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How e-commerce is reinventing itself

Last updated on: June 14, 2012 14:45 IST

How e-commerce is reinventing itself

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Swati Garg in Kolkata

The experience of 99labels, a fashion e-retailing site controlled by InfoEdge -- the same company that owns India's largest job search site, Naukri.com -- is key to understanding big changes sweeping the e-commerce sector.

According to 99labels founder and CEO, Ishita Swarup, marketing budgets at the company have been cut to one-fourth of what they used to be around December 2011. "We have gone completely off mass media for marketing, and focused only on social media, primarily Facebook," said Swarup. Till December, 99labels was marketing heavily on radio as well.

Last year, a multitude of e-commerce companies were burning money, advertising heavily and throwing cash at anything that could help them scale faster. Then, the slowdown caught up with them and the fountain of investments slowed down to a trickle, leaving them gasping for survival.

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In the first 10 months of 2011, $829 million was pumped into the sector, but in November, according to data of research consultancy firm VCC Edge, private equity players invested only $57 million in 12 deals.

In December, that number was $16 million, climbing feebly to $24 million in January. "Last year the money was flowing. However, most players had no roadmap for profitability. Since October, most PE firms that had earlier been bullish on the market have been in wait and watch mode, making money hard to come by," said the CEO of an e-commerce company.

The current slowdown has been a moment of reckoning -- yet a blessing in disguise for many who were once happy with running unprofitable business models amidst a glut of venture money. Now, however, the cash crunch has forced many -- such as Yebhi, 99Lables and Fashion&You -- to look at other avenues to generate cash, by cutting flab and scaling down expenses which they couldn't afford earlier anyway. 

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Photographs: Charles Platiau/Reuters

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This means growth has slowed, says Swarup, but that's a good thing for 99labels. "Till December, we were growing in the high double digits. This has now come down to below 10 per cent. And yet, we are finally making money," Swarup adds.

Ditching big marketing spends of the kind that Swarup earlier mentioned is one big reason for companies now being able to put their heads above water. Mahesh Murthy, venture capitalist and founder of online media marketing agency, Pinstorm, feels that the biggest problem with marketing spends incurred till now has been that the return on investments (RoI) have not justified the expenditure.

Even today, Murthy accuses companies like Jabong of spending more on marketing than their overall revenues. "Jabong is currently spending Rs 75 crore (Rs 750 million) on just online marketing, with average daily transactions at 6,000," he said. Then, there's Flipkart. With revenues of Rs 5,000 crore (Rs 50 million) last year, it is still one of the biggest spenders on TV and a partner company promoting Indian Idol on Sony.

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Photographs: Kevin Lamarque/Reuters

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Even online advertising can send money down a black hole, says Murthy. The industry average cost of a click is estimated anywhere between Rs 12-Rs 15. This means, to generate 100 clicks, a company spends Rs 1,500.

Again, on average, for every 100 clicks, only one person buys a product. This means to make money off the one consumer, there have to be at least 8-10 repeat buys, he says.

Prashanth Prakash, of Accel Partners, which has invested about $30 million in just the ecommerce space in India till now, says the cuts were inevitable. "It has now become imperative that companies look at metrics they have till now ignored so they at least start chalking out a road to profitability," he says.

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Photographs: Catherine Benson/Reuters

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This could mean several different things. 99Labels, for example, has decided to blacklist anyone who turns away an order for no 'justified' reason. "The merchandise returns pile up inventory levels, which then have to be given greater discounts, thus creating problems," says Swarup.

Others have morphed their business models in order to survive. Snapdeal, which boasts of 16 million registered users and 30,000 transactions a day, is no longer a 'deal site'.

"We started products on a small scale and then they took on a life of their own. We are now looking to become the biggest e-commerce site in the country," says Kunal Bahl, CEO, Snapdeal.

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Photographs: Reuters

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Snapdeal, which has just ended a six-week marketing campaign, says it runs the biggest digital newspaper in the country, given the strength of its registered user base and has therefore no desire to burn money on additional marketing.

"The email system, is a great way of consumer engagement -- it keeps us within the periphery of the buyer's vision and helps us tap into spontaneous buying as well," says Bahl.

Myntra, the fashion catalogue website that aspires to go from the current revenues of Rs 80 crore (Rs 800 million) annually to Rs 500 crore (Rs 5 billion) in the next year, plans to launch a private label to help it get there.

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Photographs: Truth Leem/Reuters
Tags: Bahl , Myntra , Snapdeal

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"Launched at a cost of $5 million, the label will help improve our margins from the current 37 per cent to almost 45 per cent, because we will control the entire line," says Ashutosh Lawania, co-founder, Myntra.

The private label to be launched by December, will be sold only on Myntra. The production of the line will be outsourced. Myntra will choose designers and ensure quality control.

In the lifecycle of a business, it sometimes takes successive failures to learn how to succeed and today's e-commerce companies are lucky enough to be forced to navigate that learning curve. 


Photographs: Reuters

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