Inventory based model is dead

Written by Anand J | KUNAL BAHL interview, | Updated: Jun 4 2013, 01:39am hrs
Snapdeal is one of the first e-commerce companies in India to turn to a market-place model that is now the toast of the sector with the likes of market leader Flipkart also trying this business model. The company which is planning to clock sales of R3,000 crore this year and $1 billion by 2015, will have 30,000 sellers in its market-place by the end of this calendar year. Kunal Bahl, co-founder and CEO of Snapdeal, in an interaction with Anand J tells that the inventory model for e-commerce is dead and the companies must be acting only as a marketing platforms.

What is happening in the e-commerce sector right now

The e-commerce sector is going through a lot of flux right now. Eighteen months back there were new companies starting every week. Now same number of companies are shutting every week. From euphoria, industry has moved into consolidation. About 18 months ago we started building the market-place model that is unique in a way, we can scale up easily. Now most of the e-commerce is moving from inventory led to this model. Along with deals, companies started listing their products and services on our website. We did not say no, because at

the end of the day, we are just a marketing platform. We provide reach to

merchants, giving an opportunity to supply locally and sell nationally.

We wish to grow the size of Indias retail market, which has innumerable local brands that are great products, but dont have the reach. We help them with technology, logistics, managing customer support, merchandising and so on.

Why do you think that inventory model will not work in India

Inventory based model is basically dead. Now they are building businesses from scratch. After sinking hundreds of millions of investors money, they

are moving to market-place model.

Inventory model is not financially

viable because of the inventory risks of crore of rupees, thousands of people

in the logistics area, have significant

operating costs. Globally, there are

not many successful inventory model

e-commerce businesses. We dont need any working capital for inventory.

We are spending less money because of automation, even as we are growing.

How exactly does a seller benefit from a market-place

For instance, if a brand has 1,000

unsold T-shirts, finding a single buyer is

difficult. And sending them to 150 retail outlets across the country is also

inefficient. So, our market-place

will solve these issues and still make

money on this. Business is a lot about

having critical mass and more sellers will bring in more buyers and vice versa.

Why is it that real world retailers globally make money whereas

virtual retailers dont

The real estate cost is exorbitantly high in India that you cant make

money in retail. The problem with

virtual retailers are that they build a huge logistics team, which they dont need. And on top of that many of the brick and mortar retailers dont have that much inventory and you have so much money stuck in working capital. You have already bought it and end up selling only 70% of it. And then you sell the remaining stock at super discounts that you end up losing all the good margins you made in selling the 70% of goods.

Are the margins lower in the market-place model

Not really, if you account for the

working capital cost. And also for the fact that there is substantial amount of distress in the inventory levels and you are selling goods at throwaway prices, which wipes out the additional margins you get in inventory model. You cannot see the margins in isolation. The cost tends to add up in managing and liquidating the inventory as well as the cost of managing a workforce for this inventory.

When are you going to be profitable

If you try to achieve profitability too soon before scaling, you end up not

investing in growth. We are currently

investing in two focus areas. One is technology like we give the sellers a lot of performance management tools so as to help them to benchmark against the best performers in the same category, technology related to shipping and so on. And the other is acquiring new consumers. You cant ask telecom companies whether they are profitable in the third year of business from around 70 lakh e-commerce transactors (excluding travel), we will go up to three crore over the next five years. We are still in an investment phase and I think it is the prudent thing to do.

What is the role of Trustpay in the market-place model

That was more a reactive decision.

According to a recent Google study, the single biggest reason for consumers not buying on e-commerce is lack of trust. This gives the consumers seven days under which if they dont like the product, they can get their money back. The money is put in an escrow till the consumer is happy with the product. We also have a shipping platform called Safeship, which has integrated large number local and national courier companies so that there is no burden on the sellers to find a courier service.