Lessons from Amazon, Flipkart: Next wave for e-commerce is tech and services

Will another big fish swallow a small one in the e-commerce space in India soon? Ever since Flipkart bought India’s largest online fashion store Myntra in an iconic deal in May this year, the e-commerce sector has been rife with speculation of impending consolidation. Firstbiz spoke to experts from the startup ecosystem to gauge the pulse and likely road ahead.

The general consensus viz-a-viz merger and acquisition (M&A) activity has its votes around deals bringing specific value to business. “M&A activity will be driven more by filling strategic gaps in overall business rather than to buy companies to thwart competition,” notes Ankur Bisen, Senior President, Retail at Technopak Advisors, a market research firm.

Tech value only

Echoing his sentiment, Ashish Jhalani, Founder of eTailing India says, “I think M&A activity will be limited to large players investing in technology and services to help them deliver a better customer experience.”

One reason for this is the recent investment announcements by Flipkart and Amazon that is expected to increase barriers of entry into this space. “Some other players will now be forced to raise funds in order to compete effectively. We also expect large players to acquire some of the smaller vertically focused players in categories that they are not currently strong in,” says Rehan Yar Khan, General Partner, Orios Venture Partners.

Start-up mentor and angel investor Prajakt Raut, also Founder of The Hub for Startups, says at the most he sees an opportunity where an investment bank could consolidate 10-20 mid-sized players with strategic value and create a compelling case for acquisition. “However, I do not expect healthy valuations unless there is significant strategic value,” Raut affirms.

Although e-tailing is still a small contributor to retail, accounting for only 0.4 percent of the overall market, it is on a rapid growth trajectory. It is projected that the $2.3 billion e-tailing market in 2014 will reach 3 percent of Indian retail or $32 billion by 2020 says data by Technopak Advisors in a July 2014 report entitled- e-tailing in India- At Inflection Point.

“Eventually, we expect the India e-tailing industry will have three to four large retailers (online department stores) along with numerous specialty retailers across various verticals and target segments,” Khan predicts.

New Prey

Of course, the million dollar question plaguing minds is around Flipkart or Amazon’s next take-over target? We asked stakeholders in the eco-system about it and most felt that at this point acquisitions will be to bring in technology and service providers to quickly upgrade infrastructure and customer experience rather than to add more customers or vendors. “I don’t think they will take over any e-commerce company,” Jhalani reiterates.

“Even if they do, it will be distress sale from e-commerce companies struggling to survive. Such acquisitions may be largely to get some solid people capabilities on board,” Raut highlights in a similar vein adding that Flipkart, Snapdeal and Amazon have reached a scale where they do not need to acquire smaller companies for more scalability.

“They may, however, acquire companies which bring them some specific strategic value. It could be technology, or brand, new vendor relationships, or something that they may find cheaper and faster to acquire rather than build such as an after-sales-service company as that offers healthy adjacent revenue opportunities for their white-goods business or companies building robotic solutions for warehousing and analytics firms,” Raut says. All this will be done primarily to acquire talent and technology.

Khan of Orios Venture Partners anticipates Flipkart to make acquisitions in the healthcare, household goods and utilities vertical.

E-tailing Evolution

Though e-commerce in India is still at infancy when compared to China and US, there is only one way ahead - Up. “Today, India’s e-commerce industry is where US was in 2003 and China in 2007. Currently, India’s internet penetration is approximately 1/3th of China and the size of the industry is approx 1/60th of China indicating that future growth is going to come both from increased internet penetration and increased doption,” Khan points out, adding that the current set of 25 million online buyers is slated to touch over 100 million by 2020.

Jhalani expects a large set of niche and mid-scale players to evolve and capture market share. “As large players invest money to build infrastructure and acquire new customers, smaller players will ride on their coat tails,” he says.

Growth, Khan believes, will be driven by women-centric categories like fashion, footwear and accessories, while Raut says the massive gifting sector will go online on the back of a growing wedding market in India.

The music and publishing industry too will see a shift in business models as cloud storage becomes cheaper and data speeds become faster. “Sectors like music, movies and books will see drastic reduction in prices and thus piracy could disappear. People will start consuming paid content - streamed for a few,” Raut hopes.

On the payment side, Khan is sure of the mobile emerging as a preferred medium for online transactions. “As the banking sector expands its financial inclusion program, Cash On Delivery (COD) will disappear. It is an operationally challenging irritant for the industry,” Raut adds.

Further, Tier 2 and 3 cities will fuel a significant portion of growth. “If you look at some of the large eCommerce companies in China, more than 40 percent of revenue comes from tier 2 and 3 locations,” Khan notes.

New wave

Khan is certain the next wave of growth in India will come from online brands that are focused on selling primarily online. “A very recent example of this is Motorola’s success in the Indian market. Motorola was one of the first global brands to exclusively leverage the internet as a sales channel (with an exclusive tie-up with Flipkart) to reduce cost and time to market. India has emerged as one of the most successful countries for Motorola, with the company selling one million phones in less than six months,” Khan says.

Alongside, a handful of local home-grown brands like BlueStone, Done By None, Fab Alley, PrettySecrets among others are using the online channel to quickly ramp-up their scale domestically and to tap Tier 2 and 3 markets that would otherwise not have access to these products.

As far as business models likely to exist, experts are of the opinion that both marketplace and inventory led models will co-exist. “Different players will be trying different combinations to get the right hybrid. There is no right or wrong choices. There are success and failure stories in both,” Bisen says.

Execution will be a key factor to sustainability affirms Jhalani, who says we may see the same models executed better. “New models are definitely in the pipeline such as eStores - where a customer can shop online in case they lack any infrastructure themselves such as payment option or internet,” he adds.

A slightly futuristic Raut believes new service layers will be added to existing business models. “For instance, when you book a home theatre system there could be a three-year extended warrantor an installation plan thrown in,” he elaborates.