The State of Indian E-commerce; The Big Trends & Some Questions

Venture Capital firm Accel Partners has put together a good study on the e-commerce industry in India. Here are some of our thoughts on it.
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Venture Capital firm Accel Partners has put together a good study on the e-commerce industry in India. According to the study, online shopping of physical goods in India will grow to $8.5 bn in 2016 and the number of online shoppers in India will more than double to 40 mn. Take a look at the deck shared by Accel below. We are adding a few thoughts of ours to it.

Here are our notes.

Slide #5: Growth in Fashion

The fashion category, which doubled in sale last year, is expected to grow 400% in the next 3 years. Accel is projecting a GMV of $2811 mn for the calendar year of 2016 in this category.

E-commerce firm Koov’s which raised money from the junior exchange in London, had outlined a macro trend in its IPO filing. According to them

As private consumption drives India’s GDP growth, the retail market is set to reach $845 bn in size by 2017. The demographic shifts in India in recent years are very favorable for fashion retail, particularly e-commerce fashion retail. The median age of India’s population is 26 (significantly lower than western countries) and the growing middle class also helps the category.

With Flipkart, Myntra, Jabong and Snapdeal competing in the space, Fashion as a category will soon overtake electronics as the single largest selling category.

Slide #6: Growth in Mobile

By 2016, Accel is projecting a 27x growth from 2012 levels. Clearly, the e-commerce companies have seen this coming. Last year India overtook Japan to become the 3rd largest smartphone market in the world. Flipkart’s CEO Sachin Bansal feels that the company which has a GMV of $1 bn will be largely a mobile commerce company in the next 2-3 years. The company’s mobile strategy is also geared to tap that market. Others such as Snapdeal have also launched mobile apps. Last year in June, Snapdeal said that nearly 30% of its orders come from mobile, clocking a 10x growth. Most users come from metros and three fourth of such orders were cash on delivery.

Slide #7: Rise of EMI & Wallets

Based on the data from Accel’s portfolio companies and others, the VC firm anticipates Cash on Delivery to go down by 10% by 2016. The rise of mobile wallets will also aid this trend. As we’d written earlier, mobile wallets and electronic payment companies are making a comeback in India. Since October 2013 more than half a dozen mobile payments solutions companies including Livquik, emPay, Mswipe, iKaaz and Eashmart have raised funding.

Slide #8: Growth of Tier 2

Apparently, e-commerce is growing faster in tier 2 cities as compared to tier 1 cities. One reason could be the lack of options/ selection in such cities, where there is a need to address pent up demand. There are interesting models being tried out by companies like eDabba, to tap into the tier 2 market quicker. eDabba is setting up small kiosks (using a franchise model) from where customers can place orders.

Percentage wise, they could be growing faster because they are growing on a smaller base.

Slide #9: Headroom for Growth

As you can see, e-commerce is still a very tiny portion of total retail that happens in India. So yes, there’s a lot of headroom to grow. In categories like electronics, e-commerce has made good progress. But in others, there’s a lot more to be done. The friction between online and offline retailers will increase. There is also a need to establish greater clarity on various taxes for e-commerce companies early on. Otherwise, it might lead to retrospective changes that businesses hate.

Slide #14: Like China?

The study points out that the Indian market is likely to look like China in a few years. While there are similarities, one key difference is language. Unlike China, India’s online shopper is largely English speaking. So the chances of Amazon or a Walmart eating the lunch of homegrown e-commerce players are higher. Companies like Google believe that the next 300 million of Indian Internet users will be more comfortable in local languages. If that turns out to be true, moves like the launch of a local language support by companies like Snapdeal make sense. However, as we’d written earlier, it is just a hypothesis which could pan out either way.

Slide #15: Traffic to Revenue Gap on Mobile

While lots of people end up on a shopping site using mobile, they don’t seem to be buying enough. Accel figures that the reasons could be because mobile sites aren’t good enough and that marketing budgets aren’t big enough on mobile. Now this also means that there still are a lot of opportunities for startups to solve.

Slide #24: Low adoption of e-commerce in central & North East

North eastern states have poorer logistics infrastructure and access to cheaper goods (think tax exemptions). Bihar, Uttarakhand and Jharkhand have lower penetration of e-commerce, Accel points out. In fact companies like Flipkart have stopped delivering large COD orders in places like UP because people have been ordering ‘Just for fun’ and sending back the goods.

Slide # 29: India Far Behind Other BRIC Nations

Only 17% of Indians are online, while more than 40% of the other BRIC countries are online. Of these, only 9% shop online while greater than 30% shop online in the BRIC countries. We think that 17% is a very optimistic number (it could be much lower than this currently) but what is evident is the big online-offline divide.

While some e-commerce companies are trying a hybrid model to reach a larger audience, the jury is still out on whether the model will be successful. Offline retailers on the other hand, are also making an online push. Recently, offline retailers like Croma and Titan announced big online plans. Delhi’s Citywalk mall is also setting up an online marketplace for its tenants.

The big disparity between those Indians online and those who actually shop online could be because consumers usually research online, and buy offline. In April 2013, a study found that over 36 million Indians do their product research online before making an actual purchase.

As online companies have been offering better prices and pushing mobile apps aggressively, this trend is slowly seeing a reversal.  It is a common sight these days at malls: Customers scan the barcode of a product and compare it with online prices on their mobile devices. The trend, called showrooming, is picking up globally.

From logistics to broadband, infrastructure in India is seriously lacking. However, hope lies in the fact that mobile Internet is growing fast and the pan India launch of 4G will be a game changer.

The Big Question: Whither Profitability?

gmv funding

Evidently, e-commerce in India has great growth potential. But profitability seems to be a far cry for now. This is not just the case of e-commerce. Organized offline retail has also been a largely unprofitable business.

Clearly – from the slides themselves – offline is still king. By a huge margin. Even within that, unorganized retail trumps organized, and the latter has been struggling for over a decade to see profits. Real estate costs, an economic slump and cut-throat competition have ensured that break-even has gotten perpetually pushed out, and even operational profits have been a rare, elusive sighting.

The Indian audience is also fed on deals, deals and more deals. Assuming we are in a winner takes all market, iIs it worth burning so much money? When the free-party is over, will customers stick? Will online become that much of a habit once the deals disappear – offline still seems to be a huge presence in consumers’ lives and will continue being a challenge, especially if real estate pricing softens, as has been threatening to do so for a while now.

There’s a lot of opportunity for e-commerce. But there’s a whole set of challenges and unknowns that make the extrapolated growth curves less certain than the slides suggest.

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