Who will win in ONDC, India's new e-commerce public network?

What started in April 2022 as a test launch in a limited number of Indian cities with a controlled number of users has developed now into a flourishing marketplace, present in more than 80 cities and reaching a volume of 4.7 million cumulative transactions just now in November. Mobility (100,000 cab rides per day in only four cities) and food (grocery transactions grew more than 200% in the past two months) seem to be the two main categories in those transactions, with the expectation of many more categories developing soon. Even business to business transactions on the network are currently around 30,000 per month, making ONDC’s promise even more universal. Looking forward, the most optimistic estimates for ONDC have it reaching the participation of 900 million people in the next two years and increasing e-commerce penetration in India from the current 5% to 25%.

But that is the rosy scenario. In that previous post, I was pointing at the fact that ONDC’s complexity as a network is orders of magnitude higher than UPI’s complexity. ONDC acts as a loose network where millions of customers and businesses aggregate into temporary value chains in order to serve individual transactions. For example, when a customer uses ONDC to get a burger from McDonald’s, a chain between the burger place and the customer is temporarily formed, including the businesses that take care of intermediate steps like order fulfilment, payments, customer service, etc. The elements in that chain might all be independent businesses and thus require a good level of coordination amongst them to achieve a seamless customer experience. Moreover, ONDC allows many types of transactions, from buying toothpaste to getting a cab ride to pretty much anything that can be e-commerce, which increases even more the complexity of the interactions and thus the coordination problem. Can such a loose network manage millions of such varied transactions smoothly and at a low cost?

And what is the solution to that challenge? Well, coordination problems are usually solved with integration and this seems to be the case here as well. So the logical corollary is that the biggest winners in ONDC are likely to be many of the large integrated players whose power ONDC was meant to diminish. But there is a twist to that. While ONDC will not make Amazon’s marketplace less powerful by enabling small businesses to offer their products or services directly to online consumers, it definitely might do so by enabling other large players to establish themselves as powerful parts of the ONDC network. Two cases might illustrate that.

ONDC has two sides: Buyers and sellers. The seller side is populated by any company that either offers a product or service or performs an activity related to the seller’s job (software, logistics, procurement, etc). Enter HUL. In the analog world, HUL products usually have to go through at least two levels of intermediate distributors before they reach the small neighborhood kirana store. This is a slow value chain, poorly prepared to deal with the digital world. So in recent years HUL has been onboarding those kirana stores into its own digital platform (called Shikhar) so they can order directly from HUL. This means HUL is now in direct digital contact with thousands of small stores and can leverage its scale and expertise to offer them a variety of services such as inventory and revenue growth management, logistics, accounting, etc.

With Shikhar, HUL also becomes exceptionally well positioned to enter the ONDC world. All it has to do is to connect Shikhar to the platform through a seller app (called Shikhar Seller) and, voila, HUL becomes an important player by controlling the link of potentially millions of stores (HUL actually reaches about 9 million of kiranas, though the ones currently in Shikhar are still just a fraction) to the rest of the chain. Shikhar Seller is now being piloted, with full implementation coming soon.

Let’s look at the other side of the ONDC platform. Here, millions of buyers will connect at any given point to look for a product or service in a variety of categories. Similar to the sellers’ problem, individual buyers are difficult to serve with a loose ONDC network (e.g., who solves their returns, their queries, or their payments?). Enter Paytm, a company that has built a massive customer base (more than 300 million users) through payments and other services.

Starting in 2017, Paytm tried to develop its own e-commerce platform (Paytm Mall) but building a whole integrated Amazon-like marketplace from scratch in a hyper-competitive environment was always going to be a daunting task and the results were not good. But here comes the ONDC opportunity. Again, much like HUL did on the seller side, Paytm only has to connect its customer base to ONDC through a buyer app and voila all of its users can now automatically buy groceries from any store connected on the seller side (maybe through HUL!). And Paytm is already expert in the activities required to manage, engage and retain a customer base and can deliver them smoothly at scale. Incidentally, Paytm also is connected to merchants for its payments service so it could also consider being on the seller side eventually.

More generally, Paytm’s example shows how any buyer aggregator can leverage ONDC as a simple and low-cost solution to offer a full e-commerce service to its users.

So what kind of the change is ONDC bringing? It is indeed some kind of democratization of e-commerce, in which the fully integrated Amazon or Flipkart marketplaces are now more vulnerable to competition from combinations like HUL-ONDC-Paytm. One can substitute Paytm for other buyer aggregators like Ola or PhonePe or Magicpin and HUL for other seller aggregators like Coca-Cola (through its seller app Coke Shop) or Shiprocket (an e-commerce services company) or Marico, with many more to come as the platform grows, and you get the idea of the many competing combinations that would exist.

Many fresh questions arise from all the above. Will ONDC become a fragmented, hyper-competitive and low-profit space if any business with a decently large user base can (and will) plug in so easily? Or will there still be differentiation factors, allowing, with time, some of those combinations to become more stable and dominate the market? And how will the government managing the platform itself react to attempts to dominate the market, since the purpose of ONDC was always to avoid that? A fascinating new era of e-commerce competition is starting in India, without a doubt.