Indian e-commerce is tipped for huge growth and domestic players are seeking to tap into this with a raft of IPOs.
When it comes to e-commerce, many would be forgiven for not looking beyond the feeding frenzy taking place in China. JD.com, Alibaba and others are all grabbing the headlines with some eye-watering IPOs—Alibaba is seeing valuations of up to US$220bn. But Indian e-commerce firms, with slightly more modest valuations, are a causing a stir of their own with a raft of hopeful firms looking to emulate Alibaba’s success.
To call the Indian e-commerce market nascent is something of an understatement. According to the Internet & Mobile Association of India (IAMAI) Indian e-commerce rose by one-third to reach Rs62,967 crore in 2013 (about US$10.5bn). This is tiny compared to Chinese e-commerce sales which passed the US$300bn mark over the same period. In addition to this the IAMAI reported that 71% of Indian e-commerce was for travel. When it comes to retail the figure stands much lower.
Indian online retail is hampered by many developmental challenges. Poor infrastructure, low internet penetration and difficulties with basic enablers like online payments mean that e-commerce is only viable for a small proportion of consumers. The number of internet users is estimated by the IMAI at 243m, a large number in itself, but less than a quarter of the population. More significant is the rapid growth in mobile internet users: currently estimated at 185m, opening the door for mobile commerce (m-commerce).
Equally, as a nation of shopkeepers, many Indian consumers continue to find it more convenient to make purchases in local stores than to venture online. This sentiment is compounded by potential pitfalls in all stages of online transactions, whether it is connectivity, the trustworthiness of the retailer, the authenticity of the goods sold, the viability of delivery or the means to make payments securely.
Low incomes are another factor. Only around 6% of Indian households have incomes in excess of US$10,000 per year and almost half of households earn less than US$5,000. With annual per capita consumer expenditure of around US$970, margins on any e-commerce venture will remain tight. Finally regulation presents another hurdle, especially to foreign entrants who cannot sell directly but can invest in marketplace-driven ventures which host and fulfil for domestic third-party sellers.
Despite this, progress is being made and it is rapid. Current excitement around Indian e-commerce comes precisely because it has so much future potential. Nasscomm estimate that e-commerce sales will reach US$100bn by 2020, creating up to 50,000 jobs in the process—although global tech consultancy Forrester Research have set a more modest forecast of US$16bn for online retail by 2018. Expectation has led to a host of firms—domestic and foreign—expanding aggressively to ensure they are well placed when the market takes off.
Snapdeal and Flipkart, the two largest domestic players have both been busy of late. Snapdeal, a marketplace seller which boasts 25m registered users, hopes to emulate Alibaba’s success and has set an annual transaction target of US$1bn on its platforms by the end of 2015. Flipkart which merged with Fashion portal Myntra in May sees apparel retail as the next online area of growth, targeting a 60-70% share of Indian online fashion. Both firms have been tipped to hold IPOs in the relatively near future along with smaller firms like Jabong, another fashion retailer.
Much of the current frenzy of activity could also be due to timing. Despite closing off avenues of foreign investment in multibrand retail, there are expectations that 2014 will see liberalisation taking place to allow foreign ownership of e-commerce ventures. WalMart has already announced significant investment plans in its Indian technology business in anticipation of a relaxation of regulation. Amazon and eBay both have a foothold in India. Amazon, initially through its Junglee.com portal, but more recently under its own brand, has been operating a marketplace in India since 1998. EBay meanwhile has a modest direct presence but has also invested heavily in domestic firms, notably Snapdeal.
In fact foreign investment has been a key driver of their expansion. A study by Care Ratings estimated that between January 2010 and June 2013 Indian e-commerce ventures received US$1.3bn in foreign investment. In May Snapdeal raised over US$100m from investors, to add to earlier investments of US$134m from eBay and others. Jabong was recently backed to the tune of US$100m by investors including the German incubator Rocket Internet. Last year Flipkart was forced to switch to a marketplace selling model because the level of foreign investment had attracted the attention of Indian regulators.
Growth but not profit
As with multibrand retail, anticipation over the potential of Indian e-commerce could still come to a sticky end. Despite the investment Indian e-commerce players have yet to see their activities move into the black. Rapidly rising sales have done little to address the high capital investment required to bed in e-commerce. Even from a marketplace perspective Indian e-commerce players have had to develop fulfilment centres and their own click and collect channels with local businesses. Prompt deliveries are still reserved for larger cities and attempts to target smaller communities by Snapdeal will no doubt increase sales volumes, but also impact on margins.
There is also no cast-iron guarantee of restrictions on ownership easing. Powerful lobbyists such as the Confederation of All India Traders, one of the country’s largest trade bodies, are voicing strong opposition to liberalisation plans. A protest rally against e-commerce liberalisation is due to take place in August, and in India protests can have a tangible impact on policymaking. Even the ill-fated attempt to liberalise FDI in multibrand retail under the previous government was beset with a quagmire of bureaucracy and clauses. There is no guarantee that e-commerce liberalisation will be any more workable for the players involved, although it will take a lot to dampen the current optimism around India’s e-commerce future.