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Deciphering the right ecommerce model for India

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Multiple ecommerce models have evolved in the market starting from Pure Inventory Model (capital intensive) on one extreme to Pure Market Place Model on the other (technology based agent model that is light weight on capital).  In US 3 models dominate the space, they include

-      Pure Inventory Model

-      Hybrid+ Model- ex: Amazon

-      Pure Market Place Model - ex: eBay

However in India, while the market initially started off with Inventory led ecommerce model the capital intensive nature of business, concerns from stakeholders on profitability and scale as well as threat from International bigges like Amazon has led to emergence of new class of ecommerce Model namely

  1. Hybrid Model
  2. Managed Market Place Model

Each model has come into existence for similar reasons but with different intentions. The Managed Market Place Model has been adopted by Flipkart, Snapdeal and Amazon to circumvent FDI Laws and bring foreign money to beef up capital. While there are debates on whether it is legal to bring FDI under the Managed Market place model, for the time being it is seen as a quick source of much needed capital for these companies.

On the other hand Myntra (in early 2014) also introduced (but did not switch completely) to a Market Place model while retaining the Inventory based ecommerce model. Per one of the earlier announcements from the company, Myntra will continue to operate both models (one needs to read this with caution as Myntra got acquired by Flipkart in mid 2014) - src: www.economictimes.com

       Sell premium and private label brands through inventory model

       Sell Local and Boutique Brands through Marketplace model

While managed market place model is one sure way to scale profitably without needing too much capital and providing right level of control towards customer experience, there are still multiple problems to deal with

       Limited or Lack of control over Product availability and quality  from third party sellers

       Humungous task of managing a large supplier base that is fragmented and Limited ability of 3rd party suppliers to scale and meet demand fluctuations

       Delays in shipment and marginally higher shipping costs as multiple products in an order needs to be fulfilled from multiple suppliers consolidated at a Fulfillment center and then and shipped to customer

       Loss of competitive advantage over the long run as the technology platform offering (for managed marketplace) can be replicated by other players leaving little or o differentiation between various players in the market

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In my view the model followed by Myntra** in India (hybrid model) or the one followed by Amazon in US (hybrid+) has greater appeal over the managed marketplace model for the following reasons

       Provides leverage to sell premium and exclusive brands through their own inventory

       Focus on private labels and improve margins

       Provides an option to the company to scale and sell other products/categories (from their own inventory) when 3rd party sellers are not providing the right quality of product or service

       Utilize marketplace to derive trends and insights on new products and gaps in current offering and use the Inventory model to exploit those gaps.

       Strikes a fine balance between Capital Requirements vs control on product quality, inventory and fulfillment

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To summarize, in the near term the market in India will move towards the Managed Market Place model for ecommerce for obvious reasons. However once the restrictions on FDI in online retail (B2C) are removed and when capital is available at acceptable rates most players will settle for a 'hybrid' model where Inventory and Market Place models will co-exist on their ecommerce platforms allowing players to exercise right amount of control on product quality, inventory, price, fulfillment and order tracking. Think about a hybrid model where high value-low volume and designer goods are sold through inventory model and categories that have high volume/low value and low margin goods are sold through marketplace model.

Other interesting proposition to consider would be that of Brick and Mortar retailer like Reliance Retail or Tata*** to build or acquire one of the ecommerce platforms and provide a compelling business case. A player like Reliance Retail has the following advantages

       Established supplier network for multiple categories as they already operate various formats like Fresh, Hypermart, Digital and Fashion - helps scale the business faster

       Faster rollout into Tier-2 and Tier-3 markets by leveraging well established store network in these cities.

       Availability of capital from parent company which will help scale the business. Deep  pockets and easy access to capital ensures staying power in the low margin online business

       Omni channel support by leveraging stores as fulfillment centers ensuring faster deliveries and improved customer experience

Clearly these are exciting times for online retail in India. The extent to which any model succeeds will depend on positive policy changes, efficient usage of available capital, trust quotient, scale, optimal customer experience and supplier network management and tight control on operations (price, quality, availability, fulfillment and returns).

* Includes Control on Product Quality, Inventory, Price, Logistics, Fulfillment and Tracking

** Myntra got acquired by Flipkart in Mid 2014 and hence their business model might be subject to change

*** Tata has already made investments in Bluestone, UrbanLadder and Snapdeal in 2014

Comments

Market place model is good in India, but seller are not willing to join new player as they have feeling that SnapDeal has not done payment for many vendors. SnapDeal has more vendor than product. It is very confusing. In this regard Shopclue.com, Flipkart.com(extremely good),Amazon.in and buyonkart.com is doing well.

This is a very well written article. With businesses globally putting more weight-age on customer experience, this would come as a major challenge for a pure market place player.

Would customers want to pay a slight premium (although it would still be less that the brick and mortar players) for this is yet to be seen. If this happens, you will may start seeing specialized retail outlets concentrating on not more than 5 - 6 categories providing more value to the customer than the market place could.

We would have to wait to see if that model emerges or not.

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