What Shopclues’ sale for a pittance tells us about Indian e-commerce

With big-bang fundraising and incredible employment-generation projections, online retail was widely seen as the superstar of India’s technology startup boom in the past decade. However, hints of a bubble have been popping up over the recent years.

Yesterday, Gurugram-based e-commerce firm Shopclues said it will merge with Singapore’s Qoo10 in an all-stock deal. Qoo10, formerly GMarket, is backed by eBay and runs online marketplaces in China, Singapore, Indonesia, Malaysia, and Hong Kong.

This is at least the second acquisition of a major Indian e-commerce firm in the past 18 months. In May 2018, American retail giant Walmart acquired India’s largest homegrown online retailer, Flipkart, for over $16 billion, the largest e-commerce acquisition in history.

The Shopclues sale, in comparison, reportedly came at a throwaway price: between $50 million and $80 million, according to TechCrunch. That’s just over 7% of the company’s peak valuation of $1.1 billion around three years ago. This valuation meltdown for Shopclues is “one of the biggest in India’s startup history”, according to Anindya Ghose, a professor of technology, operations, and statistics at New York University’s Stern School.

In January 2016, Shopclues announced it had become a unicorn when it raised an undisclosed amount in its series E round from Singapore’s sovereign fund GIC, among other investors. At the time, The Times of India had reported the company’s claim to be a unicorn as false.

And that’s just one of the things that appeared anomalous with Shopclues.

The problem child

Shopclues was founded in 2011 by former Wall Street analyst Sandeep Aggarwal. Two years later, Aggarwal resigned from the company following insider trading charges during his time at a wealth management firm in the US.

Following his exit, the company was led by co-founders Sanjay Sethi, the CEO, and Radhika Aggarwal, the chief business officer. Radhika is Aggarwal’s wife. Under the new leadership, Shopclues has raised $257 million till now in 11 funding rounds, according to CrunchBase. Besides GIC, its investors include international heavyweights such as Tiger Global, Nexus Venture Partners, and Matrix Partners.

Leadership turmoil returned to the company in 2017 in the form of a public spat between the Aggarwal couple over a private affair.

In March 2017, Sandeep Aggarwal filed a criminal defamation case against Sethi and Radhika Aggarwal accusing them of downplaying his role in the creation of the online marketplace. Through Facebook posts, that have since been deleted, he also accused his wife of forcing him out of Shopclues and having an illicit affair with Sethi.

As the spat took a toll on its public perception, Shopclues’ business went downhill.

Earlier this year, there were reports that the company was in talks with local rival Snapdeal for a possible all-stock buyout. The talks, however, failed because Shopclues’ business was in poor shape. “During the attempted deal with Snapdeal, and the diligence process Shopclues had unpaid dues to vendors running up to $40 million,” said NYU’s Ghose. “This means that some Indian startups still have ways to go with respect to ‘professional management’.”

Earlier this year, Shopclues reportedly fired over 200 employees and was running on a skeletal staff by July.

“Shopclues has been looking for funding for more than 12 months now but failed to get investor attention due to declining growth on the number of orders and buyers,” said Satish Meena, senior forecast analyst at American market research company Forrester. “The problem with Shopclues is related to the failure to evolve the platform with the changing needs of buyers which led to the migration of buyers to other platforms…Also, the lack of funds did not allow Shopclues to reach out to new buyers aggressively leading to a situation of continuous decline in the number of orders.”

Another reason for Shopclues’s turmoil was perhaps its focus on Indian small towns, which had, in the initial years, helped the company establish itself.

The crazy race

Shopclues’s unique selling proposition always was unbranded and affordable products for small-town shoppers. Sandeep Aggarwal once described the company as “the Lajpat Nagar or Lamington Road of online marketplaces”. In its initial months, the website’s most-sold items were keychains and knives made in China. In 2015, Shopclues made headlines for selling cow-dung cakes as part of a Diwali puja package.

However, digging one’s heels in India’s small towns is not easy, as Amazon India and Flipkart would have found after years of trying. With growth saturating in big cities, the race for small towns has only intensified.

“With two giants, Amazon and Walmart, competing against each other, it won’t be easy for smaller players,” Kartik Hosanagar, professor of technology and digital business at The Wharton School of the University of Pennsylvania, told Quartz over email. “There will likely be more casualties. Success may require occupying a niche area like jewellery where margins tend to be high and where large horizontal brands like Amazon are not currently focused.”

However, massive discount at which Shopclues has been sold highlights some serious flaws with Indian e-commerce, experts who have observed the industry over the years say.

“Indian e-commerce was in a bubble in 2015-’16,” Hosanagar said. “A lot of investors overlooked some of the fundamental challenges such as low order value and high customer acquisition costs relative to customer lifetime value. There is a correction of sorts going on.”

In February 2017, the founders of Snapdeal, once among India’s top three online retailers, said they had made key mistakes, distracted by the influx of capital. The firm laid off over 600 employees, sold several of its units, and has since been trying to resurrect itself.

“Valuation of e-commerce platform was driven by the fight for GMV during 2014 and 2015 where investors are trying to bet on the winner,” Meena of Forrester said. “But after the entry of Amazon, things become difficult for online players, except Flipkart which reflected in the valuation also. We have already seen a lot of players with limited niche factors struggling as they are just not able to differentiate with Amazon and Flipkart. Still, there are players like Lenskart, Firstcry, Nykaa and others catering to niche categories. So there is space for players with differentiated offerings but limited space if you want to fight for the same categories and buyers as Amazon and Flipkart.”

This article first appeared on Quartz.