E-commerce in India – The Road Ahead

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“Come Watson, come! The game is afoot.”
– Sherlock Holmes

On May 9, Walmart Inc announced its acquisition of 77% stake in Flipkart for about USD 16 billion in the largest e-commerce deal yet. Out of this USD 16 billion, USD 2 billion will be in the form of new equity funding, while the rest would go to Flipkart’s existing backers. Walmart also stated that it is in discussions with additional potential investors who may join the round.

Here is what the e-commerce market in India looks like right now.

Source: Forrester Research

Walmart, having seen Amazon take it apart brick by brick in USA, is keen not to lose relevance in the Indian e-commerce market which is projected to show exponential growth. With Walmart’s investment, Flipkart now has a cash pile of USD 6 billion which it can put to good use competing with Amazon. But lest we forget– Amazon India has around USD 2.5 billion left from Jeff Bezos’s announced commitment for the Indian market. Of course, both Walmart and Amazon are cash flow generation goliaths and capital would not be much of a worry, atleast for the foreseeable future.

While more cash would mean more investment in infrastructure and logistics, it would also mean more of what led to Indian consumers warming up to e-commerce in the first place – Discounts.

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Between a rock and a hard place

While there is no denying that Indian e-commerce could potentially be a huge market, there is also no denying that it has been a huge sink hole – with billions of dollars spent (mostly on discounts) and no end in sight. With collective investments of more than USD 15 billion already made, the collective retail sales value of the market is also just around the same number.

The e-commerce landscape is closely resembling a game of Prisoner’s dilemma where two sides are led to take an action (here, deep discounting) which is against their mutual interest. The pay-off matrix of Prisoner’s dilemma suggests that the best course of action for the agents is to co-operate (here, stop deep discounting). It’s a tough act to follow though, with the players trying to get market share in a common market space. If both parties pursue their own interests exclusively and do not co-operate, the outcome is worse for both of them; yet in any given situation, any given party is better off not co-operating

But what if Amazon and Walmart (Flipkart) decide to co-operate? What if they say enough (discount) is enough and focus on just reasonably low prices (which would be enough to draw consumers in) rather than undercutting each other? Looking at the projected growth of e-commerce in India, it is reasonable to assume that the size of pie is large enough for both players to exist meaningfully. An analogy can be drawn with the cola giants – Coca Cola and Pepsi. They seem to have an implicit co-operation in place – while they often compete in terms of marketing, they rarely compete on price. However, the cola market lacks one key ingredient which e-commerce has – Network Effects. Increased number of buyers on a platform leads to higher number of sellers on that platform, which in turn leads to higher number of buyers and so on. This makes the e-commerce market a ‘Winner takes Most’ market if not a ‘Winner takes All’ market. Hence, neither Walmart nor Amazon is expected to relent when it comes to discounting to increase their Gross Transaction Values.

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Way out?

So while both sides compete on price, in order to emerge as the winner, they would also have to do something else in conjunction, something which gives them a competitive edge over the other.

Pillar 1: Building customer loyalty

In his latest letter to Amazon’s shareholders, Jeff Bezos revealed that Amazon Prime has crossed 100 million subscribers globally, 13 years after it was launched as a free shipping service. Over time, it has morphed into a gigantic customer loyalty program, with added benefits like Prime Video, Amazon Music etc. Morgan Stanley, in a report released in 2017, estimated that 51% of American households would be Amazon Prime subscribers (atleast one family member having the subscription) in 2018. Further, Prime subscribers on an average have a much higher spend on Amazon than non-prime subscribers. Prime has been a huge success in India too, with more than 11 million subscribers. In fact, India has been the fastest growing market for Prime subscriptions. Amazon India has stated that 40% of its orders come from Prime customers.

In Dec’17, Flipkart piloted ‘Flipkart First’, its subscription-based loyalty program (An earlier attempt was made in 2014 but it fizzled out pretty quickly). While not much progress has been made yet, it is quite possible that with Walmart’s backing, Flipkart might launch an aggressive loyalty program which would take on Prime.

Pillar 2: Aggregation – Becoming a one-stop shop

As part of its loyalty program, Flipkart was reportedly in talks with several internet companies including MakeMyTrip, BookMyShow and Ola for potential partnerships. Taking a leaf out of WeChat’s model in China, Flipkart is looking to build a ‘super app’ by aggregating several services alongside its shopping and payments verticals.In 2017, Flipkart sought the insurance regulator’s approval to act as a corporate agent to sell life insurance and general insurance online. While not underwriting the policies itself, Flipkart would offer end-to-end services such as discovery, payment, delivery and post-sale services. Flipkart is reportedly in talks with several financial services firms to co-create mutual fund and insurance products and act as a distributor.

Amazon India is also adopting a similar strategy. It recently invested in Acko, an online insurance services provider, to co-create financial products and act as a distributor. It has also invested in Capital Float, a digital lending firm and BankBazaar, an online financial services portal.

Pillar 3: Targeting Bharat, going offline

Till recently, Amazon and Flipkart have mainly focused on the Tier 1 geographies. With certain markets quite saturated, the next leg of growth will come in from smaller towns and villages. Amazon India stated earlier this year that 85% of its new customers are coming from non-metros. Reaching consumers in smaller towns is a different ball game altogether and innovative methods would be needed to serve this market successfully. Both Flipkart and Amazon have leaned on offline collaborations for last-mile delivery.

Even in urban and semi-urban areas, both Amazon and Flipkart could look at co-opting kirana stores as partners. These channels will be supplied goods and will serve as an offline channel to complement the online channels. Here, Walmart’s expertise in setting up supply chains for physical retail could provide a significant advantage to Flipkart. Walmart already has its B2B cash and carry business (Best Price) operating in 19 states and turning in revenues of around INR 4,000 crores. Amazon isn’t too far behind – it is reportedly in advanced talks to buy a minority stake in Future Retail.

One of the key success factors of this strategy would be digital payments. PhonePe, Flipkart’s in-house payments company, could be used to provide point-of-sales terminals to these stores to process card payments as well as provide integration with Flipkart’s backend infrastructure for inventory management. PhonePe could also be used to provide short-term working capital financing to these kirana stores. Amazon India has also been investing heavily in its digital payments arm and other fintech players.

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The Dark Horse

But in all this discussion, we have missed out one key player who has been making several strategic moves – all geared towards beating Flipkart and Amazon at their own game.

Paytm. More specifically, Paytm Mall, the online marketplace

In Apr’18, Paytm Mall raised close to INR 3,000 crores in a funding round led by Japan’s SoftBank, along with participation from Chinese e-commerce giant Alibaba. As per reports, post this funding round, SoftBank Vision fund will hold 21% and Alibaba & its affiliates will own 46% stake in Paytm Mall. (With Softbank exiting Flipkart post the Walmart deal, it might be open to investing even more over the next few years.)

However, Paytm Mall is not the only investment Alibaba has made in Indian e-commerce. It has invested USD 200 million in Zomato, led the USD 286 million funding round of BigBasket, invested USD 100 million in XpressBees Logistics apart from its significant investments in Paytm, the leading digital payments service provider in India today.

This series of investments in payments, ecommerce and logistics forms the ‘iron triangle’ of businesses which Jack Ma (Alibaba’s founder) believes can feed off each other.

Alibaba is reportedly taking over the operations of Paytm Mall. Once it does so, it can integrate and bring to fruition all the investments it has made over the years to provide an aggregation of services. It won’t have to look too far for customers – Paytm has 180 million customers (and growing). Further, UC web browser, owned by Alibaba, has more than 130 million monthly active users in India, mostly in Tier 2 and below areas (which forms the bulk of the target market of Paytm Mall).

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In Lewis Carroll’s book ‘Through the Looking Glass’, there is a scene where Alice and the Red Queen are running constantly but still remain in the same spot. The Queen says to a perplexed Alice – “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

E-commerce companies in India would certainly be finding themselves in a similar position.

Author | Arpit Lahoty