History is replete with examples of unbridled hype created around new commercial ‘discoveries’ that first lead to investment frenzy, formation of bubbles that grow exponentially, and then an almost overnight collapse of the same. From the tulip-mania of the 17th century to the dot.com euphoria and bust of the late 1990s-early 2000s, one of the common threads is the discarding of simple, first principles of commerce and accounting and replacing them with new ‘metrics’ of revenue estimation and business monetisation. The dot.com era led to minting of exotic terminology that included measuring of ‘eyeballs’ (or visitors to the website) and then ‘sticky eyeballs’ (whatever that meant). It seems that the e-commerce (or more specifically, e-retail) business ecosystem is taking over from where the dot.com era ended.
Three of the more exotic new terms that form the lexicon of current e-tail businesses include omni-channel, GMV (gross merchandise value), and hyperlocal. Like in the different bubble eras of the past, none of these three come with any clear, universal definition. Yet, droves of starry eyed e-tail ‘entrepreneurs’ in their final year of college start expounding that their ‘entrepreneurial’ ventures are based on one or more of these new-age fundamentals (perhaps believing that they are as immutable as the most basic laws of physics). The ‘veterans’ of e-tail, many still in their 20s and a few in their early 30s, raise millions (and some even billions) with valuations based on GMV and now hyperlocal, while also picking up on the way an enviable
assortment of awards of the ‘entrepreneur of the year’ or ‘businessman of the year’ type that are annually bestowed by various financial publications.
Let us focus on the current flavour of the year: hyperlocal. While there is no precise definition, it has its roots in another term—neighbourhood commerce. Myriad businesses that define themselves as hyperlocal have been founded on the premise that it may be more efficient in certain situations to dispense with the classical hub-and-spoke model of both physical and e-retail businesses that generally first bring their entire merchandise assortment from their vendors to one or more large distribution centers, and then redistribute the same either to their physical retail stores or directly to the end-customer using a suitable logistics network. Instead, they surmise that the merchandise that the customers usually need in a particular catchment is already
available through an existing physical retail network of independent (or localised chains) retailers. Hence, it would be more efficient to map out such retailers and their typical inventory SKUs (stock keeping units), aggregate orders from end-customers using a website/application based platform, create a shopping cart by picking the ordered merchandise from an appropriate set of locally
operating physical retailers, and deliver the same to the customer. In theory, the efficiency comes from not having to invest in expensive distribution centre infrastructure and expensive inventory (the local retail businesses already carry this inventory), and by way of reduced cost of the last mile delivery since it is done in a limited radius.
However, while such efficiencies could translate into a financially viable business model in developed organised retail markets such as the UK, France, and the US, the ground reality in India is very different. The independent retail network in India has millions of very small outlets of 500- 2000 square feet size carrying 500-2500 SKUs. In contrast, a typical supermarket in Europe would be 10,000-25,000 square feet in size and typically carry 20,000-30,000 SKUs that are usually adequate to fill the shopping basket of most households in a particular catchment area. Hence, the effort and time to fulfill a typical order from a customer in Mumbai or Delhi may require picking up products from multiple outlets, all located apart from each other, and then delivering the same to the customer. These independent retailers have little incentive to offer any significant discount (if at all, any) to their hyperlocal operators and they could end up creating the shopping basket at the prevailing retail prices while incurring significant cost in customer acquisition, besides its own cost of operation and logistics costs. On top of this, many of these hyperlocal businesses promise 10-30% discounts. Similarly, many of the newly started (and highly valued) food services hyperlocal businesses are founded on the premise that the food would be cooked in the home kitchens of their ‘suppliers’ and hence the only effort and investment is in getting such suppliers on board, build a suitable order collection platform, acquire customers, and then deliver from these distributed kitchens to the customer’s place of preference. In reality, both the ability to scale up and reliability of such a fragmented supply chain is suspect and likely to flounder as volumes build up.
To many, the financial viability of such business models would appear suspect since there is no real cost disruption in the overall value chain and instead, additional costs are being incurred while customers end up getting goods at a discount. However, investors in such businesses obviously think otherwise and continue to fuel the frenzy with tens of millions of dollars. The pedigree of most of these investors is not in doubt and hence they obviously see the potential (and financial viability) of their investee companies very differently. But then, one could have said the same at the time of the tulip mania or more recently, at the peak of the dot.com boom. The only difference this time is that there is no doubt that e-commerce, including e-retail (both inventory and marketplace models), has a great future in India. There are several fundamental reasons for it to exist and thrive, and hence hundreds of successful e-commerce businesses should come up and thrive, provided they are founded on sound business and financial accounting principles.
The author is chairman, Technopak