Though India bagged no Gold Lion this year, three Mumbai ad agencies secured nine winning entries across 19 shortlisted entries at Press Lions, says Hita GuptaIndia got off to a disappointing start on the first day at the 62nd edition of Cannes Lions with agencies from the country winning only four awards. All the awards were in Press Lions category. There were no winners for Mobile, Direct and Promo & Activation Lions from the country. Though India bagged no Gold Lion this year, three Mumbai ad agencies secured nine winning entries across 19 shortlisted entries at Press Lions. McCann Worldwide India (Mumbai) picked up two Silver trophies, followed by Grey Worldwide India with one Silver trophy. Taproot Dentsu won a Bronze Lion. McCann Worldwide won one Silver for its Dish TV campaign for Essel Group titled ‘Puddle’ and ‘Basement’ while the second Silver was bagged on back of its campaign for Dabur’s Gastrina campaign. Grey Worldwide India secured its Silver Lion for its campaign for DHL. Taproot Dentsu’s Pimp campaign for Bennett Coleman’s Mumbai Mirror earned a Bronze trophy at the awards. In total, 79 Press Lions were given away with the top prize, the Grand Prix, going to USA.
Read More
All it took was an open letter and a few Tweets for American singer Taylor Swift to bring Apple Music to its knees. The company, which will soon be starting a new service AppleMusic, has decided to pay the artists during the three-month free trial period and even beyond. Can the same happen in India? We will come to that in just a bit. Apple Music launches on June 30. In the US, it is priced at $9.99 per month for one person or $14.99 for families. In India, though the pricing is not official, or whether Apple Music will be launched simultaneously on June 30, some reports suggest it will and it will be priced at Rs 120 per month for one person or Rs 180 per month for family or six users. Apple Music includes a radio station with personalized playlists and a choice from millions of songs on demand. The service includes a live radio station called Beats 1, tools to find curated playlists or individual songs, offline listening and a social music network on which users can comment on music and share it. In addition to iOS devices, the service will also be available on Macs and even on Android, later this year. Now let’s turn to India. There are over 230 FM stations, 800-plus television channels and crore of Internet buffs who access music online. While royalties are getting paid to the film’s producers or the music companies, are the singers getting their due? Let me ask you about ISRA or Indian Singers' Rights Association? I bet many of us don’t even know what it is. But some of us do. It is around two year old society of Indian singers, as the name suggests. According to its website, ISRA aims to administer and control the exploitation/ utilisation of singer performances and collects Royalties as per Section 38A of the Copyright Act, 1957 and then distribute the Royalties to its member singers. Ashish SinhaISRA has also listed an elaborate rate plan across mediums. For example: If a singer’s songs are used by a broadcaster of Music-based TV Show/Programme, the Royalty shall be Rs 25,000 per song performance (even if it is part of a song). Similar rate is applicable for a non-music based TV show or serial. And for Broadcast to the public of the performance of a singer on a Music Channel, the Royalty is pegged at Rs 5,000 per hour or 5 per cent of the gross revenue of the Channel for that TV, whichever is higher. Royalty is similarly fixed for mediums like radio, internet, hotels, commercial establishments, commercial vehicle, and Public events among others. So far so good. But privately, singers say that getting a broadcaster or a commercial establishment to pay the royalty on playing their songs is an extremely difficult proposition. In fact, only last month a delegation of singers including Sonu Nigam, Kavita Krishnamurthy and Pankaj Udhas, among others, had met Union information and broadcasting Minister Arun Jaitley seeking his intervention. They wanted to ministry to direct certain broadcasters to "stop violations of the Performer's Right", in line with the provisions of the Copyright Act. As per the provisions, which have been introduced retrospectively, lyricists and singers should get 50 per cent royalty on any commercial use of their songs. In fact, according to Sanjay Tandon, the MD of ISRA, not even one TV channel or radio station is paying any royalty to any singer. As per the amended Copyright laws, royalty can be collected on original songs played commercially by any media, including ring tones by telephone companies, call waiting music, any songs used in any manner by any commercial establishment etc. And the law covers songs going back in time almost half a decade. So when Taylor Swift said the Apple Music plan was "unfair", arguing Apple had the money to cover the cost, the company obliged by announcing to the world it will pay for the trial period too. We wonder when that will be the case for our own singers? May be very soon! ashish.sinha@businessworld.in
Read More
In may 2015, Sushanto Mitra, founder and CEO of Lead Angels Network, an angel investment firm, decided to bet on the business prospects of MyCuteOffice, a Mumbai-based online portal that connects users to shared office spaces in six cities across the country. Mitra’s company invested an undisclosed sum in the marketplace for co-working spaces for one specific reason, its asset-light model, which he says provides opportunities to grow and scale the business much faster.Though Mitra’s investment was in the digital platform, MyCuteOffice derives its core value from the brick and mortar business of the fast-growing co-working space. The cities — Delhi NCR, Bengaluru, Hyderabad and Mumbai — which the portal covers are all startup hubs, where there is an ever-increasing demand for cost-effective office space for budding entrepreneurs.MyCuteOffice is adding one new city to its portfolio every two months, a clear indication of the growing presence and demand for shared office spaces all over the country including in tier-two and tier-three pockets such as in Barauni, Bihar and Nagpur.Roaming WorkersWorld over, the concept of co-working places, where different companies or individuals share working space, gained steam with the increase in the number of individual workers and freelancers. According to a survey done by online co-working magazine Deskmag in February 2013, there was an increase of 83 per cent in co-working spaces in just one year serving a total of 117 per cent more members.Unlike globally, there is no concrete data on co-working spaces in India, perhaps because it is still in its nascence. A broad indication though, comes from the number of people who are opting to freelance. The Global Online Work Report 2014, published by California-based online staffing platform Elance-oDesk, says there are 1.9 million Indian freelancers (or potential co-working space hunters) registered on the site and this number has been increasing at 62 per cent for the past three years. The report lists India among the top 10 freelancer-earning countries globally with a growth rate in these earnings of 22 per cent year on year.Success FormulaOne of the main benefits of co-working spaces is that they provide the infrastructure which otherwise would have been prohibitively expensive. Aakriti Bhargava, co-founder of startup marketing firm Boring Brands says: “I used to work out of Gurgaon-based co-working space 91Springboard for a year. What helped is the easy access to facilities such as a meeting room and the fully-equipped, 24/7 corporate canteen which is difficult to afford in a rented office. Also, there is absolutely no hassle of handling the administrative work and one can focus on getting the work done. The place also helps to attract good talent as they expect a certain quality of workplace hygiene in addition to a decent pay and benefits.”The presence of like-minded people under one roof also helps with opportunities to exchange ideas, barter services or boost each others’ morale, which comes in handy especially in the startup culture that is otherwise replete with ups and downs, say people who have used co-working spaces in their entrepreneurial journey.Bang For The Buck: (Left): Sharin Bhatti (sitting)and Sudeip Nair (standing) of Mumbai-based The Hive convert their co-working space into an events venue in the evening for additional revenue (below): an event at The Hive. (Photographs by Umesh Goswami)While customers find co-working spaces convenient, providers of these services are yet to find a sure-shot formula for success. Says Pranav Bhatia of Stirring Minds, an 8,000 sq. ft co-working space in central Delhi, “We keep the margins low to ensure full occupancy of the space and sometimes give the space at half price or even less to social enterprises.” Bhatia, in fact, started a co-working space in August 2013 because he wanted to create a ready pool of talent to outsource projects for his California-based tech startup Lemon Interactive Inc. But as he grew more involved with the co-working space startup, VCs and individual investors began contacting him for steady advice. Now he too has become an investor with equity in four startups.Most of these spaces charge per workstation and one can rent a place on a day-to-day, monthly or an yearly basis. Pranay Gupta, co-founder of 91Springboard says the payment model of co-working spaces can be compared with that of Amazon’s Web Services — pay only for what you use.The Side ViewIt isn’t just service providers who are experimenting with different models but developers who own the real estate as well. One basic model involves earning more cumulative rental income from different clients than what one would have got from just one customer. “As a developer if one can get better rent from the property by renting it as a co-working space then it’s a no brainer. Another way to rent out the property is through revenue sharing so the co-working space provider pays the property owner a certain amount as the base rent component and the remainder in revenue share. Co-working space providers prefer this method as it saves them from paying large rents upfront, especially when they are starting out the business,” says Ankush Johar, partner, Lloyd Venture, a multinational investment company that has recently invested in a 10,000 sq. ft co-working space in Gurgaon. Full House: Pranav Bhatia of Stirring Minds, a co-working space in Delhi, keeps the margins low to ensure full occupancy, sometimes even giving the space at half price to social enterprisesThe revenue share percentage depends on the negotiation between the two parties. Usually, there is a base rent to be paid and the revenue sharing can be in 50:50, 70:30 or 80:20 ratios. The terms of the negotiation are based on the risk appetite of the real estate owner and also on the trust and goodwill of the operator.Topping UpLloyd Ventures may have invested in the co-working spaces business, but the fact remains that building and managing space is capital-intensive and not many investors are willing to fund the developers. “The returns one can expect in this business aren’t as high as one can get from successful exits from a mobile business, where it can go as high as 100x. The returns usually vary 20-40 times depending on investment made in the co-working space,” explains Stirring Minds’ Bhatia.To meet the high cost of investment this business requires, these entrepreneurs have come out with alternative streams of revenue in addition to the fees they charge their users.One way is to collect a finder’s fee by connecting freelancers to companies who want to outsource projects or by helping the VCs identify potential startups for funding. Sobin Thomas, founder of Geek Out, a co-working space for techies, with two locations in Mumbai, says most of the revenue that they earn is from the finder fees alone. “In this industry, the finder’s fee varies from anywhere between 5 to 10 per cent depending on the project. There are companies who contact us on a weekly basis for outsourcing the projects. The average cost of these projects is around $4,000 which the developer gets. We charge 5 per cent of the total project’s cost,” he explains.What makes it easy for space providers is their ready access to the community of freelancers and startsup and also the insider’s information they have about their products and services, talent, etc., information that would interest the venture capitalists intensely. Being able to connect these dots is a win-win for all the entities — more revenue for the operator, the VCs and for the users who get greater exposure and recognition.Another source of revenue for co-working spaces is through events to provide mentorship, technical skills and networking opportunities to these young companies. The promoters of The Hive see their co-working space as a place that metamorphoses into an events arena in the evening for performance artists, stand-up comedians, or music groups. “What we are trying to do is build the business model focused on where the maximum returns are. So, we have divided this place into a co-working space during the day and for hosting events at night for full utilisation,” says Sharin Bhatti, co-promoter of The Hive. In fact they designed their three-storied bungalow into a co-working space, a workshop and a cafeteria so there is enough space for all kinds of events — founder-dating events, hackathons, bookkeeping or taxation workshops.Co-working spaces are trying every trick in the book to create a sustainable business for themselves and a self-sufficient ecosystem for startups. The investment Mitra’s Lead Angel Network made in MyCuteOffice could just be the beginning. If the new approaches enhance the business prospects for these co-working space providers, the target of future investments could well be these brick and mortar co-working space entities themselves instead of online portals. If WeWork, a New York based shared office space provider can raise its fourth round of funding of $355 million in December 2014, can Indian players be far behind? sonal@businessworld.in, @sonalkhetarpal7(This story was published in BW | Businessworld Issue Dated 13-07-2015)
Read More
When US President Barack Obama visited India this January, the quality of air in New Delhi made more headlines in his country than the Republic Day celebrations at which he was the chief guest. The US media could not be faulted for highlighting the alarming levels of pollution in the Indian capital, which ranks among the most polluted cities of the world.The truth is that New Delhi and many other Indian cities are choking on polluted air. Even with measures like the introduction of CNG buses, expansion of the Metro rail network and phasing out of old vehicles, the quality of air in Delhi has tended to improve only for brief periods before getting worse again. The culprits: The ever increasing vehicular traffic and construction activity in and around the capital. As authorities in New Delhi and the states have sought to grapple with rising pollution, the now-ubiquitous e-rickshaws have come to be touted as an answer to the problems facing the cities. There is now a thinking in states and at the Centre that electric and battery operated e-rickshaws can serve as an alternative, cleaner mode of transport in cities big and small without adding to the pollution. The upshot of all this has been that e-rickshaws, which were being assembled from kits imported from China, have caught the attention of organised players who earlier stayed away from them due to issues of legality. This newfound interest of governments and industry in e-rickshaws has, however, come about more as a result of a series of developments going back a few years, than by any planned positioning of e-rickshaws by authorities as an alternative and cleaner mode of commuting in cities.In 2009, the Delhi government first introduced e-rickshaws ahead of the Commonwealth Games to showcase and facilitate clean commuting to and from the sporting venues. Soon, the electric tricycles caught on and became a convenient mode of transport over short distances in the capital.But as e-rickshaws grew in number, they caused chaos on the roads of Delhi and adjoining cities, drawing the ire of citizens and courts. In the absence of rules and regulations for e-rickshaws, the Delhi High Court in July 2014 slapped a ban on them. As a result, people who had invested in these vehicles lost money and the companies that assembled imported kits also suffered. The ruling impacted the livelihood of over a lakh in Delhi.After months of standoff with the Delhi HC, which refused to revoke the ban on e-rickshaws, the Centre brought the Motor Vehicles (Amendment) Bill, 2015 seeking to legalise e-rickshaws.The Bill’s passage in March opened the gates for organised players such as Hero Electric, Terra Motors and Lohia Auto Industries to enter a space that has the potential to grow to Rs 5,000 crore in a few years.The law lays down that e-rickshaws of specific designs only can ply on the roads, that all drivers must get themselves registered for a licence and that certain safety norms have to be followed.Besides Delhi, Allahabad, Lucknow, Mohali, Ballabhgarh, Raipur, Tripura and Kolkata are among other cities that have introduced e-rickshaws to provide last-mile connectivity to commuters. Mumbai, which faced strong protests from auto and rickshaw unions, is conducting a feasibility survey.With the new amendment making it easier for states to legalise electric three-wheelers in their cities and towns, organised players are ready to launch their own products. Take, for instance, Lohia Auto Industries, which launched its Humrahi electric tricycle at a price of Rs 1.10 lakh soon after the government regulated the sector and notified the safety norms for e-rickshaws. In fact, it had been ready with an indigenous design for over two years. To push sales, it is tying up with companies to make loans easily available.“We manufacture 99.9 per cent of the 512 parts of Humrahi in India. Our product meets all the safety standards and we are looking at a pan-India business,” says Ayush Lohia, CEO, Lohia Auto Industries, which also manufactures electric scooters and diesel three-wheelers in the ration of 10:90. Lohia is positive about the e-rickshaw business and expects the segment to be the highest contributor to the company’s topline in the coming years. Over the next five years, he expects e-rickshaws to contribute over 40 per cent of the company’s revenue. “We sold 200 e-rickshaws last month (in May), and expect to sell around 50,000 by 2017. This segment will contribute around Rs 300-400 crore to our topline,” he adds. Hero Electric, a big name in electric cycles and scooters, has also entered the fray with its Rahi this April. Other than Delhi, the company is targeting four states including West Bengal and Gujarat, according to Sohinder Gill, CEO of Hero Electric.Even foreign firms are now showing interest. Japanese startup Terra Motors, which sells e-scooters and e-rickshaws, has opened its office in India. The group, present in the Philippines and Bangladesh, sees India as its biggest market in the coming years. It has decided to import spare parts from China and Japan and assemble the vehicles here.“We believe India is going to be a big market in the coming years. There is a need for last mile connectivity in Indian states, and we want to exploit that,” says Teppei Seki, the founding member and director, Terra Motors.Risks GaloreThere are quite a few challenges for e-rickshaw players, though. For one, the laws around them need to change. Only then, as Hero Electric’s Gill says, unorganised players will not be able to sully the sector by making and selling sub-standard products. Also, urban planning experts do not think e-rickshaws are entirely clean. Shriya Gadepalli, regional director, Institute for Transportation and Development Policy, says, “E-rickshaws... mean pollution elsewhere as the electricity required to charge them is produced by burning coal.”Besides, the e-rickshaw business has to contend with the unions of auto and taxi drivers who feel threatened by the entry of this relatively cheap vehicle. In Mumbai, even as a feasibility study is on, the unions are putting up stiff resistance against e-rickshaws. In 2014, many companies that had tied up with dealers in Mumbai had to shelve their plans because of the opposition.One can’t tell whether these noise- and- smoke-free vehicles will turn into a big sector. But what one safely say is that while these vehicles may not rid cities of their pollution, they will certainly not be a party to it.(This story was published in BW | Businessworld Issue Dated 13-07-2015)
Read More
Besides the benefits to customers, e-commerce as a business model has several advantages over traditional retail models, says Vipul Parekh The world was a different place when we started our first e-commerce venture Fabmart in 1999. Internet connections were few and far between, and ran mostly on flaky dial-up lines. People distrusted an “invisible retailer” and were unwilling to use their credit cards online.Today, with more than 30 crore people connected to the Internet (thanks in large part to smartphones), secure payment systems, and increased willingness to transact online (thanks to IRCTC and other websites), the e-commerce industry has truly taken off. In addition, people are increasingly strapped for time, and value the convenience offered by e-commerce companies much more than they perhaps did a decade ago.Besides the benefits to customers, e-commerce as a business model has several advantages over traditional retail models. First, rentals constitute a significant chunk of the cost base for a traditional retailer given their need to be present in locations with high footfalls; e-commerce companies, on the other hand, can have their warehouses in relatively faraway locations with cheaper rentals. Second, for people in smaller cities and towns (home to more than 50 per cent of the retail market) with the same aspirations as those in large cities, e-commerce offers access to a much greater range than traditional retail.Third, e-commerce companies can have centralised control over inventory, which allows superior operational efficiency and also curtails shrinkage (loss of inventory due to inefficiencies and theft). Fourth, e-commerce companies have the ability to use data and analytics to help customers make better purchase decisions. Fifth, many e-commerce companies operate as marketplace models, which significantly reduces the need for inventory and associated capex. While e-commerce companies have structural pluses over traditional retail, there are some key success factors for them that are worth keeping in mind:=Merchandising skills to enable them to buy the right products at the right time from the right place, and the ability to set and control quality standards. BigBasket.com carries more than 15,000 SKUs today and ensures that each is delivered at the right price and quality requires strong processes and capabilities in the team.=Supply chain management skills to manage a fragmented and varied supply chain for procurement and same day/next day delivery for customers across the length and breadth of the country.=People management skills to manage, recruit, train and motivate blue-collar workforce that works in the warehousing and delivery of the orders.=Technology skills to ensure that they are able to consistently offer customers a great experience while buying online and to keep them current with rapid technology changes, and also to lay the foundation for processes within the company.With all the news of funding in the sector, there is some concern whether seemingly sky-high valuations are justified. While it is hard to answer this definitively one way or another, a few facts keep me optimistic. In the US, after all these years, e-commerce constitutes only 4-5 per cent of the retail market; on the other hand, in China, the e-commerce industry constitutes nearly 10 per cent of the overall retail market. I think India may follow the trend of China rather than the US.We still have a lot of runway left. Internet penetration is still at less than 20 per cent in India versus over 50 per cent in China, and only 10 per cent of Indian Internet users are online shoppers versus close to 50 per cent in China. It is also no coincidence, in my view, that for Amazon, India was the fastest international market to clock $1 billion in revenues. Overall, I am confident that the best days of Indian e-commerce are yet to come. The author is co-founder of online grocery store BigBasket.com(This story was published in BW | Businessworld Issue Dated 13-07-2015)
Read More
The future lies in multi-channel retail that blends the benefits of real world retailing with virtual or digital interfaces, says Kishore BiyaniAmongst the biggest shifts of the last decade has been the ‘consumerisation’ of digital technology. From being confined to certain industries and research labs, digital technology has become pervasive. Technology has shrunk time and consumers now demand more convenience, customisation and consistency.The last couple of years have seen a large number of etailers built solely around technology-enabled web or mobile interfaces. One presumes that the increased use of technology will either improve efficiency and reduce costs for the business or that the consumer will be willing to pay a premium for the convenience that technology-enabled services offer, or both.Yet, evidence suggests that neither of these transformations has happened in India. Consumers will not pay extra for the convenience of ordering from home and being delivered at the doorstep. Barely anything sold by pure digital retailers aren’t discounted. The core proposition of these firms is deep discounting to the extent that it scares away brand owners who fear losing their brand salience. Even a subscription model similar to Amazon Prime, so popular in the US, has been tried and quickly withdrawn. On the other hand, millions of customers come to experience the real markets, cherish the happiness of having the product in hand and pay the price for this experience.It is evident that costs incurred by virtual retailers are significantly higher. The cost of delivering from central distribution hubs to the doorstep of consumers, the size and scale of the offices and warehouses required and the customer acquisition costs far exceed the costs associated with running a store within four walls.It is therefore not surprising that the mindshare occupied by virtual retailers (VR) is much higher than their marketshare. The Mobile and Internet Industry Association estimates that online transactions will touch Rs 1,00,000 crore by the year-end. However, virtual commerce will account for only 24 per cent of it, with the bulk of spends being in travel, financial services, media, classifieds, etc. Of the Rs 24,000 crore worth of merchandise sold, more than half is accounted for by mobiles and laptops which are low margin businesses. The larger real retailers are close or comparable to the size of the entire virtual commerce business in India.The growth of VR is not led through own brands or products or by achieving operational efficiencies or scale. It is entirely led through reducing the prices of products subsidised by the investments made by foreign companies. On the other hand, real retailers face severe restrictions in fund raising; especially foreign funds.The future lies in multi-channel retail that blends the benefits of real world retailing with virtual or digital interfaces. More than half of VR sales come from 2 or 3 cities; Delhi-NCR accounts for the lion’s share. Barely any courier company services more than half the pin codes in the country. Future Group alone is present in 244 cities and our logistics networks catering to these stores cover almost 13,000 pincodes. By treating our stores as both distribution and delivery points, logistics costs for a multi channel retailers like us will be less than one-fourth of costs incurred by a pure play virtual retailer.Role of technology in business cannot be denied. Real world retailers manage thousands of transactions every minute, source and transport tonnes of goods every day and operate networks that span the length and breadth of the country. These are possible because of a credible technology backbone. To replicate such technology for a front-end consumer interface is only a function of finding the opportune time and optimum investment that can deliver benefits to all stakeholders. The author is founder & CEO, Future Group(This story was published in BW | Businessworld Issue Dated 13-07-2015)
Read More
India’s e-commerce revolution will see a lot of small players emerging with similar or differentiated business features, but ultimately, only one or two large integrated organisations will survive the bubble. These large organisations would follow a fully-integrated model marked by better customer interface, efficient distribution network, dedicated payment system and a consistent technology backup, says Stefen Bradley, the William Ziegler Professor of Business Administration Emeritus at the Harvard Business School, and author of the bestselling book, The Broadband Explosion: Leading Thinkers on the Promise of a Truly Interactive World. “I won’t be surprised if large-scale retailers in the country, such as Reliance and Tata Group, which already own efficient supply management systems, build strong technology platforms and emerge as e-commerce giants in a short span of time,” says Bradley in an exclusive chat with BW|Businessworld.The other scenario in India, according to him, could be a large-scale consolidation wherein strong international e-commerce players or even local organisations (focused on the retail space) will buy out most targets with different areas of strength to build one integrated e-commerce mammoth to sustain in the market.“In the case of Alibaba, which really changed the market in China where there was no strong retail business, the company leveraged its digital capabilities and the distribution structure to maximise the business and create the biggest e-commerce company in China,” he says.China is fast moving in the direction of online retail, which even prompted Walmart to downsize its plans for the country. But, it is always the nature of a particular market that decides the success of a business. Plus, the complete adaptability of the business to that culture would help in taking the market along with it. Alibaba has a shipping arm that directly ships products to customers. It could build a strong trust factor, which is very critical in online business. Alibaba even certifies the products on its site to ensure no fake product comes into the channel. “But it is not necessary that these giants can survive in all the markets as it will fully depend on the nature of that market and the players’ adaptability” he says.It is always a mix of revenue models that makes a business sustainable in different markets. While advertisement revenue is still the major chunk, the margin that these companies make on the transaction will purely depend on the volume and scale they can handle on their technology platforms, says Bradley. As told to C.H. Unnikrishnan(This story was published in BW | Businessworld Issue Dated 13-07-2015)
Read More
Sure eTailing is growing by leaps and bounds. But eTailers are booking more losses than profits. Deep discounts and returns are a downward spiral they can’t pull out of by Vishal Krishna & Abraham C. MathewsThis scene repeats every day. Every morning, trucks loaded with crates of unsold and damaged goods returned by e-commerce companies and other retailers are brought to a 2,00,000 sq. ft. warehouse of Reverse Logistics (RLC) at Tumkur Road in Karnataka. These goods are then cleaned up, refurbished and then sold on RLC’s stores and website greendust.com.How much of e-commerce sales end up in warehouses? Hitendra Chaturvedi, founder and chief executive officer of GreenDust, says that it could even be upwards of 24 per cent as compared to the international norm of 12 per cent. Large eTail companies such as Flipkart, Snapdeal and Amazon are Chaturvedi’s clients. This is just a little glimpse of the back-end of India’s booming e-commerce industry. And the buzziest, within the sector, is eTailing, or the sale of goods over the Internet.The e-commerce sector, though miniscule, is rising fast. So fast that all eyes are trained on it. According to a PricewaterhouseCoopers (PwC) 2015 report on e-commerce in India, the sector has grown by 34 per cent CAGR (compound annual growth rate) since 2009 to $16.4 billion in 2014, and is expected to touch $22 billion in 2015. eTailing, which comprises online retail and online marketplaces, is the fastest-growing e-commerce segment; it has grown at a CAGR of around 56 per cent between 2009 and 2014. PICTURE PERFECT: CEO of Amazon Jeff Bezos (L) and Managing Director of Amazon India Amit AgarwalPwC pegs the size of the eTail market at $6 billion in 2015 with books, apparel, accessories and electronics constituting around 80 per cent of product distribution and sales. Compared to India’s huge retail industry, which is $550 billion according to Ernst and Young, eTailing is miniscule and will only account for 3 per cent of the trade by 2020. In comparison, the share of eTailing in China today is 8-10 per cent of its retail economy. It’s no wonder that though it is small today, eTailing in India is seen as a goldmine of opportunities.Despite deep discounting of goods and mounting losses, investors are still keen on investing in eTailing and e-commerce businesses. And so is the valuation of such ventures. Paytm sold a 25 per cent stake to Alibaba Holdings recently for $575 million, valuing the company at $2.4 billion. Broadsheet reports say Snapdeal is in talks with China’s electronic-parts maker Foxconn and Alibaba to sell a 10 per cent stake to them jointly for $500 million, valuing the eTailer at a mind-boggling $5 billion.But there is something wrong. The simple logic of the rat race between Flipkart, Snapdeal and international competitor Amazon is this: Offering a spectrum of goods at the cheapest prices with easiest terms of delivery and returns to keep your customer base expanding at geometrical progression, and then leveraging the ‘customer real estate’ to get in the next set of investors. This money is used to offer higher discounts. And once the consumer is ‘ensnared’ to eTailing practices, prices will be restored to ‘normal’ levels, and you have a good business going.What if the investments stop, and with them, the discounts. Plus, there’s a legal minefield lurking with respect to the country’s foreign direct investment (FDI) norms. So is it already a bubble waiting to burst?Bitten Too MuchThe last few years have spawned a variety of entrepreneurs, who plunged into this digital revolution. Both Flipkart and Snapdeal acquired about 10 companies in 12 months, spending $500 million.break-page-breakOther marketplaces that have raised large sums of money are Urban Ladder, which raised $77 million (Rs 493 crore), Shopclues (Rs 746 crore) and BigBasket (Rs 278 crore). “It is still early days for the e-commerce industry, but the business is no doubt here to stay,” says Sanjeev Aggarwal, co-founder of Helion Ventures.Unfortunately, acquiring consumers and weaning them away from the normal retailing practices have been expensive business for eTailers because they are compensating the seller for discounts. One estimate put the losses suffered by the big three as follows: Flipkart lost Rs 2.23 for every rupee earned; similarly the loss for Amazon was Rs 1.90, and for Snapdeal, it was Rs 1.72.Data acquired by BW|Businessworld from Accounting and Corporate Regulatory Authority (ACRA), Singapore showed that Flipkart suffered a loss of Rs 1,028.9 crore on a turnover of Rs 2,937.7 crore in FY14. Losses had doubled from the year before. In FY13, Flipkart’s loss (before taxes) was Rs 544 crore on a turnover of Rs 1,163.1 crore (see Black Hole). Sources say Snapdeal had suffered losses worth Rs 530 crore in FY14. Meanwhile Flipkart, Amazon and Snapdeal together have spent Rs 9,774 crore on reverse logistics and discounting in the last financial year to acquire customers, as explained later. Some believe that the online business models work because there are no rental costs. Remember what killed the organised retail boom in the previous decade? It was discounting and rental costs. Unfortunately, e-commerce has followed the same route today. Though most eTailers do not own physical stores, but Snapdeal, Amazon and Flipkart spend upwards of Rs 350 crore each every year on marketing and advertising to acquire the new real estate called the ‘consumer’. That apart, they are also paying rentals in maintaining warehouses. Last checked, each of the big three maintained at least 10 large warehouses at a huge rental cost.The vast monies spent to acquire customers through deep discounting remind us of the halcyon days of the brick-and-mortar retail boom between 2003 and 2009. During that period, it is estimated that upwards of $5 billion (Rs 30,000 crore) was pumped in by retailers. Many of them, such as Provogue and Subhiksha, ultimately shut shop because of high-operations cost that included rentals and inventory cost. Others, such as Future Group and RPSG’s Spencer’s Retail, kept afloat by restructuring and incurring heavy debt. Flipkart, Snapdeal and Amazon did not respond to questions raised by BW|Businessworld through email on the challenges they are facing today. Alibaba picked up 25% in Paytm for $575 million, valuing the company at $2.4 billion (Photograph: Shutterstock)For the fledgling e-commerce industry, it is probably a case of having bitten off too much, too soon. India promises a market of more than a billion customers; the industry hopes it is just a matter of time before the customer warms up to the idea of using smartphones to shop. Except, India isn’t really the homogenous stereotype as the marketing gurus like to think, where a huge customer base automatically translates into profits.However, Sachin Bansal, co-founder of Flipkart, believes that the online platform creates so much data that cultural diversity is at the heart of the game. He says that technology, including data analytics, can change the way a region is being served with the help of real data collected from the browsing habits on phones. He is optimistic that the next step is going to be hyper local, and places more emphasis on the growth of mobile shopping.Ghost Of Back-end LossesWhat Sachin Bansal’s optimism hides is the fact that eTailers are paying big time for inventory on behalf of their associate distribution companies. These distribution companies are exclusive to each marketplace. Amazon works with CloudTail and Flipkart works with WS Retail. These companies generate 40 per cent of the deliveries for their eTailers. FDI rules (from 2010) state that not more than 25 per cent can be sourced from an associate company. The rule was scrupulously followed by the now defunct Bharti and Walmart partnership; but the same cannot be said of the eTailers. In the case of Bharti Retail, it sourced only 25 per cent from Walmart’s wholesale business in India — Best Price Cash and Carry.The inventory costs for eTailers are the root cause of the losses along with discounts. Company sources say that today there is enough evidence of the losses, and it remains a permanent feature of this business. Retail is a cash-burning business and has the lowest margins, say about 4 per cent. Of the 195 million deliveries made, till FY14, by the big three eTailers, 23 per cent of the products were returned, with Rs 6,900 crore borne as the reverse logistics cost by these companies (see Shoddy Shipments and Bleeding Profusely). About 35 to 40 per cent of the total returns were from associate distribution companies, and the rest were from registered sellers. Inventory is maintained for distribution companies and this amounted to Rs 2,462 crore. Two reputed brand heads of big marketers — Puma and Samsung — preferring anonymity told BW|Businessworld that their contracts with Flipkart, Amazon and Snapdeal included a limited return clause. That is, if customers returned products for whatever reason, the vendor will accept only 5 per cent of the returns. The eTailers take the risk for returns above that level.Now for discounts: an average of 20 per cent is borne by these three e-commerce giants; they pay sellers to make good on discounts. This number rounded up to Rs 7,312 crore in FY14. Now add the returns cost of Rs 2,462 crore to the cost of maintaining discounts at Rs 7,312 crore, and this totals to a whopping Rs 9,774 crore as their losses only from discounting and reverse logistics. Everyone would be happy if new and existing investors keep the money coming and the discounts flowing for the next 15 years. But is that realistic?Regulatory Warning SignalsThere are warning signals. In May, minister of state for commerce and industry Nirmala Sitharaman told the eTail industry that relaxing of FDI rules will not happen till the government’s ‘Make In India’ campaign spurs domestic manufacturing. FDI rules currently put the onus on states to permit foreign investors in retail outlets that sell multiple brands. Most states have so far resisted.break-page-breakThus, Amazon is a marketplace in India. However, according to its submissions during a hearing before the Authority of Advance Rulings for Indirect Taxes, in 2012, Amazon said it would provide two types of services in India: A front-end online platform to facilitate merchants, and the second would be to provide logistics support in relation to the goods sold by the merchants. The details are where things get murky. The order at warehouse: Amazon unbundles wholesale packages into individual retail packages, sometimes sorting the packages if the wholesale package includes different items. It then wraps them with required protective material, and bundles products when two or more items are to be sold together. Arguably, going by this, Amazon is more than just a neutral platform. It takes up a much more active role in the sale procedure. Logistics is not limited by the FDI rules, but when combined with the online platform, like a shop-in-shop, for multiple vendors and moving the product through warehouses, it replicates a Central or a Shoppers Stop.This muddies the companies’ usual rhetoric about being just a marketplace. The point is if there’s ‘transfer of risks and rewards’. R.Muralidharan, senior director for Indirect taxes at Deloitte, says: “If only the companies have contracts that oblige them to take ownership of goods at any point, then it will be difficult to argue that risks and rewards have not been transferred.” Once that is established, tax implications would change and they would fall foul of FDI rules. The Enforcement Directorate has been investigating Flipkart for similar violations since 2012, for its relationship with WS Retail, which sells more than a third of its products. WS Retail was sold to private investors to alienate the ownership from Flipkart’s management. How independent is it really?“Regulators will ask e-commerce companies to come out with a clear idea of their business; whether they are a technology company, a market place, or a logistics business,” says Ganesh Prasad, partner at law firm Khaitan and Co. He says regulators will go after the tax liability of these companies and not valuations. “Things like the origin of the product and where, in which state, should the tax be collected will need clarity,” adds Prasad.And then, there is lobbying by brick-and-mortar businesses for a level playing field for raising foreign money. “The current protectionist policies are leading to an imbalance in the market, as the players exploit the gaps in government policies,” says Vikas Agarwal, general manager (India), One Plus, a Chinese electronics company.Defending these eTailing practices, Sachin Bansal of Flipkart, said on the side lines of a press conference: “The business has seen phenomenal growth. The capital raised, so far is being used to better technology and offer the best to the customer.” Bansal’s counterpart at Snapdeal, Kunal Bahl, agrees with him on the growth of the business. “The younger generation’s propensity to shop online is clear, for the future, and smartphones are a great way to engage with them.” But both agree that regulation was something that all e-commerce companies had to cope with and were struggling to seek clarity in the long-run.The tax issue too is being debated vehemently by the state of Karnataka. Last year, local tax authorities stopped sellers from trading, especially Amazon, from warehouses operated and managed by eTailers. The tax authorities’ case was that eTailers should collect tax on behalf of sellers. The eTailing companies, on the other hand, did not want to follow such direction because it would bring them in direct conflict with FDI regulations, which does not allow multi-brand retailing. The status quo continues to this day with no settlement in sight.Long-term ValueRegulatory hassles have not dissuaded investors. In fact, there is a glut of foreign money chasing a few e-tailers. The Russians (DST Global), the Americans (Tiger Global), the Japanese (Softbank), and the Chinese (Alibaba) are on the prowl. Every acquisition has been at an eye-popping valuation. So far, Rs 9,774 crore has been spent on servicing 36 million regular consumers, and the industry will need a further Rs 27,000 crore to acquire 100 million regular customers by 2018. The target for the VCs has always been the number of consumers their ‘investee’ companies can acquire and not the number of sellers who came on board. Flipkart, Amazon and Snapdeal have only 10 per cent of their total 1,00,000 registered sellers, as regular merchants.“It is quite possible that the liquidity in the global funds, and the promise of the Indian eTail story is driving the prices up to unreasonable levels,” says Aviral Jain of valuation firm American Appraisal, a division of Duff & Phelps. “The premise of e-commerce valuations in the US is customer loyalty, says Jain. In India, however, the challenge is that the loyalty is absent and survival until consolidation is the key, he says. In India we are loyal to prices, thus making discounts de rigueur.break-page-breakWith extensive experience in e-commerce industry and related investments, Shinoj Koshy, partner, Luthra & Luthra, says: “E-commerce players are not in the business of handing out discounts. What they are interested in is altering consumer behaviour by weaning customers from traditional brick-and-mortar outlets. Once a habit has been formed, then discounts will get rationalised and services are likely to come at cost. An indication of what is to come is paid services at Flipkart First and Amazon Prime.”Investors’ Waiting Game“That the customer is going online is true. But like any retail business, it requires capital to sustain operations,” says Vinay Parekh, CFO and co-founder of BigBasket.com. He says the industry needs long-term capital to build trust with consumers and offer the best services. Big Basket delivers grocery in six cities to 20 million customers every year. Perhaps, they are the only ones who have not spent heavily on acquiring customers. Paytm, which has harboured an ambition of making it big in eTail, plans to bring on board a hundred thousand sellers by end of the year, and bring in one million Chinese sellers.“These goods, ordered on our app or website go to our delivery centres and do not remain in there for long,” says Amit Lakhotia, general manager of Paytm wallet. He adds the opportunity to bring Alibaba’s merchants was enormous and could supplement the revenues garnered from the online wallet business. Logically, everyone is betting on the fickle smartphone user. However, the average Indian (600 million Indians under age 40) is still not using the smartphone for regular transactions.Not being able to acquire customers is beginning to glow in the darkness. These companies do not generate cash from operations, which is the lifeline of a company. The accounts filings with the Registrar of Companies, in India, show serious losses. The trio of Flipkart, Amazon India and Snapdeal posted losses totalling Rs 1,300 crore (Amazon Rs 320 crore, Snapdeal Rs 264 crore and Flipkart Rs 716 crore) in 2013-14. Can one of the three rivals afford to turn off the discount tap without losing their market share?On the other hand, a synchronised move to do away with discounts, when they have a firm control of the market, is sure to earn the censure of the Competition Commission of India.Will Investors Stay?The eTailers are at the mercy of investors who have different timelines for closing their funds. Most of them will begin exiting by 2018 and the top two Indian eTailers must create a sustainable business by then. The total share capital of Flipkart was $3.2 billion (Rs 20,000 crore) and it has already eroded by Rs 10,288 crore. Flipkart has not been generating cash from its operations and its negative cash flow stands at Rs 592 crore. Similarly, Snapdeal too has not been generating cash, and carries on its shoulders a negative cash flow of Rs 300 crore on the Rs 6,000 crore it has raised so far.When fresh money stops coming, do these home grown eTailers have the fundamentals to remain afloat? Or will they become victims of a fire sale by investors offloading to private equity funds, who usually take long-term bets. Private equity seems to be the only option. Flipkart registered in Singapore has 148 investors. Many of them are pension funds of Xerox Corp, ConAgra, Rio Tinto and Shell. Seeing Flipkart’s downward spiral, how long will they wait before exiting?Sanchit Vir Gogia, CEO of Greyhound Knowledge Group, says most investments were made between 2013 and 2014; so funds may want to exit before 2018-19, since VC fund cycles last only for five years. Institutional investors look for an exit by either selling back to the promoter, or to another investor or to the public through an initial public offering (IPO). An Indian IPO looks remote when there are no profits on the horizon. Making new investors pay more than the current valuation could be a tough ask.That is when things get tricky. Devangshu Dutta, CEO of Third Eyesight, a retail consultancy, says that these businesses, like any retail business, will not make money in the short run, but like steel or infrastructure businesses, these would take a 15-year cycle to make money. India’s home grown eTail companies are expectedly worried because by committing $2 billion to their India foray, Amazon has neutralised the advantage Flipkart built over the last five years. Today, they compete as equals.There are the long-term hopefuls. “Global investors will back these companies, and will bailout existing funds, because India is the largest consumption market,” says Ganesh Prasad of Khaitan and Company. The investors may lead yet another large round of funding, he says.“When you have the money, raise funds,” says Aviral Jain of American Appraisal. But what if your business model itself is flawed? Then the next round of funding becomes difficult. One will have to wait and see if the investors blink. Warren Buffett put it thus: “Only when the tide goes out, do you discover who has been swimming naked.” vishal@businessworld.in; @vishalskrishnamatabrahamc@gmail.com; @ebbruz(This story was published in BW | Businessworld Issue Dated 13-07-2015)
Read More
