Taking Offline Online

In May, when SoftBank finally confirmed it had sold its stake in Flipkart to Walmart, all eyes turned towards another homegrown e-commerce player, Paytm Mall. It had received $400 million from SoftBank when it still held a 21% stake in Flipkart and was tied down by a clause. The Japanese giant’s exit from Flipkart had fuelled speculation that it would pull out the cheque book for the Noida-based marketplace, soon.

In February 2017, Paytm’s parent company, One97 Communications, decided to hive off its three-year-old e-commerce arm. It was a late entrant to the e-tail space, which had seen many players such as Myntra, Jabong and Snapdeal getting taken over or struggling, leaving just two goliaths in the Indian e-commerce space — Flipkart and Amazon.

Realising it was not prudent to go head-on against the two giants, Paytm Mall decided to focus on small towns with its online-to-offline (O2O) model. Amit Sinha, COO, Paytm Mall explains, “We are a technology player and that is why our approach to e-commerce is different. I would not want to run my own logistics network, do warehousing or carry inventory, which is pure retail work. Instead, we intend to be a pure play marketplace by enabling shopkeepers of this country.”

The idea for Paytm Mall is to reach offline customers in small towns through local shopkeepers, by giving them access to technology. “There are around 15 million shopkeepers in this country, and about 96% of them operate in less than 500 sq ft area. They are hence unable to increase their traffic, stock or invest in getting customers online. Moreover, they are not able to provide endless consumer preferences like online players or services such as bank loan and warranty. That’s where we come in,” adds Sinha. 

Every shopkeeper who signs up on Paytm Mall gets an online store on the platform, which can be managed by them or Paytm. The shopkeepers can list inventory, do promotions and even tap Paytm’s inventory. Furthermore, they can form partnerships with brands and distributors to reach out to customers. Paytm supplies QR codes and point-of-sale (PoS) machines to these vendors, ensuring customers get the same offers and discounts offline as on their online portal.

With 15 million potential fulfilment partners, Sinha believes he has a scalable model that is well-geared towards selling all kinds of products. “Apart from mobile phones and western wear, we are strong in many other segments. There is a lot of competition in phones and apparel, so we will pick it up later.” The Paytm platform includes regular categories like groceries, cosmetics, fashion, home decor and mobile phones, and even cars and motorbikes. 

Pavel Naiya, senior research analyst at Counterpoint Technology Market Research, feels Paytm Mall’s strategy might just work. “In India, the culture changes every few kilometres and buying patterns differ accordingly. To capture the needs and address diversity, Paytm Mall is going beyond semi-urban areas and creating an O2O infrastructure.” 

After Paytm Mall began operating independently, it de-listed about 85,000 of its 1.25 million merchants to ensure quality and gain customer trust. The trimming is what changed their outlook towards product categories and assortment. Paytm soon started building segments that others were not focusing on. Sinha even claims Paytm Mall to be the leading player in laptops and appliances.

Naiya, too, points out the difference between Flipkart, Amazon and Paytm Mall. While the top two players compete aggressively in the smartphone segment by focusing on exclusive launches, Paytm is looking at providing older models of Apple iPhones at cheaper prices. “Paytm Mall is targeting the next segment of growth. Diversity is more important than focus on particular segments,” says Naiya.

Sinha concedes that Paytm Mall would come across as any other e-commerce site to the urban, online customer: “On the consumer side, we are competing with every other marketplace — the consumer doesn’t care what model we are operating in. On the supply side, we have no competition.” A subset of Paytm’s seven million merchants, he says, will start doing full-stack commerce with Paytm Mall. By end-FY19, Sinha projects 25% growth in gross revenue for Paytm Mall’s O2O partners.

On the consumer front, Sinha claims the company has recorded 5x growth in the past 13-14 months. “Gross Merchandise Value (GMV) traction is good, but not as fast as consumer traction. This is because, when new consumers come in, they do multiple small transactions and then gradually move on to high-ticket items.” The company claims to have seen annualised GMV of $3 billion in the last fiscal year, and doubling of its market share from 7% to 15%. Amazon and Flipkart, which include Myntra and Jabong, have market share of 31.1% and 39.1%, respectively.

China Redux

Back in 2016, Snapdeal was the third largest e-commerce player in India. This is around the same time when it started losing steam, relinquishing its position to Paytm Mall the very next year. Now, as companies like Tencent and Walmart land in India, the battle is likely to get more intense. A re-run of the dynamics in China may ensue, where Alibaba (an investor in Paytm) has been fighting Walmart and Tencent-backed JD with the help of SoftBank. Amazon is stuck in a similar tussle as well.

Interestingly, the O2O model that Paytm Mall is trying to leverage here is similar to the retail model that Alibaba successfully introduced in China. ‘New Retail’, in Jack Ma’s words, is the “integration of online, offline, logistics and data across a single value chain,” giving local convenience stores a makeover in terms of looks, technology and better capability to sell by leveraging data and analytics. While Paytm Mall is yet to provide analytics, it might not be far from it, with Sinha hinting that they have far more than QR codes and PoS systems in mind for merchants. 

That said, experts are quick to point out that while the contest may be similar, the battlegrounds are very different. K Vaitheeswaran, founder of Indiaplaza, believes that it is going to be difficult for Paytm Mall. “Fundamentally, it worked well in a closed, protected market like China where all rules are in favour of Chinese companies. So, when a company like Amazon enters, it is forced to fight not just the competition, but also government regulations. India is not like that,” he says. Giving Amazon India’s example, he states how such a global giant would only get tougher to beat going forward.

Sinha, too, admits that the Indian market is unique. “Alibaba is a major investor, but the business models remain very different. Consumer preferences vary, so does the kind of O2O traction we are seeing,” he says. About 60% of Paytm Mall’s business comes from the O2O side, proving why the Indian retail industry is led by physical stores. “These stores have strong value, having built their businesses on local understanding, relationships and trust, which is what we are leveraging. The negative aspect is the lack of scale, which is what we are solving with the help of technology. The models appear similar, but on getting a closer look at what’s happening on the ground, it’s unique,” says Sinha.

Next big thing

While e-commerce growth has been driven by mobile phones and apparels, companies are now readying the next potential booster — groceries. Being a highly complex category to crack, Flipkart and Amazon were initially hesitant to enter the space, but not anymore. AmazonFresh is gearing up to enter India, while Walmart is expected to impart its expertise in the grocery business to Flipkart. These are, however, early days, and neither have begun full-scale operations.

Paytm Mall, in turn, has partnered with BigBasket — the market leader in the online grocery space. This partnership will immensely benefit the platform, and give BigBasket access to a larger customer base. Sinha says, “People have not cracked groceries yet, but our model can do this effectively. Usually high value, low volume products work well with the warehousing model. But, the moment you start looking at groceries, it’s a different ballgame. People will find it difficult to implement a warehouse model catering to all regions in India.” BigBasket’s strength lies in its inventory and warehousing model, which has often been cited as the reason for their survival in a market where several hyperlocal start-ups have shut shop.

In February, BigBasket received $200 million from Alibaba. Vaitheeswaran connects the dots, pointing out that it makes sense for the Chinese giant to integrate both BigBasket and Paytm Mall. “The plan is to use Paytm Mall as the front-end, and BigBasket and Zomato as the back-end. It makes sense on the surface, but I’m not sure if it would work like that. The fact is, once individual brands build consumer space, accessing that service through another app will only happen if there is value addition of some sort.”  

While Vaitheeswaran wonders why a customer would get groceries from Paytm Mall instead of BigBasket, Naiya says the idea is to create a one-app ecosystem. “WeChat did the same in China by offering a multitude of services through its messaging app. That is what Paytm is trying to do here.”

Karan Mohla, partner and executive director at IDG Ventures, says  that the trick to cracking groceries would be at the B2B end. “Alibaba has a model in China called Ling Shou Tong — LST — which basically works to automate back-end processes for kirana stores, including delivery. They have tied up with distributors to solve the B2B part, while TMall does the B2C part. Here, we have BigBasket, Grofers and AmazonFresh among others for the B2C business, but only a few have cracked the B2B model.” 

Mohla states that success in this model will also depend on how well a business deals with finances and transactions, including payments, collections and financing. He adds, “If you look at how Alibaba (through Ali Pay), JD Finance or Xiaomi have (managed financing options) in China, it has become equally important as the business itself. That is yet to be figured out. Paytm Mall, because of Paytm, could solve that here.” This, now, can be one of Paytm’s strengths over Amazon and Flipkart.

Complete player

According to a Forrester report, the online retail market in India is expected to grow at a CAGR of 29.2% to cross $73 billion in 2022, which would represent 5.7% of total retail sales in India. This leaves the big companies a huge space to operate and expand in. However, Harish Bijoor, CEO, Harish Bijoor Consults rebuffs the theory that smaller towns have a different buying pattern. He says, “In the end, what happens in big cities will percolate to rural areas. The rural aspiration build-up will be the same as that of urban areas, because of media. There will not be a separate rural-buying model.” While he agrees that India would remain an omni-channel market, the biggest gainer would be the one with complete fulfilment and logistics-owned marketplace model. “To that extent, I don’t think Paytm Mall will be a success of great magnitude. They are neither here nor there,” adds Bijoor.

Logistics and warehousing are some of the most draining aspects of any e-commerce business. The Forrester report predicts that the next 100 million online buyers will come from tier-3 cities and beyond, and will pose significant challenges in terms of logistics, payment and language for online retailers. 

In this context, Sinha says that a one-size-fits-all model might not work. “The warehousing model will be there for certain categories, because it is easier to handle. With certain other items, our model will be more relevant,” he states. He cites the example of home appliances, pointing out that it is difficult to store 500,000 appliances in the warehouse. “That would mean consolidating into one or two locations, playing upon size of the business, and trying to reduce costs from sourcing. What we are giving is more choice to the customer by having fulfilment centres across the country, and best service by serving locally,” he says. 

Despite what Sinha says, Paytm Mall is not the first e-commerce company in India trying out the asset-light model. Snapdeal started off as an asset-light marketplace model, while Flipkart was an inventory-led one. Over the years, to provide better customer experience such as same-day delivery in light of tightening competition, all of them adopted a mixed model of marketplace and inventory. With Paytm Mall, the delivery is currently carried out by local stores or third-party partners like Xpressbees, another Alibaba company in India.

Satish Meena, senior research analyst, Forrester Research is unsure how Paytm Mall’s strategy would play out in India. “If the focus is payments — allowing customers to make payments through Paytm — it’s something which they can do. But overall commerce is going to be more challenging because you have two good companies also competing for the same customer and category. So it is trying to target towns where these two are not there yet, but the competitors are aggressively expanding. Frankly, we have not seen much in terms of numbers from Paytm Mall — their GMV numbers are quite confusing as they also sometimes include transactions from parent Paytm,” states Meena.

With Walmart having entered the fray now, Meena feels it might be time for Alibaba to display its heft. “If they want to compete, they have to enter fully and give Paytm Mall access to the products which Alibaba has in China.” 

In 2015, Paytm attempted to sell Chinese products through AliExpress, but rejected the idea soon after. Mohla, however, is of the opinion that Paytm Mall has got a fair chance and feels that instead of Flipkart or Amazon, stiffer competition could come from Reliance, which is developing its own O2O strategies.

Valued at $2 billion, Paytm Mall is looking to double its merchant count this year. Sinha, who is seeing monthly repeat rate (returning customers) of 60-70% on the FMCG side, is targeting a GMV of $10 billion. As the e-tailer is not chasing profitability just yet, there will be plenty of discounts to attract customers.

With all three players in it for the long haul and flush with money, the fight is set to shift from online to offline strategies. As Naiya points out, what we have witnessed so far is a warm-up round, before the real game begins. Many sectors are still relatively untapped, and many cities in India have recently started accessing the Internet. For them, the e-commerce battle has just got underway.