How e-commerce will click in future

Things may not be as upbeat today as they were a while ago, but online businesses are only going to get bigger, says the industry as it firms up plans to cash in on the expected boom

Much of the second phase of the e-commerce boom in India, if one can call it that, will be automatic, say experts. Of course, new concepts, innovations and getting the business model right will be the enablers and growth drivers. Ankur Warikoo, CEO of Groupon India, a daily deal site, points out that India has entered the second phase of e-commerce and online shopping with only serious players left in the fray now. Others, both big and small, have either shut shop or have merged and consolidated. “The big churn has taken place and people have realised e-commerce is not child’s play.”



In the next two to three years, India can expect to witness a major change in the area, according to Warikoo. That is, there will be an entire generation that has grown up with the Internet at home and school ready to spend online by 2015 or so. For this generation, the Internet is the first point of contact and online shopping a given. This is in contrast to those who have made a transition to Internet and online way of doing things in their working life, having not been exposed to it while growing up, the Groupon executive explains. “We, that is the industry, won’t have to do much,” Warikoo says, adding that the Indian demography with the large chunk of young population, which has known Google, LinkedIn, Facebook and shopping online for years, is taking care of things.

Let’s look at the numbers. There are an estimated 100 million to 120 million Internet users in the country right now. Of this, 15 million to 20 million have performed online transactions. The remaining are just content consumers. According to industry projections, in the next two to three years, the number of active online people is set to grow to 300 million in India. Interestingly, that is the total population in the US, points out Narasimha Jayakumar, COO, HomeShop18. At that point, around 50 million to 60 million people are likely to make online transactions. In other words, that’s how large the online shopping population is expected to be. It will be almost equivalent to the UK population now, adds Jayakumar, to indicate the potential of e-commerce in India. Currently, India is the third largest Internet user country in the world after US and China, and the country’s rank in the pecking order may improve soon. As of now, the e-commerce sales value, excluding travel bookings, is less than 1 per cent of the total pie of an estimated $500 billion retail sale in the country. This works out to less than $5 billion. The projection is that e-commerce will grow to $15 billion by the year 2015.

* * *
Besides cashing in on the ‘age’ advantage, many e-commerce players are innovating in a way that would benefit both the consumer as well as the company. Payment, delivery of products, stocking and warehouse management are among the areas where new ideas and concepts are making inroads. HomeShop, for instance, is encouraging consumers to use credit and debit card, rather than cash upon delivery of products in many big cities. The shopper gets an additional discount if he/she pays by card, says Jayakumar. Some other online players like Flipkart and Jabong are also bringing swipe machines to the doorstep of the customer, though not across the country yet.

Wide use of cash is seen as a major roadblock in e-commerce and big players are trying to change that. In India, just about 30 per cent online shoppers are using cards, whether before or after delivery of products. Around 70 per cent of online shoppers are still paying cash on delivery. In US, over 95 per cent online shoppers are paying through cards.

The next level of innovation will be in the backend, according to Groupon’s Warikoo. There could be players who would come up and offer backend solutions, create warehouse and stock every e-commerce player’s products. Such a model would result in economies of scale and efficiencies, leaving the online companies to focus on their core job of marketing and selling products, he says.

The fact that many e-commerce companies in India have invested in own logistics network so soon after setting up business has been detrimental, says Warikoo. Amazon, the largest online shopping portal of the world, invested in logistics network many years after it started off, he adds.

‘Chhotu’ is one such enterprise — focused on the delivery system for e-commerce companies. Started in 2011, it also has a proprietary real time shipment tracking system. Then, there are others such as ‘Delhivery’ providing flexible logistics solutions to e-commerce companies, including last-mile delivery, warehousing and payment collection. Arun Sirdeshmukh, co-founder & CEO, Fashionara.com, which describes itself as a destination fashion site, agrees that many players have come up in the ancillary services of e-commerce. The services they offer range from managing delivery of products to payment gateways, leaving the e-commerce companies to do their core business.

According to Sirdeshmukh, it won’t be wrong to say that e-commerce companies in India will now make profits at a faster pace. The larger online base size and an increasing number of people finding e-shopping a viable option to buy things are among the reasons why e-commerce is likely to succeed from now on. While the fundamentals for online retail growth are strong in India, brand accessibility on the Net has also played a critical role, points out Sirdeshmukh. While many of the big brands are not available in smaller towns, e-commerce removes any such gap.

* * *

On whether e-commerce in India is going through a period of pang or revival of some sort, Ravi Arora, senior vice-president (marketing), Flipkart, says that almost every industry goes through a cycle that includes starting up, growth pangs, rapid scaling up and maturity. Banking, offline retail and telecom are some of the sectors in India that have seen this kind of evolution and eventual maturity in recent years, Arora points out. “E-commerce is no different; 2012 was perhaps the year which saw e-commerce hit an all-time high by going mainstream and grabbing consumer mind space. However, it will see its share of turbulence before things get stable,” he adds.

Flipkart’s Arora says that with improving Internet connectivity, a larger number of Indians will be able to shop online. “Tier 2 / tier 3 cities, in particular, and mobiles will be large drivers of this growth.” However, the metros and tier I cities are also yet to realise their true potential and should see good growth in the coming year, adds Arora.

Pointing at the high growth potential in the online market, Jaideep Wahi, director, Retail Services, Cushman & Wakefield, a leading consultancy, says that although the brand penetration is limited still, the large young population may help significantly increase the e-commerce sales.

New concepts, such as the recent Cyber Monday shopping festival, can help too. Organised for the first time the past week in India, Cyber Monday is a popular concept in the West and is held on the first Monday after Thanksgiving. While Google was the platform provider, 50 e-commerce companies ranging from products and travel to classified sites participated in the festival. Many of the companies reported brisk sales and stock got exhausted within hours of the festival taking off.

But a recent Microsoft study painted a gloomy picture. Data put together by Microsoft’s ‘India Accelerator programme’ says 193 e-commerce companies were rolled out till October, out of a total of 379 technology product start-ups. Of these 193 firms, 87 have shut shop, the study says.

Even so, Arvind Singhal, chairman, Technopak Advisors, a leading retail consultancy, told Business Standard in a recent interview that e-commerce, and not foreign direct investment (FDI), will be the only major disruption in the growth of independent stores in India. Pointing out that e-commerce has the potential to be disruptive for traditional retail, Singhal said it is a platform that could be owned by anybody, with no need for any physical infrastructure. “If we were to have this discussion three years from now, we won’t be talking about big versus small retail, because it would be online all over.”

Despite the projection that online could be disruptive for traditional retail in the next few years, immediate concerns remain. For instance, many e-commerce companies are under the scanner currently for their complex organisational structure, especially for attracting FDI through the alleged back route. The Enforcement Directorate is investigating leading e-commerce player Flipkart, among others, for the alleged violation of the Foreign Exchange Management Act (FEMA) rules. Flipkart has maintained that it is in compliance with the FDI rules.

An industry insider explains how companies are able to circumvent the FDI rulebook. While foreign investment is barred in e-commerce, that is in B2C businesses, there’s no cap on B2B. Taking advantage of that grey area, online retail or e-commerce companies are creating multiple companies for routing of foreign investment.

In a shocker to the industry, the government, while permitting up to 51 per cent FDI in offline multi-brand retail, announced in September that online companies will not be allowed to get any foreign investment.

The challenges, according to Jayakumar, include how to continuously attract new customers and how to acquire them in an effective way. More important, how do you keep a consumer happy to make him repeat transaction on the site while keeping the company financially viable. So, deep discounting that was so prevalent in Indian e-commerce must go, making room for full-price buys, experts point out.

Among the companies which ceased to exist this year include Lensstreet.com (online eyewear store) and Dealivore.com (a group buying site). Letsbuy.com was acquired by Flipkart. Analysts think many e-commerce companies are shutting down because investors are forcing consolidation.

Explains Warikoo of Groupon that about two-and-a-half years ago, many homegrown e-commerce companies started operation, enabled by institutional money coming from private equity, angel investors and incubator funds, among others. While a great deal of business started, many soon realised that the pace of growth of the e-commerce companies was not matching consumer demand. Also, a niche player like an online shoe-seller realised that he must sell clothes, toys and books too to get keen buyers. That, Warikoo refers to as the first phase of e-commerce when most of the players either changed their business model, shut shop or got acquired or merged!

Source: Business Standard