Startups not a waste: Why retailers must learn to live with e-tailers

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Updated: Sep 09, 2016 7:13 AM

Kishore Biyani talks of start-ups being a waste since they are losing money, but brick-and-mortar firms lose money too—and that’s money borrowed from banks; start-ups, on the other hand, are burning PE money

Already venture capitalists are trying to tell the men from the boys. (Reuters)Already venture capitalists are trying to tell the men from the boys. (Reuters)

It is not hard to understand why Kishore Biyani is coming down so heavily on start-ups. It must be agonising to stand by and watch millions of dollars being frittered away on what seem like mindless ventures. That money could be put to better use, he might feel. But Biyani must realise this is exactly what it is all about; unless youngsters experiment even with what may come across as hair-brained schemes, the big idea will never be born. To be sure, most ventures are clones of the first product in the space—there are, for instance, about two dozen food ordering and delivery apps most of which will probably perish. But, one must risk failure to taste success because that is what innovation is all about. And Biyani, although from the brick-and-mortar world, must accept that. Mohandas Pai is right on the point that ultimately, start-ups—even the ones that do not make it—will be disruptive and that is precisely why they are so sexy.

Biyani’s point that Uber and Ola are not “creating a new economy’ is surprising coming from someone who’s always brimming with new ideas. Moreover, a revenue of R3,500 crore five years down the line is not to be sneezed at—how long did Pantaloon take to get to that top-line? The profits of the aggregators apart, what’s wonderful about taxi aggregation is the promise of livelihood that they bring with them, not to mention the convenience. Also, there is little wrong with wanting to build something from scratch and then selling it off to a larger company. Why does Biyani feel this approach doesn’t work? Aren’t M&As part of the brick-and-mortar world? Did he not sell out to the Aditya Birla group? Aren’t large corporations gobbling up smaller companies?

They are doing it all the time, and such exit options are needed to encourage entrepreneurship. To be sure, start-ups are not going to create all the jobs required but they were never expected to in the first place. In fact, at a critical time, when technology threatens to hurt employment prospects both in the manufacturing and services sectors, thanks to the arrival of robots, start-ups can provide some source of livelihood. Think of all the products and services available at a click today—from homemade knitted garments and fresh plantation coffee to architects and electricians—which would never have found their way into thousands of homes had it not been for e-tailers.

True, not every business is viable—even Paytm’s e-commerce platform has no hope in hell unless it is bailed out by Alibaba—so there will be lots of failures. Already venture capitalists are trying to tell the men from the boys. That is reflected in the sharp slowdown in funding and valuations with even the bigger players like Flipkart being marked down; for the six months to June 2016, only $2 billion flowed in compared with $4.4 billion in H2CY15. B2B ventures, too, are attracting less money with the strategy more tuned to spreading the risks rather than putting all of one’s eggs in the same basket. Incidentally, if one’s talking of money down the drain, the story couldn’t be worse than the one currently playing out in India’s industrial sector, too—where promoters have borrowed tens of thousands of crores of taxpayer money and are now unable or, in some instances, unwilling to pay it back. Many of the projects were ill-conceived, poorly planned and badly executed. To that extent, at least, PE money is not hard-earned taxpayer money. While PE funds can turn off the tap, forget the losses and move on, the banks can’t. So, why not let entrepreneurs make the most of it?

It is easy to understand Biyani’s angst. While his business was never robust, he may have been able to hold out for longer had he not been so leveraged; patient FDI money or even PE money could have helped. His best bet now is to lobby harder with the government to try and get it to allow100% FDI for multi-brand retail. It is true the field isn’t level and that e-commerce players have a huge advantage because they can attract foreign investment. The government’s case for blocking FDI in multi-brand retail is very weak; Nirmala Sitharaman, minister for commerce, believes the farmers will be hurt when in fact, they will benefit from assured procurement. Today, farmers are at the mercy of the arhatiyas who give them a pittance for their produce. Take the case of the crash in the prices of moong dal to below the MSP; had large, organised retailers been given access to the farm-gate, farmers would have stood a better chance of selling their crop. But the BJP government must look after its vote base. So, it’s unlikely the middlemen who make the fattest margins would be antagonised. The fear that kiranas would shut down in large numbers has turned out to be completely baseless. On the contrary, it’s the e-kiranas started by the likes of Flipkart, and the e-grocers that are shutting down. Whether or not FDI in multibrand retail comes about, e-tailing is here to stay. In which case, even with FDI, Biyani & co. must tailor their strategies accordingly, cutting their coats according to the cloth. In other words, they cannot be rolling out stores that do not generate enough revenues to cover costs and leave a profit. Even before the onslaught of e-retailers, most organised retail chains were not viable given the infinite choices that customers in India have; there never has been enough of a top-line to go round. Moreover, rents are way too high which is why outlets have been shut down across the sector, including quick service restaurants. As e-tailing gets its act together, there could be more pain in store.

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