Commerce N.0 - crystal ball gazing

in today’s Rajinder & Avnish are crystal ball gazing into the future of commerce – tune in to know more about trends and sectors we expect to explode in 2021.

Rajinder:

Hi and welcome to Matrix Moments. This episode is actually a fun one, commerce has actually exploded, so Avi, this one is creatively titled Commerce N.0, Crystal Ball Gazing. i think commerce frankly through the pandemic has just exploded across the globe and in many ways people feel that multiple years of the growth that they expected in commerce has actually been pulled in. in your view is this just a developed market phenomena, how much of this is likely going to sustain and whatever we’re seeing in india how long do you think this is going to play out?

Avnish:

Yeah, i wish i knew which is why we call it N.0 because we don’t know what version it is, how long it will take. You know, the joke about forecast if you don’t give a timeline to it, it will be eventually right. But before we go there, Rajinder, you’ve worked in almost every sector for us, you’ve led almost every sector so i know you have a lot of context so this should be as interactive as we can make it. And Salonie has done fantastic research, you guys started making me do these deep episodes around – we did Moats, we did Marketplaces, we did – which was the other one?

Rajinder:

Margins.

Avnish:

Marginal value add. And i think this is the fourth and we’ll do another one and a few more. And it takes a lot of research but frankly my workload gets cut 80 percent because of the work done by the team. The other thing is i have to tell you that all of us need motivation once in a while and i was fatigued out doing these episodes and then Abhiraj of Urban Company messaged saying i’ve been listening to these the three we mentioned on my runs and it was very motivating. For a founder that i look up to the acknowledge it actually has given more motivation to do it. So that’s it – now coming to your topic you know, there’s a saying, and i may get the exact wordings wrong but “there’s decades where nothing hot happens and weeks in which decades happen.” Obviously in his context it was related to revolution. But i think we should include this e-commerce penetration in the US retail chart. it is actually fascinating, scary, encouraging, a lot of things. So it shows mota-moti 10 percent in 2010 and it goes up – so e-commerce as a percentage of US retail 10 percent let’s say in 2010 goes up by 1 percentage point by the year. And then it goes from 16 pre-pandemic, so clearly, i’m not getting the numbers fully right, 16-26, so a decade has happened in three weeks and this happened in the month of April to May.

Remember in india there was a lockdown of e-commerce, in the US there was no lockdown of e-commerce. So there was a little bit of acceleration. So it’s just amazing, i think in india what happened was, first, there was a lockdown even for e-commerce so it was a little bit slower. But i can tell you that similar inflection has happened exactly what the penetration has gone up we will know after the fact. There it’s much easier to track, here it’s a little bit harder to track. india was probably at 3-4 percent before, it probably doubled. i was talking to people at Flipkart, Amazon, they were expecting sales to grow in growth rate to be higher off a higher base 60-80 percent.

We have seen a proliferation of D2C brands, there is this new nomenclature called NANF, which is not Amazon not Flipkart which is with all due respect to them they’re important platforms, but this is an important long tailing happening. But i’ll tell you something important at least in my analysis, i think if this had happened in 2018 we wouldn’t have seen this level of acceleration, i think we have to recognize that 2016 Jio launched, 2016 de-mon happened and payments started coming online. Then the true adoption of broadband internet really started kicking in in ’18 and ’19. TikTok which has been banned i think it exploded the usage in india and it is a very important factor. People became comfortable with content, that is a classic, you move from content communication to commerce. it’s a classic thing and it really accelerated. Whatsapp accelerated communication, TikTok accelerated content, people were primed, they were ready. if this had happened before it wouldn’t have been like this. So i think because of this it’s sticky because if it wasn’t for the fact that you’re using this anyway and now you’ve graduated and there is UPi and there is all of that stuff i think it is going to be sticky, it is slowing a little bit right now but i think it will be sticky because people have tasted blood and blood being convenience or discovery and i think that’s why it could be sticky.

Rajinder:

And also, i think the whole last mile fulfillment network especially in smaller towns honestly wouldn’t have been as strong as it is today. Two, three years ago the TAT was still at two, three, four days versus now it’s sub 2 – which is actually a big trigger.

Avnish:

Actually, on that note just on the economics of the business also it’s important, because the market had deepened in india we’ve always joked about it’s a reverse of the outsourcing business model which is dollar cost and rupee revenues. Here the CAC has also come to a level where you can make money. D2C brands in our portfolio are EBiTDA positive which again 2-3 years ago market was not deep enough so your CAC wasn’t good. So i think it all kind of comes together on logistics.

Rajinder:

i was actually speaking to someone at Flipkart as well and they were saying that for the first time the non-top 100 cities actually accounts for a now greater than almost 50 percent of their business and that trend is actually accelerating which seems to suggest that the behavior and the habit formation is now real outside of just the top 100 cities that we all relate to.

So fingers crossed that this is long-lasting. i’m just curious, i think we’ve spoken of Flipkart, Amazon, is it a market where you think that clearly the horizontals have very deep capabilities, they’ve got customer base, we’ve actually kind of captured the mega trend around commerce and in some ways maybe some verticals, maybe some consumer brands but really it’s the incumbents who’ve kind of really benefitted. if i was a new entrepreneur looking at commerce should i look back at this period of nine months and think oh, shit, i should have actually been there call it two years ago or should i feel motivated saying actually new market opportunities have opened up.

Avnish:

i clearly believe so there’s a Goldman Sacs report that talks about 100 billion dollars of incremental total GMV buy in the next 3-4 years and people do talk about the big guys taking 70-80 percent of it. But the question is where’s the value creation, so i have multiple perspectives. i think e-commerce is the largest – what are the largest market cap companies in the world, bunch of them are e-commerce whether its Amazon, whether it’s Alibaba, Tencent has pieces of it. So i think it is one of the largest markets globally and in india also it’s come in and a lot of value creation is going to happen. But let’s take that argument, let’s say that how much market share do market leaders typically have at most?

Rajinder:

Top two, three maybe 60-70 percent.

Avnish:

And they’re saying 100 billion of value creation, is 20-30 billion enough for you.

Rajinder:

Sounds interesting.

Avnish:  

So you should be static, right. So i think that’s the overall point which happens by the way in financial services, in consumer brands. These are so deep and wide that one company cannot cater to all buying experiences and selling experiences.

So therein lies the thought behind some of what we’re going to discuss that where can you disrupt, where are those gaps and wide spaces and recognize that you’re going up against these 800 pound gorillas. But Walmart itself was worried about getting disrupted by Amazon and now Walmart is obviously owner of Flipkart, so market dynamics changed. So i think that is very critical. in my view in e-commerce in particular having been an e-commerce entrepreneur what i would look at is, is there a demand side disruption possible for me to create a separate company or is there a supply side disruption. Let’s take the example of furniture where we know we have some companies that have done well, some have not done well. it is a fragmented nonstandard supply chain and it is a beauty lies in the eye of the beholder demand cycle. it’s the ultimate category where you can have a vertical. So i think that’s how you have to think about it and i think when you think about it in that way ultimately you would be able to create something which may by catering to a certain set of customers be worth a few billion. There are two fundamental paradigms that are disrupting commerce in my view, one is interactive commerce which we’ll talk about, which in a simplistic way is to think about TikTok of commerce and the send is D2C commerce. Now when you say 70-80 percent of the business is going to Flipkart and Amazon let’s say it does which brands are they selling. So one can actually capture that market cap through having your own brands. One can capture that market cap through logistics, one can capture that market cap through B2B, one can capture that market cap through payments. So a lot of times when things are happening we miss that these things are not happening in isolation. So, yes, two answers, one 20-30 billion is still available just in commerce and two that 70-80 billion has other enablers which is driving the market cap creation. So i think that’s how it is.

Rajinder:

i think you’ve called out two, i’d say the third at least trend globally is the call it the Shopify forex story, clearly Shopify is going to trend globally, i think in india some version of that trend will also play out where you’re kind of enabling the rebels so to speak, the ones who believe in the macro trend but don’t believe in the platforms and want to enable smaller guys to win.

Avnish:

And i think we’ll cover some of that in our B2B chat but absolutely and we’ve invested behind that trend also.

Rajinder:

So you brought up this interactive commerce point and you said TikTok of commerce and immediately it got me kind of curious. We’ve had different versions of those conversations internally, some people think of it more in terms of just the content layer, some people think about it in terms of the entire selling experience, which one do you believe in?

Avnish:

i think it’s the demand side, and i think if you step back let’s look at the history of retail and i think retail is getting disrupted but india you never really went through that cycle of modern trade.

i mean we did but we never had the Walmart scale and stuff like that. But all of us have visited supermarkets overseas and what is the structure of a supermarket, the structure of a supermarket is you walk through aisle after aisle, you have a list with you and you keep going and getting stuff. And then what happens, on the way out is a bunch of stuff that is sitting there which you never had a plan to buy and you’re picking it up. So there is intent and there is impulse.

in countries like india and China impulse is actually very big, in our cultural DNA i remember growing up we would go to the markets or the bazaars without any intent, it was like a social outing and then you go into one store and then you get something and it’s actually socializing. Where is that on the horizontals, where is impulse on the horizontals, horizontals cannot cater to an impulse. By definition intent driven commerce is lots of SKUs i should be able to come and search and find anything i want, that’s what we do. By definition impulse-based commerce is fewer items packaged very well, looking interesting, impulse based commerce is your TV based shopping malls. You know, people are – and by the way it’s coming in live streaming to – i think that’s the distinction. if you ask me there is a massive trend happening in my view of the bazaar experience coming on and that can happen only because of video and voice and that’s the “why now” of this.

Without video which is why TikTok of course when you’re in that video thing imagine now it’s just a live stream of one product after another or that same person who you’re watching and laughing about then suddenly pulls out a brand that you should buy.

Let’s look at China, so Alibaba market cap last, i haven’t check, but maybe 600-700 billion. JD which started around maybe a decade ago is 130 billion. Guess what PDD is 200 billion, happened in the last five years. So i think this interactive commerce in my view is a mega trend and i think it is a mega trend coming parallely or being developed in parallel fashion globally because video has come at the same time for everyone. So i think that’s a big opportunity and in my view that’s where the big market cap can get created because there the metaphors i’m just referring to my notes personalization and i didnt talk about. One of the things that is less – i think now appreciated enough about by Thanksgiving what happened to the US in spinning out TikTok they said this personalization technology is a national security for China.

Rajinder:

Like block and acquisition just for that?

Avnish:

So i think personalization, live feed video, where are all these tools on the horizontals and the horizontals know it and they have experiments running but now it’s the same incumbent issue, the disrupter is now the incumbent and now they have to grow month over month at GMV and all of that and it’s hard. So i think it’s a massive trend, i think very large companies are going to get created. i would say in our portfolio Dailyhunt has a little bit of that meaning shot at this, Josh is doing really well and i think you can add commerce to that.

Rajinder:

And actually coincidentally the impulse driven categories also tend to be higher margin and so in some ways you can actually potentially make even more money if you get it right.

Avnish:

That’s a good thought, i didn’t think of it, they’re generally very high margin and then if you layer the economics same in if you’re already consuming content and then you’re getting into this impulse shopping the CAC is zero because you’re already there. So assuming that you have this so i think that’s the big idea.

Rajinder:

interesting for sure. We’ve seen a few, we haven’t seen enough innovations as yet but i’m quite optimistic actually.

Avnish:

On that, Rajinder, one point i’ll make is what we just discussed about ByteDance this is as much about data science and technology as it is about commerce and i don’t think the ideas we’ve seen people have understood it. That personalization, that feed because putting up somebody for live feed is one thing but just understand that what has been perfected in this is the art of showing what is the next video that you will watch and the MOTS, the minutes of time spent, which is measured in media is probably the most important metric for you to get the ultimate commerce right and i think that gets missed.

Rajinder:

Now i think another perhaps reason is many people kind of think of interactive maybe in the same way they think of social and when they think of social they think Whatsapp, they think PDD. So is the macro thought then like should people just copy PDD and layer on something on top of it.

Avnish:

And by the way if i knew the answers, i wouldn’t be running this firm i would have been creating the next 10 million dollar PDD for india or whatever for 30 million. People can try to copy PDD but they won’t succeed and we’ve done some work on this and i’ll tell you what the thought is. The thought is that PDD is built on three pillars, demand aggregation, logistics and kind of just in time manufacturing, that very lean supply chain.

Now which of these apply to india, so demand aggregation for PDD actually started because they were the mini program on WeChat. So WeChat already had the audience and WeChat by the way has spawned a number of independent companies through the mini programs. So because there was a set of people on WeChat demand aggregation was easy so they introduced the find feed feature. Where do you do that here, which is why i’m optimistic about Dailyhunt and Josh having a shot at it, so there is that piece. Then you say logistics, now these are low AOV items, toilet paper, fruits, all kinds of daily consumption stuff. Logistics as a percentage of the value of the product in india tends to be 10-15 percent for these low AOVs, maybe even high. China as we all know we’re envious of the machine that works for logistics is another problem. Payments in india work well so that’s not a problem.

Third problem is just manufacturing, so a lot of these are ‘Just in Time’ manufactured – i mean China is the cradle of civilization now in manufacturing. So i don’t think any of these apply. Now that said the thought applies and then the question is how do you apply that thought and i think DealShare in our portfolios is doing a fantastic job and we just announced a new round of funding there. So what are they doing, the proxy for demand aggregation so they’re doing gamification, personalization, i think they could do a lot more which they should. But the proxy that they’re using for demand aggregation is B2B. So B2B also aggregates demand but only do B2B for SKUs that you want to do B2C so you’re just giving more demand to the suppliers. On the manufacturing actually as it turns out they’re great regional brands and manufacturers who don’t have national access, so they’re bringing that. And these guys are not bad, they’re not as streamlined as maybe China but again we have now the whole MSME initiative and all of that so i think they’re really riding that really well. So that’s on demand and that’s on supply. Logistics, very hard to solve, so what are they doing, the concept of DealShare Dukaan, where you aggregate. So it is your mom and pop stores, it could be a work from home entrepreneur who’s stocking the products and delivering locally.

Now if you look at Country Delight one of the big innovations is that, we deliver one liter of milk at 3 rupees or 4 rupees delivery because you’re aggregating in a certain density and delivering to apartments as opposed to normally it would be 50-60 rupees per delivery. DealShare Dukaan does that, so innovation in each is how i think you get close to PDD. Of course categories are very similar, it’s staples and so i think that’s one shot. The other shot where i’m coming from and you might have a point of view - i’m actually still positive that in fruits and vegetables you can do this because higher margin and something i learnt from Hari Menon by the way of Big Basket he said so industry wide F&B wastage is 17-18 percent, Big Basket i don’t think he’ll care, you know if the number is a positive thing, it’s single digit. And it’s because every time you touch a fruit or vegetable you add 2 points to 3 percent of wastage and perishability. So therefore incumbents are actually at a disadvantage in that category because they handle – they have this structure of warehousing, multiple points, hubs and spokes and that supply chain potentially increases wastage. So i’m optimistic that -- and you know that in China lately there have been a lot of companies funded in just fruits and vegetables doing this.

Rajinder:

Actually the pandemic in some ways actually created a new behavior almost, i remember in every – in Bangalore, in Bombay, i heard like enough people saying there are these farmers who are now aggregating and coming to local communities, there’s like a neighborhood organizer who is creating these shopping shop experiences. Whatsapp groups so that people can buy groceries. Actually in some ways i’m wondering some of that behavior in F&B may actually sustain and there could be interesting companies that capture and layer on to that behavior but build a business model around it.

Avnish:

Very important also because we also buy from some of these more organic less processed kinds of farms and my wife used to buy them at clubs that we’re all members of. There they have these shops, the grocery shops or a Nature’s Basket. Now these farms have become, they’re not fully direct to consumer but they’re tech enabled now, so now you’re buying with them on WhatsApp. i mean this is ripe for disruption, they have built the last mile logistics so they’re doing the aggregation, they need somebody who figures out the front end and aggregates it. So i think the supply side is ready and i think it would be an interesting category.

Rajinder:

And it’s a massive category with lots of margin. i’m going to switch to the other topic that you started off with after interactive the big other macro trend was actually D2C and in some ways the pandemic has just given like a clear boost to many brands. We made a few investments here so i’m guessing our portfolio is in decent shape but what’s your prognosis on what the medium-term view is on this phase?

Avnish:

i love how you slipped in that our portfolio is in decent shape and we love all our investments, all portfolios are in decent shape but it’s never that easy.

Ultimately commerce is a aggregation of match, you’re buying so obviously this is on the supply side, right, we spoke about the demand side like you said. So i think that’s definitely the case i’m not going to bring any new insight to this, D2C brands are exploding and we have a bunch of investments and we’ll talk through them. i’ll tell you where i see the gap i think that in the world of interactive commerce a D2C brand needs to come alive. in the world of passive commerce, search commerce, which is where i’m going on Amazon and i’m still buying their D2C brand, i think its fine. But i think in the world of interactive commerce i don’t think that the brands have thought this through as well.

i think brands today are at next level of interactivity, but i don’t think it’s an interactivity which is instagram post, videos and some of them are doing a fantastic job but i don’t think it brings them back alive. Do i have the answer to how they come alive, i don’t know? i have some thoughts, some companies have done a great job, when you buy something you scan a QR code and i don’t know, you get a video, you get a gift, you do something which is interactive. instagram posts are largely one way likes and dislikes, so i think there’s more to do here by the brands.

But i’ll tell you what the big idea here for me which i think it has not been fully figured out is interactive Zara on steroids or by Zara on steroids because of interactivity. What did Zara pioneer, most people would know, but Zara had this concept of mind to market in two weeks i think, something like that. So if people don’t know they used to have their buyers sitting in New York Fashion Week liking something that is being displayed, some star sketch artist sketching it, it going in those days by fax to ships which had tailors, ships off the coast of Spain. And the tailors would start stitching and the ship would sail towards its destination, that’s how you get to market if you were to get to New York City. The ship would sail by the time the fashion week is over, that’s how they did it. imagine a world, on the internet this would be so much easier. i think there’s massive businesses to be built. i just saw yesterday’s Stitch Fix’s stock went up – it’s now a 6-billion-dollar company somewhat on a similar idea. The term is C2M, consumer to manufacturer. i as the consumer tell you what i want, what world do we live in today, manufacturer to consumer. You as a manufacturer get to tell me what i should buy and where i should buy and the distribution. Can i as a consumer control this and i think it will be done. And i think it is going to happen and it’s a big idea.

Also it is a very interesting business because typically consumers pay you in advance, it’s very low inventory, it’s very high return on capital so i think this could be interesting. i’ll also say that because we speak a lot about founders, i think the founder archetype here is very different, this is not your classic, it’s a very design led founder and the category is also different. So clearly clothing, apparel, jewelry, you have to be a design first and it is a design factory that just churns out so many SKUs but bespoke.

Rajinder:

Actually, now thinking about Avi, if i’m being intellectually honest data also suggests that D2C brands have faced some challenges at least in the developed markets. if i think about Casper, couple of other mattress company brands all of their stock prices are actually down. So what’s leading to some models working and others not.

Avnish:

Yeah. So Casper was actually the darling and maybe Warby Parker pioneered, then what was the other one, Dollar Shave Club, those two pioneered and then it was Casper which was the darling because it really perfected the marketing of it, those Hollywood parties and unboxing experience.

i think in the internet and in disruption and innovation in general you always go through these cycles. And then the hard question is get asked and i think in Casper’s case just the US context is so different which is that mattresses supply chains are broken, it was supposed to be very high margin for retailers which is why in the US you have these everywhere you’ll find 20 mattress stores and i think Casper tried to do some disruption. Here’s where i think the view was wrong, the view was that a direct to consumer brand to be a brand you have to have 60-90 percent of sales from your own website and because otherwise you’re just depending on somebody else. Now where the nuance got missed was not is that 60-90 percent free traffic or is it paid traffic and what happened with a lot of these sites is they went so strong own site that the LTV to CAC and then obviously competition came in because the problem with D2C is also competition can come in very quickly, the margins didn’t work, the business models didn’t work.

in india we actually have the view that the building of business on Marketplaces is fine. Now i can argue that it’s risky but it’s another form of distribution, india has actually skipped the full organized retail and you’ve gone straight to Marketplaces. i was talking to Aman Gupta of boAt yesterday because the entire business now it’s 15-20 percent offline, but he’s built his entire business on Marketplaces. So i think that’s where i think the thought was wrong so we are happy for our companies to build business, economics has to make sense and that’s where Google and Facebook got rich because all these brands spend very heavily to have 60, 80, 90 percent traffic onsite and the economics didn’t work.

By the way you also have to do all the other hard work, logistics, warehousing, which you know in Marketplaces you don’t have to. So i think it’s a tricky balance but i’m actually very positive on Marketplaces driven brands but with one caveat, the caveat is what we discussed earlier, brands have to come alive, they also have to have a connect to the customer. if i’m going on Amazon and i’m buying cookies and therefore i’m buying a particular brand versus i’m going on Amazon and buying Open Secret cookie and that’s what i’m searching is very different things. And in fact some of our brands like OZiva, Open Secret, bunch of them that are in Marketplaces, Man Matters, they actually track the number of searches of their own keyword, so in the world of Marketplaces that indicates a brand to me and obviously ultimately, you’ve to look at cohorts and the habit forming indicators we have discussed before.

One thing i learnt from Aman of boAt is the importance of communities in building a brand. So he calls them boAt Heads, i think that’s awesome. So he mentioned how his biggest moment was when he walked into a bar or was in a bar and somebody walked in with the boAt headphones, it became a fashion accessory. So it is not where you’re selling it is how you’re connecting with the consumer.i don’t think it matters whether you’re selling in your site or you’re selling on Amazon but have you made that connect and they invested in the communities. He would call them personally, he would setup events, these boAt Heads became like a – so that’s where the onus comes in building a brand.

Rajinder:

interesting. Actually phenomenal success story. i think looking across our portfolio how do you feel we’re placed across this equation.

Avnish:

Look, it’s always a work in progress. i think we had discussed in an episode with Sanjot about DiNViBs, right, digitally native vertically integrated brand and i think Country Delight is a great example of that.

i don’t think there is a more digitally native because they go and deliver themselves and vertically integrated because they’re the supply themselves and process it, that’s Country Delight. i think overall we’ve good exposure in food and nutrition, we’ve Country Delight, OZiva, The Whole Truth, &Me, Open Secret, we also have products from Mosaic which is Man Matters as in food. in personal care we’re a little bit underweight, like to be more but we have a Mosaic which would be a house of brands, they’ve got Bodywise now which has launched for women. There’s obviously Damensch, fashion we have Chumbak. So i think work in progress, i believe that we could be 2x of this portfolio or 3x of this portfolio and yet feel really good about it because we’re in a decade long trend, there are going to be a number of brands known ten years from now which will be tens of thousands of crores, tens of thousands of crores.

For example, boAt is already a thousand of crores, which are still getting created, right? So it’s very exciting, i think in terms of overall theme of what we spoke about the interactive commerce we spoke about Deal Share, then we spoke about – you were talking about Shopify and B2B-B2C, we have Dukaan, we also have a bunch of these vertical focus of Bijnis in B2B which is riding the wave and we’ll talk more in the other episode. But riding really the wave of how do you sell on Marketplaces or retail with stuff like that. Enablers you’ve invested in Loadshare, SaaS, we have Moengage, that is helping a bunch of these brands.

My view is again from the first question you asked or second or third there are a number of ways to capture this 200-300 billion dollar market cap that’s coming. And I hope one of the things that this episode does for prospective founders is get them excited that it ain’t over. It’s just started and it’s going to be very, very interesting and there’s billions of dollars to be made if nothing else motivates you.

Rajinder:

Thanks, Avi. Awesome chatting as always.

Avnish:

Great, likewise, Thank you.

Salonie:

Thanks for tuning in. For more Matrix Moments episodes, you can head to www.matrixpartners.in/blog. You can also follow us on Twitter, LinkedIn, and YouTube for more updates.