New e-commerce ventures are
being announced everyday. I estimate that the survival rate of such ventures
will be less than 10 percent. Nine out of every 10 e-commerce ventures will
fold up. That’s because most promoters have simply no idea of the
complexities involved in the ventures they’re setting up. Most business
plans oversimplify the complexities of the marketplace, overestimate the
technological capability of promoters, and hope that the subsequent IPO
(Initial Public Offer) will be oversubscribed.
One of the key areas that’s
being under-rated is the setting up of distribution networks. Present-day
distribution networks have evolved to their current state over the last
seven decades. Many B2C companies underestimate the amount of work that’ll
go into distributing their products. Instead, they focus their energies on
setting up a site and luring eyeballs. We’re already witnessing customer
dissatisfaction over deliveries. Such dissatisfaction will most probably
increase over time.
Let’s start by examining
conventional distribution networks.
Conventional distribution
networks attempt to minimize transportation costs. So, you have one or more
factories, the output of which is sent to one or more regional warehouses.
Bulk transport is used to move goods to regional warehouses. Goods then move
from the regional warehouse to warehouses of distributors. Once again, bulk
transport is used. Distributors use smaller means of transportation to move
goods to retailers, and retailers sell to the end user.
As can be seen, the
conventional distribution process is hierarchical. You can almost imagine
the entire structure as a tree, with the point of production being the root
and retail outlets being the leaves. The most cost-efficient mechanisms are
sought to move products between the nodes of this tree. The attempt is to
minimize the total cost of moving products from the root to the leaves.
Now let’s turn to
Web-enabled B2C ventures. Where do they fit into this structure? There are
three possible places where they could fit in. They could attempt to
distribute goods locally, that is, take over the retailer-consumer link. Or,
they could attempt to fit into the distributor’s space–dispatching goods
in both B2B (to retailers) and B2C fashion. Finally, they could attempt to
set up a nation-wide network.
Setting up nation- or
region-wide distribution networks is a tough job and requires lots of time
and money. It also requires experienced people–the typical techie would
find it tough to argue with unionized truckers. Setting up a local network
too has its own problems–for example, it’s terribly cost-inefficient to
deliver one package at a time. You need volumes to be able to spread the
cost of each trip over multiple deliveries. Tying up with courier companies
is an option, but courier companies are not cheap.
Then there are other issues
involved. Many e-businesses will soon be in direct competition with
conventional distribution channels. And most corporates would not like to
spoil long-standing relationships with existing distributors, since most of
them have spent lots of time and effort promoting the business of the
company.
I would sum up the situation
as follows–distribution will prove to be the most critical part of B2C
ventures. The only exceptions to this rule are:
Businesses dealing in
high-value products, where transportation cost is a very small part of
total product cost
Businesses that center
around products for which there are no conventional distribution
channels available–for example, online auctions, and
Service-oriented
businesses, like insurance or software
Finally, India is not known
for possessing world-class distribution infrastructure. Couriers lose
packages, truckers are known to steal from consignments, and transport
unions jack up rates at will. So, potential entrepreneurs should do their
homework well.
The bottom line
The real stars of the B2C universe will be those who’ve mastered the art
of distribution. Companies like HLL or Colgate could lead the pack in
e-commerce.