After two death traps, ShopClues finds a distinct space among lower-income Indians

Sunny Sen June 30, 2017 12 min

Billionaire Mukesh Ambani made a big bet September 1 last year, just ahead of the festive season, when he announced voice calls would be free on Reliance Jio, the mobile phone venture he controls. Jio offered data for free for a limited period even after which its tariffs were the cheapest in the country.

Since September, Jio added more than 100 million customers, many of them in the small towns of India.

Jio’s disruption had a curious echo in the fortunes of ShopClues, among India’s top three ecommerce players. Like other peers, ShopClues too had big plans for the festive season sales. It offered products for as low as Rs 99. Promotions were targeted at people in smaller towns. Orders increased, and so did new customers.

But, soon ShopClues’ cofounders Sanjay Sethi and Radhika Ghai realised that the new traction was not only because of the products and its pricing. With Jio, they found, even customers with modest incomes had begun surfing the internet. Users were onboarding the mobile internet in hordes to watch movies and cricket, listen to music, and view news. And, eventually shop.
“We got the first taste of this segment coming online. Jio validated something for us,” says Sethi. Eight months later, half of ShopClues’s traffic comes from Tier-IV towns and villages — 90% of who are on Jio.

To be sure, not all of the users were first time internet users, some had used the internet and dropped off, because it was not affordable. Others would occasionally use it, but not shop online. “They are being introduced to ecommerce by ShopClues,” says Ghai.

All this would not matter if ecommerce leaders Flipkart and Amazon, engaged in a bitter fight, were not primarily focussing on India’s bigger cities and towns, where the number of users as also disposable incomes are higher. That has taken the limelight away from ShopClues, which is valued at more than a $1 billion, allowing it to quietly lure more customers and merchants from small towns and villages into its fold.

In April, according to online data tracker Comscore, ShopClues had 4.46 million unique visitors, less than a quarter of Amazon’s 18.6 million and behind Flipkart’s 13.37 million. ShopClues claims 35 million app downloads (as per business intelligence firm AppAnnie, Amazon has 39.41 million downloads and Flipkart 29.7 million). But, where ShopClues scores is its six lakh merchants; Amazon has 1.5 lakh and Flipkart a lakh. “It is not that Amazon and Flipkart are not selling in these small towns, but the difference is in the approach,” says Sethi.

In April, according to online data tracker Comscore, ShopClues had 4.46 million unique visitors  

ShopClues focusses on unstructured and unbranded products, consumers in small towns and on merchants in these small towns. Sethi understands this market well. He grew up in Jhansi, a town in Madhya Pradesh. Drive five kilometers in either direction from the centre of the town, the city ends, he says.

“If Amazon and Flipkart focuses on these buyers they will crash and burn in no time,” says Sethi about his company’s customer base. ShopClues is addressing a market that has not yet taken off. Most of its buyers have never operated a computer.

“There is a lot of headroom (in the market for growth),” Sethi says, after drawing a pyramid showing buyer demographics on the whiteboard in his office in Gurugram (formerly Gurgaon). He is in his usual running shoes, a t-shirt bought from ShopClues and khakhi trousers. He loves to buy from ShopClues, but mostly it is to test how the various parts — merchants, technology, supply chain and delivery — functions.

But it took ShopClues two near death experiences to rank among the top ecommerce companies of the country.  

As of March 2017, the last month of the 2016-17 financial year, ShopClues had a 12.8% market share pipping Snapdeal (6.9%) to become the third largest ecommerce company after Amazon (44.6%) and Flipkart (35.7%), according to market intelligence company Kalagato.

But it took ShopClues two near death experiences to rank among the top ecommerce companies of the country.

Death trap 1: Was it Amazon?

It was early 2011. ShopClues had not taken off yet. Sandeep Aggarwal, along with Sethi and Ghai had decided quit their jobs in the US, shift back to India and start ShopClues.

Aggarwal was a Wall Street analyst for over a decade and had lined up Kleiner Perkins Caufield & Byers (KPCB) as it main investor, which counts Amazon, Uber, Airbnb, Uber, among others in its portfolio. For ShopClues there was a commitment of $5 million.

But ShopClues was in for a rude jolt. KPCB pulled back from the plan to invest in ShopClues. All hell broke loose. “I was giving my farewell speech when the news came… My container was ready to be shipped to India,” recalls Sethi. FactorDaily has mailed KPCB for comment and will update this story when and if we hear from it.

KPCB pulled back from the plan to invest in ShopClues. All hell broke loose.  

Sethi and the other cofounders thought that the term sheet was taken back because Amazon had announced its entry into India. “We got to know later that the partner who was doing the deal was fired because of sexual harassment charges… but Sandeep (Aggarwal) was able to raise money quickly,” says Sethi.

ShopClues took off.

Death trap 2: Running on credit card

Snapdeal had raised more than $125 million in 2013, and Flipkart had raised $360 million the same year. ShopClues was a little known company. Add to that, the macroeconomic situation of the country was not stable — it wasn’t clear who would win the following year’s general elections, Congress or BJP.

“The overall sentiment was not good,” says Sethi. “(And) we were rapidly running out of cash. Money was suppose to come in. We had closed our term sheet. By end of March (2014) we had done the deal.”

ShopClues was just left with enough to pay salaries. For everything else — like paying Facebook for advertising, Google for server space — the founders were using their credit cards.

Even now, when Amazon and Flipkart spend about $20-25 million a month, ShopClues claims its burn to be less than $2 million.  

It was the beginning of May. The founders realised that if the money didn’t come in in another 15-20 days, ShopClues would have to be shut down. “The downward spiral would have started. But, we raised $15 million,” says Sethi, taking the total raised to more than $31 million.

He says ShopClues would have survived even with $2 million because of its low cash burn. Even now, when Amazon and Flipkart spend about $20-25 million a month, ShopClues claims its burn to be less than $2 million. “Burn is very toxic… Ours would be a tenth of Flipkart’s burn. If Snapdeal’s burn is to be added, that’s a $5 million additional burn,” Sethi says.

A different promise

It’s not only competition; everything about ShopClues is different. It doesn’t go after brands, neither does it go after buyers of brands. It also likes to add the “long tail” of merchants in smaller towns, who sell unbranded clothes.

For example, ShopClues early this year did an exclusive deal with Ivoomi mobile phone brand, which sells at Rs 4,999. Flipkart and Amazon does exclusives with Lenovo, OnePlus, Motorola, Xiaomi, and other better known brands.

“Our overlap with Flipkart and Amazon customers is about 20%,” says Ghai. ShopClues’s focus has not changed since 2011. “Whether it is the consumers we are targeting, whether it’s the categories, or the merchants we are fulfilling, that has not changed from the day we started. We have focussed on Tier II and III customers, we have focused on unstructured categories and SME merchants.”

Recently, Ghai’s son wanted to buy to Nike shoes worth Rs 6,000 to play cricket. The cofounder bought an unbranded pair of shoes at one-fourth the price. “If he continues to play for 6-8 weeks, we will buy the Nike shoes,” she says.

Sethi, on the other hand says, that there are a large number of people who will only look for the Rs 300 shoes. “For them, Bata is still a stretch brand. They buy those shoes when there is a wedding at home,” he says.

Thanks to Jio, a large number of lower income group buyers are coming online. Sethi has divvied up the country’s population into four tiers: the first and top tier is 150 million people of which 70 million shop online, the second tier is of 400 million of which only 10-15 million shop online. The last two tiers make 700 million, almost none of whom shop online.

Sethi hopes that over the next five years the Tier II will start shopping online. “We don’t promise them next day delivery. We promise them products at a price point they can afford,” he says.

To be sure, Amazon and Flipkart has similar items on their platforms but they make for just a couple of percentage points of their total volume. “A couple of percent doesn’t matter. But if about 60% of your business is about Rs 300 product, you will crash and burn. If you lose Rs 100-200 on every item it is not sustainable,” says Sethi.

In contrast, Sethi says ShopClues makes 3% contribution margin on a Rs 300 item. It achieves this by local sourcing, local delivery, and not by air like in the case of the larger e-commerce rivals.

Merchant-first approach

Some believe that ShopClues won’t be able to differentiate for a long time. “Eventually people are not going to differentiate between platforms. The merchants will also not differentiate between a Flipkart and Amazon,” says Arvind Singhal, chairman of consultancy firm Technopak.

Singhal adds that the consumer ShopClues is targeting has very low purchasing power. “Even in big cities they will be buying from the brick and mortar outlets. Whether ShopClues’s model is sustainable for a long time, I am unsure,” he says.

While Flipkart and Amazon target brands, ShopClues targets retailers… a merchant needs two products to sell online on ShopClues (for Amazon a merchant needs 60, and for Flipkart 25)  

Sethi’s lieutenants differ. “It requires a different mindset,” says Ganesh Balakrishnan, AVP, seller services, ShopClues.

While Flipkart and Amazon target brands, ShopClues targets retailers: through working capital loans under the Capital Wings programme in association with banks and non-banking financial companies; a merchant needs two products to sell online on ShopClues (for Amazon a merchant needs 60, and for Flipkart 25); then there is ShopClues University, which is an online coaching and assisting programme for sellers. Under the Sarathi programme in partnership with the ministry of small and medium industries ShopClues trains and onboards small merchants (Amazon and Flipkart have similar programmes).

ShopClues was the first to sell refurbished goods on its platform. Amazon and Flipkart followed. The category contributes about 20% in value to ShopClues’s total sales. “We work with all the brands like Apple and Samsung, for refurbished products,” says Nitin Kochhar, vice president — products, ShopClues.

Ghai says, “If 50% of your business is done by Cloudtail or WS Retail, how are you a marketplace? We have to be sensitive about that.” Cloudtail and WS Retail are joint ventures that Amazon and Flipkart respectively have to set on their own platforms.

Fixing the delivery problem

ShopClues delivers to 36,000 pin codes, of India’s nearly 40,000. Flipkart and Amazon deliver in about 20,000 pin codes. But, as Sethi is quick to admit, the problem is not with the delivering in those locations but finding the right way to deliver them while not losing a lot of money.

For example, when someone in Jagun, a village in Assam with a population of 3,139 people ordered for a 32 inches LED, a regular delivery service wouldn’t have been able to deliver. It travelled by bus from Guwahati to Margherita and then by a local transport to Jagun.

A Canon Pixma printer was delivered in the Thanger village in Jammu by a local transporter.

ShopClues works with 40 delivery companies, and those deliver companies work with a bunch of other local transport vendors, at times the delivery is done of a bicycle and sometimes on a bullock cart.

Also, the technology that ShopClues identifies the sellers close to the buyer to show up while a buyer is searching for an article, to reduce the cost of delivery. “If we do not do this our cost of delivery will go up,” says Kochhar.

Having fixed some of the fundamental problems, Sethi and Ghai are looking at the future of ShopClues.

One more round before profitability

What is the measure of your success, I ask ShopClues?

“Profitability,” says Ghai.

How far is that?

“We are not profitable as yet. We are profitable in fashion, in lifestyle. 50% of our business is already profitable. Our largest cluster is profitable,” Ghai says. “We don’t you need to raise money. That shows how efficient we are.”

The cost that ShopClues pays to acquire a customer is also not very high. Ghai compared ShopClues’s frequent buyer to an Amazon Prime customer. “That’s 35% of our buyer base… they purchase two to three times a month.”

To achieve that, ShopClues has created 2,500 customer profiles depending on delivery patterns, feedback, past purchases and the customer’s own profile.

Having done that Sethi now wants to build a better platform for retailers. “We will need more investment in technology and platform, specially merchant facing products. There are acquisition targets which will be very important in the next two years,” Sethi says, without divulging details.

Adjacent businesses will soak all investments. For example, in supply chain and inventory management. The way ShopClues gets unbranded, unstructured goods to customers, Sethi wants to build a network for retailers — give retailer the wholesalers access, and the distributor access to the wholesalers.

But, Sethi will stick to the fundamentals of efficiency. “If we raise anything between $50 million to $100 million we will be good to go, and we will still be the most efficient company.” It has cut a Rs 50 crore debt line with InnoVen Capital in an unusual step, meanwhile.

Sethi, still, will never forget the death traps. “The only reason why IBM is still there is because it never ran out of money, (even if) you might or might not be a market leader,” he says.

The consolidation in the market with the proposed sale of Snapdeal to Flipkart, Sethi believes will benefit ShopClues, but he wants to be well funded. “The chips are getting stacked higher up against us. But (the Snapdeal sale) is a payback of running after GMV. No one talked about profitability.”

And what about the rumoured sellout talks with China’s Alibaba? “These conversations happen all the time, but it should make sense for us and for them,” says Sethi of potential suitors.

For now, ShopClues has made sense for its swathe of customers and investors.


Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.