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ONDC has the potential to unlock trillion-dollar value for Indian societies

I am following Nikhil Kamath on Instagram because of his well-researched, compressed insights related to various industries. However, I have not watched any of his videos from the WTF series. A few days back, youtube suggested one of Nikhil’s video-clip related to ONDC. After listening to ONDC's explanation, I felt bad because it wasted my 6 minutes. Before that video, I had a vague idea about ONDC but never felt the need to understand it in deep. But after watching a small clip of Think School on Instagram, I follow Think School as well. I decided to clear my thinking. And hence this small essay.

To understand ONDC we need to understand the e-commerce first, let’s get started.

An e-commerce system has mainly four layers.

  • Seller side application: The application allows brands, manufacturers, Merchants etc to upload their products for customers to discover

  • Buyer-side application: The application allows users to discover products uploaded through Seller side application

  • Logistic: This either can be owned by an e-commerce player or 3rd party (3P). For example, Amazon has its own logistic system. However, for remote delivery such as for customers from my village - Bihar, Dasaut - they use 3P delivery companies such as Delhivery, and loadshare. On the other hand, Meesho’s entire business is based on 3P delivery companies

  • Payment: Payment companies complete online transactions of customers if the payment is online. Amazon has its own payment system, however, Meesho again uses the 3P payment system.

If you look at the Indian e-commerce landscape, you will realise the market is dominated by two types of players based on value layer.

  • Centralized: companies such as Amazon, Flipkart, and Udaan owns the entire value layer of the e-commerce

  • Aggregators: Companies such as Meesho just have buyer and seller apps but use 3P payment and logistics and provide everything on a single platform.

  • Individuals: They do all the above using 3P but without any external platform help. We also call them D2C brands.

For big brands, the centralised system works well because of scale and brand value. However, for small manufacturers (mainly unorganized) the centralized system is not effective because they don’t have a brand presence hence, they look towards the 2nd type of e-commerce such as Meesho.

You see the value prop of companies such as Meehos: Since e-commerce is difficult because it has multiple layers, you - manufacturers, merchants, small businesses etc - focus on your core business, and we will take care of the rest by providing everything in one place.

There is a popular 3C framework function in eCommerce - Convenience, Choice, and Cost. Amazon is the only company in the world that has achieved all three C hence, you see the global dominance. However, when a company achieve all three C, it affects small businesses. This is one of the reasons Amazon faces occasional eyeballs. ONDC is making e-commerce possible with all 3C with a distributed e-commerce system. I have explained why, below.

Also, the initial high burn in the eCommerce company is mostly on Customer Acquisition because it is not only about uploading seller products, users should know about the buyer application. And to achieve market dominance traditionally, eCommerce companies have been centralizing buyers and sellers. Also, higher CAC means higher prices, and to overcome that e-commerce companies seek massive scale.

Now before I list all the key impacts of ONDC on Indian society - buyers and sellers. I need to explain the ONDC - Open Network of Digital Commerce.

I have been reading about ONDC on Twitter for the past few weeks but never got a chance to understand that in detail. But today, when I visited a website and checked the list of participants - I was shocked because I saw IDFC First Bank (Firstforward) has been registered as Buyer Network Participant for the category under Grocery, Food & Beverage. I am still processing why a Bank would get registered under ONDC.

The true purpose of ONDC is to unlock trillion-dollar value from Indian society in the next 10 years. And to do that ONDC is decentralizing the buyers and sellers. And to do that they have built an interoperable e-commerce protocol.

It has two categories of Participants - Network and Ecosystem - and both categories have multiple roles. And to understand ONDC's impact on Indian society, we need to understand the roles of each participant.

List of Roles under ONDC under Network Participants

  • Buyer Network Participants (Paytm, IDFC Bank, CSCStore etc.)

  • Seller Network Participants (BOAT, ITC, Marico etc.)

  • Logistics Services Participants (expressbees, Dunzo, loadshare etc.)

  • Payment Service Participants (Airpay, Paythm etc.)

We need to take a few examples:

Example-1: D2C Brands such as BOAT and WOW: BOAT and WOW have joined the platform as seller network participants. This means once they will upload their products to the Seller Network Participants - uploaded products will be available to all participants under Buyer Network.

Impact: If any of you have read the BOAT IPO prospectus, they have highlighted the risk of Gross sales centralization - 85% of their entire sales have come from two centralized e-commerce: Amazon and Flipkart. However, now by being seller-side participants, BOAT products are available on 30+ buyers' Network Participants including high-frequency usage platforms such as Paytm, PhonePe etc

And this eliminates the risk of sales centralization at one platform that BOAT has highlighted in their IPO prospectus.

Example-2: CSCstore is also registered as a Buyer and Seller Network Participant. India has 1.3 million CSC centres covering 95% of the lower quintiles of India - urban and rural, both. By registering as a Buyer Network Participant even a person sitting in a remote village will have access to all the catalogues available under the network. And even a small manufacturer in a remote village can sell products directly to people sitting in Bangalore.

Impact: Discoverability for small unknown manufacturers is one of the biggest problems. And in most cases, e-commerce companies burn money on the Buyer side to bring traction and frequency. But thanks to ONDC that problem is solved.

Example-3: National FMCG manufacturers such as Marico, and ITC have also registered themselves under the Seller network. This means once they will list their products as a seller and define their functioning geography - products will be available to customers directly through any apps registered as Buyer Participants. Here the Buyer participants are mostly Wholesalers and Distributors (B2B).

Impact: Wholesalers and Distributors have more options and hence no surges-prices and massive control on the B2B value chain.

Even Microsoft has registered itself under Seller Participants (I am not sure why?)

Even Zoho has registered itself under Seller Participants ( I am not sure why?)

Meesho has registered as a Buyer Network Participant this means Meesho users will have access to all the catalogues available under the ONDC network. However, as Meesho has not registered as seller participants yet, meaning products uploaded on Meesho will only be only available on the Meesho app to Meesho users.

ONDC also have Ecosystem Participants who help companies who would like to get listed as Network Participants. Here also there are two Role

  • Seller Network Participants (will help seller Participants)

  • Buyer Network Participants (will help buyers participants)

Now before I list just the three potential impacts of ONDC on Indian society, I need to explain this with Nikhil’s example.

Let’s say, I am a soap manufacturer. What are the options I have before ONDC

  • I list on Udaan for B2B sales and pay platform commission to Udaan for B2B sales.

  • I list on Amazon, Flipkart, and Meesho and pay platform commissions to these players

  • I create my website and app and sell

Since I am an unknown brand and no one knows me - if someone will search for soap, my listing will not come in the first 20 on centralised e-commerce platforms. And if I am selling under my website and app, I must run ads to attract users to my platform. This means I have to burn money initially.

Now scenario after ONDC

  • I listed my product on the ONDC through any seller side network participants application and selected the servicing area because I know my product will be liked in a specific geographic by a specific set of customers and also defined the function distance - 5K to 1000KM to Pain India.

  • And Boom, my product is available on 30+ different buyers network participants. In this case, even if my customers are using a CSCstore application, and they search for soap, my product will be in the top-3

How my life got change due to ONDC?

Now I don’t have to pay centralized platform commission or run ads to attract customers, I can offer my product at a lower price to the exact targetted customers. And if you look at this from the buyer side, if I don’t have to install a new app, and I am getting my product at a lower price - I will come back again and again. And this creates a strong flywheel, no?

Here are three potential impacts of ONDC on Indian society.

  1. Price deflation, in the coming time, you will see genuine price deflation on most products.

  2. Rapid growth in eCommerce from seller and buyer side, today also it is just around 10%

  3. Indian retail will cross $1.75 trillion, and I think ONDC might unlock $ 1 trillion in value

Most importantly: It will prevent the centralization of eCommerce like the USA and China which is super important for our nation's pov. We have 18% of the job's dependencies on these small, unorganized retail.

ONDC is another example of 2nd type of Brekthourgh that can unlock Indian society's potential and make our world a better place. I have written another essay on a similar topic.

In my honest opinion, the ONDC is not competing on Convenience, however, it will truly democratise Cost and Choice.

Thanks for reading. If you liked my essay share this with your network. I will see you all the next week :)

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