Disruptive E-commerce, Finally Here

By Shamindra Kulamannage.

Published on September 21, 2012 with No Comments



“I don’t have to look at the future too hard because I know it will come hurtling at me anyway,” declares Anything.lk Chief Executive Reeza Zarook. Anything.lk is a paradox of out innovating, out executing competition and a chaotic business model. “Honestly we don’t know past the next six months, things are changing so rapidly,” claims Zarook who has been nimble footed to add new business lines while taking the big growth strides with existing ventures at the same time.

Anything.lk basically copied what appears to have been a nifty idea rolled out large scale by, now NASDAQ listed US firm, groupon.com. Online coupon firms offer potential customers discounts on anything from donuts to yoga lessons. For the merchants who offer products or services it’s an opportunity to attract new customers who they hope will return after a satisfying first experience.

Aping groupon.com was Anything’s first step. But now the one and a half year old venture is remarkably complex. Look closely at the company’s online façade www.anything.lk and it starts becoming apparent the firm is now more than an online coupon business; it’s also retailer, a holiday travel firm and dabbles in events. “We are not the company that we started off to be. We started being a daily deals buying site and now we are Sri Lanka’s premier e-commerce site,” says Reeza who estimates retail is worth Rs.6 billion here and the one with perhaps the greatest potential.

Each business line is a proven ecommerce success internationally. For daily discount deals there is groupon.com, for retail its amazon.com, travel is covered by expedia.com and many other similar outfits and events by ones like ticketmaster.com. Anything.lk is part owned by Rebate Networks, which also owns a number of other online discount coupon operations worldwide, some of which are also diversifying within the ecommerce sphere.

One of its ambitions is to take on travel agents for the outbound market and through the Rebate Networks connections they expect to offer cheap hotel rooms globally. “Latent potential in outbound travel is astounding,” Reeza says, “the network has the ability to source a three night Paris hotel stay for 200 Euros when normally a single room night would cost that much”.

However the greatest buzz at Anything.lk is about challenging the island’s largest consumer electronics retailers like Singer, Softlogic and Sinhagiri. Sparks of that potential were seen during December last year when Anything.lk sold fifty, 40 inch, LED televisions in a few frenzied days at Rs125,000 each when competitors were selling similar models at Rs225,000. After the offer went public the market price for a 40 inch LED tele fell to Rs185,000, but still Anything.lk was 35% cheaper. “The fact that others have stores, staff, air conditioning; that’s their problem. We don’t have that, we don’t keep stock, instead we work on consignment, so we are able to minimize costs and pass it on,” points out Jeggan Rajendram, the firm’s 20-something retail sales head. The unit now accounts for 30% of the top line, just behind daily coupon discounts at 40%, but probably has the greatest potential. “Our goal is to become a premier retailer in the country by offering, a good price, convenience, great quality products and a vast range,” claims Jeggan Rajendram, the firm’s Chief Business Development Officer, in a dismissive swagger of youthful confidence.
Rajendram’s spunk is no exception around the chaotic anything.lk setup. Youthful energy, frolic and pride permeate. Its Chief Executive Zarook carefully screens new job applicants to weed out those with pre conceived ideas about how businesses should be managed. He also says a recruit’s ability to not be overwhelmed by the chaotic culture is important.

History is replete with examples of innovative, dynamic upstarts that pulled the rug from under the old guard. It is not that firms don’t see the new threat posed by technology and emerging trends, but they find it difficult to divert resources towards the opportunity. Firms like Amazon, without the costly countrywide bricks and mortar presence achieved this at the cusp of a new business cycle a decade ago, when technology altered the competitive landscape.

Growth usually occurs in spurts because increased competition and the resulting declining profits will inspire some entrepreneurs to innovate. This is the theory of the business cycle. Often market dominating incumbents become lazy and successful innovation as a result comes from new entrants. The resulting ‘creative destruction’ changes industries. A wave of creative destruction in retail swept through the US and Europe when internet access became ubiquitous a decade ago. Retail bookshop chains have downsized and many family run corner stores are shuttering under pressure from low margin, high volume ventures like Amazon. The online retailer didn’t have instant success: it struggled in the red for six years but its Chief Executive Jeff Bezos continued to see opportunity when his critics only saw problems.

Creative destruction is a critical part of economic dynamism and entrepreneurs are at the heart of the process. Their impatient, convention spurning attitude and acceptance that risk comes with success, sets them apart from chief executives looking for incremental advances as opposed to leaps.

Anything.lk has the potential to cause a wave of creative destruction in Sri Lanka; a decade on from when the first ecommerce waves swept across US and Europe. However it is unlikely that electronic retailers here will react in wild panic. Ecommerce may only chip away at their market share over time. At 12% internet penetration and perhaps five hundred thousand people having a credit card, ecommerce is still handicapped in Sri Lanka.

But in true entrepreneurial style Anything.lk takes challenges posed by bottlenecks in its stride. It has tied up with Dialog – which has more than half the mobile market share in Sri Lanka – making it possible for customers who don’t have credit cards to charge purchases to their mobile account. A partnership with a bank for island wide payments for purchases is also in the offing.

Clad in blue jeans and casual cotton shirt, the man arguably building the most exciting online business in the country, presents an impassioned case for why Anything.lk shouldn’t be compared with its US nemesis groupon.com. “What makes us great is that we understand Sri Lankans,” declares Zarook who dismisses the notion his business can go global. Instead Anything.lk aspires to become Sri Lanka’s largest ecommerce venture.

Groupon.com, which has local sites in many big cities worldwide had a tumultuous IPO reception. Groupon’s straightjacket approach to diverse Asian cultures and occasional insensitivity to the capacity of small businesses to cater to explosive demand has resulted in floundering regional ventures and bad reputations. It famously once sold 8000 discount coupons for a small cup cake business that went bust trying to cater to the overwhelming demand.

In the heady times preceding the dot com bust up, ecommerce sites had global ambitions, some based on the simplistic mantra that products can be pushed with a website as a storefront.  Investors and investment bankers apprehensive about appearing like numbskulls to miss the next great wave and the ‘I told you so’ chagrin from clients, piled on to internet startups. Some even took the much bolder step by quitting their jobs to start internet firms.

In 1998, around the time investors were hallucinating about internet millions, Reeza Zarook, a London based investment banker moved to Sri Lanka, the land of his parents’ birth, seeking contentment. His friends from the City however were certain he was having a meltdown. Tranquility and contentment he soon realized was the perfect mask for a whole lot of other issues like lethargy, lack of ambition, not respecting deadlines and government paralysis. Understanding these Sri Lankan idiosyncrasies has helped Anything.lk adapt its business to suit local challenges.

The idea of offering discount coupons isn’t new. Newspapers and magazines have been printing them for decades which readers are expected to cut out and exchange for a discount on a particular product. Since advertising the discount is free or low cost, the merchant benefits by attracting new customers. However there are two main differences in the online model compared to the magazine coupon clipping model.
Firstly virtual coupon firms like Anything.lk needs an army of sales people to negotiate deals with businesses and a platoon of egg heads and copy writers to churn out online offers and witty media and email campaigns.

The second difference and the one that makes online discount firms really standout is the margins they command. Anything.lk typically charges businesses up to 42% of the discounted price of a voucher. For convincing reluctant merchants to offer such deep discounts they require a battalion of sales people. “Initially one of the biggest problems we had was to convince merchants to look at it as a marketing push rather than a sales push,” recounts Safraz Careem, Anything’s operations head who with Reeza Zarook made the first sales calls. “If they take it out of their marketing budget, and look at it in a long term point of view they will recover that expense over a period of time,” he says.

Zarook presents a slick case for why a merchant should and can afford to make an offer on anything’s daily deals. The pitch is based on enticing customers who have never previously tried a merchant’s products or services in the expectation they will return and pay the full price later. Attracting hundreds of new customers usually requires an advertising burst, often beyond what a beauty parlor or small retailer can afford. Zarook’s Anything.lk buys ad space in bulk, has built a deal obsessed fan base on Facebook and pushes multiple whimsical offers every day to the island’s largest email database. So even a small restaurant discount coupon offer ends up being promoted in the Daily Mirror and YES FM morning show, is seen by Anything’s 180,000 Facebook fan base plus by thousands more on the social network  through paid ads, the site’s 10,000 daily unique visitors and a quarter of a million people who receive daily emails. “Facebook has a metric called, people talking about this page, and we try to keep that metric high because the more people that interact with the page their friends see what’s being said and anything.lk is on top of the mind recall,” points out Sirraj Abdul Hameed, the firm’s Social Media manager.

What Anything.lk has done is make virtual coupon clipping exciting. Zarook – articulate and energetic – persuaded the country’s top brands like Odel and Ramani Fernando Saloons to offer virtual coupons on his site. They did. Now the unhip brands are flocking to anything.lk in the hope that some of its mystique will rub off.

For a merchant the deal is also risk free. If it’s online offer doesn’t attract new clients it costs the merchant nothing. Whereas a failed ad campaign of the same scale paid for by a merchant alone can end up a costly mistake. “We will sell 500 to 800 vouchers for a deal and it’ll not cost them anything, another word for this is performance pay,” quips Zarook who has worked in venture capital, capital market software sales, the government’s ICT policy implementation agency and managed his own consultancy business since arriving in Sri Lanka one and a half decades ago.

“Our main clients are not consumers who buy vouchers; our main clients are the merchants. We are providing them a service of being able to reach a market they are unable to otherwise reach,” contends Zarook who together with a number of other individuals and firms have stakes in the Sri Lankan business.
Marginal cost of a burger, a haircut, a spa treatment or a low end restaurant meal may be as little as 25% of the price charged. Fixed costs like salaries, rent and utility payments are unavoidable and not linked to the number of customers. These firms where the marginal cost of a product or service is low, can offer deep discounts and not worry about customers not returning because any opportunity to utilize unused capacity to drive volumes makes sense.

After the customer discount Anything.lk collects 30% to 42% of the voucher value. So any merchant offering a 50% discount through anything.lk has to have a marginal cost lower than 30% or so to not lose money. Not many businesses have such low marginal costs. The coupon discount model also attracts butterflies – compulsive deal hunters – while it’s offered to merchants as one that attracts barnacles, claim critics. Why pay full price when there will always be a half price offer somewhere on Anything.lk or its five or six competitor clones.

Zarook passionately defends the coupon model pointing to the success of Burger Blast, a small restaurant. This restaurant on Colombo’s Maitland Crescent sold 600 vouchers for burgers in a matter of days. He claims 60% of anything.lk virtual coupon clippers will return later to brands they discover through the site and pay full price. “Our competitors don’t have the funds to do Daily Mirror everyday and online promotions,” Zarook points out. “So Burger Blast was on YES FM morning show, how on earth can they otherwise afford to do that?” Burger Blast also did an offer on an anything.lk clone and sold only 100 vouchers. So if 60% of those customers become sticky to the brand, that’s 60 people, whereas on the anything.lk deal the firm gains 360 returning customers.

Critics of the groupon.com model also argue it is a giant ponzi scheme dependent on aggressive marketing and sales which can sputter when the novelty fades. Zarook estimates there is a 6,000 merchant network of which they may perhaps tap half. That’s around 10 merchants for every week day. Since Anything launches only a limited number of deals daily they can make fresh offers for two years before they have to go back to the same merchants.

Zarook also follows closely the bad press groupon.com has been getting since its IPO and is steering anything.lk away from those mistakes. His sales team makes sure a merchant is capable of dealing with a customer influx during a weekend or holiday when everybody decides to use the deals they have paid for.
The model is also easy to clone, as proven by half a dozen others in Sri Lanka. Again Zarook identifies three reasons why clones are going to struggle against Anything.lk. Firstly it’s the serious cash backing the venture.  “To date no one with the cash has understood where this business can go. Softlogic won’t put money in to this business, instead they will put it in to a business they understand. Our shareholders all come from this,” Zarook points out. Multinational Singer and Abans, both electronic goods retailers already have online stores but activity there perhaps pales compared to anything.lk.

Secondly the firm’s promoters already own and manage similar businesses overseas. “We have access to the best practices globally. They have so much knowledge to offer and they are so involved.” The third barrier – perhaps the absolute one – is the exclusive deal the firm has with Dialog enabling mobile users to charge their purchases to their phone account.

When first approached by the promoters, Zarook – embarrassingly he claims – was ignorant about the groupon.com model. Three months later, following a visit to Rebate Networks partnered Thai venture www.ensogo.com which has become a game changer in that country, he was convinced. “Working the business model it makes absolute sense, and I went back to Nick and said, this is doable,” recalls Reeza of his conversation with Nick Clayton, a promoter of the Sri Lankan venture who was keen to attract Zarook as Chief Executive.

“But I didn’t want to do this as a consultancy job and I told them ‘I want in, I want a share of the company,’ I didn’t want to do this and hand it over to somebody,” recalls Zarook. Others also invested including Thilan Wijesinghe, Mike Brinsford an investor who has worked in Asia including Sri Lanka, promoters of Thai online coupon firm ensogo.com, and Rebate Networks, which has stakes in 26 other similar ventures worldwide. A couple of founding staff members of the Sri Lankan venture, in addition to Reeza Zarook, also have small shareholdings.

Venture capitalists have been impressed by the margins online coupon firms can muster. It partly explains why groupon.com, a start-up, was able to raise $1.1 billion and also why before the initial offer internet giant Google had been willing to fork out a whopping $6 billion for the firm.

Zarook, who by then had decided to chuck up his consultancy business, fretted the details in a two year business plan to the founding shareholders. He presented this to the board when Piers Bennett put a big box around the second year and crossed it out. He then ran a dotted line across the last six months and put one giant question mark over it and asked a distressed looking Reeza, “Do you trust me? You cannot see one year down the line, you can barely see six months. So let’s just concentrate on that,” he said pointing to what’s left of the business plan, which was for the first six months. “If you deliver on that we are over the moon.”

Soon Zarook learned why the promoters – with experience running virtual coupon clipping ventures elsewhere – thought the straightjacket of a business plan was a constraint. In six months it was apparent over half the daily deals offered on the web were for retail products like cameras and phones. But merchants had thin margins on these products so they couldn’t offer deep discounts the likes of which service establishments can. “We thought; hang on, a lot of these merchants have products that are not unique to them and what if we source these products ourselves. We can give much better offers”. And so they did. Six months after the website’s launch anything.lk’s first major strategic shift; setting up an online retail store happened.

Today that store has over 500 products on sale at any given time from car stereos to cooking utensils. By year end it will become a mini-amazon with up to 3,000 items including clothes. “We can source products at better than market prices and we have very few overheads,” points out Rajendram, the head of the retail operation. While occasionally there are major deals to be had, the usual discount from the market price ranges around 10% to 20%. Low internet penetration, the major handicap for growing an ecommerce venture here, so far hasn’t prevented Anything.lk from gradually finding traction. In the last few months they have delivered flat panel TV’s to Jaffna, Vavuniya and Matara. Rajendram says some people think there is a catch to the below market price offers. “But we will overcome this soon as we grow our customer base, reputation and brand,” he adds.

The second challenge facing the retail business is one of scaling up. Anything.lk receives most products on consignment (it settles suppliers after the products have been sold) and they are focused on adding a range of products. Indian online retailers are vexed by the large number of returns (as high as 20%) and it’s unclear what habits Sri Lankan consumers will form around online retail. However retail annually is estimated to be worth Rs6 billion including gray market imports according to Zarook. “I’ve got a long way to go before I control the market,” he beams.

Anything’s growth is already proving to be more than a mere spark. It now employs nearly 70 people, has just moved in to a swanky new office and sold over 60,000 coupons on the way claiming 90% virtual coupon market share. “The market reacts and we react to the market. Right now this is what the market is asking for and we are delivering this. And we have plans for sub verticals of these things and I’m sure there will be new businesses that come on stream,” beams Zarook confidently.

Anything’s business is a nifty idea, but not a groundbreaking one. The differentiator is its grand vision and ability to out strategise and out implement against competitors. But perhaps its absolute strength is the quality of the leadership. Reeza Zarook has his feet on the ground about challenges of running a business in Sri Lanka. “What we lack is focus on commercial reality, we have no skills in project management and people and are not very interested in details.” Instead he is impatient about stuffy conventions, undeterred about odds of ecommerce success in a country where internet penetration is 12% and coolly confident about turning the market uside-down. The firm certainly has the leadership to become the dominant platform for a range of services from virtual coupons, online retail and overseas holiday sales. Powerful momentum, visionary leadership and unmatched financial backing, maybe the formula that propels an anything.lk led round of creative destruction. Perhaps it’s time the behemoths took notice.


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