The largest investor in the company, Chinese e-commerce behemoth Alibaba, realised that Paytm’s volumes, driven largely by cashbacks, would not be a sustainable business.
Anushree Singh & Aditi Shrivastava – ETtec
Updated: April 22, 2019, 10:34 IST
In December last year, when board members of Indian e-commerce company Paytm Mall met to take stock of its business, they were in for a shock.
The e-commerce entity had burnt roughly $150 million to $200 million in the September-October period – the traditional Diwali sales window – on cashbacks and marketing, sources said. The cash burn, though, wasn’t helping it to make a dent in the wider e-commerce landscape dominated by Amazon and Walmart-owned Flipkart.
The largest investor in the company, Chinese e-commerce behemoth Alibaba, realised then that Paytm’s volumes, driven largely by cashbacks, would not be a sustainable business. Paytm’s pure-play e-commerce business required massive investments in warehousing and logistics for scale, and cashbacks in such a scenario were proving to be a drag.
That is when Alibaba started pulling the plug, asking Paytm’s management to build what they had initially set out to do — create a platform that enables Paytm’s core payments offering by facilitating a sticky merchant ecosystem.
The vision was never to compete with an Amazon or a Flipkart, which Paytm’s investors thought were very well-capitalised competitors, a person privy to the matter told ET. “To fight the big e-commerce majors was a strategy drawn up by the company, not as much by the other shareholders,” the source said.
“In fact, Alibaba was clear it wasn’t going to dump billions of dollars into Paytm Mall because that was never the plan, this is where the company got carried away,” said another person close to the developments. Alibaba did not see long-term growth opportunities in e-commerce; their big bet was on the digital payments sector, with commerce as one of the big use cases, the source said.
The refrain was similar when ET spoke to several top Paytm Mall executives, former employees, business partners, industry observers and investors. A deep-dive into the reasons why Paytm Mall, which was among the fastest domestic internet firms to grow into a unicorn, failed to take-off revealed that despite the backing of heavyweight investors, its e-commerce strategy was driven by a short-term vision largely dependent on cashbacks.
“Running a digital payments company as opposed to a commerce platform is extremely different. This overlap may have led to some cost synergies but not necessarily better business,” a former executive at the firm said. “They did not build basic capabilities in supply chain, logistics, which are the essentials for running a consumer facing e-commerce business,” said another person in the know.
A detailed questionnaire sent by ET to spokespersons at Paytm Mall, Alibaba and SoftBank did not elicit any response.
Paytm’s rise to the unicorn club was dizzy. It raised $650 million in a span of two years from Alibaba, SoftBank and SAIF Partners, with Alibaba group (including Ant Financial) eventually holding a 42% stake in Paytm Mall and around 37% stake in Paytm’s parent entity One97 Communications, according to regulatory filings.
However, the losses mounted. In FY 2018, the company posted a loss of Rs 1,787.55 crore on total revenue of Rs 774.86 crore, according to the filings. Interestingly, in the same period, Paytm E-commerce transferred Rs 405 crore in royalty fee and Rs 307.27 crore in customer access expenses to One97 Communications, its holding company, helping the payments business notch up revenues, as per the filings with the Registrar of Companies. As for Paytm Mall, sources said they expected losses to go up 40-50% for FY 2019, driven by high marketing and promotional expenses.
Neil Shah, an analyst at Counterpoint Research, said: “Paytm Mall was not able to crack exclusive partnerships in the mobile and electronics category. They lagged behind in overall customer support and service which ultimately impacts the stickiness of the platform.” In comparison, mobile and electronics have traditionally contributed the most to e-commerce gross merchandise value (GMV) for players such as Flipkart and Amazon. GMV is the preferred metric used by e-commerce players for gross sales in a particular time period.
Paytm Mall finally began making amends, under sustained investor pressure, earlier this year.
It shut down its national e-commerce shipping business, which entailed onboarding sellers and shipping products across the country, broke contracts with sellers, logistics and warehousing partners, cut marketing spends, and trimmed cashbacks by almost 80%.
As a result, multiple sources said, the company’s shipments fell from 150,000 per day in October last year to 50,000 in January and to as low as 35,000 daily orders as of March this year.
From clocking $400 million to $450 million in GMV during the last quarter of 2018, numbers fell 60-65% as cashbacks were cut and operations scaled down, according to three sources. Market share also came down by almost half to 3% last year, from 5.6% in 2017 at a GMV of $1 billion, according to data by Forrester Research.
Total visits to Paytm Mall dropped to 5.6 million in March this year from 45 million in October last year, as per data by SimilarWeb, a digital market intelligence platform. App Annie data also shows that the company’s active users halved to 4 million in March from 8 million in October.
The company’s market share is also estimated to have fallen to 3-4%, according to Counterpoint Research.
As the number of orders and market share started getting eroded, more than 100 people across Paytm and Paytm Mall were handed pink slips or transferred to adjacent businesses during the first two months of this year, sources close to the matter said.
Sources also pointed out that there was a sizeable number of employee overlap between Paytm and its Mall business, including finance, marketing, HR, and communications. “Running a digital payments company as opposed to a commerce platform is extremely different. This overlap may have led to some cost synergies but not necessarily better business,” said another former executive at the firm.
Sensing that Alibaba and SoftBank would not be pumping in fresh capital, Paytm founder Vijay Shekhar Sharma has taken approval from the board to bring in a strategic investor in December.
He is also going back to basics with a push to build an online-to-offline (O2O) model, enabling small and authorized merchants to sell online.
The company has decided to narrow its focus to a wholesale platform, the executives told ET, with O2O local commerce becoming core from what was earlier a consumer facing e-commerce site.
A part of the business — e-commerce shipping and warehousing — did not work out as planned, Sharma had told ET previously, although he defended the company’s strategy which was enabling local commerce.
He said Paytm Mall would continue to generate a bulk of its sales from O2O with 15% from wholesale and 35% from warehouse items.
Paytm Mall expects to hit $2 billion in gross merchandise sales this year, according to Sharma, mirroring its investor Alibaba’s Hema stores strategy, which is a pioneer of O2O in China. Paytm Mall is hiring 600 people to expand its O2O footprint, it said in a statement to ET. In July last year, Paytm moved its payment bank CEO Renu Satti, an old hand at the company to be the new chief operating officer of ‘New Retail’ which focuses on instant groceries, pharmacies and locals shops deliveries
“Paytm knows its DNA is not running a marketplace, it’s a far more robust payments platform so it makes sense to build on that strength,” said Shah of Counterpoint.