E-Commerce Market in India

The rapid growth of internet and mobile telephony in the developed and developing countries has been responsible for the transition in the modes of transaction over the past decade. The growth of internet and mobile telephony has reciprocally been instrumental in the development of new business models, namely e-commerce.

Global spending in online B2C1 transactions is estimated to be about US$1.2 trillion (2012) and the spending in online B2B transactions is estimated at about US$12 trillion (2012)2. The global e-commerce market has grown rapidly. However, the growth rate has not been homogeneous across jurisdictions, attributed to different market dynamics such as development of supporting infrastructure, regulatory framework and cultural ethos of people. The USA, UK, Japan and South Korea are the major e-commerce markets with a cumulative market share of more than 50% (2011)3.

Emerging markets such as Brazil, China, Russia, Mexico and India are expected to witness high growth in the e-commerce sector subject to a precipitated economic

1 B2C - Business to Consumer 2 BuddeComm Research

3 Forrester Research

development, surge in internet and smartphone users.

E-Commerce in India E-commerce in India is steadily mushrooming on account of favorable developments in the supporting ecosystem and other humane aspects inter alia the hectic pace of urban life, rising fuel prices and parking space constraints at retail localities. Retailing in the cyberspace has gained acceptance among a section of Indian e-urban population.

The “online emptor” space is magnifying in a multitude of activities such as purchase of travel, movie, accommodation reservations, reading material, matrimonial services, electronic goods, fashion accessories, and even grocery.

The B2C/C2C4 e-commerce market has grown at about 50% CARG5 over the past 3 years to capture a market dimension of approximately US$9.86 billion in 2011 and the B2B e-commerce market is estimated to be approximately US$48.8 million in 2011. 6

4 Business to Consumer / Consumer to Consumer 5 Compounded Annual Growth Rate

6 “Digital Commerce,” IAMAI reports, March 2011,

p.4;

Evolution of E-Commerce in

India The first wave of e-commerce in India (from 1995 to 2000) was marked by B2B directories being emulated by the classified services of the online matrimonial and recruitment services.

The entry of low-cost carriers in Indian in 2005 promulgated the second wave in e-commerce as consumers started adopting the internet for selection of travel destination and reservation with regard to the same. The success of the online travel segment helped increase the Indian consumer’s acceptance of the online media for other retail requirements, leading to the development of the online retail fora.

The growth of online retail was partially driven by the metamorphosis in urban consumer lifestyle and need for convenience. Online retail in India developed further with the launch of multiple online retail websites. These new businesses were driven by entrepreneurs who looked to differentiate themselves by enhancing customer experience and establishing a strong market presence, collaterally.

Furthermore, logistics infrastructure, internet penetration, charge card penetration, mobile telephony and mobile wallets, have all helped the second wave of e-commerce entrepreneurs in India to develop a successful business

Characteristics of the E-Commerce Market in India The B2C e-commerce sector in India can be split into two broad categories: travel and non-travel. Online travel is the largest B2C e-commerce segment in India, accounting for approximately 81% of the e-commerce market revenues in 2011. The online non-travel market is further segmented into e-tailing, digital downloads, financial services and classifieds 7 The non travel segment of the e-commerce market is expected to drive the next wave of growth, backed by the flurry of B2C e-commerce platforms targeting all the niches in the market today.

The fragmented nature of the travel industry has motivated the growth of the online travel market in the country. The online travel market has grown rapidly at a CAGR of 52% from approximately US$1.5 billion in 2007 to approximately US$8 billion in 20118. The OTA 9 market penetration has also increased from 2.2% in 2005 to 28% in 2011.10 Online ticket reservation is the largest segment in the online travel market with about 90% share of the US$8 billion pie. Online air travel reservation is the most prominent segment with about 50% penetration. This segment of the market faces threat due to an increasing

7 A short ad in a magazine (usually in small print)

and appearing along with other ads of the same

type 8 ResearchonIndia, & MakeMyTrip limited 9 OpenTravel Alliance 10 ResearchonIndia, & MakeMyTrip limited

of competition and reduction of commission structure for travel reservation agents. Facilitation of accommodation reservation in India is the close target space after travel reservation, given the high commission margins (approximately 25-30%), though the unorganized nature of the small to medium sized accommodation facilities poses a challenges.

Analyzing the non-travel, e-tailing market in India, contributed to approximately US$572 million that accounted for ~ 6% of the e-commerce sector revenues in 2011. Within e-tailing, consumer electronics emerges as the most traded product category online accounting for about 50% of all online transactions.

In bullion driven economies like India Cash-on-Delivery (COD) payments have helped Indian consumers overcome their inertia of online purchase. COD has expanded the customer base of e-commerce companies beyond charge card users and has attracted consumers like students who do not have charge cards but spend maximum time on the internet compared to other age groups to use the media to purchase books, music, software, fashion accessories amongst other products in the country.

Group buying has seen a phenomenal rise in terms of the magnitude of consumers visiting and availing the group/couponing deals. The market size of the ‘deals' segment was estimated to be US$76.3 million in 2011

The online classifieds market grew at a CAGR of 33% (2008-11) and is currently valued at approximately US$ 292 million. Owing to the concentration of keen online advertisers in urban locations, online classifieds are mainly a phenomenon of the top 30 to 50 cities in India.

Drivers of E-Commerce in India The discretionary spending in India is

expected to rise from 52% in 2005 to 61%

in 2015 and 70% in 2025. The annual

disposable income per household is

expected to increase at a CAGR of 5.1%

from 2005 to 2025

Around 40% of the internet users in India

are users in the age bracket of 25-34

years, who spend a significant time on the

internet and also are the working

population.

The Indian consumer is price-sensitive and

discounts are a key incentives to purchase

online.

E-tailers in India are providing various

value-added services such as free

shipping, product returns, product and

price comparison, user reviews and

demonstration videos, etc.

All these factors are driving the change in the

preference from offline to online retail among

the Indian population.

Challenges in Online Retailing The primary intention of a transaction even for an e-commerce company is customer satisfaction which promulgates offline, which brings a certain set of challenges.-

- Logistics: Logistics cost in India is among the world’s highest due to the poor physical infrastructure in India, which has forced online retailer to develop their in-house logistics capacities

- COD: COD is a double edged sword – Though COD assures sales, its implementation adds another layer in the supply chain in the form of cash handling. It increases the settlement period between the online retailers and the courier companies to 2-3 weeks, which stretches the cash collection cycle of online retailer, as well as additional reduction in revenues in the order of 1-2%.

- Tax: Non-uniform and multiple tax rates across states in India, has an impact on transfer of goods from one state to another.

- Touch-and-feel Factor: Most Indian consumers prefer to try/test/sample a product before purchasing it. The lack of touch-and-feel in online shopping can lead to issues such as wrong product sizes (shoes, clothing, and personal accessories) which forms a mental barrier for consumers to shop online.

- Stocking: Online retailers stock products by buying them from the suppliers. This results in additional risk in the form of inventory risk, as well as a need for SKU management and warehousing.

- The initial investment required to start an online venture is as low as a approximately US$10,000-20,000. This is making it easier for the entrepreneurs to secure funding easily. This has lead to a flurry of e-commerce players in the market with little or no differentiation

- Rapidly changing business models: Due to heightened competition and inability to sustain high costs, business models in the e-commerce sector have been changing rapidly. Hence, companies in the e-commerce space need to adapt to changing business models and innovate constantly to sustain their business.

- User Location: E-commerce market in India is mainly restricted to urban areas, with majority of business coming from urban areas.

- Language: Lack of vernacular content on the e-commerce websites is another reason for the low penetration in rural areas.

- Customer Acquisition Cost: Cost of customer acquisition is high due to lack of differentiation and zero switching cost.

Investments in E-Commerce

sector in India The requirement for funds, coupled with the

growth potential in e-commerce has made the

sector a favorite among venture capitalists

(VC). The e-commerce sector in India

attracted an investment of approximately

US$305 million in 37 deals from January 2011

to November 2011, which was 454% more

than the US$55 million raised from 12 deals in

the sector in 2010. The investments in the e-

commerce sector accounted for more than

20% of the overall VC investments in India in

2011.11 Further, deal sizes in the second round

and subsequent rounds have more than

doubled in 2011, compared to earlier years.

Future Outlook The culmination of the e-commerce era in

India is only at its alpha stage now. The road

with an inception of novelty has various

challenges to be addressed, and markets to be

tapped. E-commerce in India has hit only the

tip of the iceberg. The expansion of internet

user-base, increased broadband penetration,

introduction of 3G services, smart phone

penetration and progress in consumer ethos

have been the key facilitators of growth. India

looks to widen its e-commerce space with

improved logistics and physical infrastructure,

11 Businessworld.com website

increasing vernacular content, and the masses

attitude the market is expected to grow

manifolds.

About the Author

Anirudh Chari

Disclaimer

All views and opinions in this article are personal

and/or have been gathered based on extensive

research in the sector and personal interest. All

data points have been collected through secondary

research, informal industry contacts and I have not

undertaken any additional work to establish the

reliability of the sources or to evidence

independence of the relevant source. Wherever

sufficient information was not available in the

public domain, suitable assumptions were made to

extrapolate values for the same.

Anirudh has worked as a management consultant, for about 5 years and has had the opportunity to work on several

projects for Indian and International clients in the areas of Strategy Formulation, Validation & Implementation, Business

Planning, Entry & Expansion Strategy, Feasibility studies & Location Advisory and Market Assessment.

His work has entailed, advising several companies across sectors, such as, Telecom, Media & Entertainment, Mobile Value

Added Services, Information Technology, Infrastructure & Financial Services, Real Estate, Manufacturing, etc.

He has also been involved in a conceptualizing four entrepreneurial ventures; which have given him the exposure to

fundraising, funding requirement, negotiations with investors, return appetite for various categories for investors and

investments.

His most recent venture was in the E-Commerce market in India, some firsthand experiences of which have been

highlighted in this article.