India's eCommerce market

India’s eCommerce market

Off late there has been some interesting activity in India’s eCommerce market: Flipkart and Myntra merged in a 2,000 crore deal, FICCI tied up with eBay and Amazon brought in the marketplace model. The government is likely to announce its FDI policy in eCommerce along with the budget next month. I’m writing this post to educate my readers about India’s e-commerce market, e-commerce concepts and business models that are now prevalent in India and rest of the world.

India’s eCommerce Market

India is better known for its bustling bazaars and colorful open-air markets, but in just five years the eCommerce market in India has grown over 600%, from $2.5 billion USD in 2009 to an incredible $16 billion USD in 2013. This exciting trend will continue, with research from the Associated Chambers of Commerce and Industry of India (ASSOCHAM) projecting the e-commerce market in India to reach a value of $56 billion over the next decade.

India’s eCommerce market is still in its infancy – online retail is now only 1% of the country’s retail market. Travel is the most popular e-commerce sector, accounting for about 70% of online purchases. Consumer goods, particularly fashion and electronics, are a close second. The Internet and Mobile Association of India (IAMAI) has released industry figures that show robust growth in the online retail business in India, estimating the number of online retailers as close to 1 million as of date.

These online retailers represent a very wide range of categories including electronics, books, apparel, accessories, footwear and jewelry. Figures available with IAMAI show that India had 213 million internet users at the end of last year – a number that is likely to grow to 243 million by this June. This increase would make India a global leader in internet usage, second only to China’s 600 million internet users.

The downside to this of course is low Internet penetration (8%) and the credit card population which is less than 5%. Both these segments are not growing at a jaw dropping pace. Add to this the high cost of customer acquisition and free shipping.

One of the biggest pain points of eCommerce websites is customer acquisition. Before they can even worry about converting a visitor to a customer, they have to think about how they can get that visitor on the site. A few larger e-commerce sites are big enough brands to receive some direct traffic. For example, plenty of online shoppers navigate directly to Amazon when they’re thinking about making a purchase. But if you’re operating in a niche category, you’re likely not getting a lot of type-in traffic from people who know your brand and come directly to you to buy from you online.

Nor are most eCommerce sites likely to show up in relevant search results, especially for generic or competitive terms. eCommerce sites generally struggle to attract inbound links and search engine love, since they aren’t in the game of producing high quality content. Instead, the general lack of meaningful free direct and organic search traffic means that most eCommerce sites have to pay to get visitors to their sites.

Given the general reliance on paid traffic, the efficiency with which an eCommerce site is able to buy relevant traffic is a critical factor. If more than 95% of visitors are going to leave a site empty-handed, you can’t afford to pay much to get them on your site in the first place. Yet the extreme competitiveness of many eCommerce niches means that cheap pay-per-click traffic is hard to come by.

Once, it was generally assumed that in exchange for the convenience of online shopping customers could expect to pay up for shipping. But that has changed pretty quickly as major eCommerce stores have introduced free (or cheap) shipping as a way to lure customers. The words “free shipping” have become increasingly common online

As free shipping has become more and more common, the shock of high shipping costs has become more painful. When presented with a sudden and significant increase in costs, online shoppers are likely to abandon the process and look for an option that includes free shipping. Figuring out a cost efficient shipping solution is critical to the success of your e-commerce venture.

eCommerce Business Models

With the growing consumer acceptance of eCommerce and a difficult business environment, brands and businesses are all greedily eyeing the eCommerce opportunity.  But, India’s eCommerce market is still in its infancy.  If the percentage of total retail is closing in on double digits in some countries, the eCommerce model is still learning its way for the majority of us. Businesses are needing to figure out if and how to integrate eCommerce into their existing business strategy.

Some startups have the opportunity to begin from the start as a ‘pure player’; but, this is not necessarily an easy route. For most brands, meanwhile, it means figuring out the best mix of channels in light of their history and their existing partners and commercial strategy.

For any company sizing up its eCommerce strategy, there is no historical data on which to build a model—there is just not a lot of granular data available on how eCommerce is doing — and certainly not in terms of profitability since the data is always folded into some larger number (except for the odd publicly traded pure player). Nor is there a lot of talent with experience to go around. The main analysis in setting up an electronic commerce site must focus on three key pillars areas:

  1. set up the right fit with the brand image
  2. align with the company’s culture
  3. consider the fit/mix with the existing channels.

Here are nine different eCommerce business models

  • The Single Brand. This is when a brand decides to create its own eCommerce site, à la Hermès or Louis Vuitton.
  • Marketplace.  A e-shopping Mall with multiple brands and categories.  Examples: Amazon, eBay, Snapdeal, OLX.
  • Vertical marketplace. A eShopping mall on a specific segment.  Examples: Lenskart, cardekho (cars), Zappos (shoes), Diapers.com, OneStopPlus (plus size fashion).
  • Community marketplace. Built around a lifestyle, a community marketplace involves identifying and galvanizing a shared mindset. Examples: Etsy, Craigslist, ModCloth (Indie/Retro/Vintage clothing), SkullCandy (earphones & headphones).
  • Flash Sell marketplace.  The concept is creating pent up demand to be bought at specific time slots, and sometimes in limited series.  The majority of flash sell concepts seem to be concentrated on fashion.  Examples: Ideeli, VentePrivee, Gilt Group, HauteLook.
  • Crossover.  A blend of Brick & Click stores.  Examples: Lavinia (wine), FarFetch (independent fashion labels), Cyrillus (fashion)… and, of course, we can say the same for all major distribution chains with their own eCommerce site (à la Walmart, Carrefour, etc.).
  • Personalization. The online nature of sites allows for a greater ease of personalization. Examples: There are a number of variations on this theme. In the tech space, you can order a custom-built computer with DELL or Apple (where you can also order your name on the back of your ipod). In design or interior decoration, you have Made or MyFab. Or again ShirtsmyWay or DesignYourOwnDishes (coming soon).
  • Immaterial going Physical.  In other words, making an electronic version into something real.  Examples abound: Other than the likes of foto.com, shutterfly and snapfish that turn your digital photos into photo albums and personal calendars, you have Blurb to print your own book, Flipstory to convert YouTube videos into real flip books, or again TasteBook to create personalized recipe books.
  • Facebook or Social Commerce. Putting up an f-Commerce site is another option, still largely uncharted and unproven. Examples of note: Asos, 1-800-Flowers, Coca-Cola, Mark.Girl Cosmetics. You also have some companies doing partial offers on Facebook, such as Victoria Secrets which have used their fan page to offer gift vouchers.

The Road Ahead

The growth seen so far is skewed towards metros driving a major chunk of internet users and penetration. However, there shall now be growth from tier II and III cities due to the urbanized pockets of the population in these cities.

Other demographics such as age, education and income also play a crucial role for tier II and III cities. These are the markets that shall be the catalyst of growth and hold immense potential for eCommerce marketers. The top eight metros account for 70-75 per cent of the current total internet penetration in India. However, SEC C, SEC D and SEC E districts and cities will expectedly drive the future growth of eCommerce buyers in India.

Mobile tele-density is also expected to grow further from non-metros, with major cities already having more than 100 per cent mobile tele-density. Potential of tier II and III markets is no longer a secret. With huge traction for eCommerce coming from these cities and growing demand for regional content, these markets are already hot spots for a number of brands.

Going forward, these markets will need as much attention as the metros in media plans because that is where majority of India’s internet savvy population shall dwell. An exciting statistics is that as many as 68 million internet users are from rural India  and the eCommerce industry is waking up to the potential of the rural Indian who often has enough money but lacks access to goods.

India’s internet users are not all that active, but an increase in logins will hopefully go with the sharp rise in smartphone and tablet usage. In 2013, the sale of smartphones grew by 180%. Along with this rise in devices, Indian users can look forward to expanded 3G and 4G broadband coverage, making it even more convenient to shop on-the-go.

India’s demographics are another aspect of India’s e-commerce revolution. Around 450 million people in India are between ages 15-34, which is a high proportion of working-age adults in comparison to dependents (children and seniors). This trend will continue, with a report by the IRIS Knowledge Foundation and UN-HABITAT estimating that by 2020, 64% of India’s population will be in the working age group, making it the world’s youngest country (or country with the world’s youngest population).

This allows for more disposable income to be directed to the online retail sector, and survey data shows the following trends:

  • Young Indians are spending about 16% of their disposable income on eCommerce
  • Only 30 percent of online buyers in India are drawn to Internet shopping for discounts.
  • A higher proportion (37 percent) valued the comfort of shopping from home
  • 29 percent said that they appreciated the expanded variety of products available online compared with what is available at brick-and-mortar stores.

In contrast to more advanced eCommerce markets, digitally influenced consumers in India rely on company websites for detailed product information as commonly as they refer to third-party sites for comparative research and online purchases. The average Indian customer doesn’t known how to get discounts on e-com sites, nor how to search for better products on the internet.  He is not even aware of how to get true reviews for product on search engines like Google and Bing to get the true worth of his money that is spent on e-commerce sites. Also, it is highly worrisome that there is no clear differentiation between the hundreds of eCommerce sites in India.

Foreign Direct Investment (FDI)

India could allow global online retailers such as Amazon.com Inc. to sell their own products as early as June, 2014, removing restrictions that have held back competition in one of the world’s biggest, and most price-sensitive, retail markets. The decision, which is likely to be announced in or along with the budget, is one of the first tangible signs of economic reform by the government of Prime Minister Narendra Modi. A more robust online retail sector would spur manufacturing and consumption, helping revive an economy that has grown at below 5% for two years, the longest period of sub-par expansion since the late 1980s.

Heavy investments to the tune of tens of billions is required to fast track the growth of this industry. FDI will boost infrastructure development and spur manufacturing facility besides bringing in the much needed investments. FDI would not only help companies scale up fast but also identify and create more private label brands, thus helping them (whom) decrease their dependency on vendors. It will offset the funding problems of several local businesses that often perish because of cash flow drying up.

If approved, the policy will not only allow foreign retailers to expand in India, but will also give local online businesses access to much-needed foreign capital. The companies vying for a bigger slice of the Indian online retail market include the country’s largest e-tailer Flipkart, marketplace Snapdeal and fashion retailers Myntra and Jabong. All retailers in the business are losing money due to high costs owing to high-voltage advertising campaigns, heavy discounts and an underdeveloped logistics network. Only 18 of the 52 eCommerce start-ups in India—which raised $700 million in venture capital funding in the three years ending 2012—were able to raise follow-on investments last year.

For foreign brands, particularly smaller ones, this policy can make entering or testing new markets far easier; no rents to pay, salespeople to hire, and fewer logistics hassles to manage. While Amazon and other global retailers have for many years been able to ship cross-border, many of the newer eCommerce sites are locally owned and operated from the markets they sell in. That means some can offer better logistics help and market research advice to brands listing on them.

Logistics

Up to 90% of goods ordered online in India are moved by air, which pushes up delivery costs by around half, according to several online retailers and logistics companies. Road and rail transport networks remain woefully underdeveloped and entangled in graft and bureaucracy.

Logistics remains the biggest barrier to growth and transport troubles are just the tip of the iceberg. The biggest advantage of eCommerce is the instant nationwide reach it enables sellers of all sizes, however, it is the delivery of that opportunity that requires significant focus and investment from the industry.

With India’s perennial infrastructure failings far from being resolved, most e-tailers are focusing their investment on setting up their own capital-intensive logistics businesses.

Flipkart is aggressively growing its logistics arm E-Kart. To reduce air shipments, Flipkart is setting up regional warehouses and signing up more suppliers across the country to ensure customers get orders delivered by the nearest supplier. Having its own network now means Flipkart can handle delivery rescheduling requests better, manage product returns faster and help customers exchange products, services that are time-consuming when handled by a third-party operator.

Amazon, the world’s biggest online retailer, is pumping up the capacities at Amazon Logistics. That’s in addition to existing partnerships with third-party logistics firms including GATI , Blue Dart and FedEx Corp. In addition to building its own warehouses, it is trialing (?) using neighbourhood grocery stores and petrol stations as delivery points. It also negotiated agreements with the Indian Postal Service to reach far-flung places in the country.

For the many Indian e-tailers that lack the deep pockets of Amazon and Flipkart, air freight and couriers are not an option. Instead, they are altering their packaging and product lines to ensure they can reach customers via road and rail. Pepperfry, one of India’s largest online furniture and home products retailer, is training suppliers to make knock-down, foldable products, similar to IKEA furnishings.

Industry consultants say companies like Pepperfry that are able to adapt their business to the ailing infrastructure are better placed to take advantage of the expected eCommerce boom. India’s roads and railways are not going to get better anytime soon, and commercial airlines can only carry so much cargo. The roads are where the action is going to be when volumes start surging. Innovations dealing with logistic challenges will be of immense help to this upcoming infrastructure.

Unlocking Human Potential

There is still huge untapped potential in India’s human capital. This means productivity will continue to rise in India. The Indian urbanization rate is only at 31.3%. The rate of growth in urbanization is a respectable 2.47%.

Most of the work force is still trapped on agricultural land, which only produces 17% of the country’s GDP. Service is the biggest sector in the Indian economy, with 31% of the work force. The industrial sector is underdeveloped and there is need for better infrastructure.

In India, the literacy rate is quite high in the male population, while Indian women deserve the chance to gain a higher level of literacy. With a focus on services, IT and engineering, India will continue to generate more talent inside the country. With English as a compulsory language, India will continue to be a formidable force in global services.

India’s PM Mr. Modi says, “There is no need to fear competition, and the way for India to move forward faster is to embrace that competition with open arms”. Modi’s government will elaborate on investment guidelines as well as a foreign ownership cap in the coming months. The rollout of the policy will be mandatory for all states.

Conclusion: The rapidly expanding digital influence in India is a call to action for FMCG companies. By acting quickly and decisively, these companies can mitigate the risk of being disintermediated from their customers by e-commerce powerhouses as has happened in the U.S. and China. To capitalize on this growing market, companies must do the following:

  • integrate their online and offline strategies,
  • engage consumers and build their loyalty,
  • refocus ad spending,
  • actively manage the Internet channel,
  • mind the gaps in which online activity is low,
  • and optimize the mobile experience.

Today, India’s eCommerce numbers tell only part of the story. Far more important is the bigger picture: the relationship between online activities and offline sales, as well as the powerful influence that the Internet has in shaping the brand preferences and buying decisions of Indian shoppers.

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