Why Online Marketplaces may fail in India…
Indian eCommerce space is slowly transforming itself and virtual marketplace is the new frontier. Flipkart recently launched their own marketplace as reported here, and in the last 18 months, several eCommerce ventures started their own marketplaces: Snapdeal, Infibeam, Tradus, ShopClues to name a few. In fact, so much is the energy in this sector that Ebay recently fought with Amazon to invest money in Snapdeal and eventually placed $50 million to claim a minority stake.
Another point to notice: In the last 3 years, more than 50 e-commerce sites have collectively generated VC funding of around $800 million, but only 20 odd companies have been able to raise a second round. Something is not working it seems.
Will Online Marketplaces prove to be a new trend which will totally transform (and save) the Indian ecommerce space or it is something which is being copied from the West with a hope that it can work in India too?
I have several reservations, that I would like to point out.
What is an Online Marketplace?
Have you ever been to a local bazaar or haat in India? Online Marketplace is something similar: sellers bring in their products to sell and buyers choose from an army of options. When it comes to Online, then these marketplaces need a platform to operate.
This business model wherein ecommerce companies provide a platform for both buyers and sellers is not new, atleast in US. The providers of these platforms charge a small fee ranging from 2-10% on each transaction and make their profit.
Ebay is world’s largest online marketplace where sellers post their products and buyers choose them. Reportedly, there are more than 1.3 million sellers (in 2008) on Ebay.
Amazon, the world’s largest online retailer with profits of $1.15 billion in 2010 has around 1.6 million sellers on their own marketplace and 40% of their total revenue is being generated via these marketplaces.
Etsy, another big online marketplace reportedly sold more than $1 billion worth of exclusive handicrafts from their online platform.
Why Online Marketplaces in India?
Very tough question to answer, but financial wizards are claiming that the recent decision by government to allow FDI in this marketplace model can be termed as one of the reason for this sudden spurt. FDI is not allowed for direct online retail.
Additionally, by opting for this model, the ecommerce companies are not required to invest in storage and inventory as the sellers will take care of that. Yes, another saving option and another channel for increased revenue.
Why Online Marketplace may fail in India
Supply Chain & Customer Experience: Supply chain and logistics remain one of the major issues with India. The reason online marketplaces work so magnificently in US is because of their incredible supply chain.
With just an addition of a dollar or two, one can opt for overnight shipping! It is this infrastructure and supply chain capability which has enabled sellers to prosper and grow. But in India, it can be a challenge.
For example, the hallmark of Flipkart has been its excellent timely delivery. Now, say a seller based in Assam has sold a product to a buyer based in Mumbai. The delivery time of the product will suffer, and so will the customer experience.
Additionally, there can be issues with the products advertised and products sold as well, leading to greater returns and bad customer experience.
At the end of the say, the buyer will not blame the seller for this late/poor delivery but will target Flipkart.
Customer Acquisition Costs: Although the ecommerce companies can save on the storage and inventory costs by opening its platform to individual sellers, the customer acquisition costs for the company remains the same. And with lower margin while opting for open marketplace, the revenue part will suffer. The Venture Capitalists will need their answers and ROI.
Only time will tell whether this new model will succeed or not within India, but the road to success looks quite bumpy.
What do you think about Online Marketplaces in India?
Will it work like it works for Ebay and Etsy? Would love to hear your comments!