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A positive consequence of GST and demonetization is the coming of age of business marketplaces in India
Bengaluru: Having been around for two decades, Indiamart is one of the oldest internet firms in the country. Started by Dinesh Agarwal in 1999 as an export marketplace for businesses, it shifted focus to domestic trade in 2008. Since 2016 Indiamart has become a fast-growing, profitable firm that provides a marketplace for businesses as well as payment services. Its business has thrived so much that in June, Indiamart pulled off a successful stock market listing—the rarest of rare achievements for an Indian internet firm.
In 2016, Udaan, another business-to-business (B2B) marketplace, was launched. Within two years, it would become a unicorn (startups that are valued at $1 billion or more), the fastest among Indian startups.
The timing of Indiamart’s IPO and Udaan’s rise isn’t incidental. They were spurred by three large changes that occurred in India in 2016-17: the launch of 4G services led by Reliance Jio, the introduction of a goods and services tax (GST), and demonetization. By damaging the informal economy, the last two changes have contributed to the present economic slowdown, according to analysts. But one sector has benefitted immensely from them: B2B e-commerce.
Digitalization
Until recently, B2B e-commerce startups failed to make a dent in the largely-unorganized market. Startups such as Shotang, Just Buy Live folded up while the likes of IndustryBuying and Tolexo, a unit of a larger internet firm, shrank operations. Since the end of 2016, however, several B2B companies have prospered. Experts say demonetization and GST forced several small and medium enterprises to use digital means to do business. The global B2B market size is expected to be around $700 billion by 2020, according to an April 2016 report by the Confederation of Indian Industry and Deloitte.
Indian internet companies are finally showing signs of organizing this massive market. Apart from Indiamart and Udaan, other B2B e-commerce startups including ShopX, Jumbotail and Ninjacart have raised large amounts of capital over the past year. Even the government has launched a new platform, Government e-Marketplace, to make procurement by public sector enterprises more efficient. Since its launch in 2016, Government e-Marketplace has processed transactions worth ₹32,000 crore, according to a story in The Economic Times.
The fastest-growing startup in this space, though, is Udaan, which facilitates buying and selling of fashion, groceries and electronics between manufacturers, brands and retailers. Udaan was incorporated in June 2016 by three former Flipkartexecutives, Amod Malviya, Sujeet Kumar and Vaibhav Gupta. Since then the company has expanded its operations to 900 cities, fuelled by a fund-raising spree of about $700 million that has seen its valuation rise to more than $2 billion.
According to Kumar, Udaan’s co-founder, the revival of B2B e-commerce has been driven by structural changes in the industry brought about by macro factors. The introduction of GST made it convenient to transport goods between states and demonetization compelled businesses to experiment with digital payments. While 4G mobile provided stable and fast internet connections that made businesses more willing to use the internet to conduct business.“In any internet business, timing is key, and in our case, and for B2B e-commerce in general, all these factors were crucial enablers,” Kumar said.
Path to profits
It is clear that since the end of 2016, B2B e-commerce has grown by leaps and bounds. Indiamart’s revenues more than doubled to ₹497 crore in FY19 from FY16. Indiamart’s other key metrics—the number of buyers and sellers, business enquiries—have also doubled or tripled in the past three years, according to the company’s published financial statements. Most importantly, the number of paying suppliers of Indiamart’s, which comprise SMEs across the country, have increased to 130,000 in FY19 from 72,000 in FY16. This metric is especially encouraging for B2B e-commerce startups and investors as it was generally believed that Indian businesses were unwilling to pay for using a digital platform and other technological services.
“Retailers are willing to pay for our services because the value that we are providing, be it credit, or price discovery and transparency or logistics, has transformed their businesses. Not only do they earn more revenues and can expand into other categories, they are also seeing an increase in profit margins. Instead of paying wholesalers, they are paying us,” Kumar said.
According to RedSeer Management, micro, small and medium enterprises (MSMEs) in India spent $1.5 billion on digital services in 2018. On the whole, only 6% of all MSMEs in India paid for digital services in any form in 2018, RedSeer data shows. The others have still not taken to the internet because of a lack of knowledge about how to use software, low awareness about B2B platforms and unwillingness to pay for such services.
But RedSeer estimates that as a higher number of MSMEs come online, the digital services market serving these firms will increase to $10 billion in 2023 from $1.5 billion.
Udaan’s Kumar believes that the online B2B market will grow primarily through the displacement of wholesalers. “Currently, the most profitable players in the ecosystem are wholesalers. Retailers make very less margins. Wholesalers enjoy a far higher return on capital than retailers. By introducing efficiencies, we want to reduce prices, and increase the margins of manufacturers and retailers and keep some for ourselves,” Kumar said.
B2B e-commerce platforms earn revenues in four broad ways: one, by facilitating commerce (buying and selling commission); two, charging for logistics services; three, providing finance and credit; four, supplying so-called value-added services such as advertising and analytics. Presently, most customers of the B2B internet platforms pay for the first three, but do not yet use value-added services such as online advertising and analytics. “The most important element here is data. Once we collect enough data then we will provide these kinds of services. You will see it happen in the coming years as transactions increase and our platform grows bigger,” Kumar said.
Big boys
Udaan, Indiamart and others have very different business models. Indiamart is primarily a listing platform for goods; it also provides for payments. It has avoided building a logistical network, connecting its customers instead to external transportation providers. Udaan, on the other hand, is creating an entire ecosystem where it provides credit and transportation apart from a messaging platform for businesses. Udaan’s logistics service, Udaan Express, delivers 65% of the company’s orders.
Udaan and Indiamart have other differences, too. While Indiamart gets a majority of its business from metros and other large cities with less than 25% coming from middle India, about 85% of Udaan’s turnover comes from cities in middle India.
“Most of the B2B e-commerce businesses are fundamentally financing engines as that was a big role played by layers of distribution,” Vinod Murali, managing partner at venture debt firm Alteria Capital, said. “The more they can add value, their margins will improve but at the heart of it, there is a strong need for working capital that is being met by them.”
Udaan’s high-risk, high-reward approach necessitates raising large quantities of capital, which is reflected in its numbers. According to two people familiar with the matter, the company facilitates annualized gross sales of about $2 billion on its platform, but it also burns through more than $15 million a month, a high amount in a sector that is said to require much less capital than many consumer internet businesses. Udaan’s Kumar said that the company spends mostly on setting up infrastructure rather than marketing. With such a cost structure, the company’s per-unit costs may reduce significantly with increased scale.
Indiamart, on the other hand, showed an EBITDA (earnings before interest, tax, depreciation and amortization) of ₹80 crore in FY19. It took Indiamart almost five years to become profitable and almost a decade to find the right business model for domestic B2B e-commerce.
“We have a strong buyer interest with 60 million visits on a monthly basis but to get the suppliers to migrate to a new way of doing business, we have built several tools such as lead management system, payment management system and escrow system, etc,” Indiamart’s Agarwal said. “And now we have also started generating leads for bigger brands and not just SMEs.”
Vertical players
Udaan and Indiamart are so-called horizontal platforms, which serve retailers across industries. Many other B2B startups, however, have chosen to focus on specific regions or categories.
For instance, Kalaari Capital and Nexus-backed Jumbotail is currently present in Bengaluru and serves about 20,000 neighbourhood kirana stores in the city. Jumbotail has created an ecosystem where it houses the products in its fulfilment centres, provides in-house last mile delivery services, supplies software to the mom-and-pop store owners and also offers working capital. The company said it has built a unique logistical technology that provides real-time tracking of products and allows its customers to run their business more efficiently.
“Our proprietary technology is built specifically for wholesale food and grocery and removes the need for product bar code scanning without compromising on accuracy or speed of operations,” Ashish Jhina, Jumbotail co-founder and COO, said. “We use artificial intelligence and machine vision to further improve product identification. Our entire supply chain is paperless.”
Jumbotail has been slow and steady with its geographical expansion. After starting its operations in Bengaluru in April 2016, the firm is only now running a pilot in Hyderabad. They are looking at scaling up Hyderabad soon and expanding to other cities in southern India in the next 6-12 months. Jumbotail has also launched an in-house brand Jumbofarms, a strategy similar to what consumer e-commerce companies have adopted. Jumbofarms, which was launched over a year ago now forms 15% of the firm’s sales. It has around 100 SKUs across rice, pulses, spices, dry fruits, among others.
Another vertical B2B platform is NinjaCart. The Tiger Global-backed firm was founded in 2015 as a consumer internet firm but shifted to B2B e-commerce later. The platform now enables retailers and merchants to source fresh produce directly from farmers daily. NinjaCart eliminates middlemen by allowing farmers to directly deal with establishments. With an estimated 12,000 farmers on its platform, the firm is present in seven cities. It also offers supply chain services through its network of fulfilment centres.
Some investors that Mint spoke with said that while horizontal platforms can expand faster, they may not succeed in establishing depth in a segment as much as a vertical player. In addition, many firms have steered clear of becoming horizontal platforms because it requires massive amounts of capital. “I believe that in B2B e-commerce, more value can be created by going vertical because customers are no individuals by enterprizes,” said an investor in this space, requesting anonymity. “Domain expertise can bring large volumes of orders for the vertical e-commerce companies in the B2B space.”
Another reason, investors believe that, vertical play in B2B e-commerce is slightly more prudent than a horizontal one is due to credit risk. “One of the important aspects of underwriting credit risk is to know your customer really well—which a vertical player would know the customer better,” said another investor tracking the space, requesting anonymity. “That said, the horizontal player, because of its scale, has the advantage of going to a big bank for underwriting.”