8 simple reasons
1. PAIN vs PLEASURE
IRCTC is the biggest success in e-commerce in India.
It democratized Railway Tickets buying – the biggest pain point in the life of an Indian. At least the Indian who travelled in the ’70s, ’80s and ’90s.
As a young boy, I was trained to go to Churchgate station, stand in a line and buy a ticket – in an effort to teach me patience.
The 2012 e-commerce sites are presenting goods that I should buy for PLEASURE. All kinds of stuff that may give me a kick once or twice but never forever. It’s not a repeatable business.
I mean just check out the fancy wares on most of these sites.
Sure, I will buy sunglasses and t-shirts once, twice, but not as a regular habit!
2. PULL vs PUSH
Most of the travel portals succeeded in India as the Internet picked up by then, by becoming accessible.
When we began to ‘search’ for Mumbai – Delhi tickets, the usual travel portals began to show up and consumers began to go to those sites automatically.
That was generic PULL traffic.
In 2012, if I wanna color my hair (i don’t wanna), I will NOT go to the Internet and search for ‘Garnier Hair Care’ Color. That doesn’t make sense to me at least. It’s NOT typical consumer behaviour.
If at all I need it, I will go to the nearest Kirana Shop. Thats PULL.
Now, if a rich stupid funded site comes up and PUSHES me the color dye, then it’s expecting me to behave abnormally (getting PUSHED to buy).
I will, but it will really cost the e-commerce site their business!
Check out this case of my experience of buying hair color on the web.
3. BUILD vs SELL
I came across someone yesterday who is leaving his cozy career to START an e-commerce dot com that he says will BE SOLD to Someone (he did not know who will buy it and why – but because it’s e-commerce, Someone will).
His entire plan is to create a business that will sell out. To whom, and why, even God doesn’t know.
When Make My Trip started out in 1998/99, Deep and his team BUILT a business they BELIEVED in.
It took 12 years for MMT to make that vision a success; with lots of scary moments thrown in.
They were in BUILD MODE and became a 1 billion dollar company.
My personal belief is that if you start a company with a SELL mentality from DAY 1, then you circumvent REAL value creation.
You build stuff that’s fluff – not anything real.
And fluff NEVER gets bought.
4. COUNTRY vs THEME
If e-ventures invested in MMT in ’99 and later people like SAIF supported them, it was because they were taking a Country call.
Their call was that INDIA will be an Internet economy – and all the successes of Content, Services, Communities that make the Internet throb will thrive.
In 2012, lots of VCs are taking e-commerce as a ‘thematic’ bet. They think, “Oh yeah, we don’t have an e-commerce play, so let’s invest in a couple of Companies”.
Ha!!
What may be a “thematic” experience for them, may be a nightmare for the entrepreneur.
Because the truth is – VCs can change entrepreneurs as often as they like. But entrepreneurs can’t change their own businesses just because they don’t like it anymore!!
5. SERIES A vs SERIES E
Look around and examine the long term e-commerce sites in the USA. Even MMT or maybe Flipkart too. Count the many rounds of capital they have raised.
Look at the Capital consumption of Amazon.com!
These are businesses built on LONG TERM capital.
I ask – how many of the 2012 e-commerce sites will ever get refuelled?
With one bad year, a couple of more sites down, will their investors want to invest more money in something they thought was a “thematic” flavor of the year investment?
6. ENTREPRENEURS vs COWBOYS
Meet Deep Kalra. Check out the Entrepreneur DNA in him.
Then meet the 2012 jokers of e-commerce who are coming from plastics, warehousing, petrol pumps and God knows what, just to start “e-commerce”. Some of them are freshly minted MBAs pretending to be entrepreneurs!
The 2012 batch of e-commerce Cowboys remind me so so much of the 2000 batch of Internet Wannabes who jumped into the fray at that moment just to be “in the Internet” business.
One bad jhatka of the horse and these Cowboys will be on the streets.
7. PRICE vs PRIZE
Conceptually speaking, e-Commerce is supposed to make the PRICE of goods more economical for me. That’s classical ‘me-the-Economist’ talking.
Now, this is NOT DISCOUNTS!
How do goods become “cost effective for me”?
– By reducing the COST of travel, efforts etc. that are involved to go to the physical store to buy the goods.
– By making GIFTING a Painless and Cost Efficient process (imagine buying gifts and lugging them to people the old fashioned way).
– By giving me the benefit of prices assuming that there is a mass purchase at the Buyer’s end.
Sure, there are delights of buying special things that are not found elsewhere etc. etc., but routine shopping is for getting my usual things in the most cost effective (read price + saved time + saved energy) price.
Now, the 2012 gang are giving away their Goods like PRIZES!
They are discounting regular stuff, throwing price down the drain to make people BUY – even when they don’t need the product.
Well, I have learnt in many businesses that the LURE of Prizes is very very short term.
8. VALUATION vs PROFITABILITY
Most e-commerce plays in 2012 are geared towards weird valuation metrics. They believe in things like ‘Customer base’, ‘nos. of orders sold per day’, ‘value of goods sold per day’ etc. etc.
These are nice juicy terms that are the season of a boom.
In a downturn, the vocabulary of valuation has only one word in it – that is VALUE.
Now, don’t get me wrong. I personally run businesses that lose money but are still valuable ( I hope :-))
That’s because the word ‘Value’ if NOT measured in money terms is in showing TANGIBLE ASSETS – like returning visitors, a leadership in the business category, an acquisition cost of consumer that is plummeting etc. etc.
If you buy a book for Rs 100 from a publisher and sell it to me for Rs 50 and write off Rs 50 as ‘consumer acquisition’ – that’s a silly metric if I NEVER COME BACK!
It’s like paying to acquire a ghost!
So, when the shit hits the turbines, all these fancy metrics are going to be put through the stress tests. Investors are going to ask WHY and not WHAT!!!
How many of these silly e-commerce start ups will be able to claim ANY value creation when they all look and smell and taste the same? If 28 sites sell the same Hair Color at the same price to consumers like me, who will never return again, then where and what is the value creation???
Also, financially, these 2012 guys have NO CLUE of the measurement of cost of acquisition of customers or the CONCEPT of lifetime value etc. The people I have spoken to believe that, “as long as we advertise, we will get consumers. These consumers will magically keep coming back to us and give us repeat buys. Via such loyalty, we will build a brand. And then on Diwali day we will get acquired”.
I have never heard of a DUMBER pitch than that!
*****
Image credits – games2win.com
****
Added on the 13th of Jan 2012:
This post came up on the same day I posted this note. Its scary.
Its about how a consumer was shipped a USED BLACKBERRY when she bought a NEW ONE?
https://www.therodinhoods.com/forum/topics/e-commerce-the-joy-ride-bump
KK
Thank you. This is very, very insightful. I am a spectator to this valuation game (the group has many eCom entities) and yes, all that you say here is something very few bear in mind. And we can count those few and their successes on our fingers..
Looking forward to a piece on the different eCommerce models that are being followed. And your take on what works/will work and what hasn’t/won’t.
What do you think of players who are adding categories to up trasactions? An apparel guy gets funding and suddenly starts selling electronics…something he doesn’t know jack of. Poor guy had just spent a year or so building expertise in apparel and maybe got that right! It seems like a simple idea to add categories=increase transactions. But is it viable? Or are niche models unviable in such amazon-like scenarios? Would love to hear your (and others) views.
Rabi Gupta
+100000000 🙂
Hemant Soreng
Right on dot Alok !!!
Pratik Rokade
Its not really that game. The valuations are going to be real. The Indian market is so big and use of internet so exploding that there is real big business opportunity in this area. Lots of e-commerce startups born in last year but those are definitely not by cowboys, there are serious brains behind most of these and these are the ones who have identified opportunity in the market. Its not valuation game for all of them, they are serious and committed to build long term sustainable business.
They are not selling book below prices they have got, but business model allows them to sell below MRP that is priced at retail shops. They don’t have overheads of managing retail store, staff, supply chain etc. and these are all national players they directly deal with manufacturer with so much margins that they actually can afford to sell at discounted price and still make profits on it.
Alok Rodinhood Kejriwal
I hope u r right my friend! Would love to be proven wrong on this one… I wish I Am wrong!
Alok Rodinhood Kejriwal
Pratik, what is your background my friend?
Varun Intoxicated
though i see a see a bit of denial about e-comm in u. this post will surely create some awareness about the burst effects to all wanna be entrepreneurs.cheers.. 😉
Prashant Chauhan
Agreed ! Ecom is Bubble and will bust all the cow boys and people showning jugglery in accounts will be sent home ,As per my prespective i feel only the Offline Big Retail Gaints like Future Group bigbazar,aditya Birla Group retail etc.
Can make it through in ecommerce space in india as they are trusted retail brands offliine,and can easily build offline customers to make purchase online as such their CPA would be ZERO and most customers will Purchase for facality
The Price Riots that newbies have created will soon END as 90 % will Bleed to death and 5 % will make TOPI to INVESTORS and 5% will be onces who will actualy Survive and Create value in Long term.
i strongly belive among that 5 %
20 % will be sites like ebay,flipkart and who have survived previous Bubble etc and 80 % will be Big OFFLINE RETAIL BRANDS selling Online.
As Mentality of Indian Customers is much Diffrent then US or UK customers here people are More Paranoid .
K.K
Alok Rodinhood Kejriwal
On therodinhoods, we like to hear about our Members views – not of publicly read posts on sites like techcrunch!
What’s your view if you have one?
W B
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 (if a zero revenue company being valued out of the door at that amount is fair, but then, these are different times). If they divested only 10% equity, they are valued at a whopping $50 million.
Now, to justify the VC’s exit at 3x to 5x (at a minimum) after 3 years or 5 years, the company would need to have a turnover of at least 3x to 5x of $25 million (assuming a terrible valuation at only 1x of 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. It doesnt look good.
Alok Rodinhood Kejriwal
:-))
Now this is what i call a Point of View!
W B
Thanks Alok. I have learnt a lot from your posts, I am more than happy to “crowd” your forum with my thoughts. 🙂
Alok Rodinhood Kejriwal
This post came up on the same day I posted this note. Its scary.
Its about how a consumer was shipped a USED BLACKBERRY when she bought a NEW ONE?
https://www.therodinhoods.com/forum/topics/e-commerce-the-joy-ride-bump
Siddharth Sethi
I think ,only 2 categories of Ecommerce players will win
1.Who improvise (not innovate :Indian market doesn’t have the quorum to reward innovation)and do a few smarter things(handful of them if at all) and go along at a happy pace
2.the resilient investor(this guy is betting for long term and does not mind taking the knock for few more years).In the latter case its the money winning not human intelligence.They buy into the long term indian story and keep slugging it out and as everyone says if you stay put for long you eventually reach somewhere.Loss leader strategy!
I personally have seen very few real entrepreneurs in e-commerce space, everyone plays the valuation game.
Alok,You have mentioned travel space/MMT petty often but I have serious doubts there too.
1.Airticketing>commissions are very poor and cost of acquisition 2-3 times.Everyone makes losses and some are willing to bleed more .New entrants are wiping away market share by offering more discount.This is bad because you use air tickets to lure in people and sell them high margin products like Hotels and Packages.Established players keep losing the foundation .Any new entrant can come :offer a rs 200 promo code and take away market share , its as simple as that.People do not differntiate amongst portals they just want to book the lowest cost thing.
Packages:High cost of servicing.Human intensive.Low yield.Yet to be automated.
I am not sure if 1 billion valuation are justified for these precariously perched models.You look at the balance sheet of any travel guy , it is struggling to turn a profit even after 5-10 years.The defences are poor against misadventures by the reckless.
Yes , there is sufficient demand and growing but its like sand dunes , it keeps shifting , you cant invest on one piece of land when the sands of demand keep shifting.I would bet on industry growing (its obvious) but not on companies here.Its too risky!
Transaction are increasing, habits are changing but we are putting it on steriods , we want to milk it faster .
We want to suck out 5x transaction wheres the market can only give x.We are in a hurry and we are marrying the companies to the investors too soon.There are bound to be abortions
Sidd.
Amit Lakhotia
My views are a bit biased (am an e-commerce entrepreneur), so please take them with a pinch of salt.
Well, valuations may be speculative but e-commerce is certainly the in thing now. People have really become comfortable booking product and services online. I would take my example itself. I run an online cab rental portal –http://www.GetMeCab.com. For an end user, he gets access to a variety of cab options along with transparency in pricing and convenience of booking immediately. Compare this with traditional way of going to yellow pages/google, finding some operator numbers, calling them and ascertaining the inventory availability and the pricing structure and then making a guess to select the one who sounds most promising, booking online is far more convenient and comfortable. And the last minute haggling on pricing with driver over the hidden charges (night charges, state taxes) etc at end of trip is quite unnerving for a normal traveler. and that is the reason, we get a lot of repeat customers
Yes, a lot of e-commerce companies are throwing a lot of marketing money under the guise of customer acquisition. and some of these companies are bound to fall. That happens in every upcoming business line. That happened in ticketing and that is going to happen in e-retailing too. No one is going to get customer loyalty by throwing discounts regularly. But once the customer is happy with consistency in quality of your delivery, the chances are that they are going to make shopping through you a habit. The discounts are there just to induce the initial customers. Once customer is comfortable with you, you might not have to continue with unsustainable discounts. We have seen this with makemytrip, we have seen this with flipkart in India.
Nishant Agrawal
So true!
These e-commerce sites commanding astronomical valuations are all hollow. People talk about revenues, users, visitors, and not profits. Why? Isn’t business supposed to make profits? What use is a 10,000cr revenue business if it cant generate profits. You might invest in one of these sites, hoping to find a fool who will take the baton from you form a higher amount. But then, the market will run out of fools one day.
The rule of thumb is that a reasonable valuation of a company is 11 times its profits. Just imagine running this formula on one of these startups!
I don’t understand how makemytrip.com is any different. For all it’s valuation – its still a loss making business.
Not every e-commerce site is ebay or amazon.
Its all mostly because of lack of entry barriers.
Snehal Nimje
Good post. Just you need to refactor few points:
1. disposable income has increased like anything – hence more money for pleasure.
2. single item is stupid, but if i do whole months shopping, saves me sweating and carrying.
7. steroids – not always great, but they are used to bring inevitable future faster.
rest all are very entrepreneur, vc specific points.
Amit Arvind
I do agree with the take on most ecommerce startups. But with regards to Healthkart I must bring out that they had products which most don’t stock. I had a running injury due to which I needed a specific support which I could not even get at the QI Physiotherapy Centre(probably the best in mumbai) but got it from HealthKart within a couple of days. A lot of products for sports injuries, fitness etc would probably be easier to buy online than through a shop due to the wider range available.
Srikanth
We’re underestimating the damage these fly-by-night shops can wreak.
Consumers are still unsure of fulfillment and quality [nasty experiences like the one above are not helping]. A few rotten apples will undo the hard work that folks like IRCTC, MMT and Flipkart have put in, and erode the entire industry’s credibility.
While I agree with your opinion on the quality of “entrepreneurship” we find in today’s start-up bunch, don’t you think VC’s deserve a share of the blame for fueling irresponsible businesses?
Ankul rastogi
Pretty Nice article… tough I have my reservations on a few points tough …
E-commerce never took off in INDIA overnight … It was the outcome of need. A need of convenience. The demand spurred it. Rather than a PUSH/PULL thing its more of a DEMAND/SUPPLY.Also regards to funding, you cannot move a rock without money. And people have to fun in putting money in places where they dont their money growing. Its very natural ..Indian E commerce space is going to growing, whether anyone likes it or not. The point is whom you choose your seller to be. Be very careful, everyone here is steal your money. You have to be cautious where you want to spend your money on.
It’s very similar to going to a sabzi mandi … Each vendor has the same vegetables on offer. Now if you go there regulary you figure out who is giving you the best thing at the most reasonable price. Some give you free chillies, free lemon. You dont get lured by them there, then why are u getting lured on the internet space.
Everyone has a right to choose. People choose to start their company, then people choose to fund them. You as a customer also choose.People who cant upkeep will always be left out, close down and move on.
Maybe the author met with the wrong people in business, leading to some wrong perception
Praveen Prabhu
i wholeheartedly agree, no exceptions, the whole point of starting a venture just to sell it to ‘someone’ will never work in the long run! It’s also a pretty stupid way to keep one occupied, if you get acquired because of the value your business has & if you are ready to give your baby for adoption, then its fine i guess.
Pritam Roy
Great post, Alok.
And very entertaining, too. 🙂
Sanchita Dutta
Well sorry to be blunt, but i can list perhaps 16 solid reasons why it will work.
the point is how you look at a glass- half filled or half empty. online selling websites are offering superb disocunts and offers mainly because they are able to cut down on overheads. true there will be far too many me-too ones as well but deservingly, they will with time wither away to oblivion. the last standing ones will definitely bring glory to themselves, the concept as well as the industry
Alok Rodinhood Kejriwal
Sanchita,
Then List them!
Sure, there are nice sentimental and philosophical reasons to support ecommerce, but my article speaks of specific points.
Counter them?
And for the record, sure there will be survivors!
I am a 2001 dot com survivor!
BUT, in retrospect, if someone had written an article in 2000 with the headline ‘Why the Dot Com bubble will burst’, it would not sound silly TODAY would it?
I’m confused about the point you are making.
Alok
Nishant Agrawal
No one is talking about the viability of ecommerce from the point of view of consumers. We are talking about the business model. Flipkart reported a loss of 90 lakhs on a turnover of 12 crores – and its the hottest ecom business in India! $1billion valuation! Any guesses where the discounts come from?
Joe Felix
Err.. Pratik … give us an Indian ecom case as example to your logic [ except flipkart]
Its quite irritating to hear assumptive statements. How on earth are these guys can negotiate a better price than , per se Big Bazaar ?. The logic is that the ecommerce sites, do not have the overheads of a offline retailer and that benefit is passed on to the customer. Most of the time ecommerce players procure stuff at a higher price than the offline players, purely because of the volume game that offline retailers play.
A bit of sarcasm here : The problem with Indian Internet Industry is that everyone with a gmail account or a blog thinks that he is part of Industry and starts giving dotcom lessons. I personally suggest most of you MBA students/freshers to give opinion only if you have seen it happening and not reading it in medianama or alootechie :
Sanchita Dutta
Alok,
can. For each of points u mentioned. But will be an article in itself.
i think only certain websites with apt name like sastalo.com is selling the item u mentioned in ur 1st point. most reputed ones sell only Branded MFr Warranty items with Moneyback guarantee. wud hav seen flipkart ad 4 sure
Push-pull point is out of place and exaggerated. no one sells or buys hair colour. or even if someone, there is always that lazywood wud love to wait for a few days to receive it at his door than to go to kirana store. for others lower prices and delivery within 2-4 days is a good deal
Build-sell i agree, but then u wud never hear about sell types as they will be gone long b4 anyone can notice them. for build types, most should exist as they do today…snapdeal, flipkart, letsbuy, myntra R making money
Country/Theme issue is also incorrect. VCs r back cos economy is looking up, Internet penetration is looking up and mobile internet and banking is on verge of explosion. also websites other than e-commerce dont need to shout on rooftops hence we dont hear bout them
Trust me a large part of VC funding goes in SHOSHA!!! Not required! u only need to keep ur growth measured. dont have to be a shooting star.. dont have to try to be another amazon. is the Kirana store at the corner of ur colony making money? well then u too shud, cos it is possible to keep costs lower than his. u being a pro/ex-pro wud appreciate
Add Cowboys into SHOSHA group. also u wud never hear bout them..they will deservingly burn out far too fast
Pt 7, if the VC money is going on discounting below cost price, then both the VC and the Cowboy need to BURN. let customers enjoy as long as party lasts. But smarter ones are sourcing cheap and selling cheap and making money in between.
Again, those who have foolish money deserve to lose. so if they buy valuation without profits, its ok with me and wid every1 else. no sweat. money only changing hands. also Darwin’s laws will be at play. Fools n Weaks will perish and the smarter ones like flipkart, ebay will live….
well that answers ur 8 points. tried to economise words as much possible 🙂
Also plan to soon request you to allow me write as guest writer (perhaps rebutting one of ur pet topics 😉
BTW: I buy stuff fm same place fm where flipkart guys buy. certain products. your eyes will pop out if i tell you the price differential between MRP, Tata Chrome prices, flipkart and “we dealer” prices 🙂
Joe Felix
Alok , I personally beleive that the traditional retail chains [ with widespread network across the country/region] are well placed to play the ecommerce game than the “boys” who are jumping into the game. Unfortunately , these large format retailers go to their digital agency for advise and to build the infra. This is exactly where they fail. So , most of the traditional retailers fail to take off.
Else , the offering has to be unique and not very accessible in the real world. But we don’t see many such initiatives . This is where the game becomes shady.
I also want to point you towards Rocket Internet , Germany who’ve mastered the art of building and selling sites to global leaders. But again , these guys are god level guys in terms of execution , whereas the the guys who wanna build and sell in India are basic internet users turned wannabe entrepreneurs with exit strato as end goal.
Alok Rodinhood Kejriwal
No one buys Hair Color?
Well check this
I wrote this article just now for u!!
https://www.therodinhoods.com/forum/topics/omg-i-just-figured-google-is-actually-an-e-commerce-site
Alok Rodinhood Kejriwal
hey, anyone can write on therodinhoods!
Just Hit ‘Add Discussion’ and viola! ur live!!
Amit Arvind
“Croma”
Sanchita Dutta
Stand corrected. thanks Amit
Sanchita Dutta
where did u get this info about Flipkart. they are not even a public company and hence not obliged to declare their financial results. hence there is no way to get the details of their finances.. How did u get then?
and i doubt if they r losing money. cos their turnover has grown substantially and they really did not crash down thier prices
Ashutosh Goyal
Point 3 Makes all the difference….Build V/s sell:
The point is not just to build crap (read fluff) but build something to last.
The problem with build to sell is that when u want to sell (and today it seems that it is from day 1 that people want to sell hoping their lucky number has been chosen even before they bought the ticket!) there may be no takers.
Whereas…
With build to last, you may not really want to sell when there is someone knocking on your walls to buy.
And that’s what is going to separate real businesses from…….
Alok Rodinhood Kejriwal
Sanchita – ever heard of the Registrar of Companies?
Even Pvt. Ltd Companies balance sheets and P&L’s are available.
Its the RTI (Rights to Information) act.
Alok Rodinhood Kejriwal
Felix, you have said and indentified the MOST MOST relevant point in this long post.
You know? I completely agree when you say that these Brick and Mortar companies have no execution capabilities yet.
But guess who will they BUY when Humpty Dumpty begins to wobble?!
W B
Joe’s point is golden. Something that we discuss a lot amongst our friends as well.
End of the day, e-commerce is one more channel of sales, its like having a card swipe machine for your shop – an additional mode of collecting payments other than cash. The day these brick and mortars start e-commerce initiatives, they will beat these wannabes hands down because:
I know those arguments of having lower infrastructure costs and shared logistics … you cannot chipkao-fy those arguments from abroad to here, just because you have some stake in these dot gones. Even Amazon was a loss making business till 2002. Not everyone can keep standing after 6 years and continued losses, unless your sugar daddy VC is still there for you. Mostly not. For every Amazon left standing, there are many dot gones like webvan, fatbrain, pets.com … the list is loooong.
In a business, there is a difference between spin and reality. Save the spin for outside, but the day you believe it yourself, the delusion will start forcing you to make bad business decisions.
Nishant Agrawal
https://articles.economictimes.indiatimes.com/2011-08-17/news/29896669_1_e-commerce-private-equity-creative-accounting
Its what they filed with the RoC
They must have grown profitable by now. But come on, which retailer reports a negative margin of 10% or sales of 10 crore? Does that sound like a viable business model?
Going by the rule of thumb, a justified valuation is 11 times the profits. Considering flipkart’s 5000 crore valuation (the article says its nearing 15,000), they need to churn out a profit of 500 crore every year. Their NP margin, say, is 10% when their t/o grows. So they would need an average t/o of 5000 crores over the next 11 years to justify their valuation.
Deepa Kumar
Other costs that e-comm sites are absorbing into the system
The logistics companies need to be paid. Its FREE shipping for the customer, but not for the e-comm companies.
COD- And again the best quote I have got for Cash On Delivery from any of the better logistics companies is Rs50 or 2% of invoice value. And then if its COD, you better call the customer before you deliver, which means the cost of a call too.
And for a product company which wants to use the e-commerce model and make profits, it gets real tough.
Because the customer asks for FREE SHIPPING, COD and “WHAT OFFERS ARE YOU HAVING NEXT”
Kamlesh Pant
Alok is a seasoned guy in the start-up space. While this is a well-timed article, it’s laden with a dose of pessimism. Definitely, there are more optimistic “Rich Stupids” out there who are and have been fuelling the growth of such sunrise industries, knowing fully well the high risks involved but betting on the upside.
Although I am personally not too bullish on the ecommerce scene in India, some winners are bound to emerge. There are companies creating real value and some of these 2012 cowboys will make Alok write praises for them just as he is doing for Deep today. Hindsight is 20-20.
With due respect to Alok’s expertise, let me submit my humble rebuttals:
1. PAIN vs PLEASURE
Aren’t your games sites for pleasure? Don’t they have an addiction quotient? Don’t users come back? Can’t non-gaming “pleasure” have at least some addiction value (and may be some real value too)?
2. PULL vs PUSH
In the first place, how much can an ecommerce company REALLY push someone to buy a product or service? Secondly, are you saying push doesn’t work? Or that “pushed” customers won’t come back? There’s always a first time a consumer has to use a product or service to understand the value. What about latent needs, of which ipod – and more recently tablets – are classic examples. Even selling such a valuable product as insurance involves good amount of push to win first-time customers. May be you’ll start liking that hair color once you use it. Push is what much of FMCG is thriving on.
3. BUILD vs SELL
Agree with this one. A business started with a plan to sell out is its own enemy. But not all 2012 businesses are beginning with a sellout in mind. May be longevity is the plan and sellout, just an eventuality.
4. COUNTRY vs THEME
“Oh yeah, we don’t have an e-commerce play, so let’s invest in a couple of Companies”. Why shouldn’t VCs diversify? Especially if it takes rather small amounts of investment (a few million dollars) to acquire a stake in a potential survivor and subsequent winner.
In some cases, IT, BPO, Biotech, Healthcare have been been “thematic” bets, and not purely “Country” bets. But they played out well in the long run. Off course there too, impatient investors lost their birds in the bush.
5. SERIES A vs SERIES E
I fail to understand why 2012 e-commerce sites will never get refuelled. Series B and subsequent funding can only follow Series A funding which in most cases has happened only recently. Flipkart started early so they have secured more rounds of funding already. For one, I’m predicting that FirstCry will raise more funding.
6. ENTREPRENEURS vs COWBOYS
Nothing succeeds like success. “Cowboys or successful entrepreneurs?” can only be determined in hindsight. Some entrepreneurs will succeed and many will vanish. That’s in keeping with the accepted norms. Yes, the failure rate in ecommerce will be higher owing to low entry barriers. It’s time we accepted that as a fact, too. And what’s so inauspicious about being a “2012 entrepreneur” :-). You have to give the 2012 jokers of ecommerce their due time. After all, as you rightly said, it took 12 years for Make My Trip to make their vision a success.
7. PRICE vs PRIZE
Agreed. But eventually, only customer experience and convenience will drive the growth and price though important, will become secondary.
8. VALUATION vs PROFITABILITY
Yes, some metrics being used are plain fancy. In an ecommerce business, what matters is returning customers and repeat orders. But regarding value creation, if a FirstCry is free-shipping a Rs. 699 MRP Mamy Poko directly to me instead of shipping it to a store, and charging me just Rs. 594, that’s value-creation not only for me but in absolute terms. In fact tomorrow, I would buy it at MRP for the sheer convenience it renders. Why lug the huge packet from an easyday into my car?
[ Disclaimer: I have no interests in FirstCry 🙂 ]
In the whole article, the imperative of winning by creating superior customer experience both online and offline, has been overlooked. Over time, that’s what will be the core competency of these ecommerce businesses. A similar phenomenon took place in the mobile service provider space, with the network infrastructure and technology getting quickly commoditized. Over time, the price advantage ecommerce offers will not be the primary driver luring consumers to buy online.
Finally, what about the long tail in numerous categories that only online portals can cater to. What about the Tier2 and Tier3 towns that don’t have a Bose showroom to capture the WTP (Willingness To Pay) of its music enthusiasts; and this Tier2 and Tier3 market is much bigger than just a bunch of music lovers. Even a physical store in metros and Tier1s can’t maintain an inventory of all colors, textures, flavors, and configurations.
The ecommerce bubble in India IS likely to burst but there may not be EIGHT reasons for that. The reason may prove to be the failure of these startups to build a robust supply chain and distribution network, which Amazon and Flipkart did successfully.
Alok Rodinhood Kejriwal
And here are my replies:
Reply by Kamlesh Pant 18 minutes agoDelete
Alok is a seasoned guy in the start-up space. While this is a well-timed article, it’s laden with a dose of pessimism. Definitely, there are more optimistic “Rich Stupids” out there who are and have been fuelling the growth of such sunrise industries, knowing fully well the high risks involved but betting on the upside.
Although I am personally not too bullish on the ecommerce scene in India, some winners are bound to emerge. There are companies creating real value and some of these 2012 cowboys will make Alok write praises for them just as he is doing for Deep today. Hindsight is 20-20.
With due respect to Alok’s expertise, let me submit my humble rebuttals:
1. PAIN vs PLEASURE
Aren’t your games sites for pleasure? Don’t they have an addiction quotient? Don’t users come back? Can’t non-gaming “pleasure” have at least some addiction value (and may be some real value too)?
ALOK – AND GAMES AND E-COMMERCE ARE THE SAME THING?
WOW!
2. PULL vs PUSH
In the first place, how much can an ecommerce company REALLY push someone to buy a product or service? Secondly, are you saying push doesn’t work? Or that “pushed” customers won’t come back? There’s always a first time a consumer has to use a product or service to understand the value. What about latent needs, of which ipod – and more recently tablets – are classic examples. Even selling such a valuable product as insurance involves good amount of push to win first-time customers. May be you’ll start liking that hair color once you use it. Push is what much of FMCG is thriving on.
ALOK – PUSH WORKS WHEN A GOOD IS AN IMPULSE PURCHASE LIKE A COLA
OR A HIGH VALUE ITEM LIKE A CAR
OR EVEN A HAIR COLOR WHEN THE COMPANY MAKING IT FOR RS 95 SELLS IT TO ME.
BECAUSE??
MARGINS!
LOREAL MAKES 50 BUCKS ON THE RS 95 PRODUCT – NOT A LOSS OF 90 BUCKS (IF YOU CALCULATE THE NET NET COST OF PEPPERFRY SENDING IT TO ME)
3. BUILD vs SELL
Agree with this one. A business started with a plan to sell out is its own enemy. But not all 2012 businesses are beginning with a sellout in mind. May be longevity is the plan and sellout, just an eventuality.
4. COUNTRY vs THEME
“Oh yeah, we don’t have an e-commerce play, so let’s invest in a couple of Companies”. Why shouldn’t VCs diversify? Especially if it takes rather small amounts of investment (a few million dollars) to acquire a stake in a potential survivor and subsequent winner.
In some cases, IT, BPO, Biotech, Healthcare have been been “thematic” bets, and not purely “Country” bets. But they played out well in the long run. Off course there too, impatient investors lost their birds in the bush.
ALOK
THIS IS NOT ABOUT EVERYONE DYING.
THIS IS ABOUT THE DONKEY VC’S WHO WILL FAINT WHEN THE BUST COMES
BUT WHEN 3 E-COMM GUYS DIE IN FRONT OF US, ALL WILL PANIC
5. SERIES A vs SERIES E
I fail to understand why 2012 e-commerce sites will never get refuelled. Series B and subsequent funding can only follow Series A funding which in most cases has happened only recently. Flipkart started early so they have secured more rounds of funding already. For one, I’m predicting that FirstCry will raise more funding.
ALOK – WHY DID TAGGLE.IN SHUT DOWN?
6. ENTREPRENEURS vs COWBOYS
Nothing succeeds like success. “Cowboys or successful entrepreneurs?” can only be determined in hindsight. Some entrepreneurs will succeed and many will vanish. That’s in keeping with the accepted norms. Yes, the failure rate in ecommerce will be higher owing to low entry barriers. It’s time we accepted that as a fact, too. And what’s so inauspicious about being a “2012 entrepreneur” :-). You have to give the 2012 jokers of ecommerce their due time. After all, as you rightly said, it took 12 years for Make My Trip to make their vision a success.
ALOK – HAVE U MET SOME OF THESE PEOPLE YOURSELF?
I HAVE!
ONE GUY THINKS THAT MAKING SLICK TVC’S AND ‘BRANNNNDDDDING’ WILL MAKE HIS E-COMM SUCCESSFUL.
HE IS NOT JUST THE COWBOY – HE IS THE COWBOY WHOSE BRAINS FELL IN THE WELL
7. PRICE vs PRIZE
Agreed. But eventually, only customer experience and convenience will drive the growth and price though important, will become secondary.
8. VALUATION vs PROFITABILITY
Yes, some metrics being used are plain fancy. In an ecommerce business, what matters is returning customers and repeat orders. But regarding value creation, if a FirstCry is free-shipping a Rs. 699 MRP Mamy Poko directly to me instead of shipping it to a store, and charging me just Rs. 594, that’s value-creation not only for me but in absolute terms. In fact tomorrow, I would buy it at MRP for the sheer convenience it renders. Why lug the huge packet from an easyday into my car?
[ Disclaimer: I have no interests in FirstCry 🙂 ]
In the whole article, the imperative of winning by creating superior customer experience both online and offline, has been overlooked. Over time, that’s what will be the core competency of these ecommerce businesses. A similar phenomenon took place in the mobile service provider space, with the network infrastructure and technology getting quickly commoditized. Over time, the price advantage ecommerce offers will not be the primary driver luring consumers to buy online.
Finally, what about the long tail in numerous categories that only online portals can cater to. What about the Tier2 and Tier3 towns that don’t have a Bose showroom to capture the WTP (Willingness To Pay) of its music enthusiasts; and this Tier2 and Tier3 market is much bigger than just a bunch of music lovers. Even a physical store in metros and Tier1s can’t maintain an inventory of all colors, textures, flavors, and configurations.
The ecommerce bubble in India IS likely to burst but there may not be EIGHT reasons for that. The reason may prove to be the failure of these startups to build a robust supply chain and distribution network, which Amazon and Flipkart did successfully.
Kamlesh Pant
Alok, all I can see is empty space after your “And here are my replies:” What am I missing here?
Alok Rodinhood Kejriwal
u cant see the CAPITAL LETTERS? i see them here…
Alok Rodinhood Kejriwal
ah now ….
Amit Arvind
actually..nor can I..
Alok Rodinhood Kejriwal
Not now
Sanchita Dutta
WB, you r so out of times, i cant explaine 🙂
I sell online on ebay.in. about 800 items pm. all IT related. prices ranging fm 32 to 72000.
Guess who constitutes my major buyers? its the small town, far flung places where perhaps even electricity is erratic and roads are broken. But they get an item, Free of shipping charges at a price which you will perhaps wont get in Lamington Road if u r fm mumbai or Nehru Place if ur fm Delhi
Such is the business model. Not boasting, but its simply true. items are sold by manufacturer loyalty and not shop loyalty. trust me even a Mercedes Hopping Style Bhai will run to the shop next door if he gets same brand a little cheaper. seen with my own eyes such ones haggling for prices which will put even the hardened housewives to shame. Point loyalty to brand and the lowest prices remain
Feel n touch is gr8. so do it in the mall next door and then buy online a couple of grands cheaper. thats the smarter way which many are already doing
if you r the type who loves to give dressing down, perhaps the online sellers would not want you with them (in the lighter vein). on serious note, this whole line of thinking is negative and incorrect. so i feel
Indians buy a lot. only a small fraction is shifting online. but there are so few players there that all thier plates are already full
Haggling, bargaining DOES NOT make up for the discounts online. its the truth. Challenge me with a product n best price, will show cheaper same one at a reputed online store
Most reputed ones are v careful bout online reputation as its much more fragile. i have written a full fledged article on my website http://www.gizmobhai.com on the same. the link to it is https://www.gizmobhai.com/2011/11/making-a-living-on-ebay-part-i/ . in brief, online reputation is very hard to build and very easy to break. exactly opposite is brick n mortar reputation. so where is the buyer more protected?
Comparing Online Stores especially big reputed ones to Ponzi schemes simply does not make sense and hence cannot be commented upon.
PS: I dont have a up and running online business other than what i sell on ebay.in which is almost free to sell and remains that way all through. But yes how Online business can be run cheaper there are ways to do.. for which i will be writing soon here 🙂
Sanchita Dutta
i did, when i was registering my company. but yes i did not realise the data of unlisted companies will be available there 🙂
Sanchita Dutta
Hey Alok, i was just reading ur article “Cash is King”. Dint realise you are the Legendary Alok “Contests2win” Kejriwal. High salute to you and i dare not pick up a fight with someone whom i idolized from the days i was in college. I am happy to know you “somewhat personally” through these interactions. Best Wishes.
PS: Exchange of ideas on strong note to continue notwithstanding for i like you do have strong feelings about issues close to heart. Also surprised to see the article coming from you who had built perhaps the first immensely successful online empire back then!!
Nishant Agrawal
I’d love know the accounting practices of these ecomm start ups. I’ve heard they capitalize advertisement expenses to show inflated profits in the initial years. Advertisement brings them permanent customers, they say, which are their ‘assets’. Assets – maybe, but fickle ones. At least on the internet.
Inflated profits = more investors.
Alok Rodinhood Kejriwal
:-))) honour to know u too
W B
Sanchita,
Valid points by you. Especially related to fragile reputation for sellers online. We used to buy from ebay a lot, after my bad experience, we stopped. More than a specific seller, I was angry at ebay India for letting me down. I never had this fear of shopping online when I lived in the US a decade ago. I have shopped from all kinds of sites there and I do know the advantages of shopping online. But in India, my fear was justified because one bad seller ruined it for me.
I may not have come across with clarity. Maybe you should read my previous post as well.
I dont believe that eCommerce in India is a no-go. Or that it is not viable.
My point has been that the sites which sell online using a loss-leader strategy, blindly imitating Amazon’s initial loss-leader strategy – these sites are not viable.
eCommerce is viable, you are proof. A 1 crore funding for a budding business like yours will propel it really forward. Surely you can grow it bigger and return 3x to 5x to a VC in 5 years time.
But can you really take a good IT peripherals online store to a level where you can now absorb 25 crores in funding and return them 100 crores in 5 years – difficult right ? The difficulty is not in your capability, which I am sure is very good, the difficulty is in whether the market is indeed so big and can you really get that big chunk of a market share. Especially when newer cash-loaded punters enter the market with the sole aim of selling at a lower price than you, just to gain “traction”.
This is the problem that I am talking about with the present funding inflow into all types of dot coms, most of which are being started by tech guys and not business people. A traditional retailer who steps into eCommerce in India, with a limited funding, will surely have a profitable business in 1 year than a techie wannabe.
I think Alok’s post once long ago made a lot of sense to me – not every business is venture fundable – that does not make it a bad business at all. VCs look for a different type of returns – 3 times to 5 times minimum, 10 times preferably within the next 3 to 5 years. See my previous post in this thread for a valuation and sales example highlighting that this will be near impossible for some of these companies. Especially when new ones jump in the fray everyday.
eCommerce initiatives, especially targetting large value electronics items – difficult to gain traction. I stand by my arguments. The risk amount per transaction is high for an average customer. Of course, we can agree to disagree. And – I do know how to source IT peripherals at a cost lower than eBay, have been doing it for the last 2 years now – check prices on ebay, go to the electronics wholesale street in my city and get it from a good seller there. But yes, not everyone may have the time or inclination or urgency to do this regularly 🙂
So, to summarize, an eCommerce initiative with modest funding and non-steroidal ambitions will succeed in India, especially in niche verticals. But over-funded dot gones with monthly TV ad budgets of 2 crores to 5 crores are ponzi schemes, waiting for a bigger bakra.
Unless a business makes a profit and till it survives on a bade baap ka paisa, it is not the very best of ideas – the day the VC pulls the plug, that day it unfolds.
Good luck with your ebay store! Think bigger, you will achieve your goals, especially if customer trust is your core value.
Sai Rodinhood Pothuri
well… learnt a lot thanks for sharing
Thanks
sai