Will Family Businesses Jump on the e-commerce Bandwagon?

This article was first published in www.entrepreneur.com on September 6, 2017; Co-author: S. Subramanian; https://www.entrepreneur.com/article/299866

The family businesses quickly entered the IT industry in the 1990s and today represent 14.31% of Nifty in Market Capitalization

It is interesting to note that out of the 13 different sectors represented by the Nifty stocks, sunshine industries like Pharma, Telecom and IT are totally dominated by family businesses. Though most of the older family business groups like the Bajaj, Birla, Godrej, Reliance and TATA started with traditional manufacturing, metals and energy sectors, almost all of them forayed into the emerging services sector with aplomb and success.

Family Businesses Rule

Out of the 50 companies in Nifty, 32 are family businesses and 11 of those 32 are less than 25 years of age, accounting for 47 per cent of the market capitalization of Family businesses in Nifty. This points towards the swiftness with which families have responded to the emerging opportunities and embraced them.

Entrepreneur Ruling the Scene

The family businesses quickly entered the IT industry in the 1990s and today represent 14.31% of Nifty in Market Capitalization and 74% of the market capitalization of all IT industry stocks in Nifty. To draw a parallel, e-commerce in India is at a nascent stage and start-ups, all entrepreneurs, are ruling the scene in this space. However, what intrigues us is that none of the large family businesses have forayed into it in a major way so far. While they do have a presence in the B2B space, they have so far stayed away from the B2C sector, with the exception of the recent foray of TATAs with CLIQ.

E-commerce Business Boost

With government initiative like Digital India, the internet penetration in the country is set to rise further. The growth rate is already one of the highest at 51 per cent per annum.  This will provide a further boost to the e-commerce business. According to estimates by the Associated Chambers of Commerce & Industry of India (Assocham) and Forrester, revenues from e-commerce market in India is expected to grow to $120billion by the year 2020.

How a Young Team Helps

Typically the ecommerce start-ups are headed by youngsters of less than 35 years age and the employee teams are also usually fresh engineers and MBAs.  This may be essential for a B2C e-commerce venture as the buyers in online stores are predominantly the youngsters. Their behavioural pattern as consumers is very different from that of the traditional buyers.

For example, they rely a lot on social media communication to develop an opinion about the product. And hence having a young team, led by a youngster, is important to understand the consumer mindset and set the right strategic direction for the ecommerce firm. But the traditional family owned businesses tend to have experienced personnel at the very top level. Having very young people lead a venture is new for them and may take some time to culturally accept.

VC-funded Start-ups

Let us assume that a business group does promote an e-commerce business and lets a team of youngsters, led by a young CEO, manage it.  Will that guarantee success? Probably no, as the team may not still get the strategic freedom similar to that of their standalone competitors. Most of the existing ecommerce start-ups are almost fully funded by the venture capitalists (VC), whose expectation as investors are completely different from that of a business family. The VCs’ expectation of success in the start-up that they invest is just about 10 percent or so. Hence they allow the team to take risks, even if it means going to an uncharted territory. The families do not and probably cannot allow such risky moves in their own ventures, there by effectively curtailing the strategic freedom of the top management.

High-risk Strategies

Further, such high-risk strategies have created expectations of high returns from the e-commerce ventures. This, in turn, resulted in the valuations skyrocketing, essentially creating a bubble, and some analysts went to the extent of calling them as Ponzi schemes. The business families, while willing to enter into the sunshine sector, are generally cautious about their reputation.

The entry of Tata Group into e-commerce sector with CliQ, the first such venture by a major family business group, may indicate that the moment has come. What is to be seen is if CliQ is not too late to take on the Flipkarts and the Amazons of the industry which have already established themselves in the market. Would CliQ set the precedence for the other family businesses to foray into the ecommerce bandwagon? And, we would be happy to do a similar analysis 20 years from now to see how many ecommerce companies form a part of Nifty and how many of them will be family businesses!