Headroom for growth

Ashish Kashyap, Group CEO, ibibo, shares his thoughts on the top five opportunities and threats in the ecommerce sector

POORNIMA KAVLEKAR

ASHISH KASHYAP, GROUP CEO, IBIBO WEB

In 2011 alone, US $467 million was pumped into 78 companies in the e-commerce space. That’s not all. In the first four months of 2012, a further US $242million was invested into 30 companies in the sector. Going by this data (gathered from Venture Intelligence,  KPMG in India analysis), the e-commerce space is certainly one to watch out for. It is, however, not all rosy. With too much money being pumped in and too many companies with little differentiation among themselves cropping up, profitability and sustainability of a majority of these companies has been a question. However, investors and entrepreneurs are still willing to bet big in this space.

“There is a huge head room for growth given that ecommerce penetration is less than one per cent,” says Ashish Kashyap, Group CEO, ibibo web (p) ltd. Kashyap launched the ibibo group in 2007 before which he was the country head of Google India where he set up the domestic business operation from ground up. He also founded the ecommerce business at Indiatimes.com. He is of the opinion that the ecommerce ecosystem needs to be created and one requires talent of a different class for that to happen. And this is the biggest change that has happened over the last two years. “There is an increase in the number of engineers who want to develop the ecommerce peripheral, services and platform rather than take up a professional assignment with corporates. Venture capitals, angel investors and, of late, incubators have mushroomed to support this sector,” says Kashyap. Search engines and social media (some important generators of demand and traffic) have developed over the last few years. Many shipping companies have come up in the market, as goods have to be delivered last mile.  With such a development in the ecosystem, Kashyap looks at the opportunities and threats that this sector throws up to entrepreneurs.

Factors that work: the opportunities

The need for the consumers to use and transact on the Internet has reached an inflection point. “This means that the market has arrived, which was not the case three to four years back,” says Kashyap. There is a critical mass of well-connected buyers transacting on the Internet.  According to him, another very important opportunity is that there is an increase in the quality of talent, especially the entrepreneurial teams.  Kashyap recalls, “What was happening in the past is that most of the engineers coming out of college would join a technology offshore company rather than work towards innovating and creating original IP.” Currently, there is huge supply of entrepreneurial talent, which does not want to work in BPOs or offshore sectors, but wants to create something from scratch for the domestic market.

There are many small and medium enterprises that are producing for the domestic market and as a result they are aggregating supply. “More the fragmentation of supply, the better the solution the Internet provides,” says Kashyap.  Citing an example, he says, “The fashion and lifestyle sector has over 1,00,000 suppliers. The Internet solves a problem for them by aggregating things on a single platform.” Many years ago, apparel manufacturing was happening for the export market and not for the domestic market. This is now changing. Fragmented suppliers, who were yesteryear exporters, now want to provide value for domestic market and ecommerce is a connecting platform for them.

Inefficient offline retail economy due to disproportionately high real estate cost is a situation, which is unique to India. The real estate cost of a retail infrastructure in urban cities is very high; perhaps for a few it is as high as HongKong’s cost structure. But that does not commensurate to the purchasing power or the average sale value of a product.  “This is the reason why few offline retailers make money. It makes them inefficient,” says Kashyap. The elimination of real estate costs leads to a benefit, which in turn is passed on to the customer. The Internet also addresses the lack of organised retail infrastructure in Tier 2 and Tier 3 cities and towns.

Look out for: the threats

There is no uniform taxation system for ecommerce. “It does not understand borders – it does not understand Haryana or New Delhi,” reasons Kashyap. So the challenges are the cross-border taxation and lack of incentives for the sector. In the U.S., Internet economy is more evolved with incentives given to ecommerce ecosystem that pass on the benefits to the users.

There is too much reliance on cash on delivery (COD), which is not very efficient. “70 per cent of ecommerce purchases are on COD mode. Problem with COD is that it is bad for working capital,” says Kashyap. When a microwave which costs Rs. 2,382 is being delivered on COD, it will take the delivery person five times the time to deliver the product than what it would take him to deliver a paid for product (through transactions like Internet banking, credit cards and debit cards). So it is a 3 minutes vs. 15 minutes time lag. The delivery person would have delivered to five additional households had it been a paid for product. “The Government, industry and the regulators should work together and come up with solutions like incentivising credit card transaction,” says Kashyap. This will also eliminate black economy / cash economy / parallel economy which is again unique to India.  Cash transactions are likely to evade all kinds of taxes – be it on the sell-side or buy-side. The Internet is part of a formal economy and every transaction is clear.  However, a short-term weakness is that the regulations are not very clear for this sector. There is no formal cybercrime system. As the market is very nascent, the regulators need to formalise it.

There were many players who came in to the industry in the last two years with a lot of exuberance thinking this is the biggest gold mine waiting to happen. Unfortunately, everybody is still learning this business. “So in the short-term, investor confidence could have been shaken. It is important to develop that confidence and execute ecommerce in a disciplined manner to focus on its core fundamentals on all aspects including supply and margin,” says Kashyap.   This will help in articulating the long-term potential that this market holds.

The ecosystem and its future

A big shift has happened over the last few years in the ecosystem. Many pieces of the puzzle are coming together. “Some of these pieces were missing earlier which prevented this market from growing,” says Kashyap. Buyer interest is being generated and people buy very naturally on websites for certain products like air tickets.  However, like every market, there will be consolidation in this sector too. There will be mergers, acquisitions and in many cases, closure of business.  There will also be the birth of more entrepreneurs as the ecosystem evolves. But to stay in the race, entrepreneurs need to differentiate. “They need to identify the problem to solve and how to solve it differently. It need not be a massive disruptive innovation. But if an entreprenuer can solve the problem better than anyone else using technology, he/she will get good traction and as a result, have a fundamentally sound business,” advices Kashyap. Once this is done, it is important to earmark the pilot customer base. This customer base should accept what the entrepreneur offers not just once, but on a regular basis. “If this happens, then the entrepreneur should develop the market. If not, he/ she should go back to the drawing board,” concludes Kashyap.


TOP 5 OPPORTUNITIES 

  • Inflection point – there is a critical mass of buyers
  • Increase in the quality of talent, especially entrepreneurial teams
  • More fragmented supply and increase in domestic production. These SMEs turn to the Internet to sell their wares
  • Huge head room for growth given that ecommerce penetration is below one per cent
  • Inefficient offline retail economy due to disproportionately high real estate cost; ecommerce overcomes these inefficiencies

TOP 5 THREATS

  • Cross-border taxation issues and lack of tax incentive structures for a larger ecosystem to be created
  • Too much reliance on cash on delivery
  • Cash economy/ black economy/ parallel economy
  • Short-term investor confidence could be shaken as the industry is young and continues to learn
  • Unclear regulations – FDI, cyber crime, payments etc.

Poornima Kavlekar has been associated with The Smart CEO since the time of launch and is the Consulting Editor of the magazine. She has been writing for almost 20 years on a cross section of topics including stocks and personal finance and now, on entrepreneurship and growth enterprises. She is a trained Yoga Teacher, an avid endurance Cyclist and a Veena player.