Bangalore: Over the past 18 months, many e-commerce companies have either converted to or launched online marketplaces from where independent merchants sell products directly to shoppers, even though analysts and investors say the model is not yet a proven success in India. However, Kunal Bahl, chief executive at one of India’s biggest online marketplaces, Snapdeal.com, said this model is the only viable way to work around poor logistics and high costs of holding inventory. In a telephone interview, Bahl said the inventory-led direct online retail model in India was “dead”. He also said Snapdeal is looking for acquisitions to improve its services to third-party sellers. Edited excerpts:
Why do you believe that the marketplace is the best model for e-commerce websites in India?
Less than 8% of retail in India is organized. There’s a huge fragmentation on the supply side and retail distribution side. You have a very, very long tail on the supply side. The only way you can aggregate supply is by allowing sellers to list on a particular platform which has a lot of demand. The other option is carrying inventory—in a market where only 3% of apparel sold is branded and most of the supply side is controlled by small dealers. It’s hard for anyone to hold tens of thousands of local and regional brands. If you look at most emerging markets in the world, the biggest e-commerce companies are marketplaces. And the reason is the fragmented supply side.
Why can’t inventory-led online retailers be successful?
One main reason is that their fixed-cost base is too high. It’s clear that the inventory-led model is dead. After sinking hundreds of millions of dollars of investors’ money, inventory-led e-commerce companies are discarding their model and replacing it with the market place.
Some industry executives say that in future companies will adopt a part marketplace-part inventory model. What do you think?
Marketplaces and inventory-led businesses are like oil and water: they just don’t mix. Let’s say you’re a category manager. Till now, he’s been going to a particular brand and saying that we want to list your product, here’s a cheque for Rs.5 crore. Now suddenly, you’re going to the same guy and saying, no cheque this time, just come and list on our site. It doesn’t work.
There’s a company in China called China Dangdang, which was the darling of the e-commerce industry at one point. They changed their business model from inventory to marketplace about 1 ½ years before going public in November 2010. As of today they’ve lost 70% of their market value. There’s an inherent conflict of interest between an inventory-led business and a third-party seller on the same platform. It’s a problem Amazon.com faces as well.
What will happen to inventory-led companies then?
My sense is that if you’re not selling stuff worth Rs.50 crore a month, and if you don’t have $50 million in the bank, it’ll be very hard to survive this year. In the last two months, I’ve looked at 10 venture-funded inventory-led e-commerce companies which came to us to sell. These companies have raised anywhere from $10 million to $50 million each in capital. They were willing to sell for less than a tenth of what their last-round valuation was.
Are you looking at acquisitions now?
I don’t think there are e-commerce companies out there that are interesting. The areas that we are interested in are around technology and technology-based services we can provide to our sellers. We are in talks with 2-3 companies. If something works out, it’ll happen in the next three months.
How do you compete against inventory-led companies on things such as delivering products in time and guaranteeing returns?
Ninety percent of our products are delivered in three days. We have saree sellers from Benares and T-shirt sellers from south India and so on. We have sellers from all parts of the country. Often times, courier companies don’t have enough runs in some parts. But that is a problem which will be solved over time using technology and increasingly higher number of logistics companies that are coming up. We recently initiated a buyer protection service. Any problems that a buyer has—quality, size, etc.—we guarantee 100% money back. We don’t release money to sellers till the time the consumer says, “I’m happy with the product.”
What’s your sales target for this financial year?
We don’t disclose our sales, but what I can say that products worth Rs.2,000 crore will be sold on Snapdeal this year.