Why online-only brands fumbled and failed to make a dent

The second wave of e-commerce started around 2010 and several behemoths in the present were just startups-in-the-making then. In 2010, online retail had just begun and unicorns like Flipkart, Snapdeal started drawing the attention of venture capitalists. Besides horizontal e-retail platforms, pure-play online brands like Zovi and Freecultr came under the limelight: the former raised $5.5 million from SAIF Partners and MakeMyTrip founder Deep Kalra; seven months later Freecultr also raised $4 million Series A from Sequoia Capital.

A year later Zovi raised $10-million Series B round from Tiger Global and SAIF while Freecultr was topped up with $9-million Series B from Russian VC ru-Net and Sequoia Capital. However, after raising $29.5 million collectively both companies are shutting shop.

Apart from the aforementioned companies, Seedfund-backed DoneByNone wounded up its operations last year. Previously known as HandsPick.com, the company had raised $2 million in seed funding from Seedfund in 2012 and rebranded as DoneByNone.

So, why did these companies fail to make a dent or even just survive? Is making an online fashion brand unfathomable? "Acquiring customer on the Internet is expensive and creating stickiness to one brand is almost impossible,” says Manmohan Aggarwal, Co-founder, Yebhi, adding that he never really understood the philosophy behind launching a pure-play online brand.

Anonymous Twitter handle Unicon Baba says:

Distribution is a big challenge when it comes to an online-only brand. India has about 50 million shoppers and a majority of them buy branded products. It’s difficult to build brand with limited audience.

Online-only brands primarily design and conceptualise products themselves and get it manufactured from third parties. A majority of the online-only brands globally as well as in India were inspired by the success of ASOS in the UK. But ASOS was built around premise of premium and this was largely missing in Zovi, Freecultr, DoneByNone and others.

Missing factor: Premium

“'Premiumness' allows brands to charge more, however these companies were selling products in the range of Rs 500-1,000. Such low ticket size offers very little margin that eventually takes a toll on unit economics,” says Rahul Sethi, who was part of Bazee, Tradus and exited from women focused fashion marketplace Ladyblush last year. He adds,

Instead of evangelising premium category, Zovi, Freecultr and DoneByNone fall prey to price category.

Building a single brand is indeed challenging not only in the online but also in the offline world. None of the Indian brands except a few like Bata, FabIndia have scaled and are thriving. Remember NewPort (Arvind Mills brand) and Liberty? They used to be the rage in the nineties, but gradually lost their premium factor, and consequently disappeared into oblivion. “NewPort started with price tag of Rs 399 and instantly found place in the wardrobe of young Indians. But it lacks 'premiumness' factor because of affordability,” adds Shailesh Vickram Singh, Executive Director, Seedfund.

Globally, pure-play online store ASOS and offline-cum-online fashion brand Zara established themselves as premium brands and are gradually finding their footing in India too. But what made them successful?

Fashion moves very fast and Zara stands for it. Sethi adds,

Every time you go to Zara, you find something new and this is perhaps the biggest differentiator for it.

On the contrary, none of the Indian fashion brands tend to change their inventory as fast as Zara does. “ASOS’s biggest USP was fast-moving inventory and designs that are short-lived. But pure-play online firms in India failed to rotate inventory with a flavour of fresh fashion on regular intervals,” adds Aggarwal.

Investors failed to understand brand-building exercise

The failure of some online-only brands is largely because of mismatch of expectation and reality. Santosh Desai, MD and CEO, Future Brands adds:

Investors expected market to change radically. They invested ahead of the curve and expected to turn market in their favour. The problem isn’t with the market. It’s with investor and their rosy dreams.

He outlines that market is ready for online-only brands if they gun for the long haul without excessive investing in marketing.

Unlike Desai, a section of analysts believe that online-only brands suffered as VC interest switched from inventory-led play to marketplace approach. “DoneByNone succumbed as it failed to raise follow-on capital. It had a healthy margin (in tune of 70 percent) but during 2013-14 investment turned tepid towards pure-play online brands,” says one of the co-founders of DoneByNone on condition of anonymity.

Is it impossible to build online-only brand?

“No. It isn’t impossible,” says Desai. He argues that building a brand takes a decade and one should go slow. He adds,

So far, online-only brands followed the typical VCs mindset - speed and scale. They ignored challenges lie in supply chain, fresh design and delivering superior consumer experience.

Success of any online brand largely depends on four factors: high margin, low inventory, premium factor and no design risk. While online-only businesses have higher margin, they have much higher inventory risk because the curation of design (the design risk) lies with the company: the company is its own brand and can’t bank on other brands to make a design curation for them.

“Think about it this way: a marketplace has a low inventory but low margins. An online-only brand has high margin but very high inventory. StalkBuyLove breaks the efficient frontier: it has high margins (70 percent after discount) and extremely-low inventory. The inventory-adjusted margin is extremely high,” says Tushar Ahluwalia, Co-founder, StalkBuyLove.

Currently, a few online-only fashion brands like StalkBuyLove managed to make a mark, but on very small scale. With growing Internet penetration, disposable income and fashion awareness the future of online-only brands look promising. However, the making of any brand requires time, long-term vision, patience, frugality and investment.