Online startups Will they change the way Business is done in India?

Transcription

1 Online startups Will they change the way Business is done in India? CRISIL Young Thought Leader 2014 Submitted by Roshan Tated (MBA ) Indian Institute of Foreign Trade, New Delhi 1 P a g e

2 Table of Contents Executive Summary Introduction Business models of Online Startups Benefits offered by Online medium 5 2. Future Outlook of online ecosystem in India Current Scenario Reasons for success Challenges faced by the industry Future Outlook for the industry 9 3. Online Business in India vs. Developed Economies The Online boom vs. Dot-com bubble The way Forward Conclusion.11 List of Exhibits- E1: GDP per capita growth E2: Internet Penetration and Online Shopping in BRIC nations E3: Growth in e-tailing revenues in India E4: E-commerce category-wise revenue breakup E5: Comparative growth trend of E-commerce vs. E-tailing E6: An innovative Logistics model 2 P a g e

3 Executive Summary India is presently in the midst of Internet revolution with nearly 243 million citizens using the Internet. The rising Internet and Mobile penetration has phenomenally changed the way we communicate and do business. Though, India is second only to China and USA in terms of number of Internet users; E-commerce in countries like China and USA has clocked an annual sales of about 150 billion USD. India is still in the infancy stage with only 9% of its internet users shopping online. According to one study, India e-commerce is expected to grow form 10 billion USD currently to 43 billion USD in the next five years. This presents a huge opportunity for current players and new entrants. Foreign investors are investing heavily in Indian online players realizing the huge growth potential. This report presents a detailed analysis of the current e-commerce scenario in India and the future outlook for the industry. Business models of other online startups which are not in e- tailing is also presented. Also, an analysis of the unique challenges face by e-commerce players in India is presented backed by relevant facts and figures. The sustainability of Cash-on-delivery (COD) model, which is the biggest driver of adoption of e-commerce, is also given. E-commerce industry in India faces unique set of issues like Predatory Pricing claims by brick and mortar retailers, the highly competitive environment and scalability issues. I have also given my recommendations about how a healthy eco-system can be developed by building upon the synergies of click and brick players. I have substantiated these recommendations with relevant facts, figures and analyses. 3 P a g e

4 1. Introduction For the last fifteen years, India has been undergoing a technology revolution. India is already one of the leading destinations for organizations in countries like USA and the EU nations for undertaking IT projects. In a recent survey, 80% of US and European firms ranked India as their number one outsourcing destination. The main drivers for these are English-speaking and immensely talented workforce, abundant supply of skilled labor at very competitive wages and favorable pro-it government policies. The GDP of India has grown by about 7.2 percent CAGR over the last 10 years even when the global economy witnessed one of the worst recessions in This has led to rising disposable incomes and a growing proportion of middle class E1- households. The GDP growth coupled with few other significant reasons provide an exciting ground for online businesses to flourish. Firstly, the Internet and Mobile penetration in India has grown phenomenally over the past 5 years. At present, 243 million Indians (19.19 % of total population) have an access to Internet and this figure is estimated to increase to 330 million by 2015 and India will be second only to China. Further, a whopping 924 million Indians are mobile phone users and the usage of smartphones is gradually increasing. This coupled with other factors like Cash on Delivery model by E-commerce companies, among others, have led exciting revenue growth for online businesses. 1.1 Business Models of Online Startups Following are the primary business models followed by online startups in India a. Online Marketplaces- In this model, the website acts as a meeting point for the sellers and buyers. Since government regulations do not allow for inventory based multi-brand online retailing, this is the preferred mode for websites like Flipkart, Myntra, and Amazon. A number of suppliers list themselves 4 P a g e

5 with the online website and sell products. The online intermediary may get a small commission for each transaction. The various advantages offered to sellers and buyers in this model are- Wider reach for suppliers: Since, E-commerce websites can be accessed from anywhere, suppliers can reach potential customers in different geographies. For example, handicraft makers from Dharavi slum in Mumbai have seen a significant boost in sales after they tied up with e-bay to sell their products. More choices for consumers: Consumers can compare prices for a particular product and make an informed decision. This leads to healthy competition between suppliers and thus benefits the end consumer. Lower Capital expenditure for E-commerce companies: In this model the intermediary website does not need to set up warehouses and logistics is generally handled by third party logistics companies. b. Inventory-based model- In this model, the e-commerce company manages the inventory and thus needs to manage its own warehouses. This leads to cost escalations but greater control over logistics. This model makes it mandatory for the e-commerce company to deal in single brand since government regulations in India don t allow for inventory-based multi-brand e-tailing. c. Affiliate Marketing model- In this model, the e-commerce company offers value-added services and promotes other firms. The company earns a commission whenever a user clicks on advertisements of promoted firms. Zomato is a good example of this model. Zomato is an online restaurant search website that earns a commission whenever a user clicks on advertisement of a particular restaurant. Restaurants use services of Zomato because it offers very precise targeting. For example, advertisement for a restaurant in Saket will be displayed only when user searches for Restaurants in South Delhi. Justdial is another example. d. Online Extensions of Brick and Mortar retailers- These are basically websites operated by brick and mortar players that exclusively offer products of a particular brand. This offers a better reach and also leads to cost savings since merchandise can be directly shipped from warehouse to customer. TrendIn.com is a good example. 1.2 Benefits offered by Online Medium To Customers- Convenience- Products are home delivered(usually free of cost) Discounts- Since E-commerce eliminates middle men, a major chunk of savings can be passed on to customers via discounts More variety To Businesses- Wider reach- Online channel has a wider reach since the website can be accessed anywhere Better Targeting- Businesses can devise their strategies to target specific segment Focus on core competencies- Businesses do not need to set up shops or warehouses 5 P a g e

6 Informed decision- Purchases are generally accompanied with thorough research 2. Future Outlook for Online Startup ecosystem in India 2.1 Current scenario- The success of any online business ultimately depends upon the number of users with Internet access. Internet penetration, though has increased phenomenally over the past 5 years, it still stands at 19.2 % (USA 81%, China 42.3%, developing nation average 24%). Only 55% of internet users access Internet at least once a day. Further, only about 10% of population has engaged in online transactions. The below given chart shows relative comparison of online population and online shoppers for BRIC nations. Though, India has second highest Internet population, the number of online shoppers is the lowest of all BRIC countries. E2 E3 In spite of this the revenues of e-tailing industry have grown exponentially over the last 5 years. From a meagre 1.08 billion in 2005, the industry has grown to a whopping 13 billion in 2013 (at a CAGR of 34%). Online ticketing from websites like makemytrip.com contributes the most to e-tailing revenues. Considering only the e-commerce revenues, Electronics category is the biggest revenue earner. 6 P a g e Source: MckInsey Quarterly

7 E4 The reasons for this growth over last five years are manifold. But the two most important reasons are Growth in internet usage coupled with rise in disposable incomes and adoption of innovative models like Cash-on-Delivery (COD) by online retailers. 2.2 Reasons for Success- a. Cash-on-Delivery Sachin Bansal, founder of Flipkart, realized that the biggest hurdle for Indian consumer to do online purchases was security issues. A psychological barrier with regards to online payments and delivery of products existed in Indian consumer s mind. What if the seller never ships my product? This barrier was overcome by COD model Customer pays on delivery of product. It is one of the biggest reasons for success of E-commerce in India b. Attractive discounts - The cost savings due to removal of intermediaries are passed on to customers in the form of attractive discounts. c. Flexible return policy - Most online retailers offer a 30-day return policy. d. Excellent service quality Online players like Flipkart and Myntra redefined service and customer excellence with models like same-day delivery, next-day delivery etc. e. Investment by PE firms E-commerce players have witnessed rising investments by private equity firms like Accel Partners, Tiger Global, DST Global etc. who are keen to tap on the potential of Indian E-commerce industry. For example, a group of PE firms recently invested $1 billion in Flipkart. These investments help e-commerce players to constantly innovate and offer better services. E-commerce firms, backed with these investments, are focusing on expanding market share rather than profitability. Following chart shows top reasons cited by consumers to shop online 2.3 Challenges faced by the Industry- 7 P a g e

8 E-commerce in India faces some unique challenges not faced by E-commerce companies in developed economies. a. No-Shows Since, in COD model a customer pays only after received the good, he/she may not turn up when the product is delivered. Even worse, people order products and get them delivered at someone else s address. This incurs a huge logistics overhead and leads to poor inventory management. This is particularly the case with respect to goods like electronic items like televisions, washing machines etc. b. Low Brand Loyalty Indian customers tend to seek discounts and cite attractive discounts as the top reason for shopping online. In such scenario, a customer may purchase from any website which offers the best deal (highest discount). Even after providing excellent service quality, this challenge is faced by all major e-tailers. c. Logistics issues All major third party logistic terms and even in-house logistics arms of e- commerce firms have limitations when it comes to distribution. For example, Flipkart only delivers Books in tier-3 cities through India Post. The delivery in such cases take almost 8-10 days. Hence, a huge potential of semi-rural and rural markets is still going untapped because of limitations of logistics. d. Supplier reliability Since, all major e-commerce companies have started adopting marketplace model, whereby third party suppliers register themselves with the e-commerce firms, quality remains a big concern. For example, recently a customer who ordered a smartphone from a popular ecommerce company was shipped a soap bar by the supplier. e. Profitability The main goal of e-commerce companies at present is to acquire a solid customer base. Profitability is not a primary concern since these companies are funded heavily by outside investors. Building a sustainable business will require the e-commerce companies to focus on profitability in long run. f. Low barriers to entry Since, the marketplace model of e-tailing requires very low seed funding, more and more companies are venturing in the space thereby deepening competition. 2.4 Future Outlook for the Industry- The Indian online industry is estimated to be a $90 billion industry by Presently, biggest share in online revenues come from online ticketing. Online ticketing eliminates the need for standing in queues and also touch and feel of the product is not required. The apparel segment is expected to grow significantly over the next few years. E-commerce players will rejoice since profit margins in apparel segment are higher as compared to other categories. As a result, the share of e-commerce in the overall e-tailing revenues will grow even faster at a CAGR of 40-50% and reach about $15 billion USD by P a g e

9 E5 The reasons that will drive growth from $13 billion in 2013 to $90 billion in 2020 are- Rising disposable incomes and increasing customer awareness; Increasing number of Smartphone users and Internet users; Window shopping will grow; The share of apparel category in the overall online revenues will grow exponentially. 3. Online Business in India vs. Developed Economies- While e-commerce in developed countries like USA has reached a saturation phase, it is still in its infancy stage in India. Internet penetration is very low and number of online shoppers is lowest among BRIC nations. The key pointers that differentiate the e-commerce industry in India from that in, say a developed economy like USA are- High untapped potential in India Infrastructural problems The IT and logistics infrastructure in India is still not up to the par. For example, recently Flipkart ran a Big Billion Day on lines of Black Friday Sale in US and ran heavy discounts. The website saw heavy traffic which the servers were not equipped to handle. As a result, the site crashed repeatedly leading to frustration of customers. This led to very negative publicity on social media platforms. Secondly, the existing logistics capabilities only cover urban and semi-urban areas. Huge potential of rural and semi-rural markets can t be tapped because of limitations on distribution reach. Cash-on-Delivery model As discussed above, COD is a model started in India taking into account the low credit/debit card penetration and resistance of Indian customers to pay online. But COD has problems like high incidence of returns which lead to additional overheads for e-commerce companies. In developed economies, almost 100% of payments are done online because of high card penetration. Breakeven point E-commerce companies in developed economies and BRIC nations are profitable in home nations. For example, Alibaba.com of China is one of the most profitable e-commerce ventures in the world. Most of the e-commerce companies are incurring losses in order to acquire market share. 9 P a g e

10 Problem of no-shows This is yet another problem unique to India because of the COD model of e-commerce industry. Customers order online and never turn up to collect their products. Few customers even get products ordered at wrong address. This is very costly affair, especially in case of heavy electronic items. 4. The Online Boom vs. the Dot-Com Bubble- The Dot-Com bubble of occurred primarily because stocks of technology companies were overvalued regardless of their intrinsic value. People invested in technology only on the basis of speculation and herd behavior and this led to the bursting of bubble in Recently, we saw that the IPO of Chinese online retailer Alibaba was oversubscribed and helped the company raise $25 billion in fresh capital. On the home turf we saw that Flipkart was able to raise a fresh capital of $1 billion from investors. But these investments are based on solid grounds and not mere speculations. The e-commerce industry is set to change the way we fundamentally deal with the customers and offers a huge opportunity E-commerce is a natural progression of brick and mortar firms in the way that it eliminates intermediaries. Customers will always prefer the channel that offers them the highest value for money Though e-commerce has a very bright future and deserves the investment that it is getting, some caution needs to be exercised The Company s balance sheet and profitability should be studied before investing. Also, people should exercise due diligence and not get swayed by speculation. 5. The way forward- E-commerce companies current focus is on increasing topline without caring much about bottom line. But for sustenance in longer run, the companies will have to focus on profitability and at the same time retain profitable customers. Here are a few ways to achieve this- Data Analytics Using data analytics, a very personalized experience can be offered to the customer. For example, a recommendation with details about a tie of a favorite color of the user can be sent after he has purchased a formal shirt. The color, design and price range can be determined from data pertaining to his/her past purchases. Data analytics can go a long way in building brand loyalty and delighting customers. Tackling the problem of no-shows This problem arises because of cash-on-delivery model. To avoid this problem, a small fee (5% of bill amount, for example) can be taken via online transactions. Customers will not hesitate since they would be paying the remaining amount once the produce is delivered in good condition. This approach can address both the problems Avoiding no-shows and at the same time removing the mental barrier associated with online payments and security. 10 P a g e

11 E6 Synergies with brick-and-mortar retailers Sales of brick and mortar stores have gone down and retailers have made claims of predatory pricing against e-commerce companies. For example, retailers claimed that Flipkart sold some of the products at price lower than the cost price on the Big Billion Day and took up the issue with Competition Commission of India. E-commerce companies should work extensively to form profitable synergies with retailers. The retailers can register themselves with online marketplace and target new geographies. Offline and Online channels should engage in a symbiotic relationship to provide a fantastic customer experience. Going Mobile Mobile is will lead to almost 50% of online sales by Smartphone penetration in country is increasing. E-commerce companies should make their presence felt on mobile phones by offering an engaging app. Focus should be on making very light weight apps since Internet speed is still very low in most parts of the country. Scaling up of logistics capabilities The reach of e-commerce companies is limited because of logistic issues. For example, Flipkart doesn t ship products to tehsils (semiurban agglomerations in India) except books. Demand exists in such places and provides a huge opportunity. Though warehouses can t be built at such places (because of the huge cost involved), a middle path Hub can 1 be followed (illustrated below) D1 Central Warehouse (metros and tier 1 cities) Hub 2 Pick-up point D2 Hub 3 D3 Steps Involved- The central warehouse delivers short-tail items (items ordered frequently) to hubs which are located in tier-2 cities. Items in tier-2 cities can be directly delivered from these hubs. A hub periodically (once every 15 days) delivers all the pending orders to the pick-up point which is located in semi-rural areas like tehsils. The fixed delivery date can be informed to the customer at the time of order placement. At level 3, customers from rural areas (D1, D2, and D3) can collect the products from pick-up points in the nearest tehsil. Customers will order the products even if there is a delay of 15 days between order placement and delivery (at least, for heavy electrical and electronic items etc.) as long as the delivery is done to the desired destination. This model minimizes costs on a number of fronts fewer central warehouses, periodic delivery to semi-rural areas like tehsils and at the same time offers the benefits of e- commerce to rural customers. 11 P a g e

12 6. Conclusion- E-commerce in India is still in its nascent stage and presents a huge opportunity for e-tailers because of rising disposable incomes, increasing internet and mobile penetration along with growing consumer awareness about benefits of e-commerce. But to tap this the opportunity successfully a number of challenges pertaining to logistics, payments, infrastructure and government regulations needs to be tackled. E-commerce in India will be successful in true sense only when people in semi-rural and rural areas will be able to derive its benefits. To do this, initiatives by government and e-commerce companies alike should be made to make supply chain robust and payments hassle-free. Also, offline and online retailers need to engage in symbiotic relationship and build upon the other s strength to tap the big opportunity called India. 12 P a g e