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General Thinking

Trolling – Who Benefits?

Flipkart Vs Snapdeal

There is a lot of discussion currently about the BigBillionDay campaign which Flipkart had run. Flipkart decided to make a splash about certain sale/discount/offers being available on their website on the day in order to generate shopper interest and therefore sales. Given the numbers that the company has ben publishing, we can only conclude that the campaign was a glorious success. They seem to have pulled of a $100 Million worth of sales in 10 hours, which translates to Rs. 1 Crores worth of goods sold each minute. I am not sure what you think, but I think its a big deal!

On the day of this sale, Snapdeal and Amazon were quick to jump on Flipkart’s heels to effectively try and piss on their parade. Both companies by the looks of it seem to have effectively trolled Flipkart, but who got the mileage at the end of the day?

We live in a world where marketing is about eye-balls. It does not matter how those eye-balls arrive. Look at Buzzfeed; crap journalism, but who cares?

Trolling is all about poking fun at your competitors weakness and exaggerating it. Its more like an ambush; wherever you seem to go, you come up against the same jokes. The trolls forget the basic human instinct. When somebody is getting beaten everyone likes to stand around and watch.

Have you ever been in a situation where some team is giving another a drubbing; even if you have no particular interest in the sport, you just tune in to see how the drubbing is taking place? (I have watched a lot of 8-0 football matches and almost none which ended 0-0) How many of you watched or talked about the Germany Vs Brazil match in the World Cup while not having watched all of the WC matches? Same psychology at play.

When you start trolling and poking fun, people want to see the action first hand.

We live in a digital world where every business has a web presence; 50 years ago trolling might have been useful since it was hard to check the veracity. In the digital world we live in today, any such story results in a hit to the website of the company being trolled.

It gives the trolled an additional opportunity to convert the skeptic into a follower. In the world where eye-balls are all that matter, any publicity is good publicity. Trolls are also part of the publicity.

The problem is not when people talk bad of you, but when people stop talking about you.

I, for certain believe that Snapdeal put in considerable resources to make sure that the Flipkart #BigBillionDay was a raging success.

Even Internationally in a similar vein, Samsung keeps trolling Apple all the time. Things have come to a point where I feel Samsung cannot make an ad without mentioned Apple. In fact, when the bendgate broke out; Samsung, LG and others could not hold themselves back from trolling Apple, the moment the whiff of the story came out. iPhone 6 Plus seems to be selling like gangbusters. (4 Weeks+ wait list)

iPhone6

Apple cannot seem to produce enough iDevices to meet the demand; Samsung published their expectation for last quarter yesterday; 60% down on profits does not look very pretty.

So we arrives at the question, who is helped by all of the trolling. I think if we are to go by numbers, the end results are clear.

May the Trolls rest in peace.

Categories
General Thinking

Online Retail – The Revolution?

In a commerce class in school, I was taught that the point of a business is to earn a profit. Online retail startups have certainly caused me to question this notion.

 

Money, money everywhere; not a cent to be earned!

amazon-logo-a-smile-black  VS main-qimg-6775e2918eef64f05db9bc95aa673606

I find it quite amazing that there is immense investor confidence in a business that is unable to turn a profit even with millions of users on board. The best (perhaps the only) analogy for the current online retail scenario would be the airline industry.

When airlines started flying people in the 40’s; there was a lot of excitement about growth opportunities, and the loss-making nature meant that governments owned most airlines – more as status symbols rather than viable businesses. Eventually, private companies got into the game and operating running airlines as well. At the time, it was believed that with increasing connectivity between several cities as well as an increasing number of people using airlines, it was expected to become a viable business and a profitable business. But, as time progresses, we can see that this expectation has not been met. On every occasion, other reasons have been blamed for the lack of profitability in the sector: SARS, 9/11, hijacking, disappearing planes, and so on. Nonetheless, airlines have not been able to consistently turn a profit. This has resulted in many mergers and acquisitions, amalgamations, and even bankruptcy.

The only type of airlines that have been successful are the ones which have specialised in a very specific segment (corporate/business customers) or geographical region. The sad consequence is that one of the bigger airlines always acquires the profitable operation and tries to scale it, resulting in its inevitable decline.

Online retail, by comparison, is a far more recent phenomenon. Ideally, it should be compared with retail, which is what it promises to replace. To date, the success (in turnover) of online retail has relied on discounting. Walmart also relies on discounting, and by relying on any means necessary (paying extremely low wages, providing hard terms to manufacturers, etc.), they have managed to run a business that is highly profitable.

With Flipkart securing a funding of $1 billion, followed instantly by Amazon announcing to pump $2 billion, there has been a lot of commentary about online retail and the opportunities that lie ahead.

I think the point of a business is to create value, and that value creation results in profits. A retailer makes it easier for you to explore a multitude of products, compare brands and buy them. The online retail industry provides nearly the same service offering, along with the added convenience of being able to shop from home. The only difference is that the retailer sources the goods at a lower price than the one at which it is sold to you. Unfortunately, the selling price of products on online retail platforms is lower than their purchase price.

 

US Airways Amazon

Is it not amazing how similar the profitability trends seem? Essentially, there is none.

US Airways Vs. Amazon

Different industries, same struggle.

 

Now, I understand that for certain businesses, in order to be profitable, you need to have a minimum base of customers. Social Networks are shining examples of how that works. Having said that, if you cannot make something work profitably with 20 million customers, how will ramping that number up to 100 million make any difference? Even if you do make a profit, the margins are going to be in the low single digit percentages. I find it hard to justify investing billions of dollars to generate a profit in the millions (and most likely tens of millions, and not hundreds).

 

WACC

This chart sourced from an IATA’s 2013 report shows how well the returns have worked out for the airline industry. Investor value destruction!

 

I believe the online retail industry is headed the same way, at least from the point of view of “all-under-one-roof” retailers.

Similar to the case of airlines, there is some oasis of hope. There are online retail firms, not unlike the airline industry, which specialise in a very narrow segment of product offerings. DollarShaveClub, Bonobos, NastyGal, Diapers.com, and closer home, Myntra.com, are examples of models that work well. Unfortunately, similar to the airline industry, these smaller firms, which will never have very high turnovers, are acquired by larger players, since it makes for a nice press release and helps keep investors at bay. At the time of acquisition, the larger firm tries to “integrate the business” and benefit from the “synergies”, and end up running the business to the ground. If they leave it alone, it may just work – it has shown success in its current form after all! This has happened time and again in the airline industry; it remains to be seen how it plays out in online retail.

So why the investments? Well, if we come back to Flipkart, the investors invest a large sum of money into the company because it furthers the company’s chances of an IPO. If the company is sitting on $500 million in cash in 12 months’ time and files for IPO, they will certainly be able to sell through the IPO and exit neatly. The CEO, on behalf of the investors, made clear the hopes that would be sold to IPO investors – A $100 billion valuation. So, even if they project a $20 billion valuation at the time of listing, which would be close to three times the valuation at which the funds were raised (if rumours are to be believed); as compared to $100 billion, it will still appear as though there is still more value to be unlocked. And as far the current investors are concerned, 300% in 12 months is not too bad a deal, is it?

If Amazon were to be used as a benchmark, the possibility of running an online retail business with decent profit margins seems remote. To add to that, Amazon itself has always been ready to enter into a price war with anyone who strays into its territory, since its investors seem quite satisfied even if the company posts a loss. Therefore, if profits ever exist, they will always be extremely low.

Will Flipkart be able to keep hopes up without turning a profit? Well, only time will tell!

 

Categories
General Thinking

Entrepreneurs and Investment

If I had a dime for every aspiring entrepreneur that I met, who told me that if only the investment was in place, they would start off!!

Entrepreneurship is a journey and not a destination. So my question to most entrepreneurs is; When would you have sufficient funds to run your startup? Its 7 years in and Flipkart is still raising money to meet their financial requirements.

One of the facts of being an entrepreneur is that you are never going to have enough money to meet all of your financial obligations. No matter how much you have, you could do with some more. Balancing financial resources is a fact of life for every entrepreneur and there is nothing, no amount of fundraising that would change that.

So my advise is; If you really believe that what you are about to do is going to create value, start building the enterprise. There has to be some degree of initial planning, but one cannot expect all of the pieces to be in place before starting out!

If you are building something and you are 65% of the way there, the chances of you finding someone (even your parents/relatives) who is willing to back you are much greater than if you have built 0% of it.

Entrepreneurship is a plunge much like quitting smoking. You jump into it and see how it plays out. You cannot know all eventualities and consequences and be prepared for every challenge (including the financial ones) right at the outset.