Last week, online marketplace unicorn ShopClues launched an international platform to help Indian buyers access global products. 

Online, marketplace, unicorn. Three heavy terms, that when put together should result in immediate recognition.  ShopClues, though, is almost literally like an actual unicorn - most of us have heard about it, but will never see it. Other companies that fit these three heavy terms are Amazon, Flipkart, Snapdeal and Paytm. A simple Google Trends search throws up the following online search metrics - Amazon 100, Flipkart 90, Paytm 16, Snapdeal 9. Where is ShopClues?

At 2. 

I had written about Snapdeal fell from being one of the hottest Indian internet companies to its present self. ShopClues' web search traffic is even lower than Snapdeal, and for a company that touts itself as an "online marketplace", it's troubling. Bear in mind that ShopClues is no midget when it comes to the internet ecosystem, it has raised more than $250MM from marquee investors. It also has the privilege of being valued at more than a billion dollars, close to food unicorn Swiggy. You probably remember when you last ordered from Swiggy, but when did you order last from ShopClues?

According to the CBO and founder, it could be because you live in "a metro" while the consumers of ShopClues are from "Tier 2/3/4 cities". While Amazon and Flipkart target the "metros", people who really want to shop from Tier 2/3/4 cities are unable to find products at a price point they could purchase. This sounds like a nice feel-good pitch, and one could even believe this is true, if you didn't have data. When Amazon has 50% of its sales from these aforementioned "Tier 2/3 cities", while seeing significant growth from this very consumer base, data isn't telling the story you want everyone to hear. 

Is it a nice story but a not very nice business? Actually, what is ShopClues' business, really?

ShopClues started in 2011, in Silicon Valley, to get sellers from Tier 2/3/4 cities in India online (the irony). This makes it clearly evident that the founders had the capability to sell a vision, and were onto building a business. In 2014, the CEO claimed that the company is an "e-commerce operating system in the cloud" (today, equivalent phrases are "artificial intelligence for neural networks on blockchain"). The operating model of the company, though, was (and is) interesting. The company is a pure-play marketplace with zero inventory (think eBay). 

This stokes the age-old debate on what kind of marketplace model works best. You have zero inventory Uber and AirBnb or the inventory led Flipkart and Amazon. The well-placed claim by the ShopClues team is that the inventory model doesn't work in India. This is primarily because India is a disorganized and largely unbranded market. Sellers are disparate, and stocking and selling their products would be a logistical nightmare. Economics would not make sense. 

ShopClues, therefore, took the pure marketplace approach, targeted at the "whitespace" of Tier 2/3/4 cities. The company, due to the non-inventory led model, had the ability to sell at a lower commission than the others. For the first 5 years of its existence, ShopClues sold exactly what the other players in the market did. The signs of what would be coming later would be seen in the pressure the company started to feel in 2016. The company created two divisions, "wired" and "non wired", and soon realized the wired (i.e. phones etc.) would not cut it. 

The company thus let the foot off the pedal on wired products, that was actually being won by Flipkart and Amazon. Avoiding competition is probably one of the best ways to building enduring companies. Losing a market and moving out of it is clearly not, as ShopClues did. Pursuing the "higher gross margin non wired" category is basically accepting defeat. The overall e-commerce market is pegged at $16Bn, with electronics accounting for 50%, while apparel accounts for 25%. With Shopclues' focus now outside the 50% of electronics, and non-metros accounting for50% of the overall market, the company was staring at a $4Bn market, which is 25% (50%*50%) of the overall market.

Bear in mind that this is GMV. At an average commission of 10% - the company has an addressable market of $400MM. For a company valued at $1.1Bn, having a (diminishing) market size smaller than the company's valuation doesn't read very well.

But that is not the end of ShopClues' woes. The company may have thought that Amazon and Co. would not focus on Tier 2/3/4 cities. Sure, that was true 3 years back when Amazon et. al. built a solid, aspirational brand in the metros. With better penetration, they have a substantial number of customers and sellers locked into the platform (Amazon has more than 300K). Additionally, the quality of these customers and sellers is high, they buy/sell high-value items that allow Amazon to generate better margin. This margin allows Amazon to acquire initially lower value customers in smaller cities, through cross-subsidization across customer cohorts.

You begin to realize that ShopClues will now be hit with the double punch of economies of scale and network effects.

Scale allows its competition to access customers more cheaply. Network effects make customers and sellers more likely to be attracted to competitor platforms. The gambit of not being "bothered by Amazon" has already begun to backfire. Customers find Amazon and Flipkart more aspirational. Sellers find Amazon and Flipkart more lucrative. It isn't necessary that Tier 2/3/4 sellers and customers will only interact amongst each other (in fact they are probably looking for different kinds of buyers/seller). 

ShopClues has painted itself into a corner, that continues to contract. 

In the reverse process of building a monopoly, even this "diminished" market isn't safe now. The company claims it will target "lower ASP" products, which don't find the front page of its competitors. If you're selling ticket sizes as low as 300 INR ($5), and taking a 15% cut, you're left with 45 INR. Customers in Tier 2/3/4 cities are likely not familiar with online purchasing, so accessing them and acquiring them is going to be expensive. Assuming even a conservative 200 INR customer acquisition cost (CAC), you need at least 6 purchases to break even on revenue. Given the smaller subset of products being sold, this may likely take 6-12 months to break even, assuming a customer purchases at least once. 

ShopClues has a contracting market and a broken business model, and we haven't even delved into financials or management.

Droom, that I had covered in Edition 49, is the brainchild of ShopClues founder Sandeep Aggarwal. While his leaving ShopClues was acrimonious, his departure was a strong negative vote of confidence for the company. Senior management of the company has also churned, with the chief marketing officer leaving in 6 months. The company did a GMV of $3Bn in FY2017, but claimed to do $500MM in FY2018. The revenue of FY17 was 189 Cr ($25MM), and FY18 was 275 Cr ($30MM). Revenue growth? Not really, because it includes a 90 Cr ad-for-equity deal, which would put ShopClues' "true" business revenue at 182 Cr, lesser than the previous year. News reports of a $1MM "bridge round" for a company that had previously raised $250MM just reinforce the company's bleak situation. 

The writing is clearly on the wall, the business is genuinely struggling. The expansion into these new international markets is clearly a repeat of the same story of leaving markets while being beaten by competition. It is not very easy to understand why ShopClues would open external markets, especially to a customer base that is falling. 

ShopClues looks clueless about the future, and it doesn't look very rosy.