Exploring The Missing Link To Profitability with eCommerce- Order Fulfilment

By Guest Author|26th Oct 2012
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There is a lot going for the Indian E-retail market. Money is still pouring in from the VCs albeit at a slower pace than earlier. Every E-retailer I meet is talking about 100% + YoY revenue growth.

You go to any E-Commerce conference and the mood is upbeat on the potential and future of E-commerce. Nobody has till date questioned the oft repeated numbers which are going to help grow E-Commerce- 100 million Net users growing to 300 million by 2015 and 14 million on-line buyers increasing to 38 million- these are more or less considered a done deal. Add to that the huge 15-44 years population of India which is the key target segment for E-Commerce and the music just gets louder and there are many rushing in to gate crash the party.

The current market size of the E-retail market in India in merchandise value is USD 1 billion or approx INR 5000 Crores. If this was to grow by a CAGR of 50% then the size in 8 years in 2020 would be a more than respectable  INR 1,30,000 Crores ( USD 26 billion).

But then there are murmurs- When will E-retail make money?

WILL HIGHER SCALE LEAD TO PROFITABILITY?

Currently the Indian E-retail market is in an expansion phase and “higher volume is the answer to making profits” mood. One can randomly surf any TV channel and within 15 minutes an ad from an E-retailer is likely to blare at you. Not to speak about the full page ads on the front and last page of Times of India and I am sure many other newspapers. This costs serious money. On top of this are attractive promotions and discounts. Will all this spend increase the penetration of E-commerce and get in more buyers? The answer is a resounding – Yes.

But will higher volumes result in making E-retail profitable- the answer is, may be. The right kind of volumes will ensure higher profitability. Thus it is required to balance the growth from low margin categories like books, mobile phones and laptops with high margins ones like the shoes and apparels. Everybody knows, Private labels have substantially higher margins, so that is another key cog in the wheel for making money.

So how far will higher scale take the E-retail business on the road to making profit? Let us put this theory of higher volumes leading to profitability theory, to a quick and dirty test.

I just checked the Amazon financial figures on the net and for the year ended 2011 Amazon grew a phenomenal 41% on the top line over 2010 but the Operating Income and Net Income where down for the year 2011 and are just 1.8% and 1.4% of the USD 48 Billion revenue, respectively. So going by these figures (with all the dangers of extrapolation) even in 2020, with half the revenue size of Amazon, the Indian E-retail market can potentially make a Net Income of INR 1,800 Crores. Not bad- but certainly not something which deserves a 6-8X valuation of the top line.

Every spurt in growth will need higher investments in people, technology and back end infrastructure like warehouses. Thus volume or revenue growth by itself is no sure shot mantra for making profits. It helps, but only up to a point.

CONTROLLING COST OF ORDER FULFILMENT WHILE RETAINING CUSTOMERS IS THE KEY

The success or failure of an E-retailer will not be decided by Marketing, but by the efficiency of their Order Fulfilment- i.e what happens after the order is received.

E-retailer can spend loads of money on ads and promotions and acquire the customer (the current cost of acquisition is INR 1500- 2000 per customer) but unless this is backed by high retention and repeat orders, the benefits of larger numbers are unlikely to reach the bottom line.

People buy online because the prices are lower. Convenience, ease of shopping and a wide choice do play a role- but the number 1 reason is lower prices.

As Jeff Bezos- founder of Amazon said- “I can’t imagine that ten years from now (customers) are going to say: I really love Amazon but I wish their prices were a little higher”

Being an E-retailer is signing up for a life long battle with controlling costs while ensuring a great shopping experience.

STOCK IN HAND vs. DROP SHIPPING

Having inventory of everything that is displayed on the shopping portal is till now the preferred model for Indian E-retailers. Even if certain items are procured back-to-back, these are brought to the warehouse and then shipped. This model gives total control- proper pick & pack, QC, right billing and timely despatch. It also is the less profitable model and in some ways it is taking the easy way out vis-à-vis Drop Shipping.

A drop shipper is a manufacturer or supplier who will ship single item orders directly to the E-retailers customers.

There are many benefits of Drop Shipping due to which it is a more profitable model. It shifts the risk to the supplier, does not block working capital, has no dead stock, there are no minimum order quantities, no warehousing space is needed and it has immense possibilities of having an enormous catalogue.

Yes, the biggest disadvantage is complete reliance on the supplier to send product to the customer on-time and of proper quality and as per the order i.e size, colour, etc.

It is not a quick fix model. To be successful in this model requires a different mind-set of identifying, hand holding and developing quality suppliers. It would need an on-going and robust process of vendor evaluation and addition and deletions.

It is a much more complex model from a logistics perspective also, as it requires multi-point pickups from potentially a different set of suppliers every day, depending on the orders received. Thus, it requires close co-ordination, integration and synchronisation between the E-retailer, Suppliers and the Logistics Company. Not easy- but it might just be worth the trouble.

DEDICATED DELIVERY NETWORK vs. A 3rd PARTY LOGISTICS SERVICE PROVIDER

For an online buyer, delivery of their shopping is the proof of the pudding. How fast the shopping is delivered, what is the “experience” they get along with the ease of Return/ Exchange, decides whether they will ever buy again on the net or certainly from that E-retailer.

An excellent delivery experience is what gives the WOW factor and every E-retailer knows it. It is also true that the legacy Logistics Service Providers have lagged behind in bringing their systems, processes and technology up to speed for the needs of this business segment. Thus it is not difficult to see how the decision making happened by the E-retailers – “if the Logistics companies cannot support my business I will do it myself”. But, do it myself at what cost?

Running a quasi courier company just goes against the basic tenet of ‘stick to your knitting’. I can understand the temptation to take charge and control the delivery part of the business, but it is not a sustainable model. The economics just do not add up. Shipping cost is 7-8% of an average transaction. I would reckon the actual cost of an in-house delivery service would be 40-50% higher than what an out sourced delivery partner would offer. It is just that the complete cost of running an own delivery network is not transparent and visible and just gets merged into the various cost lines and adds to the total loss the E-retail companies are making.

Rather than jumping in and setting up an own delivery network, E-retailers would be better off forming key partnerships with chosen LSPs, work closely with them to define processes specific to their business and make long term commitments which would give the LSPs confidence to invest in technology and resources for the E-retail segment. Market in the next 12-24 months will move out of the current ‘free shipping’ syndrome. To do that, the first step would be to offer premium delivery services at a fee. Industry would do well to forge a strong partnership with the LSPs and traverse this path together.

To summarise, increasing volumes is important but creating an efficient and well organised order fulfilment process is even more critical and would be the key to success or failure of E-retailers. Many E-retail business entrepreneurs have underestimated the importance and complications of the fulfilment side of their business. They may continue to do so at their own peril.

About the Author:

Sanjiv Kathuria is a co-founder and CEO of a soon to be launched Delivery Service company which will focus exclusively on E-retail and other Non-store retail business. He was earlier the Country Director Sales & Marketing for TNT Express India, and brings over 20 years of experience in Logistics, Sales, Marketing and General Management. He is an alumnus of IIM Bangalore

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