Amazon 2.0 : Private Labels!


6712-fortune-vishnu-avatar-01

A recent report by Recode.net suggests that Amazon will soon start selling its own brand of snacks, diapers and detergents. And it is just a matter of time when Amazon Prime members will exclusively get the first taste of Amazon’s brands like Happy Belly and Mama Bear. And prima facie, this move by Amazon can not to be taken lightly by any of those companies who are going to turn into competitors of Amazon pretty soon.

Two factors which actually intensifies the situation are – a) The increasing penetration of online buying for daily needs across the globe; and b) The impressive reach of Amazon in the major markets, including more than 50% of US e-commerce market. This move is sure going to be a trend-changer, or a trend  maker.

While it might not be anything new for a company to adopt Private Label route to increase its effectiveness in the market, the timing of doing so is what makes the whole difference and brings the impact. In past, we have seen companies adopt this route to cut costs, or increase its profitability, or to eliminate their dependence on specific brands. But how many times have you seen a company adopt private label route to establish an increased ‘dominance’ in the market? Probably none so far. I have little or absolutely no doubt that this move by Amazon is certainly going to impact the revenues of several companies, including the ones who are selling on Amazon platform since years. And this also enables Amazon, at least theoretically, to expand its presence beyond the online arena and compete with these consumer brands on their home turf – the offline retail.

470261103-jeff-bezos-blockquote

Having shared my thoughts on the Amazon’s masterstroke, a question which remains in my mind – Is it an ethical move? As a platform whose primary goal was to enable retailers/manufacturers sell anything and everything from a single outlet, wasn’t neutrality (towards all its sellers) the founding pillar of the business? Will owning a brand and selling it on the same platform not translate to conflict of interest? To me, it certainly appears like overriding the very founding principles on which the whole company flourished. And some repercussions will soon appear from different segments with-in the market segments.

What is most interesting is that now, it is going to become de-facto strategy for most of the marketplaces across the world (including Indian e-commerce marketplaces) to adopt and promote private label items on their platform to meet the profitability and penetration targets. Like, I can imagine Flipkart racing towards its own line of Fashion & Accessories brands (apart from what it already owns at Myntra), or SnapDeal employing Chinese companies to manufacture SmartPhones for them. All this is bound to happen.

[As a side note, its not that Indian e-Commerce companies were not trying similar things earlier. They approached this problem by incubating suppliers like WS Retail, CloudTail etc. Which was another form of Private Label. However, the recent regulatory move by Government of India has restricted the role of such incubated private label sellers. However, now the chances are very high that private labels floated by these e-commerce biggies will open the floodgates.]

1926234891-Jeff_Bezos_brand_quote

But how will Amazon India benefit from it? Well, that depends on what Flipkart & SnapDeal (and others like ShopClues & Jabong) choose to do. Let’s say, all these home grown brands adopt the private label route and flood the market. In such a case, Amazon India will become a de-facto platform for selling those originally popular brands to Indian consumers, and hence making Amazon India attract a more price insensitive consumers, and hence lift the company towards profitability & dominance. [If they adopt private label route, Amazon India won’t take that route for sure.]

And what if the e-Commerce biggies of India do not take the the private label route and continue to operate as always? Amazon India will have to suppress its itch to adopt private labels in India, and continue playing its patient game while watching Flipkart & SnapDeal bleed every day.

alibaba-rising

Is there anyone who remains unaffected by Amazon’s private label adoption strategy? Well yes, the Chinese e-Commerce companies. They were anyway playing the game behind the secured boundaries provided by the Chinese government. They will continue get ideas from Amazon to up their game in the domestic as well international markets, but remain absolutely unaffected when it comes to serving those 1.3 billion consumer at home.

Advertisements

Valuations are a theoretical exercise, always!


Sachin-Binny_Flipkart

Sachin Bansal was recently quoted saying valuations are a ‘theoretical exercise’ and not based on any transactions, and he is not worried too much about the markdowns by a few of investors. Well, Sachin is right when he says that about valuations. But I wish he had said a similar thing when investors were pushing up Flipkart’s valuations based on those theoretical estimates and assumptions.

Flipkart being the poster-boy of Indian e-Commerce, this markdown comes out heralding some harsh truths about the times we are into. And this makes it utterly important to understand what just happened and how did we reach till this stage, and then where from here?

So, the story goes something like this – Till the end of year 2015, e-commerce businesses were valued on the basis of GMVs, meaning irrespective of how much bribe you give away  to your customers in order to make them purchase, all that matters is that what was sum total of the Max Retail Price (MRP) of all the goods sold. I personally prefer calling this phenomena as – Buying your own revenue. Basically you are paying something from your pocket in the form of Discounts, Cash Backs, Promotional Offers, etc to make a customer cheaply own the product sold by you. So, the entire Indian e-Commerce was gung ho about transaction count without being realistic about the money lost to buy those transactions. And for doing such a ‘sinful’ thing, these companies were getting valued more and more.

And while all the players were busy buying their revenue (or transactions) and hence pushing their valuations up, someone somewhere was trying to do some enquiry into the valuation benchmarks across the globe, and found out some contrasting numbers, like the ones below:

  • Flipkart’s GMV was anywhere between $5 – $7 billion, meaning it’s MarketValue/GMV was somewhere around 2.2x – 3.2x for its $16 billion valuation.
  • Alibaba’s GMV for Q1 2016 was $115 billion, the annualized value for 2016 being $400 – $450 billion. Its current market cap is close to $200 billion, meaning MktCap/GMV = 0.5
  • Etsy (an online marketplace for handmade goods) total GMV in 2015 was $2.5 billion. Its currently valued at slightly less than $1 billion. MktVal/GMV = 0.4
  • Walmart’s revenues in 2015 was $480 billion. The GMV must have be higher than this considering the discounts. However, its current valuation is just higher than Alibaba at $215 billion. MktVal/GMV = ~ 0.4

Considering that Flipkart is a late stage startup, its valuation should not be more than 0.5x, or at best stretched upto 1x times the GMV.

Once anyone does this calculation, he would be of the opinion that previously some massive blunder has been made, and will immediately change his mind on the valuation numbers crowned to these e-commerce players.

And thus, the goalpost got shifted. And that is why you hear Kunal Bahl of SnapDeal suddenly talking about cutting costs and adding more categories like air-ticketing, etc. And he claims that they are redefining the m-commerce space.  The reality is however different from what Mr Bahl is trying to impose.

KunalBahl

Its no more a question of how, rather its a question of when the valuation markdown of SnapDeal and other poster boys from other niche segments will start appearing in public. And the only option these guys are left with is to exercise their options to remain attractive in the public view. Like, SnapDeal has recently made up it’s mind to buy out the distressed asset Housing.com at a throw-away price (and hence save the face of Mr Nikesh Arora and SoftBank). But will such distressed asset buy-outs really help restore or defend their valuation figures? Only the time will tell.

So who must be laughing at all these valuation shifts and distressed asset buy-out plans just to defend their valuations and ‘perceived’ market position? Probably two guys must be loving the whole situation – Amit Agarwal, the CEO of Amazon India, and Rahul Yadav, ex-CEO of Housing.com, for reasons better left unsaid 😉