What does the Flipkart acquisition of LetsBuy mean?

Let’s look at the facts first

1. Flipkart, India’s most successful eCommerce company and definitely the most talked about, reportedly worth $1 Billion, acquired one of its biggest competitors LetsBuy for a reported amount of $25 Million to $30 Million (Cash and Equity).

2. Letsbuy, one of India’s top eCommerce companies, with an approx topline of 15 Crore per month, was looking at raising another round of funding but just could not.

3. Flipkart has been funded to the tune of $ 150 Million and LetsBuy received around $6 Million.

4. Both of them were funded by Multiple VCs. Tiger Global and Accel Partners were common VC firms.

5. Flipkart, though known for its Books category, offers multiple categories and Letsbuy concentrates primarily on consumer electronics.

6. This is Flipkart’s 4th acquisition of a startup, but its first of a competitor.

 

What does it all mean?

Consolidation – Over the last 3-5 years a number of eCommerce companies have sprung up almost out of nowhere. Moreover a number of offline players are also getting into the online space. Sites often indicate that it takes less than Rs. 1,00,000 to set up your own eCommerce site. With a number of entrepreneurs jumping in to build sites, offering categories across the spectrum, to super specific niches, to weird things which you may never want to buy, the era of unchecked eCommerce proliferation has reached a certain inflection point. The acquisition of a fairly ‘Successful’ eCommerce company which has visibility on TV, Radio and other mediums, just like any other national brand, means that it will now take more than just great topline to convince your investors and others for further rounds of investment. Lets be clear about this, LetsBuy was acquired (in part) because it and Flipkart had common investors and they wanted greater scaling up of Flipkart’s business. But the real kicker was the fact that despite impressive exponential growth and topline, existing investors of LetsBuy just did not think that another round of investment was a great idea. A squeeze on investment funds and requirement of exits will lead to consolidation in the market.

2. Changed funding dynamics – Venture Capital money is now going to turn smarter than what it was before. Startups which are general or broad category players, will find fresh funding an issue to deal with. Since new VC money is limited in supply and now looking for a few quick exits, the bet is that acquisition worthy targets, like startups which help in the process or transaction of eCommerce, specific/niche category eCommerce players, logistics players, Warehousing etc will be of great interest due to the intense scaling up requirements of the eCommerce ecosystem. So no more blind funding, though the famous herd mentality of funding certain startups is expected to continue.

3. Development of an ecosystem – A natural progression of the above point, it means that Startups like Chottu (End mile logistics players) will start supporting and creating an entire eCommerce ecosystem. We may soon see eCommerce Social Media, warehousing, SEO, GUI etc startups, which essentially take a small yet important bit of the eCommerce ecosystem and make it better than what it already is. This will lead to greater value and efficiency for major eCommerce firms. This in turn will lead to greater value and experience for the end customer leading to exponential sales in the future for established Ecommerce players.

 4. Competitive mindset – Till now eCommerce and other startups in general, considered the ability to capture the market, scale up and deliver products/services to customers as their biggest challenge. In short, their own ability and the lack of market infrastructure was ‘Competition’ for most. However with the substantial growth in the number of ‘big brand’ startups (Snapdeal, Myntra, Fashion&You, Flipkart etc) over the last couple of years and an aware, value conscious consumer set, this is leading to inter-startup competition of sorts. This is a great sign as now Startups can’t just hope to survive on building and tweaking the same mousetrap. They will have to reinvent the mousetrap or find a better way of killing mice altogether.

5. VC exit issues – It’s a fact, that with the volatility in the economic scenario and no great history of exits for the Indian Venture Capital market, VCs are looking at results in the short term to get the money in from investments made over the last few years. Since no major Startup is anywhere near an IPO, acquisitions are seen as the way forward.

6. Reality Check for Startups – You can have great topline and yet not get funded in the next round. VCs may force you to sell out if they don’t see an exit in the medium term. Most retail consumer driven startups will burn cash in the medium term. The amount of VC money ‘readily’ investible is overstated. Vanilla (undifferentiated) eCommerce was yesterday’s great idea, Niche eCommerce is today’s good idea and we better start working on tomorrow’s idea. There is no shame in selling your startup if it will ultimately lead to greater value for consumers and stakeholders. Only the well funded survive the ‘Cash Burn’ reality of eCommerce. Good is not good enough, you have to be world class now.

What ails eCommerce in India?

The day started with me getting this lovely book from Flipkart, a day before they had promised it to me. A friend, who had also ordered a book by another eCommerce retailer was still waiting for his to arrive, even though he had ordered it way before I had. This prompted a discussion on why eCommerce companies in India, barring a few notable exceptions, still suck.

A few other friends also joined in and put in their own 2 cents to the debate (some opinions were actually worth 2 cents). In the end, while we had a rich and comprehensive discussion, we decided to move on. Partly because we were hungry and partly because we were really really hungry.

So I decided to take up this oft mentioned and widely written about hot topic of contention for customers, entrepreneurs, investors and the media, based on my observations and the comments of others who work with eCommerce startups very closely.

1. Cash on Delivery (COD)| Logistics – Apparently the saviour and great innovation of India’s eCommerce wave. It is so…but to an extent. Flipkart, Letsbuy, Yebhi, Fashion&You, Myntra etc (well funded big boys) have delivery teams in major cities like Bangalore, Mumbai and Delhi but don’t have those teams in smaller cities, towns and villages. Hence they tie up with national courier companies and even the Indian Postal service to deliver. Now, not only does the cost of delivery increase using these partners but the real loses happen with COD and return of unaccepted goods. Usually there is a separate Rs. 50 to Rs. 100 (sometimes Rs. 300) charge for the COD facility and a charge in case there is a return, which is between Rs. 100 to Rs. 300 (approx) and the return route charge, since they will now deliver the goods back to where they came from… the eCommerce company.

Considering that many companies now deliver up to 80% of all goods with COD payment and that the Return rate may sometimes be as high as 15% of total goods, the bottom line (if any exists) gets squeezed or is brought into the red real quick.

Logistics Partner Delivery + [(COD Charge) or (Return Back Charges)] 

This is not sustainable in the long term and needs to be rectified.

2. Non-Aligned Logistics – Lets be clear, apart from exceptions like Chottu (The Delhi based logistics startup) most local and regional players have shown only token interest in eCommerce. Most of them just aren’t willing to change or create plans for eCommerce Startups. Most National players also have the same approach though notable examples like Blue Dart, have a formal approach to it, but like their rep told me, small volumes just don’t matter for them. This is unfortunately true and if you are a great eCommerce company delivering only socks (great idea) you will bleed since you don’t have the volumes or the value of transactions to make it worthwhile for any of them. Till the time relationship driven, local and regional players don’t become active, at least in Tier 2 and 3 cities, eCommerce will be a money losing proposition for a large chunk of eCommerce products and penetration into the underserviced markets of India will either be prohibitively expensive or just relegated to a few categories. 

3. Culture | Touch and Feel – This one is fairly simple. As a nation we just don’t trust stuff which we haven’t held in our hands, before buying it. Such is our culture. An emergent younger generation does trust brands and is fairly comfortable with branded products on eCommerce. But new brands will still face this cultural and physcological wall. The theory behind eCommerce is that it can help brands and people take advantage of the long tail in retail. But if people don’t know the product manufacturers and names on the site, then these eCommerce sites will have to develop their own brand and hence develop trust.

And trust is something that most eCommerce sites are screwing around with. If you don’t believe in this theory, ask yourself how many times you or your friends have gone to Chroma or Staples, just to look at that computer accessory/smartphone, before buying it online.  

4. Focus on Discounts – Most eCommerce sites don’t know it yet, but this will kill a number of them eventually. With not enough buyers leverage, their focus on cost by cutting down on their own margins and mostly selling at cost or at a loss, was never going to be sustainable. They all came in thinking ‘Hey! let’s give them a great deal and if we make a loss right now, it’s cool, we will call it Customer Acquisition Cost and then when we reach scales of efficiency, due to logistics and buying power, we will hit profitability’. 

Well it hasn’t happened yet. Logistics is an issue for eCommerce sites (though by setting up logistics teams in the main cities they have been able to reduce costs) and buying power is still a fraction of what it needs to be.  And then to top it off, the next thing happened.

5. Junglee.com – This point is fairly predictive in nature and only a few people will agree with me. Junglee.com is the Amazon.com venture in India. Though Amazon.com is an eCommerce company, in India Junglee.com is a marketplace. Which means, they don’t really aim to sell (though they do put up their own Amazon prices) but want to let the customer know, who is the cheapest seller of the product they are looking for, out of over 500 selected online sellers.

They are doing this because 1. They need to be ready when Amazon finally launches in India, probably after 100% FDI is allowed in retail. 2. They want to build up their logistics infrastructure for India. 

Since 100% FDI is allowed in Logistics, Amazon will probably start offering delivery services to other eCommerce players thereby making money from eCommerce, whether the sellers do… or don’t. 

Also a number of uncompetitive sites will start getting killed off due to intense price competition on the site (see how discounts is working against them) and prospective acquisition targets can be easily identified and bought.

6. Shitty Sites – My biggest grouse. Most sites are just bad looking and people can’t find their products, make multiple shopping cart choices, get good product suggestions, check out reviews etc . More than looks, their GUI (graphical user interface) functionality makes some sites very difficult to deal with. Ads, notices, offers, distractions leads to the kind of clutter which retailers have been trying to get rid off in their stores for decades. Site designers would do well to follow their lead and not just cut copy paste from existing templates. So not only does the sit look bad, it works badly, distracts and puts a customer off from shopping. Reminds me of one of those Subhiksha stores during the last few months of the company.

7. Trust & Broken Promises – The fact that most eCommerce players can’t commit to time or even the right product, gives a bad name to eCommerce sites and eCommerce in general. If players can’t establish trust by sticking to what they mean, then deep discounts won’t really create any customer loyalty. Ask the average buyer why he buys from Flipkart and most will state great service as one of the top 3 reasons. 

8. Language – Sites, emails, messages and customer service in languages other than Hindi and English will lead to higher adoption of eCommerce services across linguistically diverse regions. It’s worthwhile remembering that we feel more connected and feel a certain trust with people and services who talk to us in a language we are most comfortable with.

And we have over 30 languages spoken by a minimum of 1 million people.

9. Newbies – There are lots of guys out there who have read a few articles, downloaded a template, contacted some vendors and are selling stuff online. Which is good for startups and eCommerce in general. Unfortunately most end up creating a really bad quality company and keep it that way. Many of these teams have very little idea of the quality and details that go into creating a great eCommerce company (most just claim to run an eCommerce ‘site’). Most feel that setting up a site sits takes less than 1 lakh and then the money starts rolling in. Such sunny dispositions leads to failure and almost zero innovation. Hence, today we have a horde of mediocre to bad sites which just do not work.

My Point. Running an eCommerce company is not easy; it is NOT a tech centric company. If anything it is mash between a retail, tech and a logistics company. And unlike 3-5 years back people expect their products to come on time, featured products to be in stock, a professional site, multiple modes of payment, good customer service, a return policy, a constantly updated site and lots of professionalism.

10. High Attrition – Though recently it has stemmed, major players for eCommerce had shown high attrition before and around Diwali due to the proliferation of well funded startups looking for people. This  has led to a nascent industry developing on shifting sands. After all, even for a process-centric, strong, services company, you need experienced and talented people to set the processes, follow them, tweak them, document them and then create a process centric culture. This is critical for most companies.