An avid shopper, Hima Shukla, 29 years old, didn’t bother to visit market for Diwali (major Indian festival) shopping this year. Even the discounts offered by various retailers were not enough to change her mind. The reason for this was that the discounts offered by brick-and-mortar retailers paled when compared with discounts offered by online retailers.
“There was just no comparison. The discount offered by online retailers was simply unbelieveable. It just didn’t make any sense to visit regular market. In fact, I totally cut down on Diwali visits as well and had the gifts delivered at friends and relatives places,” elaborates Shukla.
She is not the only one. The rock bottom discounts offered by the online retailers this year managed to draw even their harshest critics to the platform. A prominent Indian etailer, Flipkart made record single day sales of Rs 600 crore in October this year. Backed by heavy investment funding and in an effort to garner maximum subscribers, online retailers like Myntra, Flipkart, Jabong and Amazon are offering mind blowing discounts to their customers.
The sector is witnessing a heightened merger and acquisition activity this year. In May, Myntra agreed to be bought by Flipkart for $330 million in the country’s largest ever e-Governance deal. Not just that, almost all the major e-commerce firms, Flipkart, Jabong, Pepperfry and Limeroad have announced fund-raisings this year.
However, this was not always the case. The scenario was totally different a few months back. Generally, people were unsure about online retailers and felt that they were fly-by-night kind of companies. They were also reluctant to share debit/credit card details on internet. The same people are now happily shopping through their mobile and tablets.
What really led to this change? Experts believe that the decision of the online retailers to offer cash on delivery was a game changer. This meant that a customer has the option of paying in cash once the product is delivered and he is satisfied. This coupled with frequent discounts offered by the companies enticed the consumer to at least try them out once.
“Rapidly changing consumer behavior towards technology adoption and Internet is one of the prime drivers of this boom. Besides that the demographic profile of the country favors a vast majority of young population, which is ready to try out new concepts,” says Ankur Bisen, Senior Vice President, Retail and Consumer Products, Technopak. The company is a management firm with focus on the Indian retail industry.
There are other reasons for this change in consumer behavior. There is a perceptible lack of modern retail penetration in brick-and-mortar format, especially so, in mid and small towns and cities. This implies that there is a gap between desirability and availability of retail outlets. The upcoming online retail outlets perfectly address this segment.
“Although e-tailing is still a small contributor to retail, accounting for only 0.4% of the overall market, it is on a rapid growth trajectory. It is projected that the ~USD 2.3 billion e-tailing market in 2014, will reach 3% of Indian retail i.e. USD 32 billion by 2020,” says the recently released report by Technopak.
The rise of online retailers can be compared to the dot com bubble at the turn of the century. As a cub reporter in Bangalore (Silicon Valley of India) at the time, I recall attending at least two website launches every week, with a number of them announcing significant funding from investors. What happened next is history. Is something similar in store for India’s online retailers?
“No, the trend of e-tailing’s growth is not a bubble. While one can question the viability of players in e-tailing to succeed in the long term, but the trend and so the business opportunity is here to stay,” says Bisen.
Experts also believe that discounts (many of them simply unviable) do not tell the entire story. Online retailers are able to offer discounts because they do not have brick-and-mortar infrastructure to maintain and thus have fewer expenses, which enable them to offer discounts to their customers, which a traditional business would never be able to offer.
“Discount structures offered by e-railers are rapidly evolving. Today it is not about discounts alone. Also, many discounts offered are built-in the margin model of E-tailers. While practice of offering discounts will continue, the reasons will be as normal as any other retailer offering discounts for liquidation, sales uplift etc,” elaborates Bisen.
A major challenge for most of these firms is that almost none of them are anywhere near profitability. Huge investments have gone in setting up operations across the country but profits are nowhere in sight. Besides huge discounts mean the road to profitability is further pushed forward.
“Most of the companies claim that they are on the path to profitability. In the next two years you will see success stories emerge,” says Bisen.
And the tough gets going
Going forward, online stores face major challenges like last mile delivery, regulatory and policy clarity and lack of talent pool in the country.
“Order fulfilment is one of the biggest challenges and concerns for Indian e-tailers. Logistics, which is a key component of order fulfilment, is challenging given the geographical complexity, sub-optimal infrastructure, and regulatory variations across India. Further, logistics services have traditionally not been designed to serve B2C needs like that of e-tailing. India has witnessed a direct correlation between the evolution of e-tailing and that of B2C logistics and while we have seen considerable progress in the past five years in terms of the development of the B2C logistics ecosystem, this still remains the biggest challenge in this sector,” says Technopak report.
There is another reason for comparison with dot com bubble burst. The bubble burst was characterised by a huge hype surrounding the potential of the websites. The current ecommerce boom is witnessing the same phenomenon. Realistically speaking, from overall consumer spending perspective, the share of e-tail channel by 2020 is expected to be just 3% of the net sales value and not more than 10% by 2025.
The e-tailers would need to gear up to capitalise on the opportunities in the market. In spite of the challenges it can be said that ecommerce has finally and firmly arrived in India. The coming year is likely to witness a heightened activity in this sector.