The Innovation Issue – ONLINE RETAILER TAKAS’ TECHNOLOGY ADVANTAGE AND UNEXPECTED DISCOVERY
Since founding five years ago, online retailer takas.lk has focused on three things: offering as many products for sale, cash payment on delivery, and island-wide distribution. Unlike in the rich world, Sri Lanka’s poor transport infrastructure, low internet penetration (only 30% of Sri Lankans are online) and low disposable incomes require a level of ingenuity by e-commerce firms unique to emerging economies. In rich countries, e-commerce companies have taken away market share from organised retail.
Bookshops were the first to be swallowed up by e-commerce, followed by electronic retail stores. Across the rich world, businesses are feeling the pressure from e-commerce firms grabbing market share by offering lower prices, a wider selection of goods and next day delivery. E-commerce behemoths like Amazon in the western world and Alibaba in China have piggybacked on existing logistics, payment and wholesale infrastructure to build commanding market positions.
But, it’s simplistic to assume the battle for e-commerce dominance will be won on blanket internet access, higher household incomes and easier order fulfillment due to good infrastructure as these improve in Sri Lanka. These are signs that the market readiness for e-commerce is improving, but no proof that a business can thrive at scale. To overcome bottlenecks, meet shopper expectations, and tempt people to purchase online, Takas, like other online retailers, has been on a discounting spree. It sells washing machines at 18% less than high street retailers and flat screen TVs for as much as 27% less. Nearly half of Sri Lanka’s population and its most affluent live in a concentrated area no more than 60 kilometers from Colombo, the biggest city, and per person GDP, $3,900 now, is forecast to double in six to eight years. High value electronics like flat screen TVs, refrigerators and mobile phones are the top contributors to Takas’ topline. Its virtual store retails its own inventory and acts as a marketplace for inventory from its partners that range from importers of fancy goods and large FMCG companies, to importers and retailers of high value goods.
SURPRISING RURAL E-COMMERCE DEMAND
‘What’s happening here,” Takas Co-Founder Lahiru Pathmalal recalls his reaction at noticing 18 months ago that the South Eastern Uva Province, the poorest of Sri Lanka’s nine provincial administrative areas, was generating the most orders after the affluent Western province. It was also a surprising outcome because Takas’ marketing is in English, targeting the well-heeled in the Western province where 30% of Sri Lankans live, and incomes and Internet use are much higher. It had been the company’s experience that customer acquisition costs were higher at Takas.lk’s online store listing goods in Sinhala.
However, following the realisation, Takas’ founders, Pathmalal and two friends, explored how the island’s poorest province was driving a mini demand surge. People in Uva were primarily buying smartphones, which was the best-selling product on Takas. TVs were the bestseller until recently when smartphone sales overtook it. Pathmalal explains that people replace a smartphone every two years compared to buying a new TV every 10 years or so. On the Takas platform, smartphone sales are growing in double-digits month-on-month, a good sign for the future of e-commerce. A Sri Lankan map at Pathmalal’s office depicts every owned or dealer operated by major white goods retail players like Softlogic and Singer. It was apparent the Uva province wasn’t well covered by organised retail. However, Pathmalal, who is also Chief Executive of Takas, says alternatives existed.
Enterprising rural businesses source TVs, refrigerators, washing machines and stereo systems from Colombo at low prices to resell in small towns. Pathmalal says customers switching online due to the price transparency that Takas and online retailers make possible, is one reason for their rural sales growth. “Customer are able to compare prices due to growing computer literacy,” says Pathmalal, who co-founded Takas when he returned to the country in 2012 after undergraduate studies and working overseas. In the five years since Takas’ founding, millions of Sri Lankans have started accessing the Internet frequently. Currently, around 40% of users access takas.lk on their smartphones compared to 5% in 2013.
The belief that shopping for young people armed with a smartphone is likely to become a very different experience than it was for their parents is what fuels e-commerce investment all over the world. The contest for dominance is frenzied, and disregard for profits is ruthless because of the outsized prize the winner is expected to claim. In some emerging markets like India, frenzied focus on market share has resulted in some online retailers selling goods below cost. Takas’ business plan – to provide as many products, cash on delivery and island-wide distribution – is identical to the strategies of even India’s largest e-commerce sites like Flipkart.com and Amazon.in.
“We used to get hammered when we delivered to Jaffna,” reacts Pathmalal about the economics of having consumers far from their operating centre in Colombo. Thirty percent of Takas’ orders are from outside the Western Province. Key metrics that measure the health of online businesses are improving. At Takas, gross profit margin is rising, customer acquisition costs are declining and the number of repeat customers is increasing as a trend.
“A recent phenomenon has been growing trust in e-commerce,” explains Pathmalal of the critical factors that have led to measurable improvements in key financial health indicators. However, gross profit margins are still quite low, he admits.
PROPRIETY TECH ADVANTAGE FOR A SMALL COMPANY
Small businesses, including virtual stores, lack the heft and clout of organised retail. Online retail’s disregard for profit comes from their need to land grab, or take share from organised retail and other virtual stores. Competition is so fierce that online retailers have to make bold bets to secure an advantage.
When its first funding of Rs6 million was secured, Takas.lk made such a bold bet: to invest in a platform with the ability to electronically track orders even when they were being delivered by a contractor. Most orders placed on the website are delivered by courier companies who themselves lack sophisticated systems. “Fulfillment was a challenge because we were at the mercy of a delivery company’s tracking system,” Pathmalal says of the early years when their system was under development. “Now, we ask delivery companies ‘you can track the product using our system, what’s your price’.”
Pathmalal estimates that 35% of their resources are invested in technology, and many of his team are IT engineers. He also dismisses the notion that small companies like Takas can acquire off-the-shelf technology for mission-critical functions.
“People close to us were saying we were crazy to be hiring people to build the technology. There is this myth and prevailing idea that you can just buy the technology.” Often, small companies will find that sophisticated IT systems are too costly and are an overkill. Large resource planning systems also require specialist staff to operate, and input and tracking technology to gather data. For a company with a few transactions, they don’t offer a competitive advantage.
“Plus, if you invest, you have the rights to your technology, and more importantly, complete maneuverability.”
Since deploying the complete system, which took two and a half years to develop, Takas is able to track goods anywhere in the island as long as the person delivering the item carries a GPS-enabled smartphone.
The greatest advantage that Pathmalal sees in technology focus for a company is the culture of doing things quickly. Sri Lanka’s rising smartphone use and fewer retail chains suggest the sale of items from high value goods to groceries may be purchased online by a generation that is young and comfortable with technology. Takas, like other online retailers, is counting on the younger generation leapfrogging ‘organised retail’ to shop online altogether.
A technology advantage and surprising demand it’s now experiencing from rural Sri Lanka suggest that Takas is on to something.