New Delhi/Bengaluru: Specialty online retailers are hastening their offline expansion in order to survive the onslaught from Flipkart and Amazon India amid a broader slowdown in the growth of the e-commerce market and a lack of interest among investors towards funding e-commerce businesses.
Over the past one year, the likes of eyewear retailer Lenskart Solutions Pvt. Ltd, furniture brand Urban Ladder Home Decor Solutions Pvt. Ltd, baby products seller FirstCry (BrainBees Solutions Pvt. Ltd) and others have changed their strategies to protect their turf against Flipkart and Amazon India.
Some like FirstCry, furniture retailer Pepperfry (Trendsutra Platform Services Pvt. Ltd) and interior design platform Livspace (Home Interior Designs E-commerce Pvt. Ltd) are investing heavily in offline stores to give a “touch-and-feel" experience to their customers.
Others such as Lenskart and Urban Ladder are opening offline stores as well as trying to establish themselves as brands that are available across channels rather than just as pure retailers.
“Vertical players need to have a strong moat against the horizontals otherwise they can get run over," said Mukul Arora, managing director and partner at SAIF Partners, a venture capital firm. “You either build an offline presence that will protect your business against the horizontals, or you build your own brand of products that you can sell across channels and on all platforms, including horizontals. If you execute rigorously on these two strategies, then I think there’s still a very large opportunity for verticals and enough investor interest."
Building a brand is critical, said Peyush Bansal, chief executive of Lenskart.
“If people don’t think Lenskart is a specialized player which can do a better job, then why will they come? And that is not just based on marketing if you ask me, the biggest differentiation is the product. From lenses to frames, their material and fitting, and the cost at which we can procure and deliver to the customer—(Flipkart and Amazon) will never be able to do it," Bansal said.
Unlike the large e-commerce platforms, category-specific brands have a greater focus on pleasing customers, said Ashish Goel, chief executive officer of Urban Ladder.
“As an omni-channel brand, we thrive on the value proposition created by being category-specific. We completely understand the customers who seek out our products and that allows us to go where the customer wants us. An omni-channel presence ensures that our brand is where the customer is, especially for a category like furniture which is so touch and feel," Goel said.
Suchi Mukherjee, CEO of online fashion retailer Limeroad (AM Marketplaces Pvt. Ltd), said India is a large enough market to accommodate vertical e-commerce companies.
She added that even in the US and China, the world’s largest e-commerce markets, specialty fashion businesses have thrived despite the preponderance of Amazon.com Inc. and Alibaba Group Holding Ltd.
“We have grown 10 times (in terms of gross merchandise value) in the last two years and we are the only e-commerce company in the country that has positive contribution margins after marketing spend," Mukherjee said, as an example of why specialty e-commerce platforms can thrive.
While specialty online retailers are trying to differentiate their businesses, doubts about their viability remain.
The last funding rounds at Pepperfry, Urban Ladder and Livspace were done by their existing investors, partly because these companies feared they would have to lower their valuations to attract new investors.
Limeroad’s last round happened in March 2015, when it raised $30 million from Tiger Global Management, Lightspeed Partners and Matrix Partners India, all existing investors.
The fact that the company has gone without fresh funds since is an indicator of its capital efficiency but it is also partly because investors have soured on e-commerce.
India’s e-commerce market had been expected to touch anywhere between $48-100 billion by 2020 but since the start of 2016 there has been a sharp slowdown in growth.
The market grew by less than 15% in 2016 to $14-15 billion and it’s expected to grow only slightly faster this year. The slowdown has caused investors to slash their projections for the market.
That along with the size of Flipkart and Amazon and their plans to expand in more categories has led to doubts about the ability of specialist e-commerce companies to survive.
Now, most investors believe that only companies that are clear leaders in their respective categories can hold their own against Flipkart and Amazon and attract fresh capital.
Several specialty e-commerce companies including Pepperfry, Urban Ladder, Lenskart and Limeroad are expected to hit the market for fresh funds over the next few months.
“Today, the biggest fear about verticals is what will happen if Flipkart and Amazon decide to focus on their category. There are hardly any defensible positions in verticals. Additionally, their CAC (customer acquisition costs) aren’t coming down as quickly as they had hoped because the scale hasn’t come yet. It’s a very tough market for verticals to raise money," said an investment banker who helps start-ups raise funds. He spoke on the condition of anonymity.