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World's Most Expensive $100Bn Lesson For Investors: Offline Is The Battlefield For Indian Commerce

Photo of an offline store in India

By AltG Research On Behalf Of Taponeel Mukherjee & Poornima Vardhan

In the latest e-commerce bloodbath, Glance - with total fundraising of $390 million did not get even a single order from live streams. In June 2022, there was a five-day Glance live fest, and they hit three orders. Yes, three orders in five days. While this lacklustre performance is an anomaly, Amazon's India problem and no sight of profitability in the industry's near future - a mature market points to the obvious. The writing on the wall is clear, Indian commerce will be won by Offline and Hybrid models.

Some people learn by analysis and logic, and some after burning a few billion dollars. At the end of the day, capital needs to generate returns - Precisely what investors get paid to do - make money! We're going to put on our investor hat here. Now that the days of Zero Interest Rates are firmly behind us, generating returns is paramount.

At the outset, let's get a few definitions right. So, what is commerce according to us? It's any product or service that's getting consumed by the end consumer. The bottom line is India is at the cusp of a tremendous growth wave, with the Indian consumer starting to consume increasing quantities of phones, clothes, coffee, household material, and biscuits. You name it, and there's a Multi-Billion Dollar play in India. The good news is, if you're still not in India, you have time to get on the bandwagon.

Winning In India Is All About Leveraging Fixed Assets

One quick look at the list of large Indian companies that have successfully generated Free-Cash Flows (FCF) points to the importance of the lessons we learnt in Micro Economics 101. At scale, Fixed Costs or what economists call "Operating Leverage" matters a lot. The flexibility of a business built around "Variable Costs" when small comes to bite when the business achieves scale but doesn't have FCF dropping in the bottom line.

India is a "high transaction volume" and "low transaction value" economy. Businesses that take advantage of a rapidly declining average fixed cost curve with scale will trump those that are structurally based upon variable costs that do not provide economies of scale.

Basically, your business needs to be able to leverage fixed assets to make money. If you're in the business of a high component of variable cost, you're going to really struggle.

This is precisely where Offline or Hybrid models of commerce win. They're able to deliver value to both their consumers and shareholders, aka the investors. A quick look at the likes of Decathlon, Jubilant FoodWorks, Devyani International, and KEI Industries shows that across industries, players who've been able to create business models that leverage fixed assets and innovative distribution models win. It doesn't matter if you're selling a pair of running shoes, pizzas or electric cable; what matters is your business model that leverages fixed assets (offline) and innovates on distribution.

Distribution Is King In India

Before someone tells us that distribution is king everywhere, let's be clear that India needs innovation on the distribution side. When you're looking at investing and building in India, understanding the deep distribution of general trade in India is crucial. Too often, we've seen people building businesses using pure online businesses that don't solve problems. Essentially, there is no problem to solve.

Another way to look at this is that one theme that has and will continue to generate investment returns in India is "The Levered Real-Estate" Play. The ability to use real estate to provide a service or product to the consumer using a piece of real estate is where a significant investment opportunity exists in India. Let's be clear: "Levered Real -Estate" plays have existed since humans have, but in an Indian context, it assumes increased significance. When you're reading about the big money-spinning deals in India - Hospitals, QSR, Coffee and Malls, ask yourself what you're really reading about as a business. Essentially, the ability to use real estate to create value and get consumers to pay. That's where the opportunity lies in India.

What About Pure Online Commerce Plays?

Pure online players will have to go hybrid or essentially embrace offline or will die. The offline push is evident across the board and will continue unabated. This is clearly evident from the fact that every single e-commerce business in India is trying to go offline (although unsuccessfully) - From Flipkart, Snapdeal, and Amazon to Nykaa and every single D2C brand in India.

But, Online Sells A Lot?

How many 100 Dollar Bills can you sell for 50 Dollars? I guess a lot!

Digital Is King!

Let's be absolutely clear "Digital Is King". India's Digital Transformation is stunning, to say the least, and will be a crucial driver of growth. For investors and consumers, every single component of the India Stack is transforming lives on a daily basis. The ability to use digital tools to transform the consumer experience is at the forefront for all successful "Offline Commerce" businesses. It isn't a choice anymore in terms of whether a business needs to go digital; it's imperative for survival! But, we must differentiate between the Digital tool and businesses that are structurally based upon variable-cost online models of commerce.

How To Invest In India?

For investors looking to get into India to tap into what is undoubtedly the defining investment opportunity of the 21st Century, understanding "business models" that work in India will be the defining factor. In India's march towards a 50 Trillion Dollar economy by 2050, the "Offline-Commerce" will decide the winners and losers. Which side are you on?


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