Cash on Delivery- The catalyst for E-tailing in India? – Deepak Srinath

I often hear people saying that e-commerce entrepreneurs in India have it easy when it comes to ideas for their startups- they simply have to look at what has worked in the US and copy that model. Group Buying sites inspired by Groupon are the favorite examples used to illustrate this. Sure, E-commerce startup’s in India are by and large inspired by successful US models – Group buying for services and products, private sales for fashion, flash sales for electronics and accessories, category specific sites such as baby products or shoes…you name the e-commerce startup in India and there is a corresponding US model. However, it would be massively unfair to Indian E-commerce entrepreneurs not to give them credit for the clever and sometimes subtle adaptations to suit Indian markets and consumers. Perhaps the most significant and game changing of all these innovations is the ”Cash on Delivery’ (COD) payment option. In fact, I will stick my neck out and say that the e-tailing business in India owes its explosive growth to COD.

For a long time any discussion or article on E-commerce in India centered around the twin problems of low internet penetration and low debit/credit card base. Add to this the perceived ‘trust issues’ of Indian consumers for transacting online and it was believed that e-commerce in India would take years and years to scale. As recently as 18 months ago, while the online travel model was relatively well established, it was difficult to imagine how e-tailing or online purchase of physical goods would take off anytime soon.

And then the e-tailing revolution happened, and how! Flipkart and Infibeam led the charge, starting off with categories such as books, music CD’s, etc which were easier to sell online. As reports of their phenomenal growth came in, the trickle turned into a flood and at least a hundred e-tailing startup’s sprung up across the country across all possible categories. VC money started pouring into these startup’s and valuations based on annualized Gross Merchandize Value (GMV) multiples became the norm. Hygiene factors such as internet and card base reaching critical mass had helped but the real reason why sales took off was perhaps a small innovation in the payment model called Cash on Delivery. It allowed internet consumers to ‘order’ without paying upfront and allowed them the luxury of seeing the product (or at least the packaging box 🙂 ) before they paid for it. Logistics companies such as Bluedart and Aramex supported this model and trained their employees to collect payments. COD entails an extra charge of Rs.75 to 100, but consumers don’t seem to mind. Suddenly the limitation imposed by card base or trust issues for online purchase were redundant. Moreover, India has a large parallel ‘cash economy’ which has its own dynamics and cash payments are the preferred mode for all non salaried professionals. It’s a win-win situation for e-commerce firms and consumers and the only flip side to the e-commerce firm is an increase in working capital requirement.

So what % of e-tailing happens through COD? E-tailers I’ve interacted with say that 50% to 80% of their sales come from COD and rejection rates upon delivery are lower than 10%. I’m not sure whether COD was the brainchild of a single e-commerce firm or whether it evolved naturally as a solution to the payment problem based on a facility logistics partners anyway provided. Nevertheless, this collaborative innovation in business model and it’s impact on e-commerce in India should be the subject of a business school case study.

The Cloud – why is this space interesting? – Uday Disley

Few things have happened in the last few weeks and days which pretty much sums up the excitement that may be in store in the cloud computing space. While the buzz might have been around for a while in the enterprise computing space, but with Amazon launching their cloud music service and Apple launching iCloud, and the impending launch of the Chorme OS the cloud seems to have become very relevant for the regular consumer on the street (or the internet). This clearly indicates few points (not in any particular order)

  • Increase in the consumption of digital content (worldwide digital music revenues were pegged at $ 67.6 Billion constituting approximately 20%-25% of the market)
  • The increase in usage of multiple devices (PC, tablets, mobile phones) for consuming the same digital content
  • Applications which enable access to ‘paid content’, having to converge on these devices
  • Wide spread penetration and usage of broadband internet (again through multiple networks), be it 3G, WiMax, wireless and wired broadband
  • At least three of The Gang of Four (Google, Apple and Amazon) are betting big on this space for enabling true mobility and making substantial revenues on the side

So how does this play out; let’s say you bought some songs on Amazon and downloaded it to your PC, but then you realized that you had a blackberry and an iPad, which you would like to interchange for listening to music at your will. In the old times you would have to wade through various compatibility issues, spend considerable time on syncing, moving it from one device to another and backing up somewhere in case you fancied buying the latest version of the iPhone. If you are looking at a market worth upwards of $150 Billion for digital content consumed by people like you and me (music, games, movies, newspapers and magazines), then having products/services to address the issue of convergence starts making a lot of sense.

While all the three players have their own take on the opportunity, Apple having launched iCloud, wants to bet on the ‘have any Apple product and have everything seamlessly synced’ theme, Amazon has its device agnostic service with ‘cloud player’ and ‘cloud drive’ and Google has its lose your device, but not your data theme with Chrome OS. But essentially the cloud is the common thread that runs across these services and a lot is riding on these products becoming popular (and making money on the side to hold everyone’s interest).

It would be interesting to see how these products/ services will take off in India, given the fact that consumption of ‘paid digital content’ is negligible and penetration of multiple devices even more so. But going by the availability of Bollywood songs (in plenty) on Amazon and apparent (large) plans of Netflix to enter India, there seem to be more people excited by the prospects than just me.

Where’s the action going to be: The Viedea guide to deals in 2011 – Compiled by Deepak Srinath with contributions from Uday Disley, Aravind G.R and Alap Bharadwaj

As we take stock of the year that went by and take our collective deep breaths for the year ahead, we’re pondering on the big question- what do we focus on in 2011? As part of our business planning process we asked each team member to send in their predictions for the year…and predictably got some interesting comments.  Uday felt this was akin to predicting whether the Indian team will win the world cup at home and Aravind opined that we should just ask that big brother VC fund (Wily Wonka’s chocolate factory is Aravind’s precise metaphor) with an army of ex-consulting associates to tell us what sectors they’re investing in and pick up mandates from all companies in those sector….The logic being that all other funds will follow big brother and we’ll be sitting pretty. Finally after much persuasion, the team sent in their vision for the year ahead, and we present to you an edited summary of our guideline for 2011:

(Please note- This is limited to VC/PE and M&A activity in the sectors we focus on in the early, growth and mid market space)

1. Internet /E-Commerce – Unanimously elected as a high action sector for the year. Frantic VC  and angel activity will continue for the first two quarters of CY2011, fuelled by the makemytrip inspired billion dollar IPO vision. The Indian consumer finally seems to be buying online and we expect all sub sectors in the ecommerce space to see funding activity. The internet investment frenzy will ease off by the second half. However, we expect strong M&A action, both inbound and domestic consolidation through the year.  The second half will also see Series B and C investments in internet firms that have managed to reach some scale.

2. Education – Last year’s darling, still has some fizz left for this year. Aravind, our in-house education expert believes that funding action will mostly be for mid to large size firms. Lot’s of small M&A deals are expected as PE funded players mop up strong regional brands to consolidate, especially in the tutorial and test prep space.  M&A deals of the size of Tutorvista-Pearson will be more of an exception than the norm. Valuations will remain unrealistic though, and we may actually see a lot of long drawn out deals that take a long time to close. (Note to Aravind – Patience and Stamina, your mantra for the year!J)

3. Mobile/3G/Connectivity – This year’s big focus in the mobile space will be around 3G plays- Video, Optimization, Software products, Cloud, Data Security and Recovery, Gaming (enabling not developing). We expect VC investments in all these areas and the likes of Apalya have already demonstrated this emerging trend.

4. IT/Tech services – Unanimously voted as the ‘not cool’ sector of the year.  As Alap says,”Mid cap IT will see another year of stagnation on the deal front.” There may be some outbound M&A  traction with Indian mid cap companies acquiring in geographies like Australia and South America.  Alap is betting on Infy making a big acquisition this year but the office betting syndicate is not giving it favorable odds yet.       

5. Hardware devices/Tablets – The gadget geeks in the office (everyone except me) want to believe this will be the year of the Indian tablet. Notion Ink has swayed them all, and we’re hoping this is one rock star to emerge from India. However, hardware plays from India remain hugely challenging and we don’t expect much funding activity here. Even the low cost mobile handset plays seem to have peaked and we expected that raising PE funding will be a challenge for new players.

6. Healthcare – Will continue to attract investor attention, both hospitals and services/technologies that enhance healthcare delivery. Rural healthcare providers will attract VC investment. Consolidation will be seen with bigger hospital chains acquiring smaller or regional hospitals.

7. Financial Services – Financial inclusion, the big investment theme in India over the last few years will continue to drive investments this year also. The MFI party will be muted this year, but areas like housing loans to lower income segments will attract PE investment. Mobile banking platforms, combining technology and brick and mortar may attract some investment.

8. Agri and Food – Farm to fork seems to be the theme for this year with supply chains and agri warehouses continuing to attract some serious investments.  Aravind is of the opinion that food processing companies that emerge from the food processing parks set up by the government will attract some investment.

We hope our analysis is useful as you plan your year. Thank you.

For your viewing pleasure: Digital Cinema – Aravind G R

A quick number crunching gives me a figure of 25-50%, this is the ‘proportion’ of opening weekend collection to the total gross a movie makes through its theatrical run. Now, if I’m a producer (studio in case of Hollywood), I would focus most of my energy & money to make sure that these 3 days work out well for me.

If I want to cash in on these three days, I better maximize the number of theaters I’m running my movie in. But, there’s a problem- each movie print costs about 3-10 lakhs, limiting my ability to cover the entire country at the same time. So, I usually try to use them multiple times, it goes to the multiplex in the city for the first few weeks (months, I hope) and then I ship the same ‘print’ to tier-2 towns like Raebareli.

To the rescue

Now this is creating two problems for me, even though the weekend market for me is a potential 4000-5000 screens (I produce bollywood blockbusters); I can barely afford 1,000 prints. Also, by the time these 1000 prints reach Raebareli, most kids there have already bought pirated camera prints of my movie on CD’s for 20 bucks.

Along came technology to my rescue. I can reach Raebareli & Chicago the same day and each ‘print’ costs me a few thousand rupees.

Distribution today happens over the airwaves; encrypted digital copies (Mpeg files) of movies are delivered directly to multiple screens (through VSAT). The exhibitor then unlocks the files before playing the movies; I also get to keep a track of how many times the movie was actually shown, lending me better control & accountability.

The digital projection & storage systems do cost 4-10 times more than film based projectors, so naturally the exhibitors resisted. Many companies (third parties) in the past have taken up the job of setting up digital systems for exhibitors and have come up with many models over the years to counter the cost issue and have seen varying degrees of success.

Cinema models

There are two basic models that have been adopted (a) D-Cinema (b) E-Cinema:

D-Cinema: The funding (to go digital) could come from a party within the system or outside. Within the system major studios who were convinced about the digital system agreed to finance (partly) the purchase of digital equipment through the Virtual Print Fee (VPF), a funding mechanism where it pays the savings it makes from digital prints over film prints.

In India, Scrabble Entertainment finances (major part) the DT equipment purchase (& installation) and recoups this investment from the negotiated VPF that the studio pays it ,each time a digital print is released to the exhibitor. The company founded by Ranjit Thakur & Manmohan Shetty (Adlabs/WalkWater), in return also gets exclusive rights to exhibit the movies from the studios at these screens.

E- Cinema: UFO Moviez (UFO), part of the Valuable Media Group finances & installs digital equipment & recoups the investment by charging a  per screening fee. UFO also manages the distribution (MPEG-4 video format) based on VSAT technology, so in essence it is a supply chain for movies across the 2000+ screens it has converted, aiding the production houses to reach all such locations simultaneously without investing heavily on film prints (opening weekends!). The equipment is not necessarily of the highest quality and has found takers mostly in single screen theaters in C&D centers.

Then, D or E?: The lower cost & the fact that UFO could invest heavily in purchase & installation of digital (quasi-digital, in most cases) equipment has worked well .The company has achieved significant strides by converting 2000+ centers in a span of just 2-3 years. They have essentially changed the game of distribution and will be a very disruptive force in the entertainment industry.

However, we at Viedea believe the way forward is more towards enhancing the cinema viewing experience and hence higher quality (DCI Systems) systems would find more takers. We expect many more companies to join this bandwagon once (a) the studios start the VPF discussions in full swing and (b) the noise around un-availability of DCI compliant equipment settles.

PS: I just read that Golmaal 3 made $25 mn in its first weekend. That’s as good as any Hollywood movie!

Costly to miss the ‘tech’ business in organised retail – The Editor

Deep slumber will kill anybody in times of competition. Indian retailers and technology companies better wake up soon because I observe that Wal-Mart, in India, is picking up the pace in netting all their potential Small and Medium businesses or ‘suppliers’- as we call them in retail parlance- in to adapting their retail supply chain technology called ‘Retail Link’.

This not only builds Wal-Mart’s supply chain, but Indian SMEs get a foothold in to becoming global suppliers to the largest retailer in the world.

Wake up Indian retailers

Personally, I feel this was the way to build any retail business, which our home grown retailers ignored. There was too much money spent in building the front end brand, without really offering quality to customers. What consumers got was the experience of modern retail discounting, but they were denied of the experience of low price plus quality.

So the argument about middleman being the scourge of organised retail- often cited by big Indian retailers- is doused by Wal-Mart, which is creating a silent revolution among its Indian suppliers. It is the technology stupid! Nobody wants to miss out on the organised retail business which is going to be at least $ 60 billion by 2015 and the total retail market’s size is estimated to be $ 600 billion in the same period.

Believe in sharing

We at Viedea know of several technology companies, even with their small size, who understand that the retail business is of technology integration which facilitates the ability of the warehouse and the supplier to deliver in to the store on time.

It is time that Indian retailers worked with retail technology providers constructively, may be even forge a partnership or engage them to build proprietary software that can be integrated with vendors for best practices.

What is unfathomable in my mind is the pace at which Wal-Mart is building the supplier base; it will certainly gobble Indian retailers if FDI opens up in this country in organised retail. This is impressive on Wal-Mart’s part because it realises that if India needs to be big on the balance sheet at Bentonville- USA then Indian suppliers have to comply with their processes completely or be dumped.

They are eager to teach some other aspiring Indian about compliance issues. Indian SMEs are averse to change, but when forced upon- they will innovate. By following such action Wal-Mart has been able to maintain strict control over purchase orders, inventory keeping and logistics management.

They have passed this value to consumers. These processes flow like a river between the suppliers, warehouses and the cash and carries – all thanks to technology.

Taking the fight to Wal-Mart

TCS, Oracle and SAP have been coaxing Indian retailers to implement their software or partner with them, but Indian retailers do not want to let data flow through such technology because it allows an insight in to cash management, which is a dark secret that is only in the diaries of promoters.

Now you do not want vendors to create a furore for untimely payment if everything is on record, do you? This is where Wal-Mart wins, while the others loose. Will Indian retailers wake up to the need of technology integration? Do call us if you want to be awakened.

Semicon Industry – Between a rock and a hard place – The Editor

If one were to meet the ten odd start ups that the Indian Semiconductor Association (ISA) had short listed for their awards recently, it would be naïve not to notice that none of these companies are VC funded. These start ups are providing high end services or making products for exciting high growth sectors such as consumer electronics, the automobile industry, healthcare and the telecommunications industry. Then one would wonder why VCs or PEs are shy of this space?

We at Viedea figure that the problem is neither in the ideas nor is it in the realm of funding. The problem the way we see it is in two areas; firstly semiconductor companies, by nature of their work, will not be able to scale up their revenues in quick time because their work is too focused on a particular industry. The R&D itself takes three years to deliver a quality chip or IP and it becomes difficult to predict success of the product in the market. Secondly there are not many Indian products that sell on a very large scale, currently, to provide a ready market for the semiconductor industry.

The eco-system of semiconductors is filled with chip manufacturers (fabless), Core IP designs on chips, Electronic Design Automation (EDA) tool providers, embedded systems companies, OEM’s and finally product brands like Apple, Samsung and the lot. No one knows the size of the semiconductor industry in India because the word semiconductor encompasses a large space and is evolving. Yes everyone is betting big on solar, but anyone who has seen the fab-city in Hyderabad will see how nothing has come out of it.

Let us come down to an example, six or seven years ago a Bangalore based company called Smart Yantra, which developed software IP in the MPEG space, was bought over by US based Genesis Microship Ltd for US $ 6 million, almost 6 times Smart Yantra’s revenue. While the deal was reasonable for a company whose revenues were of that size, the industry in India will typically see more acquisitions than fund raising for at least the next 5 years. Many of these Indian start ups have been riding on the recession wave that hit USA and Europe. There are a few players that are betting big on making their own chips and are servicing the consumer electronic space in the West. The problem is whether these guys can reach the critical mass in production and revenues even with the help of funding. This is highly unlikely as there are many such companies across the world, especially in China, where IP development is outsourced to. Unless there is demand for home grown products, but is a risky affair because of the nature of high volume low margin business in Indian retail. This typically means these companies will be bought out by bigger fish such as a TI or ARM or Analog Devices. We predict that not many will generate great buy out stories like Sling Media. Remember them! This company developed the software and hardware for ‘placeshifting’ media was bought over by Echostar for 13 times its revenues’, the deal size was estimated to be $ 380 million.

Developing core IP has always been the strength of our entrepreneurs and yes they can venture in to making their own products because there is a need for Indian based problems such as healthcare, telecommunications and energy solutions. May be this will be big in 10 years. However from the experience of Tejas Networks, which realizes now, that 10 years after its operations its revenues are yet to touch Rs 1000 crore. It is now actively seeking dollar revenues to increase top line. We at Viedea expect that raising money will be difficult for semiconductor companies, but the space will see a lot of M&A activity going forward.

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