Future of Ecommerce in India
Indian market is experiencing an unprecedented growth in ecommerce. While this is a good sign, there are concerns too that need to addressed. Overall, as of today, the only thing that can be said about future of ecommerce in India is that the market is going to experience growth.
There are several factors that have led to the massive growth. For example, in 2009 the total value of ecommerce market in India stood at $2.5 billion. This ramped up to $8.5 billion in 2012, $13.6 billion in 2014 and now it is expected to hit $20 billion by end of 2015. Experts say that the market will grow to $56 billion by end of 2023 (7 years from now). That is twice the growth in last 6 years! So, what is causing this intense growth? Here are some of the factors:
- Increased penetration of internet in India.
- Increased penetration of internet-enabled smartphones.
- Low prices and amazing deals offered by ecommerce businesses.
- Cut-throat competition between manufacturers to gain maximum visibility. This is driving down the prices.
- Cash on delivery option that resonates with Indian consumer psyche.
- Cash backs and rebates offered on credit cards and debit cards, which too hit deep in Indian psyche.
- Comfort of shopping from home at one’s convenient time.
There are many other factors that are helping the ecommerce industry in India. But the question here is, ‘despite the unprecedented growth, is the future of ecommerce in India bright?’
This is a very tricky question as there are a number of factors that come into play. While the projections for future look pretty impressive, there are some sore never points that can lead to catastrophic failure of the overall industry. All that is required is one bad move from the industry players.
Ecommerce business models in India
There are basically three core models used in India’s ecommerce turfs but other models are also picking up. All players like Flipkart, Junglee and Amazon, SnapDeal, Ebay, Jabong, Lenskart, etc. all use either use one of these models or a combination of these models. Let us take a quick look at all these three models and find out whether they will succeed in the long run or they will come to an unfortunate end.
Model of Bringing Buyers and Sellers Together – A Multi-vendor Marketplace.
Ebay, Flipkart and Snapdeal are some of the major players. Here the ecommerce player does only one thing – offer the platform where buyers and sellers come together. The ecommerce player only needs to control the technology, logistics and market the platform. Thus, the model is not really capital intensive since there is no need for warehouse maintenance and logistics control. Buyers and sellers come together. When a product is purchased, the ecommerce player picks up the product from the vendor and delivers it to the buyer. A more recent development in this field is OLX. The problem here with this model is that the ecommerce player has to stay satisfied with a very low margin rate which is usually somewhere between 4 and 6% of the product price sold through the platform
The major problem of this model is consumer satisfaction. Since the ecommerce player is not responsible for anything else but technology maintenance, the chances of consumer complaints increase significantly. Eventually, a dissatisfied consumer barely blames the manufacturer but rather blames the platform for any mishap, thereby tarnishing the image of the ecommerce player. Another problem is that often the manufacturers on such platforms end up selling products without proper invoices. This means that VAT is often skipped and the monetary exchange goes unaccounted. This puts pressure on government’s tax earnings.
Model of End-to-End Control
In this model, the ecommerce player controls everything from product procurement to warehousing and finally logistics. One inherent benefit of this business model is that of increased consumer satisfaction because ecommerce player will do everything to make the consumers happy. Though there isn’t much that can be done about the quality of the products sold (as they come from different manufacturers), ecommerce player can actually control other aspects like proper delivery, responding to consumer complaints and taking of sellers from list, timely replacement etc.
The problem with the model is that management costs run extremely high. Managing all aspect is really difficult and one wrong move can lead to extreme losses in form of unsold inventory and hence opportunity cost. Another problem is that of limited stock. Barring Amazon, all other players using this model actually face warehousing problems. There cannot be unlimited warehouses and hence, the number of products stored in a warehouse will always be limited. Amazon however is an exception. It is one mammoth of an ecommerce player that has existed in market since 1994 and has actually spent billions and billions of dollars for warehouse building. Amazon is in fact a combination of multi-vendor marketplace and end-to-end control models
The benefit of this end-to-end control model is that the ecommerce player gets to bargain and hence, drive down the cost of procurement while sell products at significantly higher prices, thereby maintaining a profit margin of 20% to 25%.
Model of Discount Coupons
Groupon pioneered this model and then Snapdeal tweaked it to fit in Indian market. Snapdeal however moved out of this model and adopted the multi-vendor marketplace model because of more benefits and increased profits. The players with discount coupon model do not sell any product. They simply sell discount coupons and provide the platform where products from different merchants are sold. What these ecommerce players do is that they strike a deal with the merchants and promise to provide a certain number of buyers. For example, an ecommerce player in this model will approach a merchant and say: “I will give you 50 buyers but you need to sell your product through my platform at 40% discount but you need to provide me 10% revenue share from the product sold at the discounted price.” So, if the merchant agrees, the ecommerce player will sell coupons which when applied on the actual price of the product, will reduce the price of that product in question by 40%. So, if the price of the product was ₹ 100, the price after applying coupon will be ₹ 60. The consumers will buy the product for ₹ 60. This is the revenue generated for the merchant. Of this ₹ 60 revenue, the ecommerce player will then deduct 10% as its share and pay the remaining to the merchant.
The problem with this model is that revenue share margins are extremely low. Also, similar discounts may be provided directly by the merchants somewhere else. Coupon logistics and maintenance involves high cost because the ecommerce player needs to ensure that the same coupon is not used multiple times by a single user. Finally, huge volume sales are to be promised to merchants. To make sure that the promised volume is sold, the deals are to be advertised properly and this attracts huge advertisement costs.
It is all Hit and Trial
Basically, there is no regulatory environment present in India for ecommerce business. All business are working on hit and trial basis to find the proper nerve of Indian shoppers. New players in market with limited investment capabilities often end up with high losses if they fail to tap the proper psyche.
One of the major challenges faced by ecommerce in India is that of payments. Indians are not really comfortable paying up front using their plastic money and hence, these players have come up with the feature of cash on delivery to counter this problem.
Heavy discounts is another major challenge for ecommerce players. Because of extremely high competition, ecommerce players often resort to aggressive pricing strategies using heavy discounts. It is often noticed that the same product on Flipkart, Snapdeal, Amazon and Ebay has different prices. Such heavy discounts often translate into heavy losses. According to a report from Deloitte and ASSOCHAM, online retailers in India collectively lost ₹ 10 billion in 2013.
The Bright Side
Good news however is that in 2014, a number of mergers and acquisitions actually helped to eliminate some competition. This means that heavy discounts that were present prior to 2014 were reduced significantly since 2014, thereby eliminating the chances of excessive losses.
Traditional retailers in India are also tying up with e-tailers. For example Big Bazar owned by Future Group tied up with Amazon while Croma owned by Tata Group tied up with Snapdeal. In cases like these, the partners are working together to provide proper technology and logistics. Together these are helping to build trust among consumers and user experience is also increasing because of improved supply chains and delivery channels.
E-tailer giants are not thinking of omni-channel business models pioneered by FirstCry. This is all about providing a complete ecosystem of online market, brick and mortar stores and mobile platforms. Together with omni-channel model, business are coming up with clutter-breaking ideas in which they are actually alienating verticals and building up on those verticals. This is allowing more focused approach where consumers know that a particular service can now be found in a particular marketplace. For example, in healthcare we have HealthKart that offers medicines, LensKart that caters to eyes, Portea that offers medical care professionals. This kind of segregation has eliminate clutter and increased efficiency of the service providers as they need to focus only on specific verticals.
One of the most pressing concerns for ecommerce in India is ever-emerging cyber threat. There is absolutely nothing that can be done to eliminate these threats but all players in market are trying their best to apply the most advanced security features for their online infrastructure. However, consumers are pretty weary about a few things. For instance, credit card companies and banks don’t disclose defaulters’ list in public. These institutions actually take care of incidents on a case-by-case format with individual merchants and private contracts. This lack of transparency keeps the security threats a closely-guarded secret that consumers barely come to know.
Again, data security breaches are stirring up things. Recent incidents of data breach at some large retail groups have actually raised concerns. This is why consumers in India are not really willing to make payments using their debit cards and credit cards or even online banking. Identity theft is yet another big time issue that keeps bothering consumers.
Online businesses are spending humongous amounts of money to take care of these issues that are extremely persistent and refuse to go away. These huge investments are taking a toll on their profits and at the same time, cash on delivery is actually increasing the cost of money management. Unless and until, the government, banks and online retailers come together to address these issues, ecommerce in India cannot bloom at its full potential.
Eventually as more and more players are coming in with new ideas and business models, the overall ecommerce ecosystem of India is improving over time. Old players and new ideas backed with venture capitals will eventually create a standard regulatory environment that will enhance consumer experience and help vendors to stay competitive as well. Future of ecommerce in India is not dim. Rather it is bright despite the fact that there are some pressing concerns. Well, no one can actually point out a business without operational challenges! Can you?