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If malls are where you love to shop, then online marketplaces that host multiple stores could offer you a virtual equivalent of that experience-well, almost. A format first popularised by the San Jose-based American shopping and auction site, eBay, marketplace has now emerged as the darling of the fast-growing online retail industry in India. While for some this retail model may be a matter of choice, for others it could be the route to survival in a restrictive regulatory environment.

Internationally, too, the marketplace format has passed the test of time. China's Taobao (owned by Alibaba), largest online retailer of the world Amazon (it offers a combination of pureplay e-commerce and marketplace), eBay, Rakuten of Japan, South Korean Gmarket and MercadoLibre, headquartered in Argentina, are among the leading examples.

To explain the model, online marketplace is a site where the owner does not hold any inventory, nor does it sell anything. It hosts a platform for multiple third parties to meet buyers and sell products. Often, billing and transactions are handled by the marketplace operator. As marketplaces access goods from many providers, the range of products is wider and prices are more competitive compared to vendor-specific retailers.

The model works around revenue-share fee that the marketplace operator gets from the retailer it hosts. The revenue share would depend on the category of products - it could vary from 5 to 50 per cent of the value of products. While sale of lifestyle products would mean a higher revenue share, that of electronics, with a lower margin, would mean a lower revenue share. As for investment in the multi-store marketplace format, it's all about people, their time and technology to make the online transactions safe and efficient.

Kunal Bahl, chief executive, Snapdeal, is convinced the future of e-commerce is the marketplace model and it will become more evident in the months to come. "The only way to grow into a multi-billion e-commerce company is not to be supply-constrained. To be able to have enough assortments, marketplace is the way to go," according to Bahl. Snapdeal is a leading marketplace player in India.

Risks and rewards

Even when it comes to return on investment (RoI), marketplace may win hands down over the inventory-led model, provided the business is run well. Back-of-the-envelope calculations indicate that RoI in the marketplace model is around five times that of the inventory model, when companies of similar scale are compared.

If investments are low in the marketplace model for not having to own inventory and run warehouses, there are risks too for precisely the same reasons. When the platform owner does not own the products being sold, ensuring the quality of products could be a challenge, experts say. Integration of brands and ensuring adequate stocks with the vendor are among the other problems a marketplace company might face.

But, more than anything else, marketplace fits well in the Indian scenario where foreign investment is still not permitted in e-commerce, though the curb was lifted for multi-brand brick-and-mortar retailers last year, allowing them up to 51 per cent foreign direct investment (FDI). Rules for single-brand chains have been eased too, so that they can attract up to 100 per cent FDI.

Till recently, a majority of the e-commerce companies in the country had been following the foreign investment rulebook through a complex corporate structure, thereby skirting the norms in essence. The front-end entity or the face of the e-commerce player was different from its back-end company that attracted foreign money. (Back-end infrastructure is free to get foreign investment.) But when government agencies clamped down on companies violating FDI rules and the Foreign Exchange Management Act, the marketplace model caught on like never before. Even if companies are still continuing with the inventory-led model, many have made announcements or loud signals about switching to marketplace. After all, the FDI rules do not apply to the marketplace model because the operator here is treated as a marketing platform and a logistics company rather than a retail player. The guiding principle is that any e-commerce company that does not own the inventory being sold on the site will not face any FDI restriction.

Popular e-commerce company Flipkart, an established inventory-led player, hit the headlines recently by announcing that it was getting into marketplace, a model it had not taken to so far. Sachin Bansal, co-founder and CEO, Flipkart, told Business Standard in a recent interview that "inventory versus non-inventory model is not a debate". The focus should be on reliability, according to Bansal, who had worked with Amazon before launching Flipkart.

"We had thoughts on the marketplace model three years ago. Then, we thought of it seriously since 2011," he had said. The idea, according to Bansal, was to open up a platform so that there could be more sellers for customers and vice-versa. "We have now found the right opportunity to make the switch." On how it would retain the market edge while losing control over the inventory, Bansal replied that "it's not a free-for-all. We have criteria and strict guidelines that sellers must follow....the others have not got it right."

An industry source, however, argues that Flipkart is yet to make a complete switch to the marketplace model as it's a hardcore believer in the inventory-led model. Other inventory-led companies such as Myntra may look at the marketplace model as well, it is believed. Tradus, another prominent e-commerce player, is already a marketplace player.

BRICK MEETS CLICK

* Online marketplace is a site where the owner does not hold any inventory, nor does it sell anything. It hosts a platform for multiple third parties to meet buyers and sell products

* The model works around revenue-share that the marketplace operator gets from the retailers it hosts

* The revenue share would depend on the category of products — it could vary from 5 to 50 per cent of the value of sales

* Return on investments are usually higher in marketplace model in comparison to the inventory-led one

* Risks of not owning inventory could pose quality problems for marketplace operators

* FDI restriction on e-commerce retailers does not apply to the marketplace model

* In India, Amazon, eBay, Snapdeal, and Tradus operate in the marketplace format; Flipkart has announced a switchover from the inventory-led to marketplace model

Key to survival

Whatever retail model one follows, differentiation holds the key, according to Arvind Singhal, chairman, Technopak Advisors, a leading retail consultancy. "The players who offer little differentiation may harm each other through greater competition in the same space, and may also harm themselves in the process," he explains.

In a market where products and models are similar, companies are trying to offer differentiation through "unique value adds", as Bahl of Snapdeal points out. Payment security applications like TrustPay and fulfillment platforms such as SafeShip are among the services on offer. But, Bahl admits, in the end, it's a market for only a few players. Even internationally, marketplace is a domain meant for one or at the most two dominant players, he says.

There's time for that, believe many others, as the e-commerce industry is still quite negligible in the country, with a huge potential for growth. A Technopak white paper pegs the size of India's e-commerce market at $10 billion in 2012, while that of the e-tailing market (excluding travel related transactions) was $0.6 billion. In India, e-tailing has the potential to grow more than hundredfold in the next nine years to reach a value of $76 billion by 2021, the paper says.

For now, competition is red hot in e-commerce, with marketplace model standing tall. In fact, marketplace grew in stature even more when Amazon launched in India. The Nasdaq-listed e-commerce company came to India through the marketplace model after years of preparation and 16 months of getting a foothold in the country through Junglee.com, a price comparison site it had acquired. Amazon operates the marketplace format in 10 countries, including the US, Canada, Japan, UK, and China.

In the face of this intense competition, how's the original marketplace company, eBay, doing? Deepa Thomas, e-commerce evangelist, eBay India, says, "It is business as usual, consumers continue to buy 13 products every minute across technology, lifestyle, collectibles and media categories." According to Thomas, eBay is bullish on the market and will continue to further strengthen its leadership position.

As Mohit Bahl, partner (transaction services), KPMG, says: marketplace is a great variation to e-commerce that can exploit the power of the brand through an inventory-light model.
 


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