The Meteorite Rise of the B2B Marketplace

Why Are B2B Marketplaces Winning?

To answer this, we must first understand how the traditional supply chain works. In a traditional supply chain, manufacturers produce goods, large distributors buy these goods and sell in smaller quantities to either smaller distributors or end customers (SMEs).

Typically, the distributor aggregates the supplies and takes its own pounds to ensure reliable and timely delivery, while providing short-term credit. On the other hand, SMEs do not have the assurance of best price, top product or delivery in the given time frame. To top it all, the credit terms are exorbitant (around 30-45% of the annual yield).

Large manufacturers face significant inefficiencies in the procurement supply chain, especially when they source from an unorganized SME supplier base. In the past, the only resource they could rely on to discover new suppliers would be B2B directories.

A large part of this traditional supply chain suffered a significant setback in the times of Covid. The B2B marketplaces were well positioned to take advantage of this opportunity, offering quality products at reasonable prices and reliable delivery schedules, along with the required standard credit terms.

In the late 1990s and early 2000s, the early entrants who took advantage of technology and the Internet to solve these problems were pure-play listing players who had just moved to the Internet. They had strong business models based on net membership fees and an early mover advantage. He solved the problem of discovery.

In 2014-17, new B2B companies emerged that provided end-to-end transaction fulfillment. The adoption of digital businesses by the manufacturer and the business ecosystem was extremely low. To allow traders to enter the market, players resorted to wafer-thin trading margins, which did not guarantee loyalty.

2019 marked the golden age of B2B, which intensified during the COVID. The pace of the real economy slowed and prompted manufacturers to evaluate innovative use of their capabilities.

The Ubiquitous Distributor value chain suffered a major setback during the COVID pandemic – their access to capital disappeared and their precarious balance sheet suffered a setback that crippled their supply chain.

Well-capitalized, technology-led B2B players such as Infra.Market, OffBusiness, Medikabazaar, Ztworks, Moglix and Elasticaron bridged the gap. Product margins increased significantly making these businesses highly profitable with high return on equity to boot.

How are B2B Marketplaces rated?

The gross merchandise value (GMV) of a business is recorded on the books as revenue. The margin maintained by the Marketplace is the Gross Margin (GM). Typically, investors are comfortable valuing the business at GM multiples, but given the market’s bullishness and 15%+ month-on-month growth, GMV multiples are in vogue again in 2021.

Investors also focus on the receivable days of the marketplace. If days receivable are above normal (typically 40-60 days), it means participants are treating the market as a credit provider. Investors tend to think of such businesses as financing businesses rather than as true markets.

Successful marketplaces are segmented medium sized SMEs operating with either the supply side or the demand side or both. Some are solving quality and reliability problems associated with sectors that have a highly disorganized supplier base. Others have large quality suppliers on one hand but a fragmented SME customer base on the demand side, where quality, credibility and credit are critical.

Some companies have introduced private labels, which have helped them increase margins and create customer ownership. Companies that focus on distribution in retail outlets are imitating modern retail by creating their own brands.

As technology adoption increases, we see the second layer of B2B companies moving beyond industrial manufacturing, manufacturing and exporting (GoMechanic, ElasticRun, Bijnis, Fashinza, etc.). This is one area that is going to truly transform Indian businesses and is poised to formalize the traditional supply chain – creating a win-win for suppliers, buyers and the government.

Pankaj Naik is the Executive Director and Co-Head, Digital & Technology, Avendus Capital.