From Traditional to Digital: The Evolution of B2B Marketplaces

21st August 2023

August 9, 2023


Since the beginning of trade, business-to-business, or B2B, transactions have existed in the Indian economy. It merely describes a transaction in which one business sells a good or service to another, which then sells it to a third party or the final customer. With the introduction of B2B marketplaces, this traditional market environment underwent a progressive change. Technology on the one hand, and the potential in fragmented supply networks on the other, were the driving forces behind this transformation. When this change fully played out, businesses that built a central platform linking various buyers and sellers to carry out transactions centered around the three key pillars; trust, quality, and timely delivery came to be known as B2B marketplaces.

Technology and partnerships with several stakeholders involved in multiple facets of a transaction, such as logistics (inbound and outbound), inventory management, credit/financing, marketing & promotion, etc., are used to tackle these difficulties.

Problems Ailing the Industry

The B2B industry faced a lot of problems even before the advent of these B2B marketplaces. Even after traditional companies ventured into the B2B marketplace space, problems still prevailed for others to identify them as opportunities and build businesses.

Some of these problems being solved by the B2B marketplaces include:

Fragmented supply chains – The market’s supply networks are fragmented and have a lot of room for upheaval. The chain has many participants, which lowers margins and makes it challenging to create value at each stage. Marketplaces work to streamline similar activities and build an ecosystem where buyers and sellers may engage and offer value without a lot of intermediaries.

Trust deficit – The B2B business has long been a conventional industry, largely controlled by HUFs or sole proprietorships. Due to the conventional participants’ limited understanding of technology and a perception of high risk, there is a significant trust deficit. Marketplaces are effectively resolving this issue with technology. They offer services like buyer and seller profiling, live tracking, and frequent updates on channels like WhatsApp.

Lack of credit accessibility – The larger market participants or those who are part of a union can obtain credit to finance their working capital requirements. MSMEs, who have historically been the underserved segment of the economy, control a sizable portion of the market. By partnering with fintech market players and offering credit at reasonable terms, marketplaces attempt to address the credit problem.

Just-in-time delivery – Due to a lack of visibility or delays at the supplier’s end, another problem for buyers is tracking their orders and meeting customer demands on time. To ensure prompt deliveries, marketplaces engage with reputable 3rd party logistics providers.

Unutilized capacity – Unutilized capacity in manufacturing facilities is a significant issue. There is still a sizable amount of revenue left for them. Marketplaces increase demand from numerous consumers for these producers, ensuring a higher capacity utilization than before and boosting their income.

Industry Overview

Regarding the sector’s prognosis, from2019 to 2022, the industry grew at a CAGR of about 100%. Up until 2027, it isanticipated to increase at a CAGR of 45%. The industry can be divided into twomajor groups: Manufacturing Segments (Pharma & Medical Supplies, Food &FMCG, Auto & Electronics), and Retail Distribution Segments (Fashion &Apparel, Construction & Equipment & Maintenance, Repairs, Operation& Packaging). It is estimated that within the next five years, theindustry’s tech penetration, which is currently less than 1%, will increase to5%. The potential for disruption in the area is shown by the low number. TheGross Merchandise Value (GMV) is a significant indicator used to assesscompanies in this sector. It speaks of the overall amount of merchandise soldby the business or platform. While 5 marketplaces had a GMV of more than $1billion as of 2022, and 14 had a GMV of more than $300 million.

Capital Infusion into the Sector

In today’s world, most startups are generally funded by venture capitalists, angel investors, family offices, private equity firms, etc. PE-VC funding has shown a lot of interest in and investment in tech-driven enterprises. A total of $189 Mn in funding was drawn to the sector in 2018, spread across 37 rounds of funding. PE-VC funding across sectors experienced exceptional growth in 2021,and B2B marketplaces did not lag behind. The B2B markets garnered an astounding$2.5 Bn in funding over 69 rounds. The funding however fell to $1 Bn across 39rounds in 2022 as a result of the market’s quick self-correction. Out of the total funding of $5.3 Bn in the last 5 years, approximately more than 60% has been raised in the last two years.

Valuation and Financials

There are currently 6 unicorns in the B2B marketplace sector. OfBusiness ($4.5 billion), Udaan ($3.1 billion), Zetwerks ($2.7 billion), Moglix ($2.6 billion), Infra. Market ($2.36 billion), and ElasticRun ($1.5 billion) are the companies in question. Only OfBusiness and Infra. The market is PAT positive among these unicorn companies, although Zetwerks is EBITDA positive. In a very short period of time, other firms in the industry have also become unicorns.

Transformation in Business Models – A Win-Win for Startups and Investors

The lack of investor profitability or poor exits led to the idea of a funding winter, which affected startup investment in the second half of 2022. This was due to the fact that many enterprises were simply cash-burning machines for investors. Since then, profitability has come to dominate over the original concept. This is how the B2B marketplaces have benefited.

Business models that are attempting to digitally transform the economy’s traditional industries and offer advantages like higher utilization, quality assurance, shorter TAT, and many more, have the potential to become investment hubs. The fact that they possess a higher certainty of providing investors the exits, in one way or the other, at some point in the future is another reason, in our opinion, why investments have continued to be drawn to this sector. Some of the aforementioned unicorns are currently anticipated to go public in the following four to five years. This indicates that the businesses anticipate an initial public offering (IPO) within ten years of operations, giving investors their desired path to return on investments.

How are Business Models Changing?

There is plenty to examine as we delve deeply into the comprehension of these firms and the next ones. None of these companies today are what they were when they first started operations. Over time, they have either entirely altered their business strategy, entered into wholly unrelated industries, or increased the scope of their operations to include other sub-sectors. As an illustration, Zetwerks was initially developed as software that helped manufacturers discover suppliers. After realizing that selling software in India is difficult, the company modified its business strategy such that it would take orders independently and carry them out using the software internally. As a result, it started a business where manufacturers could get custom goods made. The company soon expanded its line of business to include apparel (the fundamental issue being the same as with industrials). With the addition of custom manufacturing, the company has now further expanded its product line to include industrial goods utilized in several sectors of the economy, including construction, transportation, and aviation.

What will drive growth in the future?

At Merisis, we think that the market will continue to experience several upheavals in the business. There are always new players entering the market with various offerings. According to us, there are a few factors that firms should consider if they want to expand and succeed in this market.

China+1 strategy: The export component is a significant element that will set a business apart from competitors. Given that India is a cheap destination for sourcing, there is a substantial inbound demand from players all over the world in practically all the sub-sectors. The global manufacturing industry’s adoption of the China+1 strategy is what is fueling this expansion. This is a result of COVID, when the Chinese economy was plagued by severe supply chain issues and businesses felt the need to source their products elsewhere (India was the greatest option at the time). As a result, the companies that pursue exports as a component of their business plan or that generate a sizable portion of their revenue from exports will prosper.

Credit Issues: The financial risk taken is another distinguishing element that will set certain businesses apart from others. This indicates whether or not the issue of finance or credit is resolved for the entire digital supply chain. This is due to the fact that while buyers prefer credit purchases, suppliers prefer upfront payments. Businesses will grow significantly better than the rest if they are able to address the issue of credit in between without taking on additional financial risk in their books.

Integration of Manufacturing in the Supply Chain: This is due to the fact that adding value through manufacturing, as a stage in the value chain, mandates a higher gross margin addition for the company. This market trend can be anticipated given the businesses’ severe profitability issues, where they begin directly participating in the manufacturing process.

Revenues mix from the B2C market: Entry into the B2C market should be another thing organizations should think about as a determining factor. This is the pattern that was demonstrated by companies like Amazon, which began as a B2B marketplace before making a significant transition to the B2C market. The key takeaway in this instance is that some portion of B2C sales must be included in the revenues. This is so that the company may have a greater presence among end users and so achieve more traction in the market. B2B companies are now beginning to operate in this market as well. As an illustration, Infra.Market began their B2C business by setting up physical retail stores. Currently, the B2C sector accounts for 10% of the company’s overall revenues.

In conclusion, the B2B marketplace sector has a lot of room for disruption. Businesses in the future would either be technology-based or technology-led. Additionally, there are many economic sub-sectors where the disruption has not yet occurred or is only just beginning. Agribusiness is one such industry. One area of the economy that has attracted the least attention from technological advancements in India is agriculture. Many new firms are forming today in an effort to address various issues in this industry. As a result, this is one industry that will undergo significant adjustments soon and offers numerous prospects for B2B markets.

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