Giants like Amazon and Alibaba are fueling the growth of e-Commerce sector in India

The eCommerce sector has seen an unprecedented growth in 2014. Though access to the internet through broadband, 3G, etc, has led to an increase in the online consumer base, but still only 19% Indians use the internet. So there is enough potential for growth here. Furthermore, players such as Flipkart and Snapdeal and the huge investor interest around these companies displays immense potential of the Indian market

–  Compiled by Preeti Gaur

E-Commerce in India has grown by 34% (CAGR) since 2009 to touch 16.4 billion USD in 2014. The sector is expected to be in the range of 22 billion USD this year. eTravel is the most popular form of eCommerce, followed by eTail which essentially means selling of retail goods on the internet conducted by the B2C category. Read further to know factors that can fuel growth in this sector.

Currently, eTravel comprises 70% of the total eCommerce market. eTailing, which comprises of online retail and online marketplaces, has become the fastest-growing segment in the larger market having grown at a CAGR of around 56% over 2009-2014. The size of the eTail market is pegged at 6 billion USD in 2015. Books, apparel and accessories and electronics are the largest selling products through eTailing, constituting around 80% of product distribution. The increasing use of smartphones, tablets and internet broadband and 3G has led to developing a strong consumer base that is likely to increase further. This, combined with a larger number of homegrown eTail companies with their innovative business models has led to a robust eTail market in India roaring to expand at high speed.

Low Internet Penetration: Huge Growth Potential

A significantly low (19%) but fast-growing internet population of 243 million in 2014 is an indicator of the sector’s huge growth potential in India. It is evident that in absolute terms India’s internet users are short by only 36 million as compared with 279 million in the US and higher than that in Japan, Brazil and Russia. However, in relation with its population, only 19% Indians use the internet. This indicates the potential of internet use in India and as internet penetration increases, the potential of growth for the eCommerce industry will also increase.

High demographic dividends

According to Ecommerce Europe, country-wise, the US, UK and China together account for 57% of the world’s total B2C eCommerce sales in 2013, with China having total sales of 328.4 billion USD. As against this, India had sales of only 10.7 billion USD, 3.3% of that of China in 2013 with fifth position in Asia- Pacific. This is despite the fact that India enjoys high demographic dividends just like China. India’s internet penetration with total e-households at 46 million against China’s 207 million is one of the reasons behind India’s poor B2C sales growth.

An analysis of the demographic profile of internet users further testifies that eCommerce will rise rapidly in India in coming years. Around 75% of Indian internet users are in the age group of 15 to 34 years. This category shops more than the remaining population. Peer pressure, rising aspirations with career growth, fashion and trends encourage this segment to shop more than any other category and India, therefore, clearly enjoys a demographic dividend that favors the growth of eCommerce. In coming years, as internet presence increases in rural areas, rural India will yield more eCommerce business.

Entry of Giants

The entry of eCommerce behemoths such as Amazon and Alibaba, is going to intensify the competition further. Both these international players come with deep pockets and the patience to drive the Indian eCommerce market. Also, their strong domain knowledge and best practices from their international experience give them an additional edge. Additionally, these companies have been part of markets where they have seen the eCommerce market evolve and are aware of the challenges and strategies to address issues thereof.

Indian companies realize this, and are therefore aiming to continue their focus on expanding sellers and selection on their platforms, innovating on multiple customer touch points, and providing seamless and rapid delivery services in order to compete with the international entities. Competition is expected to continue, with these eCommerce companies experimenting with different ways to attract customers and increase online traffic.

Digital India Initiaive

The Indian government’s ambitious Digital India project and the modernization of India Post will also affect the eCommerce sector. The Digital India project aims to offer a one-stop shop for government services that will have the mobile phone as the backbone of its delivery mechanism. The programme will give a strong boost to the eCommerce market as bringing the internet and broadband to remote corners of the country will give rise to an increase in trade and efficient warehousing and will also present a potentially huge market for goods to be sold.

For India Post, the government is keen to develop its distribution channel and other eCommerce related services as a major revenue model going ahead, especially when India Post transacted business worth 280 crore INR in the cash-on-delivery (CoD) segment for firms such as Flipkart, Snapdeal and Amazon. Both these projects will have significant impact on increasing the reach of eCommerce players to generally non-serviceable areas, thereby boosting growth.

India’s overall retail opportunity is substantial, and coupled with favoured demographics (young population, rising standards of living and upwardly mobile middle class) and a growing internet user base, strong growth in eCommerce is expected. From an investment perspective, the market is a primarily minority stake market, with maximum traction in early-stage deals. Such early stage funding will help companies develop a strong foundation to start from. With such strong market prospects and an equally upbeat investor community, many more eCommerce companies from India are expected to enter the coveted billion-dollar club.

Box 1

Key market factors to be evaluated before entering a new eCommerce business

To achieve their vision, eCommerce companies will need to understand the intricate landscape of new markets in addition to their own internal capabilities and limitations.

The following factors must be considered:

•    Market size: Before moving too aggressively into a new market, it is important to consider how sizable the overall opportunity is.

•    eCommerce readiness: It is essential to fully understanding the payment and logistical infrastructure, consumer behaviour, retail opportunity and technological developments.

•    Scope of growth: It is also important to look at the internet penetration, demographics of the online buying population and understand which phase of development each market is in.

•    Barriers to entry: Players should understand the regulatory environment and connect with solution providers, content distribution networks, and digital agencies.

•    Competition: There is also a need to do an in-depth assessment of what competitors are doing, their online strategy and the nature of each offering.

Online business models

To get the maximum benefit from eCommerce business, a large number of companies are adopting different innovative ideas and operating models including partnering with online marketplaces or setting up their own online stores.

Some key operating models include the following:

•    Marketplace and pick-up & drop is a model where sellers often partner with leading marketplaces to set up a dedicated online store on the latter’s website. Here sellers play a key role of managing inventory and driving sales. They leverage on high traffic on the marketplaces’ website and access their distribution network. However, the sellers have limited say on pricing and customer experience.

•    Selfowned inventory is a model where the eCommerce player owns the inventory. The model provides better postpurchase customer experience and fulfillment. It provides smoother operations due to ready information on the inventory, location, supply chain and shipments, effectively leading to better control over inventory. On the flipside, however, there are risks of potential mark downs and working capital getting tied up in inventory.

•    Private label reflects a business where an eCommerce company sets up its own brand goods, which it sells through its own website. This model offers a wide-ranging products and pricing to its customers and competes with branded labels. Here, margins are typically higher than third-party branded goods.

•    White label involves the setting up of a branded online store managed by the eCommerce player or a third party. The brand takes the responsibility of generating website traffic and providing services by partnering with payment gateways. It helps build trust, customer affinity and loyalty and provides better control of brand and product experience.