The term “marketplaces”, historically brought to mind consumer companies like Flipkart, Myntra, Firstcry, or Uber for most of us. After all, most of the innovation in marketplaces over the last 15 years or so, in India, have been consumer-facing. The last couple of years have seen a change on that front as multiple companies have emerged across the B2B Marketplaces and Enablers space, with some verticals seeing early emergence of potential market leaders. Much of the strong uptick in digital B2B Commerce across verticals in India, can be attributed to the impressive number and quality of teams building B2B Marketplaces and enablement plays, bringing unique insights, credible backgrounds, and on-ground operational chops combined with a knack for leveraging technology, to the table. But before all that, why are we interested in B2B Marketplaces at all?
Why are B2B Marketplaces attractive?
Huge Market sizes; The B2B GMV flows >> consumer business flows, B2B GMV flows are 4–5x B2C GMV flows. B2B Marketplaces are a massive untapped opportunity; The status quo is that < 1% of B2B transactions happen online, however, there have been major tailwinds in the digitization of legacy businesses. The confluence of these “why now” factors is pivotal to the creation of this new chapter for B2B Commerce a. GST and introduction of SMEs to the formal economy b. Demonetization and building comfort with Online Payments c. Cheaper data access and the digitization of SMEs d. The COVID-19 pandemic led global supply chain realignments and falling apart of in-person buyer-seller relationships
How do you evaluate a B2B Marketplace?
B2B businesses are not typically habit-changing or forming. The aspect of acquiring a customer and then amortizing CAC by cross-selling higher-margin products to them just does not exist here. Procurement teams at companies have been doing this for ages, so if a customer buys from a marketplace it’s fundamentally because you give them better quality, better prices, better TAT, more assortment, or a better tap of credit.
Looking at it that way when analyzing a marketplace, there are 3 major factors at play:
- GMV Flow
For a marketplace to acquire huge throughput, it needs to function in a market that is 1) large enough for it to acquire a decent share, where 2) participants are comfortable with the presence of intermediaries/middlemen, and 3) there is sufficient tech penetration; so that a scaled tech intermediary can thrive.
Décor export is a billion-dollar opportunity, where multiple tech-enabled marketplaces have started up in the last year. Importers in the US currently source from India via professional traders, export agencies, or freelancing middlemen and sell to the end buyer at 2–3x the wholesale price. A marketplace in this space replaces the layers of intermediaries, providing better service than existing middlemen using technology as an enabler (sampling, logistics hassle for buyer/ seller, digitized payments, and managed customs)
2. Margins
The margins that a marketplace can carve out for itself are based on the value it adds to a transaction.
a. Supply Fragmentation and Constraints :
In a fragmented market with many smaller players, the participants rely on the marketplace to identify the right buyer/seller and guarantee quality and payments, thereby making it a crucial intermediary and reducing the risk of disintermediation. Oil and Gas, for instance, is a large market-but a majority of the supply is dominated by larger players like Reliance and Indian Oil. In a space like this, the marketplace provides little value to justify its take-rate
b. Friction and Customization in Business
In high-friction markets, SKUs are more customized and less comparable across sellers. In these markets, buyers must specify the goods or services they need, and suppliers respond with quotes. Buyers often rely on opaque brokers and lengthy RFQ processes to vet sellers and compare pricing. A portfolio company my colleagues work with (Ranjith and Anubhav), Expand my Business, is a managed B2B marketplace in the Digital Services sector (Digital Services are different from the sectors discussed in the image below, we will discuss this space in a separate note). The company enables the creation of digital products and services for large businesses and SMEs in India and abroad, by connecting them to Digital Services agencies in India. The nature of projects in the digital services business is such that each project is customized and requires the marketplace to identify the right vendor, define deliverables, and ensure they are delivered on time → translating to a higher marketplace value proposition and higher take rates.
c. Higher Paying Propensity While starting, it is, to the marketplace’s advantage to work with bigger buyers with a higher-paying propensity to drive volume on at least one end and also carve out higher margins for itself. For instance, Cross border buyers looking to set up supply chains in India have a higher paying propensity than Indian retailers who can’t afford to pay higher take rates (Analogous to Enterprise vs SMB customers in SaaS)
3. Working Capital
If a B2B customer buys a product for cash, it’s clearly because of the quality of the service/ product delivered. However larger buyers often dictate the payment terms and enjoy a credit period. Suppliers on the other hand being small and strapped for cash don’t have enough liquidity to offer these long credit periods. Hence, B2B marketplaces have to facilitate the working capital to make the transaction happen i.e. they give payments to the suppliers in advance and collect the payment from the buyers in 40 to 90 days. This is an integral part of all B2B transactions, which means that the growth of the marketplace is dependent on the extent of working capital financing the platform can provide.
However working capital, by itself, cannot be a moat. If a platform offers a very high credit period, then often the customer buys from the platform for the working capital offered and not the service quality. A thin margin structure coupled with a high credit period can wipe out a company and higher credit days can impact the dilution needed and the quality of the business being built.
Bizongo : A case study on How to scale B2B Marketplaces?
The above image goes over major factors in play that ascertains if a B2B marketplace can add value and scale in a given space. While these marketplaces start as discovery platforms, the fragmentation and complexity of these spaces allow different ways to scale
A case in point on the above is Bizongo. The company today, operates in the packaging and textiles markets that are at $180 Billion, growing at 16% CAGR. The commonality in the industries Bizongo operates in is the complexity of operations and the fragmented nature of suppliers. These industries are driven by key factors such as a rising population, increase in income levels, and changing lifestyles leading to increased consumption of these goods via e-commerce, food delivery, and discretionary consumer brands. India also consumes less than 20% per-capita packaging material vis-à-vis China, the US, and Europe, implying sufficient headroom for growth.
The Bizongo story is a story of the rise of the consumer market in India.
Bizongo started as an inventory-led procurement marketplace and has today become a full-stack tech-enabled supply chain management system. An average enterprise customer in the apparel space has 25k+ apparel SKUs that it procures from 100+ apparel sellers, which results in 100+ POs and 1000+ monthly invoices. The procurement process for a buyer in an industry like apparel, stretches across design and cataloging, price discovery and supplier selection, demand planning and inventory management, order-to-dispatch visibility, logistics, invoicing, taxation and settlements. The constraints a supplier faces are working capital to enable the manufacturing process, their limited capacity utilization, and lack of avenues for new demand generation. Moreover in spaces with a high extent of customization and number of SKUs, since the entire process is manual or covered by high-level ERP systems like SAP, that don’t solve for the level of granularity that is needed, the possibility of manual errors and time spent on ops by procurement teams is high.
Bizongo’s customers bring their own vendors onto the Bizongo platform to efficiently manage the supply chain of customized goods.
For a supplier, Bizongo enables
- 15–20% increased capacity utilization by allowing early payments. Early payments allow a supplier to rotate capital faster, increase manufacturing throughput and make better use of their capacity.
Without Bizongo, an average buyer runs <5 bidding events to discover prices for 100s of SKUs, because of the need to focus on operational and execution activities vs strategic and mission-critical items.
For a buyer today, Bizongo enables:
- Reduction in TCO :
a. Reduction in the purchase price as the platform enables bidding and price discovery.
b. Structural Cost Reduction : Early payments lead to prioritization of servicing the Bizongo customer vs another customer who pays in 90 days; Suppliers pay their raw material vendors faster and increased capacity utilization for the seller leads to a drop in manufacturing costs that gets passed on; in the order of 2–3%
2. Reduction in inventory : To prevent stock outs most buyers overstock inventory, but in markets like fast fashion, packaging, etc., number of SKUs are more of a consequence than inventory held for SKUs. Bizongo enables customers to hold 3–7 days of lean inventory through demand planning and consumption-linked replenishment, with the data that it has from many years of being part of the transaction layer.
3. Tech and Automation : The platform is 100% automated today allowing the design and development of products, automated procurement, and fulfillment services. The platform allows for interactions and collaborations between the clients’ internal teams of design, procurement, finances, ERPs, etc, the Bizongo team, and the suppliers.
In our learnings, there are 2 ways to scale a B2B platform :
a. The Foxconn method / Becoming the Supplier/ the asset-heavy approach : As a platform scales, the main ask from customers are lowered costs, more speed, and better quality. To enable this a platform must invest in assets and vertically integrate backwards to control capacity and manufacturing, to optimize for quality, cost of production, and speed of service. In this process the platform increases the value it adds to a transaction and hence the margins that it earns. However, as far as the buyer is concerned, the platform emulates a supplier, and being just one of its suppliers, in an effort to diversify, the wallet share that the platform holds for a given buyer will always stay low.
b. The Amazon method/ Enabling an ecosystem of suppliers/ the asset-light approach : As this platform scales, the platform enables an end buyer to drive his procurement processes better, by enabling price discovery, reducing structural costs and using transactional data to plan demand and offer visibility into the order-to-dispatch process; i.e. it enables the supplier ecosystem the buyer works with. In this journey the platform is seen as an enabler for the 100s of suppliers a given buyer works with, as a pure platform intermediary, allowing it to scale horizontally and attain 100% wallet shares. While the platform adds value to a transaction, it no longer integrates itself backward to emulate a supplier and hence its take rate in a transaction is limited.
Bizongo today is a pure platform intermediary for a buyer and their ecosystem of suppliers, enabling the suppliers to better service a given buyer. The platform is built on the mountain of data accumulated from being a vertically integrated platform first and being part of the transaction layer. They started as an inventory led marketplace → attained vertical control to become a vertically integrated procurement marketplace → let go of control to become an absolute pure marketplace. In this process, the company has become an Amazon equivalent for any industry with high level of customization and fragmentation, providing infrastructure for multiple vendors, in place of becoming the Foxconn equivalent, of emulating the supplier.
Conclusion
Our learning is that as every B2B marketplace scales, this is a transition that it has to make i.e. to vertically integrate to become the supplier or to horizontally scale to enable an ecosystem of suppliers. Either path comes from a history of being part of the transactional layer and using that data to move forward.
Over the last few months, we at Chiratae Ventures have delved into spaces like auto parts, fashion, chemicals, packaging, agri-produce, processed food, digital services, cross border payments, and over the next few series would love to discuss our notes on these spaces with you. If you’re an operator building a play in the B2B Commerce space or an investor interested in this space — would love to chat! Please reach out at thejeswi@chiratae.com