India’s B2B marketplaces shone bright post 2020. The sector saw valuations double every 3-4 months, attracting investment rounds of over USD 100 million. Its most defining characteristic? It charted its own path and did not pretend to be an Indian replica of a US/China success story.
Why are B2B marketplaces winning? To answer that, we need to first understand how traditional supply chains work. In a traditional supply chain, manufacturers produce goods, large distributors buy these goods and sell smaller quantities to either smaller distributors or end customers (SMEs).
Typically, the distributor aggregates the supply and ensures reliable and timely delivery, while providing short-term credit, taking its pound of flesh for it. On the other hand, SMEs do not have access to the best price, top product or assurance of delivery in the given time frame. To top it off, the credit terms are exorbitant (almost 30-45% of annualised yield).
Large manufacturers face significant inefficiencies in the procurement supply chains, especially when they source from an unorganized SME supplier base. In the past, the only resources they could rely on to discover new suppliers would be B2B directories.
A large part of this traditional supply chain faced a significant setback in COVID times. B2B marketplaces were rightly positioned to take advantage of this opportunity, offering quality products at reasonable prices and reliable delivery schedules, coupled with necessary standard credit terms.
In the late 90s-early 2000s, the early entrants that leveraged technology and the internet to solve these problems were pure-play listing players that had just migrated to the internet. They had strong business models based on pure subscription fees and an early mover advantage. They solved the problem of discovery.
In 2014-17, newer B2B companies emerged that provided end-to-end transaction fulfilment. The adoption of digital businesses by the manufacturer and trading ecosystem was abysmally low. Players resorted to wafer-thin trading margins to get businesses to enter the marketplace, which did not guarantee loyalty.
2019 marked the golden age of B2B, which accelerated during COVID. The pace of the real economy slowed down and pushed manufacturers to evaluate innovative utilization of their capacities. The omnipresent distributor value chain received a huge jolt during the COVID pandemic – their access to capital disappeared and their precarious balance sheets suffered a shock that crippled their supply chain. Well-capitalized, technology-led B2B players such as Infra.Market, OfBusiness, Medikabazaar, Zetwerk, Moglix and Elasticrun bridged this gap. Product margins moved up significantly to make these businesses highly profitable with a high Return on Equity to boot.
How are B2B marketplaces evaluated? The Gross Merchandise Value (GMV) of a business is recorded as revenue on the books. The margins kept by the marketplaces is Gross Margin (GM). Usually, investors are comfortable at valuing the business at GM multiples but given the bullish market sentiment and the 15%+ month on month growth, GMV multiples are back in vogue in 2021.
Investors also focus on the receivable days of marketplaces. If the receivable days are above normal (40-60 days in general), it means the participants are treating the marketplace as a credit provider. Investors think of such businesses as financing businesses, rather than true marketplaces.
Successful marketplaces are dealing with fragmented mid-sized SMEs on either the supply side or the demand side or both. Some are solving the quality and reliability problems associated with sectors which have a highly unorganized supplier base. Others have large quality suppliers on one side but a fragmented SME customer base on the demand side, where quality, reliability and credit are important.
A few players have introduced private labels, helping them expand margins and build customer ownership. Companies focused on distributing to retail outlets are replicating modern retail by creating their own brands.
As technology adoption increases, we see a second layer of B2B companies that go beyond industrial manufacturing, construction, and exports on the rise (GoMechanic, ElasticRun, Bijnis, Fashinza, etc). This is one sector that is going to truly transform Indian businesses and lead to the formalization of the traditional supply chain - creating a win-win-win for suppliers, buyers and the Government.
Pankaj Naik is Executive Director and Co-head, Digital & Technology, Avendus Capital