Inventory-led companies burn more cash than they should, given their size. On the other hand, the marketplace has more operating leverage, Kunal Bahl and Rohit Bansal tell Ankita Rai
Snapdeal started as a deals-only site but later changed the business model in favour of an online marketplace. Do you feel vindicated now?
Bahl: We are known to be the contrarian kind. We started in February 2010 as a marketplace for services. Within 14 months, we had a 70 per cent market share in the deals space. In fact, we created the market in India. However, the market size is very small as restaurants, spas and salons are still a very urban phenomenon.
The same thing happened when we started the marketplace based e-commerce business. Twelve months ago, people didn't know the difference between a marketplace and the own-inventory model. Initially, people said we were foolish as the new age of e-commerce is about owning every aspect of the supply chain such as a warehouse and logistics. Whether one talks of services or products, we had the conviction to defy the trend.
In 2011, when merchants approached us to list their products such as watches or footwear on our site, we agreed. Then we took a trip to China, which convinced us that a marketplace e-commerce model is the way forward. We are targeting a turnover of Rs 2,000 crore for FY14. Over 50 per cent of our sales are in tier-2 cities. We ship to over 4,000 towns in India and two crore people have registered with us. We are making money on every transaction.
What has been your key learning from this trip to China? Did it help establish the Snapdeal that we see today?
Bahl: India is five-six years behind China in the e-commerce business. China's largest e-commerce company, Taobao (an Alibaba portal) is also a managed marketplace. Last year, two of Alibabas portals together handled $170 billion in sales. China also started with an inventory-led business model. However, it soon became clear that this model is not sustainable. We learnt from the Chinese experience that consumers attach huge premiums to assortments, which is not available in offline stores due to the lack of space. The real estate cost as a percentage of gross revenue in India is 14 times that of the US.
Another adaptation from the Chinese market is our payment system Trustpay, which is inspired from Alipay, Taobaos online-payments system that relies on escrow (releasing money to sellers only once buyers are happy with the goods received). This builds trust among consumers. However, when it comes to supply chain, the Chinese market has something to learn from us. Our 'safe ship' system ensures better control over quality and last mile connectivity as our third party logistics companies are more efficient. Now, look at the numbers: in China, six per cent of the total retail pie is e-commerce. In India, it is only 0.2 per cent. So there is a huge opportunity here.
What is the level of investor interest in the inventory-led business model in India?
Bahl: The entry of Amazon in India has validated the marketplace business model here. The primary factor behind the growth in Amazons margins in 2012 was the success of third party sellers on its marketplace. However, a majority of the Indian players are still in the inventory-led business model. This is also influenced by investors. Investors funded similar businesses in China and thought this could be replicated in India as well. By the time they gave e-commerce businesses a serious thought in India, the companies in China started failing. Now, investors have lost confidence in the inventory-led business model in India as well.
Bansal: The issue is about the economics of the business model. Inventory-led companies burn more cash given their size. On the other hand, the marketplace has more operating leverage. Marketplace based e-commerce is doing to inventory-led companies what inventory-led companies did to offline retailers.
Much has been said about how e-commerce companies enjoy a supply chain advantage vis-a-vis offline stores. Can you explain that in simple terms specifically referring to Snapdeal?
Bahl: In India, the supply chain is broken. E-commerce ventures are reducing the physical distances that exist between supply and demand. Our philosophy is that we need to enable these businesses to supply locally and sell nationally by minimising the role of middlemen. For instance, if a sari sells for Rs 300 in Surat, the same sells for Rs 2,000 in Chandni Chowk, Delhi. The cost rises because of the number of middlemen. However, at Snapdeal, the same sari sells for Rs 1,000. The selling price reduces by half. How? Consider this calculation: for a sari that costs Rs 300, Snapdeal charges Rs 200. The merchant takes Rs 400, logistics eats up Rs 100 and the rest is the cost of goods sold.
To enable fast shipment at a minimal cost, we have a system called safe ship. The moment a merchant receives an order and processes it, the safe ship connects him with the fastest and cheapest courier service available between the two pin codes. It is done at one-third of the cost that the seller would have incurred otherwise. We have real-time tracking system.
As competition heats up, e-commerce companies are providing steep discounts. How do you set prices? How is the process different from own-inventory companies?
Bansal: At Snapdeal, we dont play a very direct role in keeping prices low. This is a platform where merchants meet consumers. We create a competitive environment among sellers on our website. The price of the product is directly proportional to the amount of stock that merchants have, their margins and the cost of fulfilling the orders. We have tie-ups with specialised sellers who have been selling products for decades. Such merchants have efficient supply chains.
In inventory-led models, an e-retailer must stock all the products it plans to sell, compare it with prices prevailing in the market and then decide a price for the product. This leads to huge overhead cost in terms of planning and execution. For instance, an e-retailer needs to have at least 20,000 products in the warehouse, if it displays 10,000 products online.
In the own-inventory model, the supply chain is under the e-retailers control. This helps deliver products on time. Getting this consistency in a marketplace model where you might have sellers in various parts of the country is difficult. How has Snapdeal addressed this issue?
Bansal: All sellers on Snapdeal are screened. We have spot checks for sellers who drop ship. We have an in-built rating system for merchants. When a product gets a bad rating consistently, it is removed. Trust pay ensures that sellers receive money only after consumers are satisfied with products.
Bahl: We don't need to own logistics for better last mile connectivity. Logistics is a manpower business; there is no intelligence in that. If a courier company is not service or price competent, it is not assigned orders. Training of merchants is very important. We send periodic customer satisfaction reports to merchants to help them supply better.
As the number of consumers purchasing goods online grows, so does their wish-list including an ever-growing urgency for receiving products quickly and cheaply. This means that e-commerce companies have to continuously tweak their supply chains. How easy or difficult is that?
Bansal: Snapdeal is making continuous improvements in the supply chain to shorten the shipment time. Earlier, we used to ship 40 per cent of products on the same day; now it is 70 per cent and we plan to take it to 90 per cent. The whole idea is to reduce shipment time.
A shift to the marketplace model from the own-inventory one requires huge work in the supply chain. Inventory-led companies are used to shipping through their warehouses and via their own logistics companies. A shift from shipping from a single warehouse to drop shipping from 1,000 sellers is not easy. Thankfully, we never had to make this change.
What are the key things to keep in mind while building a supply chain for a managed marketplace model?
Bansal: Use technology to keep costs low. Too much manual intervention in a supply chain makes it error-prone. Second, divide a process into smaller parts. Remember you can't build huge warehouses, own and manage logistics all at the same time. Instead, invest in a platform in which merchants can sell products at the best prices, such as a good forecasting system to help merchants plan their inventory. The biggest challenge we face with respect to the supply chain is the constant pressure to scale up. We work in tandem with our courier services. They have to increase their capacity as per our expansion.
Bahl: There are two philosophies in supply chain. Fulfilment centres are either built closer to the supply side or the demand side. We have three fulfilment centres in Delhi, Mumbai and Bangaluru. They are both supply hubs and demand hubs. Reaching the last mile is not difficult, but it is more important to be closer to suppliers.