On the face of it, Sri Lanka is primed for e-commerce success. Internet access is ubiquitous and affordable; its young are all online and mobile savvy; nearly half the island’s population and its most affluent live in a concentrated area no more than 60 kilometres from Colombo, the biggest city; and income per person, $3,800 now, is forecast to double by 2021.

But it would be simplistic to assume that the battle for e-commerce dominance may well be won on blanket internet access, higher household incomes and easier order fulfillment due to good infrastructure alone. These are all signs that the market may be ready for e-commerce, but not proof that a business can thrive at scale. However, the contest for dominance is frenzied because of the outsized prize the winner is expected to claim.

In rich countries, e-commerce firms have taken away market share from organized retail. Bookshops were the first to be swallowed up by e-commerce firms in rich countries, followed by electronic retail stores. Across the economy, various other business sectors are feeling the pressure of e-commerce firms grabbing market share by offering lower prices, a wide selection of goods and next-day delivery. These western 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.

In emerging markets like Sri Lanka, more people are shopping at malls, supermarkets and branded chains – the so-called organized retail. E-commerce firms aren’t just grabbing share from organized retail, but beating their own path by attracting new consumers.

[pullquote]The Chief Executive of one of Sri Lanka’s e-commerce  leaders Wow.lk, Sheyantha Abeykoon says neither of these strategies – the Indian model targeting sales at any cost or the US one, of breakeven virtual store sales and focus on allied businesses for growth – can work here[/pullquote]

Normally, markets grow around organized retail. Logistics, wholesale and payment industries develop independently. E-commerce firms enter the fray to exploit the cost arbitrage of running a business virtually, freeing them from the overheads of establishing stores. In the western world, they rely on existing payments, logistics and wholesale markets to quickly build scale and market dominance. Shareholders who share the business vision back their relentless push for market share ahead of profitability. Amazon and eBay are examples of the success of the virtual western e-commerce model, leveraging high-quality, existing infrastructure. Neither of these two companies are profitable at a level their share valuations justify.

E-commerce pioneers here including Wow.lk, a unit of listed Dialog Axiata, and private firms Kapruka.com, Mydeal.lk and Takas.lk. are all leapfrogging. These firms – unable to count on available infrastructure – are contributing to developments in logistics, payments, wholesale and import trade. This is not a development unique to Sri Lanka. In emerging Asia, e-commerce companies overcome the handicap of derelict supply chain infrastructure by investing in their own. For instance, India’s market leaders Flipkart and Snapdeal are focused on two things: growing the number of customers and increasing the value of goods sold (gross merchandise value). To overcome India’s clogged roads and ramshackle distribution infrastructure, firms there are taking the expensive route of setting up their own warehouses across the country, and investing in vehicles and distribution infrastructure. It has helped that Flipkart’s and Snapdeal’s shareholders have had ruthless disregard for profits.

Chief Executive of one of Sri Lanka’s e-commerce leaders Wow.lk Sheyantha Abeykoon (pictured above) says neither of these strategies – the Indian model targeting sales at any cost or the US one of breaking even virtual store sales and focusing on allied businesses for growth – can work here. “We (Dialog Axiata) invested because we saw a market opportunity,” says Abeykoon, who was appointed Wow.lk Chief Executive in the months after Dialog acquired control of the firm. He is circumspect about what it means to be successful in Sri Lanka and points out that e-commerce has evolved in different ways in many markets. “Market opportunity stems from trying to solve a problem for the consumer. That doesn’t mean we need to strictly stay within the confines of a website,” he points out.

Abeykoon – who held a senior position at Dialog before moving to lead Wow.lk – views the venture as a supply chain business than a virtual store, although the website is the interface that attract customers. “In a country like Sri Lanka, we shouldn’t wait till the consumer comes online. We are constantly looking to see how to take our value proposition to the consumer.”

Wow.lk’s sales are tiny compared to its parent Dialog’s and other listed consumer durables and fashion retailers in Sri Lanka. In 2015, Abeykoon says Wow.lk’s gross merchandise value doubled and they forecast similar growth this year. Its expected sales will comfortably surpass a billion rupees in 2016. In 2015, Dialog Axiata topline crossed Rs73 billion. In comparison, revenue at Singer, a retailer of electronics and household goods, topped Rs33 billion in 2015 and Softlogic Holdings, a diversified business, had revenue of Rs13.3 billion from its retail units, which included department store Odel and branded chains selling clothes, shoes and accessories. Softlogic’s phones and IT retail (including Samsung mobile agency) revenues in 2015 were Rs14.6 billion.

The grand prize of retail market dominance drives the frenzied e-commerce contest. If like in the rest of the world Sri Lankan consumers also start buying more stuff online, those who have built the supply chains for smooth order fulfillment at scale will win.

High-value electronics – like flat screen TVs and refrigerators – and mobile phones are the top contributors to Wow.lk’s topline. Wow.lk  retails both 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 like luxury kitchen appliances or high-end DSLR cameras. Wow.lk’s own imports account for 20% of the product portfolio. Their value is much higher.

Wow.lk retails up to 10,000 products – ranging from USB drives to exercise machines and toasters – fulfilling between 15,000 to 20,000 orders a month, and counts over 300,000 registered users. Unlike a small online retailer – able to deploy a few team members in hired cabs to fulfil orders efficiently – firms operating at scale require systems. Wow.lk has deployed a platform developed by Oracle, which is one of the most advanced in the world. “The player who gets logistics, distribution warehousing and backend systems right will get ahead,”  Abeykoon points out. Telco Dialog also uses Oracle-developed systems to run its operations and billing.

[pullquote]Because Wow.lk and other large e-commerce players like Kapruka are making determined invest ments to leapfrog the infrastructure shortfall in the market the importance of e-commerce will stretch beyond these individual firms and into the wider economy[/pullquote]

Because Wow.lk and other large e-commerce players like Kapruka.com are making determined investments to leapfrog the infrastructure shortfall in the market, the importance of e-commerce will stretch beyond these individual firms and into the wider economy. The convenience and low prices attract consumers to e-commerce.

In emerging markets, however, a successful e-commerce company will have a far greater impact than just delivering these keen prices and convenience. First, in emerging markets where payment infrastructure is weak, e-commerce firms have to address this if they want people to transact. For over a decade, Dialog has been developing micro payments infrastructure that is now available for use across most telcos, which is facilitating ease of transactions and lowering credit risks. Second is the impact of e-commerce on retail. Importers and producers have a far greater reach by partnering with e-commerce firm-established marketplaces. They call this the long tail strategy.

Low-value and small-margin products are frequently sourced from the open market place. Eighty percent of Wow.lk’s inventory available online is sourced from the marketplace. When one of these products are sold, they are not shipped out from the Wow.lk warehouse, but from the wholesaler or retailer stocking this item. Wow.lk just makes a commission on the sale.

Third is their role in building and encouraging investment in delivery infrastructure. So far, only around 10% of Wow.lk’s orders are from the provinces, but this is a growing percentage. Half of Wow.lk’s orders are delivered by their own fleet and the rest of the deliveries are by courier companies. Wow.lk chief executive says “Its growing pains” about the lack of sophistication and investment in Sri Lanka’s courier companies to be able to offer reliable on-time services.

Emerging markets’ e-commerce success relies on many factors, and a website’s interface isn’t the leading one. The quality of the connectivity, varied payment options, the ability for customers to see a product before committing to buy, the ability to pay at the time of delivery and next-day delivery all influence purchase decisions. These are diametrically different to rich market challenges, where value addition and web interfaces may matter more.

Abeykoon – who has a finance background but is now a t-shirt clad chief executive – contends that a hybrid model may be necessary for online commerce success here because most potential customers are either unwilling or unable to transact online. “But that doesn’t mean replicating a physical store,” Abeykoon quickly adds. He emphasizes that the challenge is to give a potential customer ‘the complete catalogue he wants’. Wow.lk is piggybacking on Dialog’s 300-plus distribution network where it has positioned kiosks that customers can use to browse the Wow.lk store and place offline orders. As many as 40% of Wow.lk customers choose to pay for goods on delivery.

“We need to have regional warehousing, and do a hub and spoke model. We must have complete control of the customer experience,” according to Abeykoon. “If achieved – and it really must be – this will reduce delivery costs and times, benefiting consumers. But to achieve this, we would require significant investment.” Wow.lk last received funding from Dialog in August 2015, soon after full control passed to the firm from the founding investors.

At founding, the firm, then called Anything.lk, was a hybrid of an online mall, a virtual discount coupon business, event tickets and a travel firm. In December 2012, Dialog invested in Anything.lk at a Rs600 million valuation and subsequently acquired ownership nearly three years later by buying the then remaining 54.35% ownership from founding shareholders for Rs248 million. That gave the firm a valuation over Rs400 million in 2015.

Abeykoon declines to discuss Wow.lk’s valuation plunge by a third in 33 months since Dialog’s first investment for a 26% equity stake. The events occured before his time leading the firm. Later-round investors usually insist on performance targets when promoters demand a high valuation based on ambitious growth projections. A lower valuation or promoters parting with a bigger stake can then be imposed if they fail to achieve targets. The circumstances that led to Wow.lk’s valuation decline are unclear, but could be indicative that its then strategy wasn’t working out as well as forecast.

[pullquote]Abeykoon – who has a finance background but is now a t-shirt clad chief executive – contends that a hybrid model maybe necessary for online commerce success here because most potential customers are either unwilling or are unable to transact online[/pullquote]

Dominant e-commerce firms have been valued at twice their gross merchandise value. Prior to being acquired, Anything.lk was burning cash to acquire new customers and grow the gross merchandise value. The difference was that Indian firms with the same growth strategy were building critical logistics infrastructure and offering mostly their own inventory for sale. Wow.lk’s predecessor Anything.lk had none of this that would indicate that it would be able to leapfrog Sri Lanka’s infrastructure crunch.

In the past 18 months, Wow.lk has been relentless with its new strategy. Dialog’s management team made two quick decisions after they took over management. First, they focused on growing Wow.lk as an online retailer with plenty of offline channels to reach customers, and second, they started building the backend infrastructure to build scale.

With the relative success since taking over, Abeykoon indulges in some nostalgia, “It was almost a reinvention of the business; we had to turn things around quickly and do it with a young team.” Wow.lk isn’t a profitable business as are its traditional competitors like Singer and Softlogic. Although Wow.lk does not have stores like its competitors, it’s in a battle for retail dominance. Sri Lanka’s infrastructure and logistical woes provide a test for a firm’s ingenuity.

Ifzaal Iqbal, Wow.lk’s Head of Sales, and Shennon Perera, Head of Customer Service, represent the hybrid model that characterizes Wow.lk now. Iqbal, who has been at the firm since it was known as Anything.lk, is energetic in claiming that they are now working on the fulfillment model. “We are not competing on products or prices, but the services,” he says, indicating that Wow.lk is now leapfrogging. While improvements to physical infrastructure are slow, digital infrastructure, which Wow.lk relies more on, is improving by leaps. Dialog estimates that 40% of mobiles are smartphones that also have high-speed internet capability. That’s up from just 20% two years ago. Shennon Perera, who joined the company later, plays a role in that service delivery. He keeps the teams on their toes by maintaining the culture of a startup in the business that’s now four years old.

[pullquote]While improvements to physical infrastructure are slow, digital infrastructure, which Wow.lk relies more on, is improving by leaps. Dialog estimates 40% of mobiles are smartphones that also have high-speed internet capability. That’s up from just 20% two years ago[/pullquote]

Abeykoon says the business is working capital positive because it manages to presell 30-40% of its own inventory before a shipment arrives at its warehouse. For online retailers, the biggest chunk of their overhead costs is marketing, and Wow.lk may be operating at a breakeven level before marketing costs are added. Retail customers are fickle and don’t have much store loyalty, so keeping them engaged is critical.

Wow.lk’s strategy for 2016 is focused on topline growth, but not at any cost. Since inception, India’s top e-commerce players have been on a discounting spree – often subsidizing buyers out of their own pockets – to boost the total value of goods sold. Fortunately for Wow.lk, none of the e-commerce players here have deep enough pockets for such aggressive land grabbing. Abeykoon agrees, but also dismisses the idea that Wow.lk’s 50% e-commerce market share can be increased with far more aggressive pricing. Having a unique and evolving catalog is critical. “It’s almost trench warfare,” muses Abeykoon. “If you keep the same catalog, soon others will also offer it and then margin pressure sets in. Wow.lk is frequently tweaking the offering with an eye on margins. During the hottest months in the city, Wow.lk had special promotions on air conditioners featured on their website. It partners with importers not to maintain supplies of the same set of products, but to offer a differentiated one.

The current crop of e-commerce firms aren’t the first in Sri Lanka but are entrenched. Abeykoon attributes Dialog’s relative e-commerce success to their ability to identify a market opportunity far wider than the keenness for price and convenience that digital commerce offers in developed markets. Wow.lk and Dialog together are building a business that encompasses supply chain expertise, payments and exiting retail. As Abeykoon points out, “Sometimes when you define your business too narrowly, it becomes a constraint”.