Shock and awe
Jabong seems to be following a strategy of "shock and awe." The company, backed by Berlin-based Rocket Internet GmBH – a venture arm of the Samwer brothers – which is known for cloning several successful online business models of the US in other markets, is reverse-engineering the success formula of Flipkart in India: Add as many categories as possible; acquire customers at any cost; build a logistics arm from ground up and delight the customer.
Jabong has been extremely aggressive in winning over customers while the company officials deny resorting to heavy discounts. "We focus on variety, widest assortment, fastest delivery time and excellent customer service rather than deals and discounts," Manu Kumar Jain, co-founder and managing director of Jabong, said in an e-mail response to Techcircle.in. The company, which has its own warehouse, claims to deliver in top 10 cities within 48 hours and to other places within 1-3 days while it is delivering on the same day in metros like Delhi.
Getting bigger, quicker
Jabong is in a hurry in India. It wants to build a sizeable e-commerce company quicker even if that means it has to burn money to acquire customers and build up a costly warehousing, delivery and customer service infrastructure. According to industry sources, Rocket Internet has committed an amount in the range of $25-40 million for building out Jabong in India. Even though it is not a big sum, considering Jabong's rivals are well-funded, the e-commerce portal has been able to shoot into the big league with relatively less capital at disposal. In contrast, Flipkart has raised about $100 million while Snapdeal has raised $60 million through multiple rounds of fundraising and are still in the market to raise money. Yebhi.com, another rival, has also raised about $30 million in multiple rounds.
According to industry grapevine, Jabong is estimated to be spending close to Rs 2,000 per customer in acquisition costs. The average customer acquisition cost online is Rs 1,500, according to a study by Zinnov, a management consulting company catering to Fortune 1000 companies. When contacted, Flipkart declined to reveal its customer acquisition cost while Snapdeal did not respond to our calls and text messages. But for now, it's certain that almost all e-commerce companies are losing money on every transaction.
Says Mahesh Murthy, an e-commerce investor and partner of early-stage venture capital firm Seedfund, "Jabong has done to Flipkart what Flipkart has done to other e-commerce portals. Enter a market, spend outrageous amounts of money for customer acquisition and build revenues." Jabong is estimated to have budgeted Rs 75-80 crore for online advertising and is currently burning around Rs 5 crore a month.
However, Jabong has denied all industry-estimated figures in response to a detailed e-mail query sent by Techcircle.in.
Can it sustain?
But how long can Jabong continue to burn money and sustain the momentum? Says K Vaitheeswaran, founder and CEO of Indiaplaza, one of the oldest horizontal e-commerce players, "Customers are, by nature, the most disloyal entity. For any e-commerce player, acquiring customers might be easy but retaining them is not."
Even venture capitalists – who usually believe in the route of building companies ground up, spending huge money – disagrees with Jabong's approach. A venture capitalist with a leading firm says that India is not a market where one can build a "sustainable" business "aggressively." He doubts whether such spending can go on for long and is unsure if customers acquired in such a way are really the right ones since they have been lured by discounts and vouchers in the first place.
Mukesh Bansal of Myntra.com, which is the direct rival of Jabong in terms of product categories, adds, "Just offering discounts and vouchers is not a sustainable strategy. If one has a unique proposition to offer, then e-commerce is a big sector for everyone to have a share (of the market)."
Besides customer acquisition costs, building own logistics force may also turn out to be counterproductive in the long run even though it is helpful to build the market in the short term. Says Percy Avari, regional manager of Aramex (South Asia), a leading logistics and supply chain company, "Building and maintaining a large logistics staff is not sustainable if it's not your core business."
Jabong's India structure
Jabong is owned by Gurgaon-based Xerion Retail Pvt Ltd, which also owns the portal FabFurnish.com. Rocket Internet has backed Xerion, but how that has been legally structured is not known since foreign investment in multi-brand retail is not allowed in India. Rocket Internet has also invested in HeavenandHome.com in India.
Jabong (like any other Rocket Internet business) is built by consulting people, rather than hard core operations professionals. The top three people at Jabong are Manu Kumar Jain, Praveen Sinha and Arun Chandra Mohan – all of whom share the same designation: Co-founder and managing director. According to an employee, who requested anonymity, Jabong does not have a CEO. All three founders have distinct roles, though. Jain, who was an engagement manager at McKinsey & Co from May 2007 to December 2011, looks after marketing and brand building, and is the lone spokesperson for Jabong. Sinha, responsible for overall operations, was also a consultant with McKinsey prior to Jabong. Mohan, who is in-charge of sourcing, was a venture partner with Rocket Internet for almost a year and prior to that role, was a senior market analyst with IT research firm IDC.
Globally, Rocket Internet has always hired "consulting types" from firms like McKinsey, Boston Consulting Group or Goldman Sachs. German magazine Der Spiegel says in a feature on the Samwer brothers, "These are the types of people who are accustomed to putting a clearly delineated plan into practice, rarely complain about having to work overtime and don't want too much freedom."
That is the Rocket Internet DNA – reflective of the Samwer brothers' approach to business – which is "cold, hard and dismissive," as the magazine described. They don't usually take in the "creative types, tinkerers and nerds." According to a CEO of a leading Indian payment company who had interacted with some of the Jabong executives, "They are extremely aggressive and are focused on getting the work done. They have a plan B if plan A does not work and a plan C also, just in case plan B does not work out."
The company works out of its sprawling office premises at Udyog Vihar in Gurgaon, which also house other ventures such as home décor portal Heaven & Home, stationery shopping site OfficeYes, as well as FoodPanda, PrintVenue, FabFurnish and 21Diamonds, all promoted by Rocket Internet in India. Rocket has 59 companies worldwide and is present in 40 countries. It operates through several entrepreneurs in residence (EIR) and venture development managers in India who are constantly evaluating opportunities in the Indian Internet space and are ready to take on executive positions when the businesses roll out.
Jabong is the biggest bet of Rocket in India. Going by the Samwer brothers' track record, they don't stay in a business for long. Either they sell out quickly to a direct competitor or a strategic buyer. For instance, the Samwer brothers started with Alando, an eBay clone, which they sold to eBay itself for $50 million in just three months after the launch of the website in 1999. Most recent example is of the sale of Citydeal, a Groupon clone, to Groupon itself in return for an estimated 10 per cent stake in the Chicago-headquartered deals company. But India is a different kettle of fish with customers more enticed by discounts and deals rather than convenience, as in other markets. Whether Rocket will continue to burn money till it sees the endgame remains to be seen.
No comments:
Post a Comment
Note: only a member of this blog may post a comment.