In the last article, we discussed E-commerce business from the vantage point of different entities – enterepeneurs, conglomerates, international players, VCs and, brick-n-mortar retail chains. In this article, we’ll dive deeper to understand the psyche behind the key criteria for a conglomerate when evaluating a move into e-commerce space. Does it move the needle for large conglomerates?
Disclaimer: The objective of this article is to merely understand the rationale behind this criterion and not validate/evaluate the e-commerce opportunity on this basis.
We can view large companies as large storehouses of capital seeking to allocate it in most profitable long-term businesses. Let’s take the example of Reliance Industries (RIL) and assume that it is presented with an opportunity to enter the data analytics marketat an investment of $100M with a near certainty of generating $200M/year in annual sales after 2 years. Would RIL make this investment?
To answer this question, let’s look at a similar problem from a different context- you are a businessperson with Rs 600,000/year income and are presented two opportunities for investment. First is to invest Rs 2,000 in a new business that will guarantee you Rs 2,000/year from next year onwards. Second is to invest Rs 100,000 in a venture that can start generating Rs 50,000/year from next year with only 25% probability of success. Which opportunity will you choose?
Most business people will choose the Rs 100,000 option even though the % return as well as probability of success is lower. Their argument would be in favour of the absolute expected benefit rather than % increase. If your second option works out, it will increase your annual income by Rs 50,000 and that will be a significant improvement. Obviously, we assume that you can arrange Rs 100,000 to invest in this option. With first option, the Rs 2,000 annual increase is guaranteed but its incremental impact on your lifestyle is minimal, making it unworthy of your time and attention. It’s important to realize that there may not be a monetary cost but there will always be some cost in terms of your mindshare in any of these options.
However, if your annual income is only Rs 20,000/year and you are presented with these two options, the situation becomes trickier. Now, you will select the option based on your risk appetite because both the options can move the needle for you. There will be many of you who would prefer option 1 as it is safer and doesn’t require an investment that is five times your annual income.
We come back to RIL’s pending decision on entering the data analytics business. RIL is a $60 billion in sales empire and would accordingly evaluate the effort of entering an altogether new segment against it potential to make a significant impact on is overall top-line. The data analytics option is most likely to resemble the option 1 for you as a businessperson – akin to generating additional Rs 2,000/year on an annual income base of Rs 600,000 or a 0.3% increase! The RIL top management would be shooting for an opportunity that adds up to $5-10 billion of annual sales either from existing businesses or new businesses that can become very large over time. A $200M/year business like data analytics will be a distraction for the management as it doesn’t move the needle.They would rather invest time in identifying other meatier markets. In 2006, RIL entered into retail eyeing the organized retail market of India that was expected to reach $20 billion in 5 years. RIL current portfolio includes petroleum, refinery, petrochemicals, textiles, retail and all of these are large markets. Markets that can move the needle for RIL should have one of the two characteristics- 1) either market size should be large enough or 2) the growth should be high so it can become large enough in 3-5 years.
The concept of moving the needle is visible in virtually all businesses, albeit in different contexts. Large IT services firms focus their energy on getting the largest of clients because smaller clients do not move their needle and thus not considered to be worth the mindshare of sales team and management. In an interview in 2009, Microsoft CEO Steve Ballmer talked about Microsoft’s view on moving the needle at $20 billion in pre-tax profit.
To sum up, large business houses’ motivation will depend on whether e-commerce business can become large enough in their scheme of things within 3-5 years. Hence, it becomes important to understand the e-commerce market size and growth prospects in India and we will discuss it in next set of articles. We will also be taking up some other important questions from the perspective of such conglomerates and develop a framework to understand e-commerce in that perspective.