The E-commerce sector, once the blue-eyed boy of India’s private equity and M&A space, has gone through a roller-coaster decade. In its heyday, during the 2010s up to 2015, it produced a new unicorn every six months. Fund houses made a beeline to invest in the so-called “next big bet”. Then came a phase when capital dried up. Many players fought for survival, some came to a screeching halt and some were acquired in investor-initiated consolidation.

For the past two years though, the sector is showing promise once more and investor confidence has picked up. According to some reports, 2018 saw PE and VC investments rise to $7 billion. In the backdrop of “economic gloom and doom” discussions across all sectors, some reports indicate that Flipkart and Amazon raked in approximately $3 billion sales in the recent festive season.

E-commerce 2.0 has moved beyond traditional B2C e-retail. Today it encompasses a larger and wider digital ecosystem – aggregators, B2B players, last-mile delivery, comparison/lead generation, recharge / digital payments, gaming, content and video delivery platforms. So in its new avatar, how is this sector shaping up and what is different from its whirlwind first innings?

Focus on margin expansion and unit economics

First (and most importantly), the single-minded focus on “growth at any cost” has rationalised. Previously, most e-commerce players compromised sound economics to achieve “hyper growth”, which in turn was also linked to soaring valuations. The “GMV-linked” multiples turned out to be a problem for the sector. This growth was mainly on the back of heavy discounting and marketing spends. In its new avatar, the sector is equally focused on margin expansion (or at least margin protection) and unit economics. Players are shifting to high margin categories and segments to improve unit economics. For last-mile delivery players that are defined by geographical markets, there is an increasing focus on tracking profitability by micro markets.

Second, the off-line strategy for mainstream e-commerce players has accelerated significantly. It could vary from full-scale off-line format stores to experience hubs where customers could get “touch and feel” of the products. Such a presence is becoming an essential part of their customer experience and brand strategy. It also provides the players with an opportunity to tap into an unexplored market and complement their online experience. Firstcry’s acquisition of Mom and Me, an off-line retail player in the kids' segment in 2017 is a classic example. Of late, Oyo has been aggressively investing in mainstream hotel assets. Online furniture players have aggressively ramped up their offline presence in the last couple of years.

Third, customer acquisition costs have been significantly rationalised. Focus has shifted from customer acquisition to customer retention. CAC (Customer Acquisition Cost) i.e. cost for acquiring a new customer – has been on the decline. Marketers are using data analytics to target their digital marketing campaigns and each category of spend is closely tracked for its RoI. Customer Cohorts (which track customer repeat patterns) are becoming more important KPIs for e-comm marketers than mere customer additions. Offline campaigns such as TV commercials, sponsorships, etc. are more targeted and with a much tighter budget. Here again, players who focused on the sustained brand building have fared well in defending their customer base against an onslaught of deep discounting and couponing by competitors.

Fourth, players are increasingly focusing on cash conservation and maintaining a comfortable cash runway. The fundraising process has become quite time consuming and more intense in the last 24 months. For companies that are nearing the end of their cash runway, it has adversely impacted their valuations as well. In the second innings, cash burn is getting tracked very closely – both internally and by investors. At a strategic level, it means curb on discretionary spends (e.g. office expansion or renovations, employee off-sites). At a more tactical level, companies are putting in place stringent budgeting systems and processes to manage cash burn.

Proper financial reporting and governance

Lastly, the deal evaluation process has changed significantly. Gone are the days when investors would write cheques based on innocuous internal MIS’ of companies, at times without any external diligence. In the recent past, the process has become prolonged, with investors carrying out detailed diligence – not just in traditional areas like legal, finance and tax but also adding elements such as forensics, background checks, technology and management capabilities. Even the post-deal or post-investment focus of investors has increased significantly. They have been actively pushing for fixing gaps in financial reporting, governance and putting in place financial controls and processes. These are no longer set aside as “housekeeping” issues.

So, where is the sector headed? As always, there is no one answer. While the economic slowdown will have an impact in terms of reduced discretionary spends, players that address the fundamental challenges such as last-mile delivery or convenience to customers, will continue to find growth triggers. All in all, e-commerce 2.0 is about “less noise and more substance”. No reason to complain!

Sanjeev Krishan is Partner and Leader – Deals and Hrishikesh Sathe is Executive Director at PwC India.

First Published:Dec 31, 2019 6:00 AM IST