Online startups Will they change the way business is done in India? ANUPAMA PRAKASH IIM KOZHIKODE

Transcription

1 Online startups Will they change the way business is done in India? ANUPAMA PRAKASH IIM KOZHIKODE CRISIL YOUNG THOUGHT LEADER 2014

2 Table of Contents EXECUTIVE SUMMARY 3 INTRODUCTION 4 CURRENT INDIAN LANDSCAPE ONLINE AND OFFLINE 4 FUTURE OUTLOOK OF E-BUSINESS IN INDIA 5 DOMINANCE OF MOBILE BASED ACCESS 5 ROLE OF INDIA S DEMOGRAPHIC DIVIDEND 5 CATEGORY SPECIFIC TRENDS 6 CHALLENGES AHEAD 7 COMPARISON OF INDIAN AND US ONLINE BUSINESSES 8 INFRASTRUCTURAL DIFFERENCE 8 SMARTPHONE DRIVEN INTERNET USAGE 9 ECONOMIC IMPACT 9 CATEGORY SPECIFIC TRENDS 10 CURRENT ONLINE BOOM V/S DOTCOM DAYS 10 SCALABILITY AND INVESTOR SENTIMENT 11 IPO TREND 11 MODERATION IN GLOBAL STOCK MARKET 12 CONCLUSION HEADING TOWARDS OMNI-CHANNEL 12 REFERENCES 13 2

3 Executive Summary: India is one of the fastest growing online markets today and is all set to get ahead of countries like US and China, and top the Internet list as the biggest online consumer market in the world. Online businesses in India have performed extremely well in the past, attracting huge funding from domestic as well as foreign investors. This trend would continue in the future for all categories, aided by the young demographic dividend of India and the upsurge in mobile-based Internet access. Yet, online firms of the country would have to tackle the challenges of poor logistics infrastructure, low Internet penetration and regulatory hurdles, during the process of scaling up. There needs to be concerted efforts by the Government and the corporate world to improve the digital inclusion of India that would help the online firms increase their reach. Backed by adequate scale and through continuous innovation in business model, online firms will pose heavy competition for offline companies in the future. However, there is sufficient scope in India for online and offline companies to co-exist as the consumer base to be catered to is huge, and the consumers of both channels considerably vary in terms of their needs, expectations and purchase characteristics. The future will see a convergence between online and offline in the form of an omnichannel strategy that would provide a seamless experience for the new-age customer. 3

4 Introduction: India has fast become one of the booming online markets in the world with over 240 million Internet users to which 5 million new users are getting added every month. India s growth rate is much higher than that of leading countries like US and China, which will enable India to quickly get to the top of the list as the biggest online consumer market in the world Internet Users (mn.) % Annual Growth Rate of Internet (%) 14% % 5% 7% 4% 0 China US India 0% China US India Source: Internet Live Stats The Indian online landscape has been garnering a lot of attention globally. Plethora of online ventures were started in India over the last few decades, resulting in successes like Flipkart, Snapdeal, BharatMatrimony, RedBus and Naukri.com. Their stories have lured domestic as well as foreign investors to pump in money into them. Foreign online firms have also entered the market and invested, trying to capture a share of the lucrative Indian pie. The Indian growth story till now has been very encouraging, but it remains to be seen how well the momentum would sustain in the future. Current Indian Landscape Online and Offline: The e-business sector in India was estimated to be around 12.6 billion USD as of Online travel leads the segment with about 70% market share, followed by retail at 18%. A comparison of online and offline modes of retail reveals that e-tailers have attracted customers through highly discounted products and cash-on-delivery options. However, offline retail outlets continue to witness increasing footfalls and growth in sales. This is because the offline retail market attracts a separate set of customers who like visiting physical stores for the instant gratification of seeing and feeling the product and also for getting expert advice on products directly from salespersons. Consumers who are 4

5 relatively unsure about the product prefer the offline mode of purchase, whereas deal seekers directly hit the online retail sites. Among other forms of online businesses, sites providing e-ticketing services and online classifieds have performed very well. But here again, offline competitors are doing considerably well because of low penetration of Internet in India. Future Outlook of E-Business in India: Some of the key characteristics that will drive the future outlook of e-business are: Dominance of Mobile Based Access: The usage of mobiles is fast growing and helping businesses resolve issues of infrastructure, digital illiteracy and last mile connectivity. As mobile usage overtakes that of desktops, websites will have to leverage the platform and develop content that is suited for smaller screens, which translates to more of audio-video and content based design, rather than plain text. Indian Internet Access by 2015 PC 53% 47% Non-PC Portable Devices Source: comscore Role of India s Demographic Dividend: Users below the age of 35 represent around 85% of the smartphone, social network and VoIP markets in India and they will tend to spend more time on the Internet for sophisticated activities like social networking, entertainment and online shopping. This demographic dividend of India can really aid in the growth of online startups. 5

6 100% 80% 60% 40% 20% 0% % of youth in smartphone, social network and VoIP market 85% 75% 60% India Aspiring Countries Developed Countries Source: McKinsey Digital Consumer Research, Dec 2012 Category Specific Trends: a) Retail: E-retail is one of the fastest growing categories within e-commerce and is projected to reach around 10 to 20 billion USD by Future success of an e-tail venture would depend on innovation and efficiency in doorstep delivery, free shipping and reverse logistics setup. The logistics model will have to adapt to unpredictable customer demands and eventually change from a push to pull model. To achieve such efficiencies and reach Tier II and III cities better, e-tail companies are expected to increase their warehousing spend. E-tail companies are also expected to launch their own store brands that will help them differentiate their offerings from others Warehousing Requirement of E-tailers (in mn. sq. ft) Source: Industry experts and PwC Analysis 6

7 b) Travel: Online travel currently makes up 20-30% of total travel bookings. In the upcoming years, Indian Online Travel Agencies (OTAs) will focus on developing mobile-based content as the proliferation of phones is set to direct ~50% of OTA traffic from mobile devices. OTAs will also be developing more of local language and text-to-speech support for mobile users. There will be increased usage of technology in development of complete travel packages and in micro-segmenting consumers. Hotel bookings present a big opportunity, which can be explored by using analytics to assimilate information from diverse sources and marketing to consumers in a targeted fashion. Challenges Ahead: a) Penetration and Infrastructure Issues: Internet penetration in India will grow further to the level of about 28% but rural penetration will remain constrained due to infrastructural issues like lack of continuous supply of electricity, dearth of Internet servers, bandwidth and connectivity limitation. 80% 60% 40% 20% 0% Internet Penetration (%) 64% 28% 9% Whole of India Urban India Rural India Source: Forbes Rural India is a big consumption market and lack of penetration in the rural belt will act as a major stumbling block for online companies to reach critical mass. So efforts towards mobilising rural populace into the network will be undertaken vigorously. This will entail participation from both Government and the corporate world. b) Usage by limited businesses: Internet is still not used by all types of businesses in India owing to low digital literacy. Small time entrepreneurs and SMEs shy away from using the power of the web, as they are not adequately educated about the medium. 7

8 Also, Internet driven sales has not yet significantly expanded to long-tail offerings and to categories like grocery, food and beverages, healthcare, etc. Long tail products are niche offerings that have low unit sales, but generate considerable volume when aggregated. Long tail is slowly becoming the driving force in developed countries, and it will take center stage in India when market matures. Efforts are being taken by e-tailers in this area to generate increased activity in offbeat categories. c) Regulatory Hurdles: FDI in currently allowed only in the marketplace model of e-commerce and not in inventory led model. However, if FDI norms are relaxed, global e-commerce giants are expected to enter and invest in the B2C online market leading to creation of new jobs, improvement of infrastructure, logistics network and increased operational efficiencies and competition in the sector. Currently e-commerce also faces challenges in terms of duplication in warehousing centers and logistics chain because of complex inter-state taxation rules. The introduction of Goods and Services Tax (GST) in the near future is expected to eliminate such issues. Comparison of Indian and US Online Businesses: US is one of the leading online markets in the world and has close to 280 million internet users who are growing at the rate of 7% per annum. Even though the growth rate is lesser when compared to India, US already has a high penetration rate of ~ 86% and this helps online businesses gain sufficient reach. Infrastructural Difference: The main difference between Indian and US online markets is the availability of Internet infrastructure. US has consistently invested in state-of-the-art technology like 3G/4G base stations, reduced the cost of high-speed Internet access and aided consumers to adapt to niche technology. India has lagged behind on this front, which explains the difference in Internet penetration between the two countries. 8

9 Number of 3G/4G Bases Stations Cost of High-speed Internet Access (cents per MB) US India 0 US India Source: McKinsey However, India is now taking efforts in this direction due to which India s infrastructure and consumer adaptation rates are growing faster than that of US. Smartphone Driven Internet Usage: While the use of smartphone for Internet usage is increasing in both countries, personal computers (PCs) still remain the preferred mode of access in US, unlike India where phones are gaining traction over PCs. % of US shoppers willing to increase the use of given channels over next 12 months 40% 35% 30% 25% 20% 15% 10% 5% 0% 35% 10% 9% 5% PC Tablet Smartphone Social Media Source: Deutsche Post DHL However, price of an average smartphone in the US is much higher ($270) when compared to India ($110) and Indian prices are falling at a steeper rate when compared to US prices. Economic Impact: Internet s contribution to GDP is above 4% in US, while the contribution in India is under 2%. Internet contribution to GDP in US is also growing at a much faster rate than 9

10 India s 14% v/s 2%. These statistics indicate that the economic benefit derived from Internet is much higher in US than in India. 15% Growth of Internet Contribution to GDP (%) 14% 30 Consumer surplus derived from Internet ($/month) 26 10% 5% 2% % US India 0 US India Category Specific Trends: Source: McKinsey Within retail, US market is spending more on big data and analytics to aid customized shopping experiences that help improve purchase frequency and order value. New modes of virtual payment, technologies like Near Field Communication (NFC) and use of digital currencies like bitcoins are transforming the payment systems in US. Within online travel, US market is focusing on meta search, meta pricing, seamless multi-device integration, booking extension to new gadgets like wearables and personalization. Such concepts are in the stage of infancy in the Indian travel market. Other e-businesses like online classifieds also widely differ between India and US. While the US market focuses on vertical classifieds (industry specific), the Indian market is more into horizontal classifieds (caters to multiple industries). This leads to many more players in the US market as compared to India where market is dominated by fewer players. Also, Internet advertising is second only to TV advertising in US, but Internet advertising in India is a small market and it falls well behind TV and print medium, which dominate because of local language content. Current Online Boom v/s Dotcom Days: The current online boom and huge investments in technology companies raises questions on whether the world is headed towards another dotcom bubble. Although current valuations of online companies seem very high, the present technology surge is different from what happened during 2000s in the following terms: 10

11 Scalability and Investor Sentiment: During the dot com days, investors put in money in any company that came up with a storyboard containing words like web and internet. The Internet was anticipated to revolutionize everything and all Internet companies were expected to quickly turn profitable. Back then, Internet companies, without any business model and revenue stream, were still able to attract VC (Venture Capital) funding. However, today s investors understand that online ventures need to be analyzed based on scalability and not immediate profitability. A company is scalable when the marginal cost incurred is less than the marginal revenue earned, and only scalable firms can become profitable in the long run. A case in point for a classic dotcom failure is that of online grocery store, Webvan, which closed down because of high marginal cost of operations. Today s startup investments are anchored on critical analysis of business model, growth prospects and scalability, because of which global venture capital funding has come down drastically. Global VC Funding for online companies (USD bn.) Q Q IPO Trend: Source: Wall Street Daily The IPO market has become much more mature today. During the dotcom era, VC funded companies with revenues less than even $50 million went public in about 4 years. However, today s online ventures go public only after 9 or 10 years having earned significant revenues. An Indian example would be that of Flipkart which is yet to go public despite the success frenzy surrounding it. Such a change in IPO market is global in nature and it suggests that companies believe in achieving scale of operations and are focusing more on long-term growth, rather than short-term gains. 11

12 Year 1999 Year , 18% 172, 36% 308, 64% Tech IPOs Other IPOs Tech IPOs Other IPOs 182, 82% Moderation in Global Stock Market: Source: Wall Street Daily The dotcom boom was so dominant that technology sector grew in the S&P 500 index from 5% in 1992 to 33% in The boom was because of a significant rally in NASDAQ, the technology heavy index, over and above the general S&P 500 index. Even today, NASDAQ trades higher than S&P 500 but the difference is not as substantial as in 2000s. Currently the technology sector trades much below the 15 year P/E ratio suggesting that it is undervalued. The above characteristics indicate that there is a considerable difference between the current online boom and the dotcom period of 2000s. Investors of today are much more cautious and evaluative of their decisions which has helped rationalize the market. Conclusion Heading towards Omni-channel : Online businesses in India will thrive and grow further with the increase in Internet user base of the country. However, there will have to be concerted efforts by the Government and private parties to improve the digital inclusion of India so as to further Internet s penetration into rural areas. There is sufficient scope in India for online and offline companies to co-exist as the consumer base to be catered to is huge, and consumers of both channels considerably vary in terms of their needs, expectations and purchase characteristics. While offline players cannot ignore the convenience of e-transactions for the user, online players cannot negate the personal servicing benefits that a user gets from a brick-and-mortar store. Hence the future would tend to a convergence strategy called omni-channel that would blend the best of both worlds. An omni-channel strategy lets a user connect to the web-store through devices like mobiles and kiosks and it also lets him/her get customer 12

13 support at a physical touch point. The visibility across channels helps in better data collection, resulting in more customized/targeted marketing. Omni-channel is already a growing concept in the area of retail, providing benefits like webrooming, collaborative shopping carts, cross-channel inventory visibility and easier returns. The omni-channel model will let online and offline players learn from both media, and it will merge the benefits of physical and virtual outlets to provide a seamless experience for the new-age customer. References: IAMAI and KPMG Report 2013, e-commerce Rhetoric, Reality and Opportunity ASSOCHAM and PwC Report 2014, Evolution of e-commerce in India Creating the bricks behind the clicks McKinsey & Company Report December 2012, Online and upcoming: The Internet s impact on India Deutsche Post DHL Perspective, The Future of E-Commerce in the U.S. Future of US online classifieds market E-business report from Economic Times Wall Street Daily Reports Dotcom bubble analysis 13