14 highlights
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Essentially, the whole argument made by the market research firm and its paying client is the following: There is a niche segment in retail which caters to a certain demographic. This segment will grow very fast and its online component even faster. For unsubstantiated reasons, traditional e-commerce companies (namely, Amazon and Walmart’s Flipkart and Myntra, who dominate the very same lifestyle categories) cannot cater to these existing and potential customers. So who are you gonna call? Snapdeal 2.0.
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Having thus customized a segment that fits nicely into the strategy of the client company, it is but natural to declare the same victors in a race being run by one.
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As per Bain & Co.’s How India Shop’s Online 2021 report, customers from Tier 2 or smaller cities contributed to more than 80% of new e-commerce customers in 2020. By this writer’s estimates, during the festive season centred on Diwali, Amazon and Flipkart already realize just over half of their gross merchandise value (gross sales that ignore discounts and returns) from customers in Tier 2+ cities.
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Therefore, the barriers to “new entrants in value lifestyle e-commerce”—market understanding, customized technology, reliable supplier base and significant marketing spends—are either not very high or are non-existent.
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For reasons best known to RedSeer’s analysts, large e-commerce players in India, listing hundreds of millions of products across dozens of categories and shipping millions of products every single day to metros, Tier 1, Tier 2+ cities, will apparently fail to capture the organic growth opportunities because they do not have “value e-commerce” as their core competency.
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First up, it is commendable that Snapdeal has moved away from e-commerce companies’ favourite measure of transactions—gross merchandise value, or GMV, which doesn’t account for discounts or cancellations and returns. Snapdeal instead uses what it calls net merchandise value. The total list price of merchandise sold (inclusive of discount from sellers) through the platform that was delivered to the customers and not returned or cancelled by them. The value of orders that are cancelled or returned either before or after delivery are excluded from NMV.
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While the effect of COVID-19 is obvious, it shows a fundamental flaw in the specialized “value lifestyle retail” e-commerce model. The underlying categories of fashion, beauty and so on are the first to be dropped from the discretionary spend basket.
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Interestingly, the shipped units might get close to the 33.94 million annual figure in 2018-19. It implies and is reflected in the drop in NMV/unit—Rs 626 in 2018-19 to Rs 447 in the first half of 2021-22. This poses two problems: the platform needs more repeat purchases to recoup customer acquisition costs and unit shipment costs have to be driven down to maintain contribution margin (revenue less fulfillment costs).
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Looking deeper, the marketplace expense (fulfillment costs) as a percentage of NMV have remained stable between 20-21% from 2019-20 onwards.
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Finally, the revenue from operations as a percentage of NMV has also dropped from 39.5% in 2018-19 to 35.7% in the first half of the current fiscal. This implies that the take rate—that is, the marketing and fulfillment charges levied by Snapdeal on marketplace sellers—might have also dropped. However, the unit economics (revenue less delivery cost) are positive according to the DRHP.
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From another lens, Snapdeal is spending Rs 1 in marketing to drive just about Rs 5.3 in net merchandise value in the current fiscal year.
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And to drive growth, as it is stated multiple times in Snapdeal’s DRHP, you need to spend more on marketing to attract new customers coming into the e-commerce ecosystem while holding on to existing ones.
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According to its draft prospectus, 1,000 sellers fulfilled more than 80% of sales on the platform in the first half of 2021-22.
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Even short-form video companies like Roposo are using small-town content creators as influencers to drive commerce through social media. Flipkart and Moj, a short-video platform, recently forged a partnership to enable live and video commerce.