Will all-in-one offerings have a happy ending?

31st May 2016
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An observation made one too many times is “the Indian e-commerce market is like a hospital with only generalist doctors. Not a specialist in sight.” We set out to find out if this is indeed true.

Riding on VC funding, e-commerce companies had chased growth in an unprecedented pace till the first quarter of this year. Besides discounts and cashbacks, the bigger firms have never stopped adding new verticals to drive more transactions on their platform. In the past one year, Snapdeal, Paytm, Flipkart, Quikr, Oyo along with several mid-sized companies have forayed into new verticals to woo existing and new consumers. For instance, Snapdeal partnered with Zomato, RedBus and Cleartrip last month to offer food, bus tickets and flights to its consumer base.

E-commerce

These additions to their offerings have been driven by one or more of the following three factors- it’s already big and growing in the US or China, it offers the hope of higher margins and low entry barriers (apparel) and finally, higher transaction value at lower cost (electronics and auto). On top of all that is FOMO (fear of missing out), every time news comes of a big fund raise by a top five player like Paytm.

Flipkart started selling motorbikes and cars while Paytm is turning into a supermarket, selling everything from movies, air and bus tickets to fashion, hotel rooms, perishable products including cake and sweets. Budget hotel aggregator OYO is testing a pilot of home services and holiday packages on its platform. Softbank-funded on-demand startup Grofers ventured into personal electronics and mobile phones this year.

Acquiring new customer is expensive: Let’s offer more choices

These companies clearly added new verticals to monetise their existing consumer base and improve unit economics. But is this the right strategy? Dev Khare, Partner at Lightspeed, says, “

Over the years, these companies have amassed a huge consumer base and offering more choices to them makes absolute sense. More services can effectively enhance their chances to make more money per user. Introduction of new services by large e-commerce companies gives an additional distribution channel for mid-sized and new startups in products and manufacturing.

Acquiring new customers is an expensive affair for e-commerce companies in India. A majority of the sales volume comes from categories like mobile phones, electronics and fashion. However, making margins on mobile and electronics has not been easy when discounts rule. “Making money by selling products would be tough for e-commerce companies in India. I always believed that profitability can only be achieved through selling services,” points out Manmohan Aggarwal, Founder and CEO, Yebhi. Yebhi ceased operations in 2014 as it failed to raise follow-on capital.

As the competitive landscape gets tightened, chances of follow-on funding looks really difficult for majority of the companies.

Santosh Desai, MD and CEO, Future Brands, adds:

Mounting pressure for profitability from all quarters (investor, media scrutiny, board etc.) are forcing horizontal e-commerce companies to foray into various verticals.

Lesson from past: Verticals integration should be a well-thought-out decision

Meanwhile, previous attempts made by e-commerce biggies in adding more verticals indicates that it’s not an easy task. Flipkart had tried the payment business (PayZippy), MP3 digital store Flyte and grocery delivery business, however it had to halt all three services in the wake of poor traction. Similarly, Ola tested food and grocery delivery but rolled back soon as they failed to achieve desirable traction and results.

Adding a new vertical is like venturing into a new business and it should be a well-thought-out decision. Satish Meena, Forecast Analyst, at Forrester says,

Flipkart's decision to add new verticals were primarily driven by hype and exuberance.

He points out that Flipkart pulled the plug from the above verticals when euphoria subsided around them. For some, Ola’s move to deliver food and grocery was only desperation.

Create value for customer: Don’t rush in expansion frenzy

“Grocery and food delivery were pure-play obsession and an abstract decision by Ola,” adds Manmohan. One can add here that heavy funding has also made it very tough for these players to think small, or give a product line enough of a rope to check for traction. It has, in fact, increased the pressure to show quick results or have the plug being pulled. It’s an argument that will only add takers with the recent news filtering out from B schools of many e-commerce players reneging or postponing offers, citing change in business plans or ‘restructuring’.

Value Customer_2 (1)

Creating value for customers is the primary reason for any business when it gets into a new vertical. However, if we see the Flipkart and Snapdeal debut in automobile segment, they are largely aggregating dealers on their platform and aren’t directly dealing with manufacturers. Satish argues,

Where’s the value for customers in aggregating dealers?

According to a top executive at a leading horizontal e-commerce platform, real estate and automobiles only serve gross merchandise volume (GMV) purpose. “They don’t add much value either for platform or consumer,” he adds.

Sell everything: Race to become Alibaba

Till recently, e-commerce companies were chasing growth but now focus has switched to profitability and some experts see introduction of new verticals as a natural progression. “From a strategy point of view there’s nothing wrong in adding more verticals. However, strength of core offering also suffers if it’s not well-planned,” says Alok Mittal, Co-founder and CEO of Indifi Technologies, which offers working capital (loan) for SMEs. “Foraying in new verticals also bring a lots of executional complexities like dedicated resources, sharp focus and long-term vision,” he adds

The majority of experts we spoke to believe that addition of verticals is largely steered by thoughts of monetising consumer base and cutting losses. Kashyap Deorah, Co-founder of Hypertrack and author of The Golden Tap sees it as a strategy to build momentum for follow-on investment. He adds,

All major horizontal e-commerce companies are in the race to become the Alibaba of India. They think that this positioning will be pivotal in raising the next round. For me, integration of new verticals is positioning for investors. I don’t even consider it a business strategy.

Will customers show affinity towards new verticals?

E-commerce companies have a genuine hope of monetising existing user base through addition of verticals. Consumer affinity towards new verticals is crucial as far as their success is concerned. “Users don’t intuitively think of buying flight/movie/bus tickets from Snapdeal and Paytm,” points out a top executive of a leading Internet group.

customer affinity

He argues that none of the global behemoths (Amazon and Alibaba) had integrated services (handymen, food delivery et al). “Instead of getting into several verticals they should focus to their core offering and figure out right unit economics around them,” he adds.

On the future prospect of new verticals by e-commerce majors, Santosh of Future Brands explains,

Foundation of e-commerce business is being tested for the first time in India. Thus, only time will tell whether introduction of new verticals will work or not.

Strangely enough, this multi-vertical approach has virtually killed off a lot of single vertical sites (other than super-specialised categories like jewellery), which, despite possibly stronger domain knowledge and insights, ended up losing to the blanket discount ‘strategies’ of the majors.

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