E-commerce: The keys to success

Monday April 18, 2016 , 6 min Read

If there is one sector that is impossible to keep away from the news, it must be e-commerce. For all the euphoria around the ubiquity of e-commerce today, not all of the news is particularly positive.

Take the case of the Rocket-Internet backed Jabong, reportedly unable to find buyers at a price of $100 million, a price that is a tenth of the $1 billion it solicited in 2015. While another Rocket Internet company FabFurnish did eventually find a buyer in the Future Group at a price of Rs 20 crore, a sum that is widely believed to be a small fraction of the total amount invested in to the firm since its inception in 2011.

When we choose to look at the market leaders in India, it would seem that the picture becomes even scarier. Amazon, Flipkart, and Snapdeal are locked in a bitter battle to the end, one where they might well have to also deal with Alibaba, sooner rather than later.

Does that mean then that all is gloom and doom for e-commerce? Certainly not!

In fact, over the last decade, no other sector has created as many large companies, directly or indirectly, and redefined consumer behaviour the way e-commerce has. In the magnitude of its impact on the rising urban middle class of India, e-commerce is probably second only to the rise of the IT industry at the turn of the 21st century.

No other sector has taken so many different forms to tap into a large market, and a large market is the starting prerequisite for us at Kae Capital, just as it is with most VCs around the world.

However, with so many heavily funded competitors and business models around, the odds of success in e-commerce are also not particularly encouraging.

What then, do we feel are the keys to success in e-commerce?

Ecommerce_Cover_Yourstory — Image by Aditya Ranade

Differentiation

The first generation of successful e-commerce businesses were horizontal platforms across categories such as Amazon and Flipkart (even though neither of them started as such).

We then saw firms taking up specialised vertical niches in categories that were underpenetrated by the horizontal businesses, such as furniture (Pepperfry and UrbanLadder), groceries (Big Basket and Grofers), eyewear (Lenskart), jewellery (CaratLane and Bluestone)and baby products (Firstcry and Babyoye), etc.

Other companies have found interesting angles to facilitate the buyer’s purchase decision: By focusing on second-hand products (Quikr and OLX), through social validation (Limeroad and Roposo) or even by emphasising on speed of delivery (Grofers).

And it would seem like there is room for many more models with their own USP.

A few months ago, one of my colleagues walked in with a rather fancy set of earphones and asked me to guess the price. My guess was Rs 2000, almost 10 times the Rs 225 he paid for it.When I asked him about how he got it for so cheap, he told me he had bought it on Wish, a cross-border shopping app hailed by many as the newest disruptor to e-commerce.

The catch? He had to wait a month for the delivery.

There is always room for e-commerce companies to find their own defensible niche, and Wish’s example shows that a USP can also be built on a trade-off.

Profitable moats

Profitability is perhaps every VC’s favourite word this season. But no, I do not mean profitability in the context of unit economics (perhaps every VC’s favourite two-word phrase this season).

What I am referring to is an e-commerce business’ ability to create ancillary revenue streams that are highly defensible and highly profitable and Amazon is undoubtedly the best example of this.

In addition to its e-commerce platform, Amazon also offers Amazon Web Services (AWS), an enterprise cloud infrastructure service. In the final quarter of 2015, AWS scored revenues of $2.4 billion and an operating profit of $687 million.

AWS delivers an operating margin of nearly 30 per cent.

I suspect that Amazon’s other non e-commerce businesses such as Twitch and the Kindle ecosystem will deliver similar financial gains in due time.

These ancillary businesses have been able to become (or promise to become) so profitable because of the scale and growth that Amazon’s e-commerce business has achieved. Scale is beautiful for e-commerce. Even in 2016.

Execution and flexibility

The Department of Industrial Policy & Promotion recently mandated that e-commerce marketplaces would not be able to sell more than 25 per cent of their aggregate numbers through a single vendor or other group companies. Many believe that this regulation will cripple Amazon and Flipkart in the short-term, since a much more significant proportion of their sales can be attributed to vendors that they are affiliated to.

However, this isn’t the first time either Flipkart or Amazon have faced similar regulatory hurdles.

In early 2014, the Enforcement Directorate was considering levying a penalty of Rs 1,400 crore on Flipkart for allegedly violating the prevailing FDI norms. Later that same year, the Karnataka government prohibited Amazon from selling certain products from its warehouse over its interpretation of the type of Amazon is, and the taxation laws that should apply to it.

The new norms on e-commerce marketplaces might well be a blessing in disguise and might help on-board the long-tail of merchants, the merchants who have thus far stayed away due to fears of predatory pricing killing their margins.

But even if that isn’t the case, history suggests that e-commerce demands entrepreneurs who are prepared to deal with legal ambiguities and the ramifications that come as a result of such ambiguities, and can ride them through.

Ambition

Most e-commerce entrepreneurs pitching to me justify their case by using arguments such as “The market is large enough” and “There is room for one more player”.

I can identify with them, I have used these lines myself while pitching to VCs.

What time has revealed though is that in e-commerce, like most other Internet-enabled businesses, there is room for only one, maybe two, dominant market leaders in each category. As an entrepreneur, the only way you can get e-commerce’s massive market potential to yield to you is if you enter with the objective of becoming that dominant market leader.

This is not to say that most entrepreneurs do not want to succeed.

However, becoming a market leader in e-commerce requires someone who is especially driven, maybe even maniacal, when it comes to beating fierce competition in order to succeed.

E-commerce makes for an exciting sector, one where the stakes are always very high. Even though it is categorised by dominant leaders, it is also a space where a new entrant can always disrupt existing players using a better model or superior technology.