Amazon, one of the world’s richest companies today, spent millions of dollars before turning a full-year profit in 2003, more than nine years after Jeff Bezos founded it.

Some of India’s biggest tech startups—Ola, OYO, and Paytm—have been pumping in millions over the years but are still saddled with losses. Digital payments and e-commerce firms are some of the biggest cash guzzlers with both local and global companies slugging it out to capture as many consumers and merchants as they can. Behemoths like Walmart, Amazon, and Alibaba are investing billions of dollars in India in the hope of eventually making mega-bucks in the world’s second most-populous country.

But sometimes it makes more sense for companies to cut their losses or to change their business strategy if they seem to be going down a financial rabbit hole. That’s what Paytm Mall, Paytm’s e-commerce arm, is doing after burning oodles of cash by offering deep discounts and cash-backs—sometimes as high as 100%—to lure customers. “I think this extra spending, which you could call cash burn in e-commerce parlance, or spending marketing or promotion money, it’s like a drug that just makes you feel high but the real revenue and growth, those still require you to work harder,” says Vijay Shekhar Sharma, founder and CEO of Paytm, one of the largest payments service platforms in the country.

Paytm Mall was spun off as a separate entity in 2016 and was meant to be a part of an e-commerce and payments ecosystem. The Alibaba- and SoftBank-backed e-commerce venture, much like the parent entity, relied on cash-backs as it scaled up and sold everything from groceries and mobiles to T-shirts and scooters. As it is, for smaller e-tailers, it’s a tall task to hold their own against the Amazons and Walmarts, who invest big bucks in customer experience, supply chain, and logistics. Hobbled on these counts, Paytm Mall’s cashback-based business model wasn’t sustainable despite big financial backers. Its market share declined from 5.6% in 2017 to3.3% last year, a tenth of that of Flipkart—the single-largest online retailer with 31.9%, followed closely by Amazon at 31.2%, according to a 2018 Forrester Research report. In FY18, Paytm Mall’s net loss widened to ₹1,787.55 crore from ₹13.63 crore in the previous year. What made matters worse for it was the government tightening rules on cashbacks and discounts last December.

Paytm Mall is now determined to make things right. There has been a management rejig. Amit Sinha, who was Paytm Mall chief operating officer (COO), left. Last year, Sharma brought in Rudra Dalmia as senior vice president for finance and business. In June, he was named executive director of Paytm Mall and a board member.

Dalmia, an MBA from Cornell University, describes himself as someone who comes from “a very disciplined business invest-ing” background. He was leading Danish retail broker Saxo Bank’sIndia operations before joining Paytm Mall and has held various leadership positions at financial services firm Dawnay Day International. So when he joined up and took stock of the situation, he did what was required. “My first input to the board and Vijay [Shekhar Sharma] was that ... we are not going to compete with metrics that don't make sense in the long term. From our perspective we will focus on building a good business, rightsizing it, and growing it in a healthier way than just growing it,” says Dalmia.

The company is betting on a new strategy to control cash burn. Itis moving to a hyperlocal model and is expanding its wholesale offerings. It has already cut its monthly cash burn to ₹40 crore ($5.6 million) from its peak of ₹200 crore last year. The company says its annual operating costs will be about $45 million-$50 million this year.

This July, Paytm Mall got a shot in the arm when eBay picked up a 5.5% stake in it for $160 million. There are two positives from the development: It is flush with funds and it has a new catalogue of products from the American e-commerce player.

For eBay, which has been in India since 2004 via various partnerships and investments in startups like Snapdeal and Flipkart apart from Paytm, this is one more bet in its endeavour to succeed in this market. The deal, says the company, provides its sellers the opportunity to reach new customers in a rapidly growing market, while providing Paytm Mall buyers a wide selection of products that would normally be out of reach locally. Paytm Mall says it now has over 2 million stock keeping units of global brands on its website.

“We believe there are many opportunities for multiple players to succeed in India’s diverse, domestic market, which has huge growth potential. Our immediate focus is on expanding eBay’s profitable, fast-growing, cross-border trade business,” an eBay spokesperson told Fortune India in an email. “In early January, we re-launched eBay.in, and this new collaboration complements our existing import, export, and domestic platforms.”

Dalmia, too, is excited about the deal with eBay. For one, the deal gives Paytm Mall access to a huge inventory. And then, the learnings from a global player. “The eBay product catalogue is very exciting for us. We want to be the funnel of the world into India from a marketplace perspective. We also want to be the largest exporter. We have a lot to learn about cross-border commerce, both outward and inward,” says Dalmia.

The optimism isn’t unfounded. India has more than 430 million Internet users, making it the world’s second-largest online market after China, according to a recent report by the Indian Private Equity & Venture Capital Association (IVCA) and EY India. The number is expected to jump to about 635.8 million by 2021, and the biggest e-commerce players in the world including Amazon, Alibaba, and Walmart are in a race to be their one-stop-shop for everything. Walmart bought a 77% stake in Flipkart for $16 billion last year, Amazon made a fresh investment of ₹2,800 crore into its market-place this year, and recently bought a 49% stake in Future Coupons, a group entity owned by India’ssecond-largest retail chain, Future Retail. The report said e-commerce and consumer Internet companies raised over $7 billion in private equity and venture capital spread over 200 deals.

Paytm office in Noida.
Paytm office in Noida.
Image : Sanjay Rawat

Paytm Mall is looking at a multi-pronged strategy to carve a niche for itself in this gigantic market. Ditching the warehousing model and going hyperlocal is part of it. Sharma says the commercial viability of shipping from nearby cities instead of meeting orders locally is low. “We found out that in the long term, the cost of delivering an item and margin available to us is not viable; so there had to be a solution in the longer term and we had to take a call,” he says. Dalmia says that this has led to a dramatic fall in logistics costs. “We believe that merchants need to ship locally,” he says.

The company is also strengthening its online-to-offline model. It has been signing up authorised sellers for brands all over the country that can fulfil orders from Paytm Mall customers in their vicinity.“We are targeting medium merchants,” says Srini-vas Mothey, senior vice president at Paytm Mall.“We are providing them with a point of sale (PoS) solution. It helps them digitise their inventory andsell online... We don’t have much logistics costs. We have seen some very good traction there.”It is not just Paytm Mall that is doing this. Many etailers and tech-driven startups are help-ing offline merchants to keep up with the times. Reliance Industries, Future Group, Amazon, andFlipkart are all providing digital solutions to smalland big traders. Sharma says the learning for Paytm has beenthat it is better to be a technology partner of ashop than a shop itself, unlike an Amazon wheremost products are shipped from centralised ware-houses. “Paytm Mall is a mall business, commerce business, where you are buying from a shopkeeper, while on other platforms, you may understand that you are buying from a seller on the platform, but they control everything,” he says.

“My first input to the board and Vijay [shekhar sharma] was that ... we are not going to compete with metrics that don’t make sense in the long term.”
Rudra Dalmia, executive director, Paytm Mall

With eBay as a partner, the company, with a roster of 12 million merchants and 65 million products, also sees selling wholesale or in bulk as an opportunity. It is already exploring partnerships with companies like footwear and clothing maker Red Tape for it. “We will be a tech partner to a shop. It also allows us to build additional services that we can give. We bring traffic to the shop, we bring supply chain, digitisation to them, webring inventory movement through online orders, we also bring wholesale supply. Based on this, we can also help them finance, help them get insurance, we become like an ecosystem partner for the merchant,” he says.

While the company is separating the mall’s operations from the payments business, Sharma says commerce is following the payments distribution curve. “Payments [business] are in 10,000-12,000 cities and towns in the country... Right now, 80% of commerce is happening in less than 100 cities,” he says. “Our small merchant relationship, it starts with payment, goes to commerce. PaytmMall allows us to capture larger value and offer larger value... payments and financial services is a stack we sit at. That is why we have it as an ecosystem and we continue to invest in it.”

But some experts are sceptical. They believe the hyperlocal model is difficult for e-commerce in India as merchants in smaller places might not have enough inventory to service orders fast. Also, competition in the online retail business is cut-throat. As more and more Indians get smartphones, online retailers from giants such as Amazon to smaller players like Snapdeal are looking to acquire customers from small towns and cities where the next phase of growth is seen coming from. “Tier 2 cities like Coimbatore, Jaipur, Agra, etc. are totally mainstream now; the race is how many of such cities can you build out,” says Sharma. However, customer stickiness for Paytm Mall is seen as an issue. After the government ruled that cashbacks provided by group companies of a marketplace should be fair and non-discriminatory, the company’s shipment volumes fell drastically. Its shipments fell from 150,000 a day in Octo-ber last year to 50,000 in January and 35,000 in March, according to The Economic Times. Satish Meena, senior forecast analyst at Forrester Research, says Paytm Mall also lacked in two crucial things: customer experience and logistics.

“Ultimately, the biggest issue in online retail is the quality or reliability of the product, and timely delivery. Those are things that Flipkart and Amazon have solved, and those are important to build customer trust,” says Meena. “They will have to rebuild that trust. The reason you purchase from Flipkart or Amazon is not because of the seller; most of the time you don’t even know who the seller is—you think that Amazon or Flipkart is going to take care of issues that you face as a customer.”

Mothey acknowledges a slight dip in business after the company cut back on the quantum of cashbacks. But he adds that unstructured categories like fashion, home, and kitchen—the main drivers of Paytm Mall’s business—are not sensitive to cashback. And structured categories like mobiles where the company saw less traction after cashback cuts don’t make a big share of its gross merchandise value (GMV).

Paytm Mall offers more utility-oriented offers now. For instance,if you buy a phone, you get a movie ticket, much like what modern retail stores often do. “Because Paytm has a lot of use-cases, travel, food recharge, bill, movie tickets, so our conversion rates actually went up,” Mothey says.

The company says it expects its GMV to rise 30% this year from $2.1 billion-$2.2 billion last year. “Our Ebitda margins are going to be very low single digits. We are contribution positive, we make money on every transaction... We are utilising our payments eco-system very effectively,” says Dalmia.

Meanwhile, UCWeb, an Alibaba Group unit, has plans to launch an e-commerce service in India this year. Arvind Singhal, chairman and managing director of consulting firm Technopak, says itis going to be tough for Paytm and its satellites. “On the services side, Paytm is still the leader in financial payments, but the government's own platforms are fast gaining popularity. There are other private wallets as well. That business is under some kind of threat.”

Sharma thinks otherwise. He expects the company to become a billion-dollar revenue company. “I think in three years, we should be there.”

(This story was originally published in the November 2019 issue of the magazine.)

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