Unpacking Paytm Mall’s ‘New Retail’ play

Alibaba backed Paytm Mall isn’t short on ambition. “We’re at $3 billion run rate and by December we want to be at $10 billion,” Amit Sinha, the chief operating officer of Paytm Mall tells us. But Industry watchers will tell you that selling goods worth $10 billion online will be tough, especially when you are off to a late start, behind deep-pocketed rivals such as Amazon and Flipkart.
At Paytm’s new office in Bengaluru, where the company is building teams to look after technology and product, Sinha doesn’t betray any signs of worry. That’s because to him, the game is chess and others are playing checkers.
While existing e-commerce companies try to sell more to online consumers, Paytm Mall’s route to $10 billion in gross merchandise value will be led by its efforts to bring offline stores online — a strategy it calls offline to online (O2O). Alibaba co-founder Jack Ma calls it New Retail.
In March 2017, Paytm spun off the commerce business into a separate company and appointed Sinha to head the business. At the core of its business is the offline to online strategy.
“We were convinced that the commerce problem isn’t supposed to be solved the way it was being solved. Our model of O2O is the way forward to bring maximum benefits to consumers and the retail ecosystem in India,” says Sinha.

The idea is simple: partner with offline retailers to improve the store experience and in the process acquire customers who aren’t online yet. To that end, the company has tied up with brands like Samsung and Red Tape to power their offline stores. “How many warehouses can you make in a country like India and fulfil the requirements for every nook and corner of the country? That’s where the thought was that on one side you have 50 million shopkeepers and retailers. How about turning them into fulfilment points for me,” he said.
This approach shifts Paytm Mall’s addressable market size by 2020 from an estimated $48 billion of online sales to $1.1 trillion of total retail in India. “Even 1% of $1.1 trillion is $100 billion. At $10 billion, I wouldn’t even have scratched the surface of that market,” Sinha said. Offline stores already drive nearly 60% of the sales on Paytm Mall, he said. The company is in nearly 75,000 stores and wants to more than triple its offline presence by the end of 2019. Amazon says it has over 300,000 sellers in India and Flipkart has over 100,000 sellers.
Stores powered by Paytm Mall will be able to sell value-added services like insurance, extended warranties and also products listed on Paytm Mall. So if a customer is at a store, he could buy from the store’s inventory or pick from Paytm Mall’s catalogue by scanning a QR Code. This way, stores can sell a wider selection of goods – in return for a commission – and also reduce the cost of keeping inventory.
 

There are early signs of the O2O model playing out well in China. Since Alibaba co-founder Jack Ma talked about ‘New Retail’ in a letter to shareholders in 2016, the online retailer has been investing heavily in the model. This means putting up QR codes for customers to scan, setting up mobile-based payment solutions and so on. At the back-end, Alibaba uses buyer data to roll out promotions, upsell products and drive footfalls. Alibaba doesn’t yet call out revenues from new retail in its earnings call but it’s grouped under a line item called ‘Other Revenues.’ In the quarter ending December 2017, Other Revenues grew 525% to $781 million (total revenue for the quarter was $12.8 billion).
In the US, Amazon acquired retailer Whole Foods for $13.7 billion and has been pushing price cuts as well as integration with its Prime membership. The stock price of rival brick and mortar stores such as Tesco and Sainsbury have taken a hit since Amazon’s entry into the market. Meanwhile, Amazon is on its way to becoming a trillion dollar company, analysts predict.
India, however, poses some challenges. Most of the country’s retail business is informal with estimates of the number of stores (mostly, kirana or mom-and-pop stores) at 50 million and 220 million people dependent on them. Bringing them onboard as partners may not as easy as bringing organised retail into the fold. Small retailers here also operate on wafer thin margins and small ticket sales mostly because a majority of buyers don’t have the means to spend beyond what is essential. “Our GDP per capita is low. We’re still poor,” says Sahil Kini, Principal at early stage venture capital firm Aspada. In China, for instance, the urban mass (about 235 million) has an annual income of $6,287 whereas, in India, the Urban Mass is considerably smaller (129 million) and earns only half their Chinese counterparts. Large portion of India’s population (nearly 250 million) earns only about $600 a year, according to a 2016 Goldman Sachs report.

Moreover, it may not be easy to convince shopkeepers to partner with Paytm as online players are seen as Goliaths out to cannibalise their business by offering discounts. Sinha says that he’s been ‘educating’ shopkeepers with the help of partner brands, citing the example of Samsung and Lenovo. At channel partner meetings hosted by brands, Paytm Mall pitches shopkeepers higher footfalls and also the ability to sell value-added services and earn commissions in exchange for a foot in the tent.
“The point is, they have a lot of benefits that are coming from the model we’re working,” says Sinha. Samsung, for instance, has over 1.5 lakh authorised stores. At these stores, the company has been able to upsell only 9500 offers to customers. With Paytm Mall, this number can be much higher, says Sinha. “Shopkeepers shouldn’t worry that they are losing business to an online player. Because they are adding huge value by explaining the product to the customer, helping sell it to him and to a large extent carrying the inventory. But on the other side, they have a lot of challenges that originate from their scale of operations,” Sinha says.

Since most shops are small in India, their cost of doing business (logistics, storage, inventory, working capital, real estate) is higher, points out Ankur Bisen, Senior Vice President of Retail & Consumer Products division at Technopak, a retail and market consultancy. Paytm wants to solve these problems with technology. “Obviously, this has to be backed by various components of the solution like logistics, wider assortment for him to sell,” says Sinha. Brands see value in this. For instance, he points out, there’s demand for gaming laptops in smaller towns but retailers don’t stock expensive laptops. “Because in a place like Dhanbad, they’ll sell 10-15 of them and how can they carry 20-30 different models?” Paytm Mall has partnered with Lenovo to sell such products at small-town shops. “We’ll get it delivered if you place the order and you don’t lose a customer because you don’t have inventory. The retailer gets to keep the margin, although lower than if they’d sold their own inventory,” says Sinha. Paytm says it is now the largest seller of laptops in the country (we couldn’t independently verify this).

This approach also solves the problem of ‘channel dissonance,’ for brands. That is, brands won’t have to struggle to balance the price between the offline and the online world. “Same offers that are running online are running offline part funded by Samsung and part funded by us. That’s an exclusive deal we have,” Sinha said. Because Paytm Mall is a pure play marketplace, it doesn’t care if an online seller sold the product or an offline seller sold it. “It’s better for me if it’s offline because it increases trust on our platform,” he said. Both Amazon and Flipkart have their own sellers such as CloudTail and WS Retail respectively.
Paytm is also not the only one targeting the offline buyer. Through its Udaan program, Amazon has tied up with companies such as Vakrangee, Storeking, Linq, and Connect India to set up offline establishments where customers new to online commerce visit, browse through its inventory, place orders, check them on receipt, and pay for it – helping them familiarise themselves with online retail. Amazon has also acquired a 5% stake in retail chain Shoppers Stop. Flipkart also has similar plans to build an offline presence. The homegrown retailer wants to license international brands and operate their stores, both online and offline in India. Also, if US retailer Walmart ends up investing in Flipkart, we may see the former launch a string of retail shops, The Economic Times has reported.

Experts point out that execution might pose a major challenge for Paytm Mall. “Enlisting enough number of partner stores, linking the scanning with ordering etc may pose a major challenge,” says Raghu Vishwanath, the founder of Vertebrand Management Consulting. Vishwanath, however, says that the offline to the online model is a better strategy for a country of India’s size and variety. “All of them, Amazon, Flipkart, Myntra have built category-specific expertise. That will take time to replicate,” says Debashish Mukherjee, who leads the Consumer Industries & Retail Products Practice for India and Southeast Asia at A T Kearney. Hiring and training foot soldiers, sending goods to the retailer or directly to the customer will also require as much capital as traditional online retailers need. For an in-store customer, it is also a behavioural change to buy online. That will take long, Mukherjee points out.

“It’s a long haul game. I won’t claim that I’ll become profitable next year. There’s a lot of investment required. We have been talking with partners. We are well capitalised for now,” says Sinha. When asked how much money this will take, he jokes: “Thankfully, we have rich parents.” By rich parents, Sinha means Alibaba and Saif Partners. So will Alibaba eventually acquire PayTm Mall? “Till now we’ve seen with them is that they want us to make it big. Daniel Zhang, the CEO of Alibaba sits on our board. He was very clear that you will win India for what you are. This is a localised market and there’s a lot of freedom,” he said.