VC who has gone on record saying that eCom in India is overvalued, himself invested a lot of money in a dot-com recently, just in case they missed the wagon. So every other VC's investments were foolish, but theirs was strategic.

What was that dialog in Ishqiya: Tumhaara ishq ishq aur hamara ishq ___ !

Anyways, good luck to the people working hard in these companies, human enterprise is always admiration worthy, though I feel that most have taken on too much funding and are way over-valued.

I have seen dot coms go bust 10 years back in the Valley, have worked in them ... the Indian scenario now doesnt look good.

HemanPatel

Sameer, at the end the companies with better technology and customer support will win. Consumers will slowly but surely figure out and learn the hard way that its not all about buying the lowest price product. I think indian ecommerce startups should learn from companies like Zappos.

rebelpreneur

Sameer, compared to the western countries, there's barely any e-commerce activity here in India.

Pick the successful companies and you can count them off your fingers. There's a lot of scope for e-commerce in India, I feel.

Hell, we didn't even begin. What do you think?

Prat

@Ashish - Do you think Flipkart innovating in supply chain is a factor that qualifies as technology by your comment's definition? Ecommerce - there isnt much as technological innovation a la some other sectors - but I think supply chain, logistics, support and technology together will form a powerful combination.

sinha

@Prat - yes, I believe that's an IP which Amazon(s) of the world cannot even match.

If Amazon plans to acquire a co. in India, it will be only for reasons like

-
market penetration. Flipkart's $1bn is a deterrent here. And
penetration can always be bought by advertising (amazon already has a
good brand recall than etailers put together).

- SCM: Supply
chain capability is what Amazon doesn't have (for e..g understanding of
local geography/how things work). This CANNOT be bought with money (and
employees). This will have to be learnt over a period of time.

-
Gharpay kind of model - i.e. acqua-hires of teams which have created a
differentiating service and would need ca$h to expand into pan-India.
These backend services will drive growth for logistics part of Amazon's
business in India.

Sameer

@rebelpreneur True - we've not even scratched the surface. And probably won't with the existing "let's sell X on a website" approach. For niches too, there'll need to be some differentiator at the supply chain level, or the sourcing (aggregation, or maybe organizing a sector?) level, and even maybe some frog-leap at the layer where consumer behaviour is understood or impacted (tougher, but likely to have latent pain points). Some examples - maybe help moms buy and plan better school lunches and meals. Or aggregate production/branding over a cottage industry - masala making, handmade woollens.

yatendra

I agree with @sameer that we have barely scratch the surface of possibilities but most ecommerce sites present right now are run of the mill ecom site with barely any clear diffrentiator and on top of that they are being over hyped. So any new player will have to have some differentiator in supply chain, technology, sourcing or somewhere else.

sameerparwani

@Sagar, there are many categories with only a handful of competitors. So yes that excerpt is accurate for certain verticals but very inaccurate for most of e-commerce. If one wants to sell gadgets or books, it's a matter of competing on price and being the last one standing, but in other verticals there are not many existing merchants

Sagar

@sameerpawani - Maybe so. Curiously, which such verticals are you hinting at when you say there aren't many existing merchants?

sameerparwani

@Sagar, if you look at my post above, I've mentioned four.

Sameer

@sagar Thanks for sharing that - useful insight.

sameerparwani

@rebelpreneur, I think you might be replying to me but tagged the other Sameer.

The Google Adwords keywords tool does work for India. If you find a niche with great demand and low supply, well done. But most likely you're going to need to forecast demand for keywords that may not be getting a lot of traffic, at least in terms of "buy x" keywords. But, if you look back at electronics even before people were buying them online pre 2007, they were researching those products online. So, you can look at what products are being researched online but not being sold much online.

As for finding niches, well think of what people buy, even on a rare basis (like hobby products). Or just go through that list of top 500 sites and see what the niches are. And yes sub niches can work though you may have to wait years for your site to become to the scale you want it to be if you choose too small of a sub niche. But sub niches can do extremely well. For example, in the USA people can make hundreds of thousands of dollars a year if they owned the first and most popular site just for hair accessories. It won't be on that scale in India for many years, so maybe you choose a little wider scale than someone would in the USA.

As for supply chain, logistics, and operations, if you start small and use available shopping cart software like Magento or Martjack, you can get off the ground fairly soon. Key decision is whether to try to dropship or to hold inventory. That really depends on the niche and if you can find dropshippers. Don't worry about trying to electronically tie your system to the dropshippers immediately. If need be you can email or call in your order to the dropshipper. Once things start working out you can improve the automation.

This answer is based on my perspective of the vast majority of e-commerce stores in the USA. You'd be surprised at how many small shops sell between $100K-$500K in goods a year. You can do the same in India. You don't have to try to be huge and raise $10 million dollars like Snapdeal, Flipkart, Fetise, DealsAndYou, etc. If you don't have a lot of money you can find a nice niche and start a small but profitable business and grow it over time.

The investors in India are rightfully going after the top spots in the market because those will be the most profitable. But small guys like you can still join in the fun as long as they don't try to compete directly with those big guys.

rebelpreneur

@sameerparwani -- Thank you so much for that painstakingly longish post. You literally kicked me awake.

I have to go back to your post and read it again until it sinks into my head. I am more determined than ever now. I don't really want to compete with the big boys. I just want to find that little sub-niche and start off as a project. I guess it makes sense, as you suggested.

Pick a subniche> find dealers/wholesalers/ I don't know who else and secure deals > set-up the site and products> make arrangements for domestic shipping> Start promoting online ( something I can do very well to start with).

What do you think?

P.S: By the way, I have a friend who works with Sony Corp. When I first bounced this idea of just selling Playstation ONLY, he said that he wouldn't do business with me since I don't have a turnover? Doesn't it remind you of the conundrum freshers looking for employment go through -- they need the job to get the experience and companies need experienced candidates, or something like that :)

rebelpreneur

Why did the font and the color change? Yuck, it looks disgusting.

sameerparwani

@rebelpreneur, You probably clicked one of the WYSIWYG font buttons. You can edit and fix it.

But please don't try to sell just Playstations online. That isn't really a niche. Well it is a niche but not one that there's much of a reason to buy from a niche retailer. Electronics is not a niche that really does well when it comes to finding sub-niches within itself.

Quora is a great resource for these types of questions. For example check out http://www.quora.com/What-is-the-best-way-to-market-a-new-e-commerce-site. You do have to adjust the advice to suit India. For example, Andrew Wise says 'instead of focusing on keywords like "baby furniture" go after product keywords like "Child Craft Lifetime Crib" this will be easier to rank for and get you more immediate sales'. But the reason he is saying that is partially because trying to rank for "baby furniture" in the USA is really difficult. But maybe its not so difficult in India. Another one of his small and quick e-commerce sites is http://www.mysalontools.com/ of which I believe he completely relies on dropshippers.

It's probably harder to find dropshippers in India than in the USA. Well that's what the hard part is going to be for you. Identifying the logistics and supply chain. But its not impossible. Maybe you do a mix of inventory and dropshipping at first till you establish yourself.

HemanPatel

@abhispra nice catch.. lol They were smart enough to remove "pre-paid UPS domestic or USPS domestic label" from third bullet point but lazy enough to copy/paste the rest.

sameerparwani

@abhispra that is pretty sad they can't come up with their own words. Everyone wants to emulate Zappos but at least don't copy and paste their policies.

rebelpreneur

@sameerparwani @abhispra It's a dumb thing to do. I have been a content strategist for years and I know how much some clients in the U.S, U.K, and Australia pay just to get the words right across their blogs, and web pages.

Some of our Indian entrepreneurs do "want to get online" but don't want to invest in "what's right". The time will come. I am sure about that :)

Sameer

The fun n games have started!?

http://www.pluggd.in/letsbuy-acquired-by-flipkart-297/

and then

http://www.pluggd.in/myntra-funding-297/

I want to watch the movie called "Being John VC" and get inside their minds.

vivek

Yeah, and it has just begun. And more acquisitions/mergers/fundings/closing shops coming up this year.

Sameer

if you were a small guy just starting out, what would the best way forward be?

Sameer

One advantage I can think of that FK might gain out of this - at least in the short/medium term - could be better pricing capability given that one of the primary competitors (which folks could trust with the experience and delivery) is gone. If FK's claim of 0.5mill/day in sales is correct, and if they paid, say 12mill in stock+cash for this, thats just a month worth of sales. If the earlier buying activity at LB moves over, coupled with better pricing ability, it might be a pretty cheap deal!

Vick

I think that ecommerce entrepreneurs need to think like other entrepreneurs, that is, without the recourse of funding. If you believe this is a business you want to pursue for the next 10 years, then go do it. Otherwise your goals are misaligned and then it's a function of who-you-know who-can-you-fool where-have-you-been, etc. rather than the fundamental business itself.

Other than that, I don't believe in the niche-category model since there is a minimum marketing cost associated with each lead in every niche which doesn't make sense in the long-run with only 1 product or service buy over the lifetime of a customer. With a product like lens or prescription glasses, it might work due to the AOV, net margin share or might work in diapers due to the high repeat frequency rate. I think horizontal lifestyle fits are better, for example: Hiking/ Camping/ Outdoors niche products vs. Tents. (bad example but thats the one that came to mind).

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