E commerce has been a discussion point since its inception. We have a bunch of small players, another handful which have shut down or are on the martyr’s road and the others which are still struggling. Of course, it’s been almost a decade since it started coming in the news and well, it’s now an industry. And as industry cycles go, questions are being asked about profitability. We need to dive into the basics to understand what’s really happening.
What is e commerce?
It’s essentially selling stuff online and delivering it to end user at a place of their convenience. Yes, it’s that simple at the surface. But every iceberg is small compared to what’s beneath. And beneath the surface, a lot goes on. For this analysis, we will stick to products only and exclude services as that’s a whole different and of course, growing ball game.
The iceberg below the surface.
There is the online store which is the face of it. With products, contract negotiations, seller information, inventory, offers, banners, categories, kart, checkout, order tracking and suggested goods (read analytics!).
Then comes the whole seller side which includes KYC, product information, inventory, order tracking, cash flow, refunds, quality checks and a lot more.
The logistics is another machine with moving parts like packaging, transportation, order tracking, delivery, order cancellations, reverse logistics, quality and product scanning (if not accepted by the seller!), payments etc.
The customers are another angle with discounts, emi options, customer behaviour, marketing, feedback, call centre’s etc.
All this is to be supported by technology which makes intelligent decisions, manages processes better and learns.
As you can see, each of these is brach of a tree (or roots!) which goes on endlessly and all of this needs to function seamlessly to provide actual value and an experience which the customers love.
As you can see, for a small set up, the work is pretty simple and quality can be controlled as there are a few people to manage. It’s when the size increases, the problems stemming from the complexity start. It’s not as simple as it looks to focus on a 2 square km radius in a city and provide niche products. It get’s tougher when the delivery service area becomes a country or when the categories explode. And in an industry driven by GMV (Gross Merchandise Value), the focus on profitability is lost.
Why is GMV the core metric?
To answer this question, it’s important to understand a simple fact which is best illustrated by a simple story.
Once there was a businessman king who owned all businesses which existed in the world. Something like the legend of the Rothschild group. Now he owned few businesses directly and some of them were competing. Something akin to the illusion of choice – like Pepsi and Coke. Each of these businesses operated independently and therefore, differently, and the King allocated capital basis performance. This ensured competition and growth.
As Birbal, our intelligent Chief of the ministers, analysed the performance, he saw that all his product and services businesses were spending a lot of their capital on marketing and real estate – rents to shops, advertising space, ad’s on televisions and newspapers, discounts and offers to customers etc. etc. Each business had inventories stacked up and had excess space in warehouses.
He soon realised that almost 40% of the business cost was spent on such activities and it was all going to the people in the marketing business primarily. Birbal, being intelligent, thought – what if we collect all the products on one platform, market that platform and deliver the products to the customers house. He did the maths and realised, that by combining all these activities of all the businesses of the King, the total expense would be around 10-15%. Which currently stood at 40% for each business.
So even if this new business never made money and was always operating at a loss, overall the king would be saving about 20-30% and giving marketing cost away for only 1 business. As all products existed on one platform, people and competition would automatically flock to it. And they could always fire the employees as their pay checks grew fatter as the profits would never be there***. If this new enterprise broke even, it would be an additional 10-15% for the King. And the King only wanted to know how many products were sold.
And if we look at the current scenario across the world, you will see only one metric by which the success of any e-commerce player is judged. Its GMV.
Is this true?
It could be. From a macro economic perspective, it makes perfect sense. The customers get the products home delivered, the King(s) benefit and real estate space is now only required for branding which is good as the population of this world is large. In India, you see big giants like TATA’s (in the news recently for other reasons!), investing in this space. A number of people would have read this behind the curtains logic as eventually, if the money runs out, it will be replaced by those who are selling products in the market.
Is there space for competition?
Not really, unless you are a niche player which focusses on products which require more effort to get on board and have a small market and even then, not in the long run. Not being in the top (first or second!), is essentially a small time game with decreasing probabilities of profits or rising in the long run. Mostly because, the moment the you grow big – either you will be acquired or the big sharks would enter the category. And the latter seems more probable, as the sellers are only selling on your platform as they are not getting attention from the bigges just yet!
Future: An opinion, which could be right or wrong.
In the long run, economics takes over and many such Kings will come up which will push down the product prices, reduce the real estate costs and bring efficiencies in logistics. (Rise of firms like Delhivery). Which is good from an economic, environment and customer point of view. But this will be gradual and till then, the Business Kings, will reap extraordinary profits.
Varun Bhutani is the Founding Director and CEO of SamayLa, a communication system which creates time by bringing in efficiencies in enterprise communication.