How the Indian E-Commerce Sector has Leapfrogged, Then Taken a U-Turn

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The Indian start-up ecosystem is amongst the world’s fastest growing ecosystems in the world. A steady backing by investors in 2014 and 2015 had lead to a growth spurt in the Indian start-up ecosystem. However, with the changing economic and global scenario, many companies have been struggling to raise funds and some of them have even had to shut shop of late.

For instance, many popular food tech and hyperlocal start-ups had tried to scale up by foraying into multiple cities, but were not very successful and had to shut down. Startups, which were leapfrogging, have seen a sudden change in the growth pace and are being compelled to rethink their strategies.

Profitability and sustainability have become the main driving force in the challenging start-up ecosystem, and start-ups have now begun to look at the long-term picture. With the sudden pullback from hedge funds and VC’s, many companies have landed in a cash crunch, and are now focussing their energies on making their operations profitable so they can become self-sustainable.

Some of the areas where the e-commerce sectors had leapfrogged in the past, but are now doing a U-turn are:

Tapping into brick and mortar stores

While initially all retail businesses were gung-ho about going from offline to online, they have now realized that to unleash their full potential, they cannot ignore brick and mortar stores. So they are tapping into the ‘best of both worlds’ by adopting an omni-channel approach.

Flipkart, which saw a huge devaluation in the first quarter of 2016, has decided to change its strategy from being only online to tapping in to new customers via brick and mortar stores. It has announced that it will be opening brick and mortar stores in order to double its customer base as the Indian e-commerce segment is seeing stagnation.

Amazon, which is slowly grabbing a bigger foothold in the Indian ecommerce segment to become the market leader, has also tied up with local brick and mortar stores to fulfil orders received on Amazon grocery stores. Amazon India had also launched a program called Udaan to train local entrepreneurs to showcase their products and had also signed a partnership with Store King which has over 10,000 retail stores in South India.

Revisiting Unit Economics

Start-ups have realized the importance of unit economics and realized they have to check costs for logistics, warehousing, supply chain, etc, if they want to sustain and scale up. Unit economics are now playing an important role for investors, as they assess the viability and sustainability of a company in the long run. E-commerce companies like Myntra are promoting their in-house brands, in order to increase their margins and profitability.

There is a considerable change from last year, when start-ups were just burning cash to acquire customers, without thinking about the profitability and future revenues of the business and investors were just pumping in money.

Investors tightening their purse strings

When the startup fever had begun to grip India a couple of years back, what gave further wind to the trend was that investors were ready to take the risk of investing in disruptive ideas based purely on instinct since there were no metrics to validate the idea. But with the Flipkart devaluation and other popular e-commerce companies struggling to stay afloat, they have begun to exercise caution. They now take into account the traction, business metrics and the long-term sustainability of the business before making any investment rather than purely relying on their gut feel.

As a result, start-ups have now started to trim the fat, by cutting down on all unnecessary expenses, and are instead re-allocating all their resources to get maximum revenue.

Minimizing cash-burn

E-commerce companies which were previously just focussing on customer acquisition by offering huge discounts and deals are now trying to offer more value to customers by offering a larger variety, improved services, faster delivery and better products. This Diwali, Amazon and Flipkart focussed on proving better quality and a wide range of products, as well as providing better customer service instead of wooing customers simply based on huge discounts to customers.

The focus is to create a real differentiator for the customers to identify with and come back to rather than burning cash mindlessly on offering deep discounts.

Conclusion

Lack of funding, poor strategy and scalability issues have begun to affect the growth of start-ups. Easy money, which was flowing until last year, has seen a significant decline with investors that are now exercising caution. In the first half of 2016, tech start-ups in India saw a 40% decline in getting funding.

To sustain, start-ups will now have to focus on becoming more capital efficient, create value for stakeholders and prove their real worth by focusing on profitability. It’s high time they revisit their business models and focus on creating some real value for customers and other stakeholders or else they are doomed.

About the Author: This article has been contributed by Ashish Jhalani, Founder of eTailing India & Indian School of eBusiness (ISeB). He is also a Angel Investor, Mentor, Advisor

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