Turn to manufacturing on higher margins, greater control over products and opportunity to create own brands
India’s new breed of e-commerce firms such as Inkfruit, Engrave and Pipal are tapping into the country’s growing market for online retail by manufacturing their own products, a shift from the conventional model wherein online retailers were mere aggregators of different brands.
Higher profit margins -- almost double of what they would earn by selling others’ products -- complete ownership of products and an opportunity to create their own brands are among reasons for these startups to shift from being pure online aggregators.
Customised retail merchandise site Inkfruit was one of the earliest to ride the trend. The portal was started by Navneet Rai and Kashyap Dalal, former executives at consumer goods giant Hindustan Unilever, who realised that the only brands available online came from all brick and mortar shops. Inkfruit’s business model is based on crowd-sourcing, where it opens up design of its merchandise such as tee-shirts and laptop skins to artists across the globe.
“Not only are there no intermediaries through online sales but the kind of consumer engagement we can generate is at a different level,” Dalal, said. “Besides our target audience is online,” he adds.
This results in higher profit margins, one of the biggest draws to set up a brand online rather than the aggregator model for online retailing. Aggregators are e-commerce companies that do not make their own products but aggregate existing brands on their own platform, typically at a discount. A group buying site is an example of an aggregator. In this model, the company gets a certain margin on the maximum retail price. But when an Inkfruit is also the maker, manufacturer margin is not involved. A brand that sells online would typically make twice the margin as compared to an aggregator.
“Although it is difficult to scale up on volumes, higher margins are one of the main attractions of this standalone company model,” said Dalal. He, however, agrees that to have greater reach, one needs to use aggregators too. “If you want deals, group buying is your place, for convenience, it would be travel. But for impulsive shopping a buyer would come to brands. Here is where brands that are online can take control and make their mark,” said Dalal. Inkfruit claims to sell around 12,000 products online monthly and is targeting 1000 transactions by the year end.
Brands that are positioned as premium online are reluctant to depend on aggregator sites. Nimish Adani and Kartik Iyer, who founded Engrave.in, a site that etches pictures on wood, acrylic and aluminium frames and ships it to people are among such entrepreneurs.
They realised that people will be willing to be pay a premium on products like these that have emotional value. Engrave.in makes a gross margin of 40-50% through their site which is close to 20% more than what a manufacturer would make if he sold it on aggregator sites, Adani said. Although the site is predominantly targeted at individuals, Engrave.in has had large deals from the Indian Navy to make customised plaques as well as schools and colleges across the country.
For many the internet is also serving up as a test market for these brands to evaluate their proposition before going offline with a brick and mortar store. Engrave.in closes around 500 transactions a month and the eight-month old company is now exploring offline sales too.
Online sales of Inkfruit too prompted the company to sell across 500 shops across the country. “We decided to go offline because everything said and done, the default, impulsive behaviour to pick up something is when you see it at a store,” Dalal admits.
The impulse purchase factor as well as popularity of the brand online is what coaxed Anuj and Abha Mahajan who founded Pipal.in which sells customised baby merchandise online to consider retailing through stores too. Having launched the website in July last year, Mahajan was very clear that he did not want to take Pipal into the offline retail market.
But as they realised that the brand became popular, they came across retail partners who were eager to sell Pipal’s products and within six months of their website launch, Pipal’s products were available in stores in Mumbai.
It now sells through three stores across the country. However, the approximate 50% margin is keeping Mahajan away from the aggregator sites.
When Shubhra Chadda founded Chumbak, a retail merchandise with an Indian theme in March last year, she approached the stores to sell Chumbak merchandise but realised very soon that Chumbak’s market was online where the brand had 12,000 active followers on Facebook.
“Initially we were only building the brand online but we realised that it was doing very well for us in terms of sale and we also have the flexibility to sell whatever we want as compared to the stores who are picky about what they want to store and also in offline retail, there is always someone between the consumer and a brand,” said Chaddha, 30, who started Chumbak after quitting her job at Nortel.
The concept of creating standalone online brands is commonplace globally. There are a few successful online brands abroad like threadless.com and LL Bean in the US. These are popular online retail brands in their geographies that are highly profit making. Take for instance, Chinese online clothing retailer Vancl.com.
It kicked off operations in 2007 as a specialty men’s retailer and then expanded to women, children and lifestyle goods at low prices. It has raised around $100 million from private equity investors and recently mandated banks to arrange a $1 billion initial public offering in the US this year.
Another Indian addition is Alma Mater, an online brand focused on school and college sweatshirts and other memorabilia. Straight out of college, Varun Agarwal (24) and Rohan Malhotra (25) started Alma Mater in Bangalore in 2009 when they realised there was opportunity was in making memorabilia accessible to alumni. They prompted institutions to share rights for the name by exclusive contracts that yielded loyalty.
“Everyone is starting an e-commerce site by bringing together brands. Where is the fun in that? We want to create a brand and encourage people to buy online instead of coming to a store,” said Varun Agarwal, who used to be a filmmaker with a production company in Bombay.
Alma Mater is now present across Bangalore, Chennai and is expanding north. They peg this on the ability to market their brand through Facebook. The site clocks a monthly turnover of Rs 7-8 lakh, which is projected to grow to Rs 15-20 lakh a month next quarter. It is in talks with venture capital investors for its first-round of funding.
Experts also notice this trend mushrooming in India. “What we are seeing is the first early indicators of this trend. On one had the ability to quickly bootstrap and reach a targeted audience can really make a brand grow online fast.
But it requires a seasoned entrepreneur or someone with multi-disciplinary skills and funds to back it,” said Prashanth Prakash, partner at venture capital firm Accel India. But creating online properties does come with a few risks.
“Aggregators are focused on generating access. For creator companies, on the other hand, the risks of complexity is doing all of this vertically. The creator company will have to be involved in design, production and access.