On July 31, 2014, Vishal Sharma re-read the article under the headline that had appeared in the

Times of
India that morning: "Online biggies may wipe out small players." He had almost missed it earlier when
his eyes had caught the larger headline further up on the same page: "Amazon to invest USS2 billion in
India." The previous day, Flipkart, the current market leader in the Indian e-tailing space in terms of
turnover, had received an investment of $1 billion at an estimated valuation of $5 billion to $7 billion.
Therefore, while Amazon's move to invest further in its Indian operations had been expected, the
magnitude of the committed investment had certainly surprised many industry observers.

As the chief executive officer (CEO) of the online fashion e-tailer, fashion2go, Sharma knew that his
company was significantly smaller than the leading e-tailers in the Indian market (such as Flipkart,
Amazon, and Snapdeal), considering both the investment levels and the consequent scale of operations.
The newspaper article predicted that the gap between the smaller players and the market leaders would
only increase further, leading to some of the small players either exiting the market or getting acquired at
below par valuations. Many industry insiders expected that a significant part of the money becoming
available to the larger players would be used to look for potential acquisitions. Accordingly, they
concluded that this emerging scenario would discourage investors from supporting smaller e-tailers.

As Sharma thought of his upcoming meeting with some investors for the next round of investment in
fashion2go, he knew that it would not be easy to convince them that the company was well positioned to
withstand the ever increasing onslaught of the market leaders and remain sustainable.

THE E-TAILING INDUSTRY

The term "e-commerce" was coined in the 1970s, and referred to any transaction involving the purchase
or sale of products or services over a network of computers or the Internet. Initially, e-commerce started
as an alternate channel to carry out some afer some of the unique opportunities offered by channel and
associated technologies were leveraged to expand e-commerce to also cover consumer-to business (C2B)
and consumer-to-consumer (C2C) transactions. business-to-

As e-commerce expanded to include different types of transactions, services, and products, it also became
more specialized. "E-retailing" or "e-tailing" came into use in the 1990s, referring specifically to B2C
sales of retail products over the Internet.

Interaction with Traditional Retailing

While e-tailing had certainly taken over a part of the traditional retail business, it had also helped to
expand the market by adding new customers and making significant indirect contributions to the overall
retail business. Rates of conversion of visitors to customers (called "conversion rates") were less than 3
per cent for amateur websites and hovered around 10 to 20 per cent for most well designed and well
operated websites. Hence, some experts believed that many visitors used e-tail websites primarily to
inform themselves about product options and price ranges before making a purchase from a conventional
retail store (see Exhibit 1). In the reverse scenario, customers had been reported to use traditional stores to
see, feel, and even try out products before purchasing them at lower prices from e-tailers.

Cost Structures

Traditional retailers incurred significant fixed costs in terms of store infrastructure, sales staff, and
inventories, all of which were completely absent in e-tailing, despite the latter's significantly higher
market reach. However, e-tailers had to make substantial investments in information technology to ensure
robust websites with easy and fast navigation performance, guaranteed data security, and various payment
options (including third-party secure sites), which led to costs not present in traditional retailing.

It was also significantly more expensive to develop an e-tailing brand, as compared to a conventional
retail brand, due to a missing physical presence, as well as the need to promote over a larger and more
diverse market. Furthermore, unlike a traditional store, e-tailing did not ensure customer "stickiness" to a
particular website, for this reason, e-tailers needed to continuously promote their websites to the entire
market. All this contributed to an increase in the average cost of winning a customer (i.e., customer
acquisition cost (CAC))

E-tailing also required significant investment in supply chain systems to ensure just-in-time sourcing (for
non- inventory models) and also maintain efficient delivery processes to ensure customer satisfaction.
Unlike in traditional retailing, there was a variable but significant logistics cost for every e-tail order (see
Exhibit 2),

Valuation and Investments in E-Tailing

A cost structure relatively lacking in fixed costs had led to many e-tailing businesses growing
aggressively at very low or even negative margins. This growth might have been based on the belief that
it would not be difficult to break even using a combination of gradual price increases and high volumes.
However, no e- tailers had sunstonfellexpectated this transformation. Apparently, in order to forego a
retail shopping experience, customer expectations in terms of price advantage were quite high.

With all major e-tailers requiring further investments to just sustain their high- and, so far, unprofitable -
growth rates, venture capitalists and private equity investors had valued them only on the basis of metrics
related to customer acquisition and gross merchandise value (GMV), without accounting for their bottom
lines However, there was growing concern among investors regarding the continued valuation of e-tailers
on this basis. Demands for these businesses to move quickly towards profitable operations were
increasing
Future Trends

Analysts expected the market opportunity in e-tailing to be driven primarily by the increase in Internet
penetration and new business models adapting new products or services for online transactions.

Data security was an essential component of online transactions and e-tailers had been trying to
differentiate themselves by associating their brands with customers' trust acquired over a period of time.
Similarly. innovative supply chain systems and efficient logistics also remained a potential source of
improvement and effective differentiation in the future.

Information technology capabilities were an integral part of every e-tailing platform, in this way, e-tailers
were in a position to capture and analyze large amounts of transactional data, and then make business
decisions based on the results. However, considering the widespread availability of the underlying
technology and big data analytics, this could be only a temporary source of operational advantage for any
e-tailer.

E-TAILING IN INDIA

In 2012, the volume of e-commerce in India was approximately 473.49 billion, which was expected to
increase by 33 per cent to 629.67 billion by 2013. The online travel industry had the highest share of this
total (71 per cent) with e-tailing having the second-largest portion (16 per cent share), worth 100.04
billion (see Exhibit 3). E-commerce in India was expected to continue to grow at a high rate, driven
primarily by rapidly increasing Internet access, especially in the country's Tier 2 and Tier 3 cities. Experts
predicted e- tailing revenues to reach 124 billion by 2015.

In 2012, the estimated total size of the retail industry in India was about 27,900 billion, with a compound
annual growth rate (CAGR) of 5.9 per cent. Thus, e-tailing as of 2012 had a share of only 0.3 per cent of
the entire retail market. With a CAGR estimated at almost 60 per cent, e-tailing in India represented huge
growth potential within the retail industry.
Flipkart.com

Incorporated in 2008, Flipkart was an online store started by two friends who had worked together at
Amazon Apparently emulating Amazon, Flipkart also started by selling books but soon expanded to
include a variety of other products to its portfolio, ranging from electronic goods to lifestyle products. In
2014, Flipkart acquired Indian online fashion e-tailer myntra.com at an estimated cost of 20 billion.
For the financial year ending in March-2013, Flipkart reported a sales turnover of *11.8 billion and a loss
of 2.817 billion. However, it managed to secure multiple rounds of investment until July 2014, with an
estimated aggregate value of 105 billion on the basis of its aggressive revenue growth targets. projecting
to achieve annual sales of 62 billion before 2015."

Amazon.in

In 1998, Amazon entered the Indian market through the acquisition of junglee.com, a virtual database
service engaged in extracting relevant data from the Internet and selling it to enterprises. Since June 2013,
junglee.com offered seller services to both online and traditional retailers in India by allowing buyers to
search and compare various products and services offered by various suppliers, while Amazon
participated in the Indian e-tailing market through its country-specific website, amazon.in.

Amazon had brought the best practices from its other markets into the Indian e-tailing industry and
introduced its programs ("Sell on Amazon" and "Fulfillment by Amazon") in India. As of September
2014, Amazon was estimated to carry 15 million products on its Indian e-tailing site, and was expected to
reach aggregate annual sales revenues of $1 billion by 2016 at the latest.13

Spurred by its success in the first year of operations and the long-term potential of the Indian e-tailing
market, Amazon had announced an investment of $2 billion in its Indian subsidiary in 2014.

Snapdeal.com

Snapdeal had started as a "daily deals" platform in 2010. In 2011, it was remodeled and extended as an e-
tailing marketplace. In 2013, Snapdeal targeted revenues of 6 billion. The company had received five
rounds of investments by 2014 with an estimated aggregate value of 21 billion. Leading the third and
fourth rounds of investments was eBay, making it Snapdeal's largest investor. Snapdeal and eBay had also
peared into approximately to mants in specific operational areas. The last round of investment had valued
Snapdeal at 62 billion.

Future Opportunities and Hurdles

The rapidly improving Internet penetration in India, combined with increasing awareness and spending
power of customers (especially in Tier 2 and Tier 3 cities), offered an excellent market opportunity for e-
tailers. Of course, success depended on whether e-tailers were able to correctly identify and meet the
needs of these customers.
In 2012, 27 per cent of Internet users looked solely for information online, while 73 per cent actually
undertook at least one transaction (as compared to 2009, when 45 per cent had looked for information
only) (see Exhibit 4). As this trend of improving trust levels continued, e-commerce businesses could
expect a higher rate of conversion of website visitors into buyers. A variety of payment options, including
cash on delivery (COD), were also helping to increase online purchases.

The poor infrastructure in India for providing last-mile connectivity had hindered the growth of fixed-line
telephone subscribers until they were outnumbered by mobile phone users. By 2014, with the same
infrastructure problems plaguing the growth of broadband connections, an increasing number of new
Internet users were accessing the online world through their mobile devices.

With very low switching costs for customers, ensuring customer loyalty was the single largest challenge
facing e-tailers. Due to high fixed expenses related to creation, promotion, and maintenance of online
platforms, e- tailers were incurring substantial CACs. Unless these costs were offset by the average
margins earned through repeated and regular purchases, measured as lifetime customer value (LCV), e-
tailers could not expect to be profitable. Most e-tailers assumed that on one hand, acquisition costs would
fall as more and more customers were acquired with lower incremental promotion, and on the other hand,
over a longer period, even non-loyalty- driven repeat purchases by customers would lead to sufficient
LCV to offset the acquisition cost. However, many industry experts viewed this assumption with
skepticism.

The price-driven model adopted by the majority of e-tailers in developed markets had also afflicted Indian
e-tailing. In the absence of other differentiators to ensure customer loyalty, the majority of Indian e-tailers
were being forced to compete primarily on the basis of prices and promotions like flash sales. Yet e-tailers
had gradually cut back on previously offered services such as free shipping in order to bolster their
margins in each order.

Some e-tailers were also attempting to escape the price wars by partnering with manufacturers and
suppliers for exclusive launches of new products supported by aggressive promotional campaigns. Others
were trying to collaborate with different suppliers to create bundles of products and services, which made
a direct one- to-one comparison with any other offer more difficult for the customer.

Even though the rapid growth of the e-tailing sector had helped similar growth in the transport and
logistics sectors, poor infrastructure in India remained a serious hindrance to efficient order fulfillment.
This had forced many e-tailers to set up their own delivery systems, which allowed greater control but
also forced the companies to engage in activities that were not part of their core competence.
tailers. Even though this situation was expected to improve with the introduction of a goods and service
tax, that development was still ongoing.
FASHION2GO

Fashion2go was established as an online fashion brand in 2011. From its inception, the company's
founders directed their efforts towards building a brand that would not be restricted to its online platform
and service (as was the case for most other e-tailers in India), but would actually extend further to the
products sold by the company. In other words, the focus was on the brand and its association with specific
products (see Exhibit 5).

Targeting the Market for Fashion in India

Driven by the communication revolution, the younger generation in India was becoming increasingly
fashion conscious. This behaviour also extended to purchase decisions for items related to personal
appearance. With limited financial resources available to them as students or new employees, the majority

of customers between ages 20 and 30 also had limited budgets for non-essential items like apparel and

footwear.

In the traditional retail industry for apparel and accessories, there was a distinct gap between the markets
for branded and unbranded products not only in terms of price but also in terms of the types of stores that
sold these products. A few brands had made half-hearted attempts to position themselves in this gap by
offering products that were priced in a lower band than the premium products; however, these new brands
did not focus on offering products that matched the fashion trends. As a result, beyond being a cheaper
product, their positioning remained ambiguous to customers.

Sharma explained fashion2go's entry into this market: "Fashion2go chose to develop a brand covering
apparel, footwear, and accessories that would satisfy the growing needs of the fashion-conscious young
generation and at the same time, remain more affordable than the premium brands."

The Choice to Go Online

Fashion2go's target segment was fashionable young people in India's Tier 1 cities. However, with
increasing media penetration leading to greater awareness of trends, this segment was now also emerging
in Tier 2 and Tier 3 cities and towns. Since the traditional non-premium retail brands had limited numbers
of physical stores in these markets, the business growth potential of e-tailing in these areas was even
higher. In addition, the company chose a solely online platform to align with its target customers, who
were more comfortable with Internet use than older customers might have been. Fashion2go knew that its
primary challenge would be to ensure efficient delivery to the smaller cities and towns, which were
underserved by logistics companies.

Marketing Promotions

Most stailers in India based their promotional activities either around their online platforms and service
aspects

or on special discount schemes for limited periods. All these initiatives provided some competitive
advantage but only until competitors offered similar services. As sustained brand building was difficult
through these activities, fashion2go decided to focus on entirely different promotional activities (see
Exhibit 6),

Daily print media was used widely by many e-tailers to promote their websites and any special price
promotions. Conversely, fashion2go entered into agreements with a few Bollywood celebrities to promote
its brand in commercials and live fashion shows. Some of these celebrities also endorsed exclusive
fashion2go product lines under their names. Sharma stated, "When the proposal of using Bollywood
celebrities... was made, it triggered vigorous debate and attracted opposition within the company. Many
people could not understand why the company needed to choose such an expensive path to promote the
brand." Yet, the favourable influence of celebrities on customers willingness to pay was instantly
reflected: 12 to 20 per cent of total sales (and approximately 10 per cent higher gross margins) were
reported on celebrity product lines for up to three months after the start of a celebrity-centred promotional
campaign.

Initially, fashion2go had to rely exclusively on word-of-mouth promotion created through open social
networking (OSN) websites to attract customers. It was only much later that it was actually able to
finalize and implement its proposed promotional campaign on television.

Remaining at the Leading Edge of Trends

Fashion2go continuously aligned its image on all of its online platforms to reflect the brand aesthetic of
being young and trendy. It also employed a team of fashion professionals who kept up to date with the
latest trends and worked closely with the procurement team to add appropriate new products to the
company's portfolio. The procurement chain was also structured to ensure a total cycle time of less than
eight weeks from design to availability for any new product.

Engaging with Customers

Discussions on OSN websites such as Facebook allowed fashion2go to gauge reactions to the brand
among its 2.2 million followers, and take appropriate interventions to remain relevant. A measure of the
customer perception of a brand-net promoter score (NPS)" monitored customer activity on OSN websites.
It used a basic system of dividing a company's customers into three categories: "promoters" (scoring 9 or
10 out of 10); "passives" (scoring 7 or 8); and "detractors" (scoring 6 or lower). The NPS was the
difference between the percentage of promoters versus detractors. An NPS of over 70 had confirmed the
positive nature of the buzz surrounding fashion2go on OSN websites (see Exhibit 7).

Pricing Without Reference to Competitors

Fashion2go products were always priced within a healthy gross margin band (see Exhibit 8) without any
reference to the prices offered on other e-tailing websites. While the company focused on efficiency to
achieve the lowest possible costs for every product, it did not try to match lower selling prices for similar
products on other sites. If faced with a significantly lower price for a very similar product on another site,
fashion2go preferred to discontinue such products and replace them with other new and unique products
under its brand.After resisting offering any discounts (even during seasonal sale periods) for a long time,
fashion2go finally concrete may offering any disced phenomenon that took place across all formats of
retailing and were a condotelles verstomers. The company therefore started offering discounts for a
selective period twice a year. Other than this, fashion2go did not feel the need to offer any flash discounts,
which were hugely popular with most other e-tailers.

Leveraging Other Marketplace E-Tailing Platforms

Fashion2go regularly monitored online search analytics for its brand and, as its popularity grew, it
decided to make its branded merchandise available on other marketplace-model-based e-tailing websites,
where any supplier could register and list its products. This helped fashion2go significantly extend the
reach of its products and also add to its brand value through association with the more popular e-tailing
brands. The company was able to secure positive net margins for itself even after sharing a portion with
other platform owners.

Incorporating Relevant Best Practices

While most e-tailers offered a bouquet of services that were largely undifferentiated, fashion2go focused
on offering and customizing those services that were relevant for its target market segment, such as the

following activities:
Establishing a telephone-based support system for customers from non-Tier 1 cities who, despite Internet
access, might initially hesitate to use it for transactions.

Developing a mobile application (app) for fashion2go, which was also available in local vernacular
languages to cater to its non-Tier 1 customers. Enclosing a pre-paid, self-addressed return package with
every shipped order to underline fashion2go's

generous return policy. Offering an online "change room" showing a virtual model in user-customizable
combinations of apparel, footwear, and accessories,

Inventory Cost and Management

By providing a platform for suppliers of a variety of products to show and sell their products,
marketplace- model-based e-tailers did not need their own product inventories. However, as a unique
brand in the market, fashion2go had to make significant investments in product inventory, warehousing,
and management. On one hand, this gave fashion2go more control over product quality and delivery
management but on the other hand, it also put an enormous burden on the company in terms of warehouse
management activity and working capital requirement, both of which increased with the growth of sales.
Rapid changes in products (as per fashion trends) also increased the risk of write-offs due to dead stock.

WHAT NEXT?

Sharma was convinced that fashion2go had a solid strategy and was reaching the young, fashion-
conscious

customers it had been targeting; yet, as he prepared his presentation for the investors, he wondered how
he could prove it.