Life below 96 stairs!!: 2015

Dissector: eCommerce

By: Shashank Kale_IM22_1502186

Summary

In the last few years, growth rates have begun to slow in mature markets and retailers have had to look beyond their borders to find sustainable opportunities that allow them to meet growth targets. While many expansion efforts have traditionally focused on new brick-and-mortar store openings, retailers have recently turned to a new growth engine by entering global markets through eCommerce. In today’s competitive global marketplace, eCommerce provides a lower risk, faster avenue to enter, test, and penetrate international markets. When properly executed, this consumer-focused approach will go a long way to differentiate brands and build customer loyalty.

With consumers becoming increasingly technologically-savvy, they demand the ability to seamlessly interact with retailers and shop through multiple channels. Thus, a digital channel can both complement an existing presence or allow a retailer to quickly test and expand its footprint into new markets, enabling retailers to better control inventory, target customers, and drive sales.

International eCommerce key trends and outlook

Since 2009, global eCommerce growth in new markets has significantly outpaced the U.S. as well as other mature markets. Growth in mature markets like the U.K., Japan, and Western Europe is slowing to make way for emerging markets in Latin America, Eastern Europe, and most notably, Asia Pacific, which has shown the fastest regional growth and strongest market base over the past three years. Looking forward to 2014 and beyond, these trends are expected to continue

Ecommerce and India:

E-commerce has lately become a keenly watched sector in India also, especially with a handful of home-grown successful ventures being valued at billions of dollars. While domestic players Flipkart and Snapdeal rule the market, the sector has also caught the fancy of global giants like the US’ Amazon and China’s Alibaba — all are competing hard for a bigger share of the cake.

The country’s e-commerce market was worth $2.3 billion in October last year and retail consultancy Technopak has estimated its value will increase more than 10 times to $32 billion by 2020. More, since the online market at present accounts for less than five per cent of India’s retail business, there still is a huge untapped space in e-commerce. The $15-billion valuation that Flipkart is eyeing in its next round of funding seems to reflect this potential, and aspirations of the existing and start-up e-commerce ventures.

History and future (India):

India’s e-commerce potential as we know it today was first spotted by the $18-billion (revenue) US firm eBay, which entered the country in 2004 — three years before Flipkart’s low-key start as an online bookseller — by acquiring local auction platform Bazee.com for about $55 million. It was eBay that brought the concept of online marketplace, where sellers and buyers engage directly.

However, neither eBay nor the hit shopping sites of the 2000s could get a first-mover advantage, despite their healthy parents, technology, favourable business model and brand equity — they were ahead of their time, say some experts. At the time eBay entered India, less than 10 million people in the country had access to the internet, and most of them were wary of shopping online, for want of clarity and trust.

By comparison, Flipkart was reported to have grown about 476 per cent in value of goods sold during the period. According to market estimates, eBay India sold goods worth Rs 1,000 crore in 2013, not much less than Flipkart’s Rs 1,180 crore that year. But their growth rates varied vastly.

The increase in disposable income levels has led to bigger online order sizes, and changes in lifestyle. Shoppers prefer online channels to physical ones, for saving time and wider variety.

At the same time, growth has been driven further by a rapid proliferation of technology — increasing adoption of devices like smartphones and tablets, and access to the internet through broadband and 3G data connections. Another fillip is likely when 4G telephony becomes a reality. These enablers were not there when the original shopping sites had started their operations back in the 2000s.

Market share of Ecommerce:

Since the eCommerce industry is fast rising, changes can be seen over a year. The sector in India has grown by 34% (CAGR) since 2009 to touch 16.4 billion USD in 20142. The sector is expected to be in the range of 22 billion USD in 2015.

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.

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. 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.

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

Ecommerce 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.

• Self-owned inventory is a model where the eCommerce player owns the inventory. The model provides better postpurchase customer experience and fulfilment. 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.

Investment In e-commerce

With the new government being elected, business confidence has significantly improved. In 2014, investors aggressively funded the eCommerce sector due to strong growth prospects. Apart from the traditional online formats of retail and lifestyle, newer online business segments such as classifieds, real estate, grocery and healthcare were also tapped.

The eCommerce businesses will continue to attract investor interest. Several of India’s blue-chip PE firms, which previously avoided investing in eCommerce, are now looking for opportunities in the sector. The focus is mainly on ancillary service providers—companies involved in support functions ranging from delivery, logistics and payments—with investments largely driven by the relatively lower valuations and smaller amounts of capital required.

Challenges in front of Ecommerce in India:

Internet penetration is low.

Internet penetration in India is still a small fraction of what you would find in several western countries. On top of that, the quality of connectivity is poor in several regions. But both these problems are fast disappearing. The day is not far when connectivity issues would not feature in a list of challenges to ecommerce in India.

Payment gateways have a high failure rate.

As if the preference for cash on delivery was not bad enough, Indian payment gateways have an unusually high failure rate by global standards. Ecommerce companies using Indian payment gateways are losing out on business, as several customers do not reattempt payment after a transaction fails.

Logistics is a problem in thousands of Indian towns.

The logistics challenge in India is not just about the lack of standardization in postal addresses. Given the large size of the country, there are thousands of towns that are not easily accessible. Metropolitan cities and other major urban centers have a fairly robust logistics infrastructure. But since the real charm of the Indian market lies in its large population, absence of seamless access to a significant proportion of prospective customers is a dampener. The problem with logistics is compounded by the fact that cash on delivery is the preferred payment option in India. International logistics providers, private Indian companies, and the government-owned postal services are making a valiant effort to solve the logistics problem

Overfunded competitors are driving up cost of customer acquisition.

The vibrancy in the Indian startup ecosystem over the past couple of years has channeled a lot of investment into the ecommerce sector. The long-term prospects for ecommerce companies are so exciting that some investors are willing to spend irrationally high amounts of money to acquire market share today. Naturally the Indian consumer is spoiled for choice. However, this trend has reversed as investors are getting worried about slipping further down a slippery slope, and we can expect more rational behavior in 2014.

Cash on delivery is the preferred payment mode.

Low credit card penetration and low trust in online transactions has led to cash on delivery being the preferred payment option in India. Unlike electronic payments, manual cash collection is laborious, risky, and expensive.

Examples and working models:

1. Flipkart : (inventory-led model)

Flipkart has started as a price comparison online portal with an initial investment of 8,000 USD and later turned into an e-retailing giant which recently ticked the 1 billion USD in gross merchandise volume. It started with a consignment model where goods were procured on demand and turned into inventory e-retailer supported by registered suppliers since it provided better control on the logistics chain.

Flipkart established warehouses in Delhi, Bangalore, Mumbai and Kolkata managing a fine balance between inventory and cost of delivering goods. Facing difficulties from the 3PLs in the form of higher delivery cost, late deliveries and faulty products delivered resulting in return and customer dissatisfaction, it has started its own logistics arm named e-Kart. E-Kart provides a robust back-end support to Flipkart and ensures timely deliveries. To achieve the economies of scale, recently e-Kart started providing back-end support to other e-retailers. It has consolidated the market and added strengths by acquiring We Read, Mime360, Chakpak.com, Letsbuy. com and Myntra along the way. The company employs around 13,000 employees and plans to add 10,000 to 12,000 more in next one to three years after a recent acquisition of Myntra.

2. Amazon (Marketplace models)

Amazon started practicing the market place model by launching its site in early 2013 in India. It started registering electronics goods sellers and ended FY 2013 offering nearly 15 million products. Amazon India has two fulfillment centers in Mumbai and Bangalore and plans to start five new fulfillment centres across the country. Known for its strong last-mile delivery network, Amazon India has set up a logistics arm named Amazon Logistics and started offering same day delivery

References and further reading:

1. http://www.business-standard.com/article/companies/the-curious-case-of-india-s-e-commerce-115042500594_1.html

2. http://www.business-standard.com/article/companies/snapdeal-aiming-to-race-past-flipkart-by-year-end-115021800055_1

3. html http://www.business-standard.com/article/companies/indian-e-commerce-sector-to-turn-operating-profitable-by-2020-report-115041500860_1.html

4. http://www.pwc.in/assets/pdfs/publications/2014/evolution-of-e-commerce-in-india.pdf

5. https://www.pwc.in/en_IN/in/assets/pdfs/publications/2015/ecommerce-in-india-accelerating-growth.pdf

6. http://www.ey.com/IN/en/Industries/Technology/Re-birth-of-e-Commerce-in-India

7. http://blogs.pb.com/ecommerce/2013/12/23/8-challenges-ecommerce-india/

8. http://www.bloombergview.com/articles/2015-05-08/india-s-e-commerce-boom-may-turn-to-bust