INDIA’S E-COMMERCE GOLDEN ERA FINALLY ARRIVES
India’s early attempts at e-commerce during the dot-com boom offered little hope that e-commerce would take off. While e-commerce in China was hitting its stride between 2004 and 2007, in India it was still languishing. Computer and Internet penetration rates remained among the lowest in the world. Data speeds were slow. And the infrastructure remained extremely fragmented and inefficient. Then, in 2007, the same year that Apple brought the first smartphone to the world, India’s e-commerce caught a second wind when two former Amazon employees opened an Amazon clone. The name of that company was Flipkart.
FLIPKART
About seven years after Sachin Bansal and Binny Bansal—who are not related, although they share the same surname—founded the company that showed e-commerce could be a winning proposition in India, I received an email from Sachin inviting me to Bangalore to talk to his staff about my experience at Alibaba. I found an impressive collection of new employees drawn from McKinsey, Amazon, and the leading business schools. They’d given up the stability of jobs in the United States and leading companies in India’s IT services sector to join the Indian start-up.
I asked Sachin what he’d like me to talk about. How e-commerce works in China? Strategies for building an online marketplace? I was surprised by his answer.
“The thing we most need right now is to hear about the organizational issues—how Alibaba grew and kept a strong company culture. We have a lot of new people on board with great experiences and are having some growing pains.”
It was a good reminder that the difficulty of growing a huge business is often overlooked in the discussion of e-commerce strategy. After all, the business model Flipkart was replicating depended on selling on a massive scale to keep costs down. And during the previous seven years, Flipkart’s workforce had quickly grown to fourteen thousand employees.
Both Sachin and Binny are graduates of the Indian Institute of Technology Delhi and former employees of Amazon. They had set out initially to build a price comparison website for India in 2007. But they quickly realized that wouldn’t work because not enough items were for sale online to provide comparisons, and they converted Flipkart to an online bookstore, striving to build an Amazon for India. They chose books for many of the same reasons that Amazon had in the United States. Books were less expensive to ship than other items, and they had a long shelf life—so they were a good fit for an online model that allowed for virtual stocking of specialized items on the “long tail”—which refers to selling a large number of unique items with relatively small quantities sold of each.
They had an important additional reason for choosing books as the category to focus on in India—lack of trust for e-commerce. “Books are something that has a lower transaction size. A book [costs as little as] one hundred rupees. So it’s very easy for a customer to trust you with that first transaction,” instead of more expensive items such as mobile phones or cameras, Sachin told an interviewer for CNBC’s Young Turks program.1
They started Flipkart in their apartment with an initial investment of $8,000. In the early days, instead of holding inventory, they would get an order and then run across the street to buy books from the local bookstore. To attract customers they used some clever guerrilla marketing tactics, such as handing out Flipkart bookmarks to people coming out of bookstores. “In order to make sure that our targeting was right, we would give bookmarks to only those who were coming out with books in hand—the people who have made purchases,” they explained.2
The strategy worked. Flipkart raised $1 million from Accel Partners in 2009, $20 million from Tiger Global in 2010, and more than $500 million from a group of investors, including Naspers, in 2012. The money helped grow Flipkart’s asset-heavy model as the company moved into buying its own inventory and operating its own warehouses. By 2010 Flipkart had 120 employees, was selling one book per minute, and was poised for rapid growth of its organization to keep up with the demand.
Flipkart’s book buyers were all over India. Most were urban, English-speaking white-collar workers. Half the transactions came from large cities and half from small cities. Flipkart shipped all over India, to places where bookstores and books could be hard to find.
As the company grew, Flipkart strived to differentiate itself from its competitors with customer service. Much as Jingdong had done in China, Flipkart wanted to control the customer’s experience from end to end to make the process seamless and reliable.
Sachin and Binny had good reasons. The Indian postal service was so notorious for losing packages that most people sent everything by registered mail, just to make sure somebody would be accountable. India had a host of courier companies but nothing like UPS, FedEx, or DHL.
Flipkart therefore built an extensive logistics and delivery infrastructure, complete with a motorcycle fleet that races around the country with yellow FLIPKART signs on its scooters. Owning the fleet has helped not only with deliveries but also with reverse logistics for product returns, something India’s logistics companies were woefully unprepared to handle. Owning the fleet also helped the company to more easily accept payments through cash on delivery, which proved to be the breakthrough that e-commerce in India needed. In interviews with various news outlets, the two founders boasted that their logistics capabilities would protect them from Amazon’s inevitable assault on the market in India—in 2011 India’s market was still closed to the US behemoth because the rules governing foreign direct investment in multibrand retail also applied to online retailers.3
By 2013 Flipkart was receiving more than a million visitors per day and had about ten million registered users.4 Its reach was growing as well, with the company claiming that five out of six online Indians visited their site. Having established Flipkart as the primary shopping destination for Indians, its founders then decided to open a marketplace that would allow third-party vendors to sell on the platform and plug into Flipkart’s fulfillment infrastructure, as Amazon had done in November 2000. Designed as a virtual mall, Flipkart’s marketplace was meant to give shoppers a wider selection of products while spreading some of the inventory risk from Flipkart’s own operations to those of the third-party merchants selling on the site.5
In expanding to a marketplace, the challenge for Flipkart was to live up to its reputation for a high level of service to customers. The company soon ran into problems, as buyers reported receiving bricks, stones, cheap knockoffs, and even mangos instead of iPhones and other expensive products, while scammers reportedly demanded refunds, telling Flipkart they’d been cheated.
In 2014, just as Alibaba was preparing for its initial public offering, Flipkart astonished the Indian tech scene by raising $1 billion, valuing the company at a reported $7 billion. But Flipkart was no longer modeled on the founders’ former employer, Amazon, but on Alibaba. “In 2008, Amazon was a dominant player and a role model for most of the people starting in e-commerce. But over time, I’ve realized that India is different and Alibaba Group’s model is better suited for the Indian market,” Sachin Bansal told the Indian start-up news site YourStory after Flipkart acquired the online retail clothier Myntra.com in May 2014. “The supply chain, the customers, their thought process … there is a lot of similarity between the Chinese and Indian online retail markets,” he said at press conference related to the acquisition. “What’s happening in China is inspiring, it is bigger than anything in the US.”6
Indeed, Alibaba’s IPO sent a signal to the world that e-commerce could work by using a different business model in emerging markets. Flipkart was becoming an Alibaba of India. But across the country in New Delhi’s Gurgaon tech district, another company—Snapdeal—was hoping to lay claim to that title.
SNAPDEAL
In 2014, when Flipkart announced it was switching to an “Alibaba-like model,” Sachin and Binny found themselves in a public spat. Kunal Bahl, founder of Snapdeal, felt his own business philosophy was closer to Alibaba’s than Flipkart’s was, and he said so to reporters.7 The public dispute between the two star Indian companies only a few months before Alibaba’s IPO made it clear that India’s e-commerce would develop more like China’s than like e-commerce in the United States.
Following in the footsteps of Alibaba also was a directional change for Snapdeal. When Kunal Bahl and his childhood friend, Rohit Bansal, started the company in 2007, it was a coupon business. They had met as classmates in 1999 and bonded over a shared interest in math. “We were very clear that at some point we were going to do something together, but it was only a matter of time,” said Bahl.8
Their paths diverged when Kunal went to the United States to study at the University of Pennsylvania’s Wharton School of Business and then work at Microsoft. Rohit stayed in India, where he studied at IIT Delhi. But they ran into each other at a wedding and rekindled their interest in working together. The day after the wedding they started brainstorming ideas for what would later evolve into Snapdeal.9
At first it wasn’t even an Internet company. Bahl and Rohit Bansal started it in 2007 as an offline business that printed coupon books. As they made the transition from white-collar workers at multinationals to entrepreneurs, they knocked on the doors of small businesses. They made sales, but they didn’t enjoy the rollicking success they’d expected, Bahl told NDTV, an Indian TV network.
“It had very, very average traction,” he said of the original business. “We realized building a business is not easy. We ran out of money every month.”10
Nevertheless, they kept plugging away and eventually started an online daily deals platform in February 2010, when Groupon was heating up in the United States.
In 2016 I visited Bahl in his offices in Delhi to hear the Snapdeal story firsthand. He explained that deals were a hot sector when he and Rohit Bansal turned Snapdeal into an online deals site. “There were seven players in the online deals business when we started,” he said. “Within six months there were fifty players.”
But despite the plethora of competitors, within a year and a half Snapdeal owned about 70 percent of the market. “We had an advantage because we’ve always been about the small businesses,” Bahl told me. “[Our] fathers are small business owners. We’ve seen the life of pain and agony that the small business owner has in India. We wanted to see how we can change that.”
They soon realized that the deals site wasn’t going to be enough to bring about that change because it didn’t create enough sales. Some venture capitalists encouraged the two friends to go to China, where e-commerce was booming, to take a look at the market there. During their trip in December 2011, they were shocked by the volume of goods that companies were selling.
“We saw companies shipping 500,000 or a million products per day,” Bahl told me. “We thought, ‘This is amazing. This is where India is heading too.’”11
They came back and announced to their board that they wanted to pivot to a marketplace model, even though they had already raised $57 million for their online deals business. Not everyone on the board was persuaded at first, but they eventually agreed. Within two months Kunal and Rohit had shut down their deals site and restarted their company as an online marketplace. That was December 2011.12
Because of the similarities of the two markets, they based their platform on what they’d seen in China. “It was very clear to us that this is where India was headed, for the same structural reasons,” Bahl said. “Both markets have very long-tail, fragmented retail and lack of access to what people need, especially in small towns.” Those conditions meant small business owners suffered “a life of acute pain, agony and stagnation” in both countries. They also shared what Bahl describes as “a deeply entrepreneurial culture.” Pointing to the busy street below his office window, Bahl elaborated: “Even sitting here there are a hundred entrepreneurs in front of us. That guy running the food truck. The guy operating that rickshaw—they’re all entrepreneurs. They are just waiting for an outlet, platform, or channel. Realizing that, we pretty much overnight shut down our deals business and said we were going to build a marketplace.”
From the outset Snapdeal eschewed the inventory model; by creating a platform for businesses, the marketplace could offer a larger assortment of products. “We always wanted to be a platform company helping small businesses,” Bahl said. “If they are motivated to be successful, we’ll be successful as a result. We never even thought about the inventory model as an option.
“For us, marketplace is not so much a business model as a philosophy,” he said, and pointed to a cup of coffee on a table. “Our philosophy is, if I have a thousand such cups in our warehouse that we own, and there are five sellers selling the same cup, which cup will I sell first? I’d sell the stuff that I’ve locked my working capital in. Automatically you’re going to compete with your own sellers, which we never wanted to do. We never wanted to put ourselves in a conflict of interest with our ecosystem.”13
Because Snapdeal didn’t own any inventory, its digital marketplace was more like Alibaba than Amazon. For India it was a unique proposition. But even Alibaba’s business model required a little tweaking. In China, Alibaba started purely as a facilitator of sales—letting other companies handle logistics. Over time Alibaba began to dip further into logistics. But Snapdeal figured early on that it needed to control more of the ecosystem to match the service provided by the companies such as Flipkart and Amazon following the inventory model.
“Traditionally it’s been ‘own everything or own nothing,’” Bahl said. “We feel the answer is somewhere in the middle. Whatever parts are really underdeveloped, you build, but for the rest we will use what is existing. I think that thoughtful approach to logistics has helped.”
Of course, Snapdeal was not the first digital marketplace in India. EBay had also tried but was languishing. I asked Bahl why he thought eBay had not succeeded in India. “They were probably thinking, ‘Let’s get to the market early and establish a dominant position there,’ but they were five or six years too early. In 1999 there were only twelve thousand Internet connections in India. They made a lot of mistakes, self-admitted.”
Despite its inability to crack the India market on its own, eBay decided to back Snapdeal and in April 2013 invested an undisclosed sum in the company. The deal allowed Snapdeal product listings to show up in eBay India search results if the product was not available on eBay India.
Snapdeal’s digital marketplace functioned at first much like Alibaba’s Tmall—which was set up to differentiate brand owners and authorized distributors from C2C merchants. But Snapdeal didn’t have to worry about differentiation, because it didn’t have any C2C sellers, or any sellers at all, for that matter.
“We needed people who already had some products,” Bahl explained. “They didn’t answer our phones so we literally just showed up at their shops and asked them, ‘Why don’t you just put this online?’”
Their first customers agreed practically out of pity, he said, chuckling, and Snapdeal did all the work to get them online—from photographing the products and writing the descriptions to uploading the content to the site. But once those customers started clocking sales, they bought in.
“The moment they saw some sales, they got excited, because their expectations were zero. Not low. Zero.”
After that, nobody had to convince other sellers to sign up. Now tens of thousands of new sellers join the platform every month, purely as a result of word of mouth.
Because India lacked a sophisticated logistics infrastructure, Snapdeal’s business had to include a more comprehensive set of shipping and logistics services than Alibaba originally did in China. To fill these gaps, Snapdeal provided warehouses in which sellers could store inventory. Snapdeal picks up vendors’ products and holds them at its warehouses, accounting for 80 percent of the products sold on Snapdeal. Bahl explained Snapdeal’s philosophy this way: “The lethal combination is marketplace with intermediated supply chain. The e-commerce business of the future is a marketplace with no inventory and intermediated logistics. Even when I talk to John Donohoe at eBay, he says if he had started eBay again, this is how he would run the businesses.”
As of May 2016, Snapdeal had spent eighteen months pumping $300 million into beefing up its logistics operations, according to the Economic Times of India. During that period, its volume of shipments nearly doubled and the number of sellers on the platform tripled, from about 100,000 at the beginning of 2015 to 300,000 in May 2016. To accommodate those volumes, the company acquired two million square feet of warehouse space in 63 locations in 45 cities.14
That’s the same amount of warehouse space Amazon India uses for its inventory model and slightly more than the amount owned by Flipkart, according to the Economic Times.15
Snapdeal acquired FreeCharge in 2015 to add a payment service to its ecosystem and modeled it after Alipay, with an escrow-based TrustPay feature that holds money for seven days before forwarding it to the seller. By 2016 FreeCharge was handling one million transactions per day.
Bahl stressed the value of the thirty million registered addresses it holds; clearly he is thinking about expanding into banking. “Most banks don’t even have thirty million registered addresses, but because of deliveries we have them,” he said. “In extending loans, where you live is the most important” factor.
And what about keeping customers from straying to another platform? “People are not likely to go outside the platform,” he said. “Our whole platform works on ratings and reviews. Without that we would just die. We provide so many protections—such as trackability, seamlessness, recommendations—that people are happy to stay in the system.” To help maintain the system’s integrity, Snapdeal also rates buyers. “Some customers order the same product from five places and just keep the one which comes first,” Bahl said. “So we have a system to score buyers. If you return the offer [with no good reason], COD will go away as an option to pay.”
In operating an online marketplace, language is a big issue in India that China didn’t have to deal with. “India is like a bazillion countries in one country,” Bahl said. “One hundred twenty million people is the number of people who can use English for e-commerce. One billion people can’t. That means that, for one billion people, going to an English Snapdeal app or site is like reading Arabic.” To address this problem, in December 2016 Snapdeal became the first marketplace to offer its platform in multiple languages.16 “That’s what’s going to unlock the next one hundred to three hundred million users. You’ll start hitting a ceiling otherwise,” Bahl said.
I shared with Bahl my surprise at the negative reaction that e-commerce so often receives in the Indian media, where reporters seem to focus on the growing pains instead of the opportunities for entrepreneurs in the country. But Bahl explained that Indian businesses that lobby for government benefits are the source of most of the whining that media have been reporting. He said Snapdeal had not encountered much resistance from existing stakeholders, such as large retailers or middlemen, because Snapdeal hasn’t really cut into their business. That, after all, is the key to the marketplace model: Snapdeal isn’t selling products; it’s helping its partners make sales.
“We are not doing replacement commerce,” he said. “We are doing incremental commerce. That commerce was not happening earlier. If we own our own inventory like Flipkart does or an Amazon does, then I would understand that. But we tell retailers, ‘Snapdeal won’t compete with you, we actually want to work with you to provide you with nationwide reach.’”
The attitude of traditional retailers has been changing over time. Many have tried to open their own e-commerce platforms and failed, then made their way to Snapdeal. “We actually work very closely with the offline retailers to say, ‘You have the product, you understand what people want, we will provide you with the reach,’” Bahl said.
The story for the middlemen is different. For centuries middlemen have exploited India’s infrastructure problems and poor communications to reap huge fortunes—and Bahl said they do it by making products unaffordable for millions despite low manufacturing costs. By cutting those guys out of the loop, Snapdeal is increasing profits for manufacturers and savings for consumers—which translates into greater sales volumes, he said.
Take a sari made in Surat, Gujarat, for about 350 rupees. When it arrived at a shop in Delhi through the traditional network of middlemen, it would cost more than 2,000 rupees. But on Snapdeal it sells for 799, including free shipping anywhere in the country.
“Everyone who should make money makes money, which is the manufacturer, ourselves, the courier company, and the consumer,” Bahl said.
Brands, too, have started to embrace e-commerce, after initial concerns that online sales were disrupting the traditional bricks-and-mortar sales channels. The locally owned mobile phone company, Micromax, for example, surpassed Samsung to become the market leader before Chinese-made smartphones started flooding the market in 2015–16.17
Although Micromax has its own branded outlets and sells phones through various other electronics and mobile phone retailers, it now makes a whopping 40 percent of its sales online, Bahl said.
One reason: deep discounts. Until April 2016, when the practice was outlawed, marketplace and payment solution companies alike were dipping into their reserves to offer deep discounts and essentially buy market share. As of now, brands like Micromax can offer discounts if they want, but they can no longer participate in the price war in which Amazon, Flipkart, Snapdeal, and the like are engaged, because nonmanufacturers are no longer allowed to offer discounts. According to the Economic Times, online sales of electronics products plunged 30 percent as a result.18
Because the online marketplace is a less expensive and more efficient way to reach customers, companies are finally beginning to look at e-commerce platforms as a way to build brands, Bahl said. “We offer landing pages with creative [services] for brands. We do exclusive deals with phones and brands. We do joint press conferences with media and have a 150-person team which only works with brands.”
One of the most productive such exercises was a joint promotional campaign with Nestlé’s Maggi noodles. Among the most popular brands in India, Maggi had suffered a huge setback in 2015, after a regulator in the state of Uttar Pradesh claimed to have discovered unacceptable levels of lead and monosodium glutamate in a batch sent to him for testing. With rumors swirling of a missed payoff or a guerrilla attack by a competing brand, India decreed a nationwide ban that pulled India’s most popular instant noodles from the shelves and forced Nestlé to destroy hundreds of tons of the product. Although subsequent tests showed nothing was wrong with Maggi noodles, newspapers ran articles about the health hazards of instant noodles and other such foods for weeks on end. In February, after the flap was over, the Swiss food giant said it could take three years to recover the lost revenue.19
That’s where Snapdeal came in.
“When it came time to relaunch, they had limited stock,” Bahl explained. “It was a great opportunity [for Nestlé] to work exclusively with Snapdeal to amplify their relaunch. We ran a flash sale for Maggi and got one million registrations and sold out 720,000 packets of Maggi in less than a minute.”
That partnership only hints at what Snapdeal has planned for India’s e-commerce scene.
The company is looking to host twenty million transactions a day by 2020, by allowing people to pay their utility bills and book airline, bus, and movie tickets with the Snapdeal app. The idea is to be the one app that users keep on their phones for e-commerce and to handle everything else. To make it happen, Bahl believes Snapdeal will have to continually expand its offerings.
One way Snapdeal planned to do that was by entering the C2C market with a brand extension called Shopo, a zero-commissions C2C marketplace it opened in July 2015. China’s Taobao led to the start of Tmall, but in India the same thing was happening in reverse, Bahl explained.
Between 2012 and 2016 Snapdeal rejected half a million sellers because they were too small. These were people making long-tail items like handmade baskets and jewelry—and they exist by the millions in India’s towns and villages. With Shopo, Snapdeal had given them a way to connect with customers across the country—which is why the site had already attracted 100,000 sellers and five million listings in its first five months, Bahl said.
“Within the next year we want to get to one million shops,” he said.
The idea made sense to me, but in February 2017 Snapdeal closed down Shopo, explaining that it had decided to focus on other, more profitable areas of its business. It was understandable, given an increasingly competitive environment with investors applying more pressure on Indian e-commerce companies to turn a profit than ever before. But with 100 million or so entrepreneurs and would-be entrepreneurs across India, I felt it a shame that the service had been closed down. There is clearly an untapped opportunity to build a marketplace that captures the vibrancy of India’s “kirana economy” of small retailers. But perhaps it will come at a different time with a more patient set of investors.
AMAZON
Among US e-commerce companies, eBay was by far the most aggressive about expanding internationally in the early years of the Internet. Amazon was a relative latecomer to emerging markets. Instead of expanding in these riskier areas, it focused on building operations and expanding in the United States and other developed economies such as the United Kingdom, Germany, and the rest of Europe. But that strategy came with a cost: by leaving the assault on China to eBay, Amazon lost a massive opportunity, albeit to Alibaba and not its American competitor. It’s hard to be the world’s most valuable e-commerce company without being a key player in the world’s largest e-commerce market. So it’s clear that Amazon does not want to compound its mistake with an error in India.
Thanks to the legal restrictions on foreign direct investment in multibrand retail, Amazon was slow to enter the Indian market too. But when CEO Jeff Bezos did make the move in 2013, he entered the market at full tilt.
Bezos had groomed Amit Agarwal, a Stanford grad from Mumbai who had been working at Amazon since 1999, to build a localized site. When Amit first presented his business plan for India, Bezos said it was not enough. “He challenged us to think like cowboys, not like computer scientists,” Agarwal said. “We need to move very fast.”20
Moving fast is possible only if you have the power to make decisions locally. Back in 2006 Bezos described why US Internet companies struggled in China: “The Chinese management team in the China market is busy trying to keep their American bosses happy, instead of trying to keep their Chinese customers happy. And that’s a mistake we will not make.”21
His diagnosis may have been correct, but during the next few years Amazon seemed to be falling into exactly that trap. The company never managed to capture more than 1 percent of the total market in China. But Amazon insiders laid the blame on simple arithmetic: the company just didn’t invest enough money to win the battle. In India Amazon’s leaders have vowed not to make that mistake again.
Since Amazon entered the Indian market in 2013, the battle between Flipkart and Amazon has become intense and the subject of news stories. In July 2014 Flipkart announced it had raised $1 billion in fresh funding to invest in the market.22 One day later Amazon counterpunched by announcing that it would commit $2 billion to the Indian market.23 And in the next two years the numbers kept going up and up—with Amazon’s commitment reaching a planned $5 billion at last count.24
But if there’s one thing Western Internet companies have proved, it’s that money can’t buy markets. Winning the market also requires the right business model. And in the case of India, Amazon had to adjust its US model so it could comply with India’s regulations, which were even more restrictive than China’s.
For several years Amazon had operated in a kind of limbo, selling products through a joint venture called Cloudtail India, although it warned investors, in a filing with the US Securities and Exchange Commission as early as October 2014, that the joint venture might violate local laws. Then, in March 2016, India finally clarified the rules for foreign investment in e-commerce firms.25
Under those rules India allowed wholly owned foreign companies to sell to consumers as well as businesses online. But in an effort to protect local retailers, it restricted the foreign companies to using the marketplace model, rather than buying and selling inventory. At the same time it issued regulations that limited sales by a single seller (such as Cloudtail) to 25 percent of total goods sold on the platform.26
Even before the rules were finalized, Amazon had relied more on a marketplace model than the inventory model. That was not a huge challenge, because about half the sales on the company’s US site are made through third-party merchants. And India’s regulations may well be a blessing in disguise for Amazon, since they force the company to focus on what I believe is a much more exciting business model for the country.
In pursuit of the largest gross merchandise value, or GMV, the marketplace model’s term for the total value of all goods sold through the website, Amazon has been engaged in a breakneck race with Snapdeal and Flipkart to sign up retailers. As of March 2016, Amazon had signed more than 400,000 sellers, 85,000 of whom were so-called active sellers, whereas Flipkart and Snapdeal boasted total sellers of about 300,000 and 100,000, respectively. That $5 billion Bezos promised to invest seems to be aimed at widening that gap even further. After Flipkart announced in early 2016 that it would hike its fees and pass on the cost of shipping and returns to its sellers, Amazon said it would slash its commissions on smartphones and software in June 2016.27 Such products account for a third of all online sales in India.
Getting that many sellers wasn’t all about spending money, however. As Snapdeal had learned, Amazon has had to do much of the legwork for retailers, helping them take photos, upload product descriptions, and get their businesses online. Amazon even fills out tax forms for some sellers. The company will also handle phone orders on behalf of sellers and pick up the products, as well as pack and deliver them in Amazon boxes. Amazon undoubtedly hopes that as retailers begin to make sales online, they will take on more of these responsibilities themselves.
Amazon’s operations in India have had to take a different form than in the United States. As in the United States, Amazon has invested in huge warehouses to handle fulfillment. In India it has built twenty-one large warehouses, with more than two million square feet of storage space across ten states.28 Its largest warehouse, in Hyderabad, is a 280,000-square-foot monstrosity with capacity for two million items. But while Amazon relies on the US Postal Service, UPS, FedEx, and regional shippers for its US delivery, in India the company has followed Flipkart’s example and hired its own motorcycle couriers who weave in and out of traffic with packages on their backs. Amazon has also partnered with local kirana, small family-owned shops, where motorcycles drop off packages. The local kirana owner then calls customers when their packages arrive and collects the money on behalf of Amazon. For the kirana, it’s a good way to bring foot traffic to the store.
As Amazon grows in India, it will have to do a delicate dance as a foreign operator in the market. In the United States retailers protested Amazon. But in India it will also have to deal with a healthy level of resentment of foreign investment. Amazon has passed the first hurdle, getting regulatory approval to operate an online marketplace in the country. But it will no doubt struggle against protectionist forces as it continues to grow.
Perhaps Amazon’s best argument for gaining acceptance in India is that it is bringing online tools to small businesses. Amazon is commonly perceived as a retail Goliath that has driven small retailers out of business. Yet by 2016, nearly 50 percent of the products sold on Amazon were from third-party sellers, a fact that, in my opinion, Amazon does not do enough to promote. If Amazon can position itself as a company that is harnessing India’s kirana spirit and empowering entrepreneurs with tools to sell both domestically and abroad, it can gain acceptance as a friend and partner to India’s small retailers, rather than resistance as a fearsome challenger.29
PAYTM
Just when Flipkart, Snapdeal, or Amazon seemed likely to dominate India’s e-commerce, a relative outsider—Paytm—leaped into the fray and surprised everyone. Until February 2014 Paytm was a mobile payment leader but had shown little interest in running a marketplace.30
Billed as a “mobile wallet” company, Paytm, or “payment through mobile,” started off as a website to allow users of prepaid cell phones to top off their balances online. Then it expanded to facilitate the purchase of other goods and services, such as movie tickets and taxi rides.
But behind the scenes, Paytm’s founder, Vijay Shekar Sharma, had been thinking about building a marketplace company as early as 2011, when he attended a conference in Hong Kong at which Alibaba’s Jack Ma was one of the keynote speakers. Eventually, the attraction proved to be mutual, and Alibaba took a 25 percent stake in Paytm with an initial investment of about $500 million in early 2015.31
Paytm was then India’s fastest-growing mobile payments company, and Sharma had gone to Hong Kong with the goal of figuring out what a world reliant on the smartphone is like. “In that year, I learnt that if you want to learn what is happening in mobile Internet in the world, you don’t go west, you go east,” he said. As he listened to Jack’s speech, Sharma was impressed by the numbers and enormous growth of e-commerce in China. What he learned, he said, is that “payments and commerce go hand in hand.”32
When I interviewed Sharma in 2016, he told me that Jack’s vision completely transformed his own ideas about where Paytm should be headed. Blown away by Jack’s offhand reference to the company’s growth from $64 billion to $126 billion in revenue in one year, “I came back and told my board members, ‘We will build a Taobao for India,’” he told me.
Nearly everyone was telling Sharma to stick with payments—a big business opportunity in itself. But he found Jack’s enthusiasm to be infectious. Sharma read virtually every word that had been written about Alibaba, Taobao, Tmall, and Jack Ma—and even bought old business magazines from a secondhand dealer to find articles. Finally, in October 2014 Sharma finagled a meeting with the Alibaba founder in Hangzhou.
“[They told me that] Jack was only going to come for twenty minutes, but in the end the meeting lasted two and a half hours,” Sharma recalled.33
The Paytm founder spoke as much about his life as he did about his company—which, a few months before, had officially become India’s largest e-commerce company by transaction volume; it was processing about 300,000 transactions per day.34 Sharma shared how he’d grown up in a modest family with no special advantages—this impressed Jack: “I was surprised that Jack thought it was an advantage that I had gone through tough times.”
Sharma went from pitching to Jack to being pitched by Jack. Essentially, both men had the same idea in mind. If everyone from Alibaba to Flipkart was building or acquiring a payments company to ramp up sales on their marketplaces, why couldn’t Paytm leverage its payments app to drive customers to a marketplace of its own?
A few weeks later Paytm raised more than $500 million, surprising the Indian tech world. But Snapdeal’s founder, Kunal Bahl, remains a skeptic.
“It’s unclear to me what business they are in,” Bahl told me. “We are an e-commerce company backing into payments. We’ve never seen anywhere in the world a payments company backing into e-commerce. The skill sets are very different. Technology requirements are different. Capabilities you need to build around a supply chain are very different. Our strategy seems a little more logical and well put together. I feel like a commerce business without payments is like a car without wheels. But the wheels by themselves are not particularly useful, either.”35
E-COMMERCE IN INDIA TODAY
Booming Numbers
It’s safe to say that e-commerce in India has now reached a turning point; sixteen years after Baazee was founded, the river finally has water. Smartphones now account for one quarter of India’s 900 million mobile phones, and Internet data prices have come down. This is helping to push Internet penetration from 32 percent in 2015 to 59 percent in 2020. It’s predicted that India will have one billion people online by 2030, adding more people online than any other country.
Indian e-commerce is leaping to mobile even more quickly than e-commerce did in China. Snapdeal’s mobile business grew from 5 percent of all transactions in 2013 to 75 percent in 2015. Because mobile commerce was growing so quickly, Flipkart even tried to do a mobile-only platform but was forced to reverse its decision when sales dropped off. It might have made the move too soon. But it is safe to assume that India is gradually shifting from mobile first to mobile only for many platforms.
Fortunately for the e-commerce players, these shifts are all coming at a time when the Indian economy is strong. If the Indian economy keeps bucking the emerging market trend, by 2025 per capita income could be double the 2014 figure of $1,570. But assuming that its growth pattern holds steady, there will be ever more traffic jams and bad offline shopping experiences, because of India’s notoriously poor infrastructure development. That is why I can imagine that the emerging middle class in India will spend more of its money online than its counterparts elsewhere.
In 2015 e-commerce sales in India had already reached $16 billion, and the top three e-commerce companies had exceeded sales of the top ten offline retailers for the first time. Morgan Stanley predicts that e-commerce sales in India will grow by 700 percent by 2020, slightly faster than the rate that China grew from 2010 to 2014.36
Drawn by the opportunity to participate in “the next China,” all the major global players are scrambling for a berth in India. Alibaba, Softbank, and former rival eBay have invested in Snapdeal. Alibaba has hedged its bets with its investment in Paytm. Naspers, the South African media company that is a major investor in China’s Tencent, has invested in Flipkart. In 2017 Tencent, eBay, and Microsoft also joined Flipkart’s roster of investors. Amazon, of course, has focused on Amazon India. Facebook has launched a payment platform for India via its WhatsApp messenger system.
As of early 2016, the market was still led by Flipkart, which held 45 percent of the market. Snapdeal followed at 26 percent, and Amazon was at 12 percent. But these numbers were very much in flux, with Amazon beginning to bridge the gap. As of June 2016, for instance, the Seattle-based giant had inched up to a 15 percent share in terms of GMV, but it had passed both rivals in terms of overall web traffic, including desktop and mobile users, Forbes reported.37
The scramble for the India market has created an investment frenzy. The frenzy is most evident during massive sales, which are modeled on Alibaba’s Singles’ Day. In a mad rush to enhance the all-important GMV figures, retailers have subsidized prices, in many cases losing money on every sale. A boon to customers to be sure, but this has led to a backlash from local retailers, who argue that they cannot not compete. And the government stepped in to say that retailers cannot set prices themselves. It will be interesting to see how the market share recalibrates when prices are no longer subsidized and return to market levels.
Cooling the market may be good for e-commerce in India, as the sector had the feel of a valuation bubble. In the long run, this could be healthy in a market where intense investor pressure for market share may be encouraging wasteful marketing spending. As Niren Shah told me, “People are destroying value.”
Uncertainty about regulations has also slowed growth. As I noted earlier, in March 2016 the Indian government helped clarify some of the rules for foreign investments in e-commerce retailers. Whereas China generally erred on the side of allowing more foreign investment, India went the other direction, prohibiting foreign companies from investing in direct retailers and requiring that no retailer on any marketplace could account for more than 25 percent of overall sales for that marketplace. This forced Flipkart and Amazon to scramble to find a way to comply; they explored such ideas as breaking down their operations into individual businesses based on categories.
Yet despite these setbacks, the investment frenzy and resulting media coverage has been good for India, accelerating the growth of e-commerce in the country. In China the battle between eBay and Alibaba ignited people’s interest in e-commerce, persuaded sellers to go online, and convinced shoppers they could find deals and trust e-commerce. The rivalry created a public debate. And it has given rise to a sector that is capturing the imagination of future entrepreneurs—and lifting them out of poverty.
Already Flipkart, Snapdeal, Amazon, and Paytm offer Indian craftspeople access to a much wider market for their products than they ever could have imagined. Snapdeal, for instance, offers a wide range of goods manufactured by two hundred or so entrepreneurs from the Dharavi neighborhood of Mumbai. A sprawling warren of shacks built from cast-off sheet metal and plastic tarps, Dharavi is Asia’s largest slum. But it’s also one of India’s most productive commercial centers, home to leather manufacturing and a host of other industries. Before the advent of e-commerce, Dharavi craftsmen, like twenty-eight-year-old Nadeem Sayed, who makes leather jackets, struggled to find markets for their products and were at the mercy of larger traders when it came to pricing. But with direct access to millions of buyers, some of these grassroots entrepreneurs have dramatically increased their incomes. Sayed once made and sold leather jackets that brought him about 15,000 rupees per month. But through Snapdeal he’s increased his sales to 1.5 million rupees a month by selling to customers in the United States, United Kingdom, and Canada instead of to Indian wholesalers.38
TRENDS AND PREDICTIONS
E-commerce will take longer to take root in India than in China …
At first glance, India looks like it could be “the next China” for e-commerce. But although e-commerce growth in India will be dramatic, taking root in India will take longer than in China because of the many additional frictions in the Indian market. These include the large number of languages spoken, infrastructure inefficiencies, and competing state tax regimes. That India is a democracy with a history of protectionism also introduces more regulatory uncertainty, which will present hurdles to the adoption of e-commerce in the short and medium terms. This is why, even with rapid growth, total retail e-commerce sales in China are still expected to be thirty times greater than in India by 2020.39
But when it does take root, it will be more important to India than even to China …
In the long run, these inefficiencies represent the greatest opportunities for entrepreneurs in India. Once they are resolved, it’s easy to imagine that e-commerce will play an even more important role in India than in China, because India’s infrastructure woes will make the gap between physical commerce and e-commerce even greater. E-commerce grew dramatically in China once the digital infrastructure was in place, and in India it will rocket forward once infrastructure problems are solved. And in doing so India’s e-commerce will become a seven-course meal when retail, from branding to delivery, moves online.
Resistance to Chinese products bought directly online will emerge in India
As I noted in the previous chapter, the Indian government is supporting a “Make in India,” campaign and celebrating innovation while encouraging foreign investment. But even as it does this, an increasing number of inexpensive products will be sold directly from China into India from cross-border e-commerce websites such as AliExpress. Two leading marketplaces, Snapdeal and Paytm, have Alibaba as a partner, which will accelerate the flood of Chinese products. This will lead to tensions and perhaps even restrictions on Chinese goods coming into the country at the same time that “Make in India” is getting a huge push.
India will emerge as an e-commerce incubator for other emerging markets
The early e-commerce entrepreneurs in China looked to the United States for inspiration. The current e-commerce players in India look to China for inspiration. And it’s likely that entrepreneurs in emerging markets will look to India for inspiration in the future. India’s economy is a better model for them than China’s.
Ideas from India will spread more quickly to other countries
Indian e-commerce companies are correct in focusing on the Indian market now. But once the market has stabilized a bit more, and companies become profitable and leaders emerge, we can expect the Indian companies will begin to look for opportunities overseas. India has an advantage over China in that India is not hampered by an authoritarian regime, so its technology and services can grow without censorship. This will make India’s services more palatable to markets outside the country. India also benefits from its use of English as the language of business as well as from internationally savvy Indian tech industry managers who could help India’s companies expand globally.
E-commerce in India will grow from a battle of marketplaces into a battle of ecosystems
Just as in China, e-commerce business models in India have converged on the marketplace model. And they will likely follow the Chinese example and expand into ecosystems that include payments, logistics, and other services as e-commerce companies scramble to increase the number of ways they can reach consumers and sellers. This is already clear from the battle between Paytm and FreeCharge for the taxi payment business. As e-commerce companies scramble to grow their ecosystems, we are likely to see an aggressive phase of mergers, acquisitions, and consolidation.
E-commerce will give rise to a new generation of homegrown brands
“India is a very long-tail market” with a highly fragmented set of suppliers and manufacturers, Sandeep Aggarwal, founder of e-commerce marketplace ShopClues, explained to me. He cited the fact that in the United States, the top twenty brands of shirts constitute a majority of the overall market share, but in India there are many more manufacturers, with no clear brands taking outsized shares of the market.40 In fact, Indians are not as obsessed with foreign brands as the Chinese are. And Indians want specialized products because of their deep and diverse cultural and religious differences. So as e-commerce allows creators to gain instant access to a nation of buyers, homegrown brands will appear, often making their debut on the Internet. It’s easy to imagine that we will soon be hearing about “Snapdeal originals” or “Paytm originals” that can only be bought online.
Offline retailers will try but fail to do e-commerce well
Throughout the world offline retailers have proved themselves to be bad at transitioning to the online world. In the United States, even long-standing titans with broad national reach, such as Barnes & Noble and Toys “R” Us, haven’t made the transition. So it is hard to imagine that in India, where organized retail accounts for such a small portion of retail in the country, traditional offline retailers will be any more successful at creating their own online stores. Instead, offline retailers like Pantaloon should follow the old adage “If you can’t beat them, join them.” When approaching the online market, major players should look to maximize their sales on Amazon, Snapdeal, and Flipkart as vendors rather than try to compete with them. As Sandeep Aggarwal told me, “The Walmart of India will not be Walmart Corporation—it will be an online company. And that online company will not be an inventory-led model; it will be a marketplace.”41
The ultimate winners will be consumers and small merchants
Most of the attention for e-commerce in India has focused on the top players, who use their billions to subsidize the growth of e-commerce. It is not yet clear which of these titans will survive, which will be gobbled up, and which will become the most successful. But there are clear winners: consumers and small merchants. Consumers will benefit from the lower prices and greater availability. Merchants will benefit from having national and even international reach for their products. So it’s in their best interests to stay friendly toward all the top players and make their stores available across a diversified range of e-commerce marketplaces.
Foreign brands will discover huge opportunities
From the perspective of foreign brands, e-commerce in India is now at about the stage China was in 2008, the year Taobao spun off Tmall to become an independent entity. Judging from the China experience, now is the time for foreign brands to get into India. All the major players have services that allow brands to sell their products and tell their stories in ways that are more sophisticated than a simple photograph and text description. Yet few brands are taking advantage of the opportunity. Tmall remains crowded with global brands competing for attention, but e-commerce in India is at a critical point, and getting in now is well worth considering.
E-commerce in India will prove to be more creative than disruptive
The China market has proved that e-commerce creates sales where none would otherwise have occurred. In India e-commerce should be an even more creative force, since it is creating a platform from which the entrepreneurial spirit of the kirana store can be harnessed online, giving eager retailers national reach for the first time. Unfortunately, the proponents of the status quo—existing retailers and other intermediaries—are convincing bureaucrats to see things their way by arguing that e-commerce is a largely disruptive force. E-commerce leaders in India need to do a much better job of touting the benefits that e-commerce is bringing to grassroots entrepreneurs there. E-commerce in India is not a case of large retailers sucking up all retail opportunities. Rather, it is about giving small retailers the tools they need to become large retailers.
E-commerce leaders should do more to highlight the successes of merchants selling on their sites. They should point to small retailers in rural and impoverished regions who have improved prospects for their families by selling online. They should highlight the growing numbers of jobs e-commerce is creating for workers who have found jobs as delivery people. Until e-commerce leaders make this compelling case, they will be met with resistance from those in the media and the government who have a stake in protecting the incumbents and the status quo.
E-commerce will give rise to a banking revolution
Banks in India have largely remained bureaucratic, inefficient, and woefully unable to serve the needs of small merchants and microentrepreneurs. Part of the problem is a thicket of regulations that make a sheaf of forms necessary for something as simple as opening an account. But it’s also the legacy of the era of state-owned banks. Privately owned banks became legal only in 1993 and have not yet fully modernized. In the Internet era, as mobile commerce moves India toward a cashless society, will the State Bank of India really need its nearly 200,000 employees in almost 10,000 branches? Without the need to physically process deposits and withdrawals, probably not.
Just as it did in China, e-commerce will drive a banking revolution in India. As e-commerce companies in India collect the transaction histories of buyers and sellers, they will be gaining important credit information. Over time this credit information will allow them to extend loans, an area that some payment companies are already exploring, although it’s not clear that banking laws will permit them to do so.
The biggest hurdle e-commerce companies face in becoming e-banks is resistance from the heavily protected banks, which will undoubtedly protest the emergence of online financial institutions. The banks will argue that e-banks are unreliable, can’t be trusted, destroy jobs, and introduce financial instability to India’s economy. But government policy has so far had the effect of accelerating the demand for the mobile payments, helping the leading service providers such as Paytm. When the Modi government banned the use of large banknotes in late 2016 in an effort to stamp out black market activities and generate more tax revenue, the daily number of digital payments jumped 271 percent.42
C2C will take off … eventually
It’s surprising that e-commerce in India has gotten as far as it has without the emergence of a massive C2C player, such as Alibaba’s Taobao, which allows small businesses and individuals to sell online. But despite many attempts, C2C simply hasn’t taken root.
However, in a nation of entrepreneurs, this should change quickly. With its strength in purely mobile marketplaces, Paytm may be able to move into the market that was left wide open when Snapdeal shut down its Shopo service. We should expect that, in the next few years, C2C mobile-based marketplaces will become an important frontier for e-commerce players in India.
Logistics: A problem that creates opportunity
Logistics will remain one of the fastest-growing industry sectors in India as new solutions are found that take the country into the e-commerce era. Because India is starting from scratch, we can expect interesting spin-offs in the logistics arena. Flipkart’s initiative to spin-off its own logistics company is one such example, but there are many others—logistics has become one of the hottest sectors for investment over the past year or two, according to Tech in Asia.43 E-commerce companies themselves are expected to invest about $6 to $8 billion in logistics, infrastructure, and warehousing in the next few years, according to one recent study, while stand-alone logistics firms like Delhivery, Ecomm Express, and GoJavas have attracted venture capital and private equity investment.44
Multiple players will coexist in the market
Alibaba still manages to hold about 80 percent of the China e-commerce market. Some have argued that this is because of protectionism. But Alibaba has such an outsized position in the China market because people simply were unaware of the opportunity there; for several years eBay was Alibaba’s only real competition. Once Alibaba vanquished eBay, the Chinese start-up had the playing field to itself for several years, which enabled it to grow and consolidate its share of the market. India is different. The success of Alibaba made people aware of the opportunity in India and attracted more competition. Thus share of the market in India will be more evenly distributed among the major players for the foreseeable future.
Private label will become an important segment for e-commerce players
Because cobbling together a fulfillment infrastructure is so expensive, players like Flipkart and Amazon are finding themselves pressured on their profit margins. So it is not surprising that they have begun experimenting with private-label products as a way to capture more of the value chain. By tracking purchase data through their systems, companies will be able to identify high-volume, commoditized items, such as iPhone chargers or men’s dress shirts, for which they should start their own private labels. It will be important not to lose focus on their core e-commerce business, but private-label items represent an opportunity to capture more profit when fierce competition is squeezing retail margins.