A Dream or a Logistics Nightmare?

For an invention that is rated among the top 10 discoveries in the history of mankind, the internet keeps taking us back in time regularly. It is 2012 but once again looks like 2000.

Down Memory Lane...

I cannot forget the experience and the roller coaster ride we underwent in 1999-2000. By the end of the century, Silicon Valley was full of internet start-ups and the dot-com boom was at fever pitch. Along with a group of friends, I had co-founded India's first pure-play e-commerce company in September 1999, but the dot-com boom was yet to happen in India. Then Sify acquired Indiaworld.com from Rajesh Jain in November 1999 and the Indian corporate world went crazy.

Over the next few months, everyone was launching a dot-com company, hundreds of e-commerce firms among them. Till April 2000, when NASDAQ crashed and the dot-com boom became the dot-com bust and e-com changed from flavor of the mouth to a 4-letter word.

Unfortunately, e-commerce died in India. Everybody had their share of fun while it lasted and now they all went back to more important things. A few e-commerce companies - actually just one, that's us, Indiaplaza.com - remained fighting the good fight. Since we believed and evangelized the Indian e-commerce potential and dream. Therefore we kept persevering and despite falling down several times we kept rising again.

Reappearance of E-commerce: An Interim Period

Furthermore, there was another brief period of madness. Sales zoomed from middle-2006 to middle-2008 and for lonely e-commerce players like Indiaplaza.com, it was a fresh burst of excitement. In 2010, suddenly e-commerce is back as the flavor of the month. Investors are once again backing all sorts of e-commerce companies - verticals, horizontals, and a few at an obtuse angle as well.

The story of e-commerce looked and sounded good, which was actually robust now. Internet users in India is a serious number now - over 100 mn and surging. Large numbers of consumers are shopping online and this can only explode going forward. Venture capitalists are putting their best dollars forward to get a share of the pie. 2011 is now called the year when e-commerce took off in India.

In early 2012, suddenly there is a chill in the air and not all of it due to winter. Promising e-commerce start-ups like Taggle.com and Letsbuy.com are down and out - one closed and one merged. More are apparently rushing downhill. Big names that a few months back were the future heroes of the e-commerce revolution are suddenly rumored to be struggling to survive. Like I said, it is 2012 but looks like 2000 all over again - Dj vu!

So, what is it about e-commerce that attracts so many start-ups who, well, start fast but also end fast? Here are my 2 cents - actually 13 years - on the matter.

Online Shopping: Looks Easy?

Many people consider this business easier than other businesses. So they jump into it without fully understanding its challenges. Internet retailing is a hard and tough business. In fact, it is the only web based business where a large part of the business happens outside the web.

A few months into the business, entrepreneurs start learning the hard way that e-commerce requires them to roll up their sleeves and get down and dirty. Picking, packing, shipping, AWBs, returns, refunds, in-transit damages, octroi, checkposts - suddenly the attractive website dream is turned into a logistical nightmare.

High Cost, Low Margins, No Profits

Retail margins in India are the lowest across all categories. Offline retailers carry inventory in large warehouses, have higher overheads and are constantly engaged in keeping up margins which is a huge challenge. This prevents them from offering the low prices offered by online retailers.

Meanwhile consumers shop online because internet retailers offer deep discounts and low prices. Given that internet retailers can scale without the restriction of physical catchments and neighborhood areas, they can work at low margins and plan for huge scale and hope to profit sometime in the future.

But when online retailers also start building warehouses and carry inventory, they start marrying a high-cost model with a low-margin business. Such businesses will grow as long as there is an uninterrupted flow of venture capital which obviously is not sustainable. This is another reason why several e-commerce companies who only go for topline growth are vulnerable.

High Overheads

A common error made by start-ups is when they start off by hiring high caliber but expensive people to build a strong management team. While the objective of building a solid management team is good, it also costs money upfront. If in a reasonable period of time the start-up struggles to constantly increase gross margins, the overheads will start hurting creating stress and challenges. What is required is to build and scale the team in line with business growth and not much in advance.

The Future of E-commerce

So, what does the closure of a few companies mean? Actually nothing. In a nascent but fast-growing industry, this is expected. Many entrepreneurs will jump in, but just a few will scale and succeed. The others will shut down or get acquired, such consolidation is the order of any early-stage industry.

The number of people shopping online is around 7 mn and this is expected to surge in the next few years.

E-commerce is really happening and will continue to happen. Entrepreneurs, those who succeed or fail will pay an equally important role in shaping the future of this industry. And for someone like me who envisioned such a booming industry way back in the last century in 1999, it would be a job well done.

K VAITHEESWARAN
The author is the founder and
CEO of Indiaplaza.com
maildqindia@cybermedia.co.in