By Shruti Venkatesh| Sep 24, 2015
Online retail platforms like Snapdeal and Flipkart may be grabbing eyeballs, but it's their business-to-business counterparts that are seeing profits
In June 2012, Gagan Arora co-founded Printvenue, an online printing portal that enables consumers as well as small and medium enterprises (SMEs) to customise products such as pens, mouse pads, pen drives, diaries and mugs. In its early days, the Gurgaon-based business-to-business (B2B) ecommerce startup offered only five product categories that clients could customise in bulk. Today, it allows customers to personalise more than 700 products across stationery (letter heads, business cards, posters, etc), bags and even home decor items (clocks, cushions and so on).
Printvenue, which has the weight of world-renowned incubator Rocket Internet behind it, does not rely on celebrity brand endorsements or flash discount sales to draw in hordes of customers scouring the internet for the next good deal. It is not as flashy as its business to consumer (B2C) brethren like Snapdeal or Flipkart either. But despite its low profile, in just three years after its launch, it has expanded to Malaysia, Indonesia and Australia. In January 2015, it raised $4.5 million from the Asia Pacific Internet Group.
Its success, however, is not an exception, but the norm. While popular and big-ticket etail businesses such as Snapdeal (valued at $5 billion) and Flipkart (which has a $15 billion valuation) have yet to show profit, B2B businesses are quietly scripting their own success stories. More often than not, these lesser-known platforms have higher revenues, better profits and stronger relationships with customers than ecommerce retailers.
A 2014 report by consulting firm Frost & Sullivan notes that, “while ecommerce has recently grown tremendously through B2C retail, many do not realise that there has been a massive upturn in B2B online retailing in the past few years, contributing more to the ecommerce market than B2C”.
Another 2014 report by global retail giant Walmart also underscores this trend. It predicts that the online B2B sector in India, which is $300 billion as of now, will grow to $700 billion by 2020. “That (conclusion) is logical,” says Brijesh Agrawal, founder of Tolexo.com, an online market place for industrial products. “If GDP grows at 7-8 percent, B2B will grow at least three to four times that rate.” Having launched in December last year, Tolexo.com—a subsidiary of e-marketplace IndiaMART—is one of the newest players on the block. According to Agrawal, his company has achieved a run rate of over a thousand orders a day in less than six months and enjoys a 40-50 percent month-on-month growth rate.
Most B2B ecommerce companies are eyeing double-digit growth and are looking to expand their presence in the country. “We are seeing triple-digit growth over the last couple of years. We would be expanding our operations to six cities,” says Vineet Neeraj, co-founder of Kobster, a Chennai-based e-market for office supplies, launched three years ago.
B2B retail startups serve as platforms for buyers and sellers of industrial goods, thereby eliminating the role of middlemen, which in turn aids the buying and selling of goods at competitive prices. Swati Gupta, co-founder of Industrybuying, which, as its name suggests, is an e-store for industrial suppliers, says, “We have preferred prices and terms with the vendors on our platform. We get to pass on the price savings to our customers, and our vendors get access to a nationwide direct sales platform. It’s a win-win for all parties.” Launched in June 2013, Industrybuying offers products from adhesives and bearings to furniture and lab equipment.
In addition to helping buyers and sellers connect with a larger audience, B2B ecommerce companies also take ownership of the whole process of purchasing and delivering the material, including the title of the goods. “We work on a zero-inventory model. After an order is placed, the supplier ships the products to our fulfilment centres where it is checked for quality and then dispatched to the customer either through our own logistics team or through partners,” says Kobster’s Neeraj.
B2Bs charge a merchant a commission which could range from anywhere between five and 40 percent of the price of the goods sold. (The fee depends on the company and the product sold.) It’s little wonder, then, that these companies are also cash positive. In contrast, B2C ecommerce companies generally rely on heavy discounts and sales for customer acquisition, and are thereby unable to make profits.
Investors, too, are bullish about this space. They see the potential in the steady restructuring of what is an unorganised and chaotic sector. According to Neeraj, almost 95 percent of the B2B market in India is unorganised and dominated by local vendors and mom-and-pop stores. But change is inevitable.
Vani Kola, managing director and co-founder of Kalaari Capital, says that the degree of disconnect and inefficiencies in B2B buying makes the idea of ecommerce in this space all the more appealing. “Whether it’s SME, or procurement, or any other opportunity in the B2B sector, we think its enablement is going to be critical for companies to give better productivity and efficiency,” says Kola.
__PAGEBREAK__Mukul Singhal, principal at venture and growth capital fund, SAIF Partners, which has invested in Industrybuying, says that the retail market is 14 percent of the GDP, whereas the industrial market is 28 percent. “Since the base is smaller, the rate of return will be better for B2B as compared to B2C. Both businesses are at a different adoption curve now. For the next five years, rate of return will be better in B2B.” (As the base, which is the number of clients a company has, increases, the rate of growth will be slower.)
Another B2B ecommerce venture, Power2SME, has raised foreign direct investment (FDI) from Indo-American venture capital firm Inventus Capital, Kalaari Capital and Accel Partners in three rounds of funding. The Gurgaon-based company helps small and medium enterprises obtain lower pricing for their procurement needs by sourcing from the manufacturer and directly selling to the SMEs. Its founder and chief executive officer, R Narayan, tells Forbes India that since its inception in 2012, Power2SME has raised $15 million.
What differentiates online B2Bs from retail ecommerce businesses is the revenue model. For one, the purchasing power of a company is bigger than that of an individual customer, thereby making the ticket size much larger in a B2B transaction.
Investor and entrepreneur confidence is bolstered by the fact that this trend is playing out the world over. As per the 2015 United Nations trade report on ecommerce readiness, the sector is dominated by B2B transactions, which recorded approximately $15 trillion in global sales in 2012-13. Compare this with business-to-consumer ecommerce, which posted sales of $1.2 trillion in the same period.
A 2015 research report by Frost & Sullivan states that China and USA will lead the online B2B market, globally.
One of the oldest B2B players in the Indian market, mjunction, has been reaping the benefits of this ecommerce growth. Launched in 2000, it is a platform for steel and coal buyers and sellers—a joint venture between the Steel Authority of India Limited (SAIL) and Tata Steel. Its founder and managing director Viresh Oberoi says, “mjunction has been profitable since the year we launched because we never offered any service for free. We charge for everything; our buyers and sellers are ready to pay because they see that they are getting value out of it.”
According to Oberoi, mjunction’s value of transaction last year was about Rs 55,000 crore. “We get a small percentage of the total Gross Merchandise Value (GMV) and that is more than enough to make our profits and to pay our dividends,” he says. The company, which has not changed its business model, has a ten-year head start over its competitors, while it is only in recent years that ecommerce has become integral to industry lexicon. Oberoi says that people are more comfortable with doing commercial business online. “When mjunction was launched, the biggest challenge was to explain the meaning of internet to buyers. Clearly, that is no longer a hurdle,” he adds.
The growth of doing business online will further drive B2B ecommerce. There is a convergence of buyers’ expectations, wherein the consumer wishes to experience a similar ‘ease’ in business buying, which he currently has in personal buying. Neatly catalogued products, wider variety, fixed prices and regulated buying are among the conveniences that businesses are seeking on a B2B ecommerce platform.
This is one of the reasons why many well-funded B2B firms are investing heavily in strengthening their online platforms and supply-chain logistics. Some like Power2SME and Tolexo.com have taken this a step further by launching mobile apps that allow clients to place orders and source raw materials through their smartphones.
But despite ticking all the correct boxes (profits, good cash flow, potential to expand, etc), B2B e-businesses—by their very nature—still have a limited customer base and lower profile. “We think B2B is a bigger challenge than the B2C opportunity,” says Kola. While sales are relatively simple in retail ecommerce, owing to fixed prices, lower quantities and easy shipping, it is the exact opposite for B2B ecommerce where volumes are higher and hence a robust logistics team is required. Varying tax rates across different states is also a concern, adds Arora, who left Printvenue in July 2015, to start his own venture.
A common woe shared by online B2B companies is the ‘payment habits’ of clients. “A lot of these buyers are used to buying goods on credit in the ‘offline’ world. What we tell them today on the platform is to pay upfront, or at the most pay cash on delivery (COD). But most companies operate on a model where payment is made 30 days after the receipt of goods,” says Tolexo.com’s Agrawal.
Long customer acquisition process is another challenge. Impulse purchases that drive etail do not work in the B2B space where bulk orders are made on need and supply, and where decision-making is slow. Supply chain management and trust are two other challenges faced by these companies. Being a relatively new space, it will take time for B2B ecommerce to provide a seamless service, say experts.
The inability to address these operational challenges and the long route to brand building for any B2B enterprise deters companies from venturing into this space, leaving it largely untapped.
It takes a brave entrepreneur to enter this space, but then, fortune favours the bold.