NEXT WAVE OF GROWTH FOR ECOMMERCE IN INDIA

The ecommerce market in India pegged at USD 9.5 bn in 2012 is likely to touch USD 12.6 bn in 2013. Of this about 71% is travel ticketing while e-tailing comprises only 10% of the pie. Secondly, the Indian ecommerce industry has been growing at a CAGR of 34% when global ecommerce industry has been growing only at a CAGR of 13%. Thirdly, India boasts of having the 3rd largest internet population in the world only after US and China. Despite all this Indian ecommerce sales is only a fraction (0.1%) of the global ecommerce sales(about USD 1.2 tn in 2013). It may be worthwhile to understand the biggest hurdles and challenges faced by the ecommerce industry in India and what can be done to engender a higher growth and adoption of online buying among the Indian internet users.

Challenges

Despite increased government and media focus and availability of adequate investment in this sector the ecommerce players so far have not succeeded in stirring enough enthusiasm for online buying in India. Some primary reason for such lackluster performance of ecommerce in India are:

Low Penetration
Internet in India has penetrated to only 11% of population while the global average of internet reach is 34%. The total internet  active user base in India is about 74 mn of which about 38% of users are from Top 8 metros (Delhi, Mumbai,Chennai,Kolkata,Bangalore, Hyderabad,Ahmedabad & Pune) 12% from small metros (Patna, Cochin, Baroda, Lucknow, Ludhiana, Coimbatore, Jaipur, Indore, Surat, Nagpur, Vishakapatnam, Faridabad), and 29% from Non-metros (Guhwati, Bhubaneswar, Raipur, Chandigarh), 15% from small towns and about 6% from rural India. 

When these figures are read against the fact that 30 percent of indian population is urban and 70 percent is rural it becomes very evident that the greatest growth opportunity for ecommerce in India is from the 2nd and 3rd tier cities. Ecommerce players so far have not done a great job in understanding the needs and challenges of the population in these cities. There is also very low awareness and understanding of online purchase in these cities. 

Access  

There are about 164 mn internet connections in India of which about 143 mn are mobile based internet connections and 21 mn are non mobile internet connection. More than 50% of internet users access the internet through a mobile devices owing to slow penetration of fixed line internet connections in India. This means a vast majority of internet users in India will experience the internet first time from a mobile device rather than a PC. Currently most of the Indian ecommerce sites doesn't have a focussed mobile strategy to woo and engage with this growing user base.

 

Motivation
 

Indian internet users primarily access internet for social networking (25%), services (email, IM) (23%) and entertainment (11%) with very less motivation to buy online. It is important to study some of the growth drivers in other big ecommerce economies and understand which of them can be replicated in the indian context. In US, the number 1 internet and eccomerce economy, growth is driven by online deals, aggressive merchandising and discounting from flash sales, more online loyalty programs, increasing time spent online owing smartphones and tablets, and large online presence of traditional retailers. In China, the second largest internet population and ecommerce population, growth is driven by growing internet population, burgeoning middle class with growing trust on online shopping, government driven campaigns to promote consumerism, improved infrastructure, product selection and services offered by online sellers and retailers. In Japan, the third largest ecommerce economy, growth is driven by "stay at home" culture, value shopping and an efficient home delivery network. In western Europe, the fourth largest ecommerce economy, growth is driven by better logistics, trust on online buying, deeper penetration of smartphones and tablets, convenience, large online presence of retailers and competitive pricing. Thus higher online presence of traditional retailer, good online deals, deeper penetration of smartphone and tablets and higher degree of trust for online purchase seems to be the common theme driving ecommerce growth in most parts of the globe.

In India only 1 percent of the 47mn small businesses are present online which means there is very less competitive pricing and selection and convenience in the online channel. This combined with low awareness about online buying makes the online channel less attractive compared to the offline channel for large part of population.  Also the trust factor for online purchase is very low among Indian Internet Users. In order to achieve scale the ecommerce companies would have to focus getting more and more retailers online and also build more trust for online purchases.

Ecosystem
A big factor hindering growth of ecommerce in India is lack of proper ecosystem to facilitate online purchase. Data proves that ecommerce growth is spurred by higher adoption of electronic payments. India is predominantly a cash driven economy. The number of credit cards in India is 19 mn (with 7 mn active card users) and the number of debit cards is 350 mn. Indians use debit cards primarily for utility bills and credit cards for online purchases. With such low penetration of credit card and absence of popular payment gateway like PayPal most online buyers prefer Cash on Delivery. About 60% of online transaction are Cash on Delivery. Cash on Delivery is not a scalable and sustainable model from a ecommerce company point of view as it increases the collection effort and the risk borne by the seller significantly.


So far ecommerce players have not been able to solve this payment puzzle of including the vast majority of non banking Indian population and yet bringing down the overall risk exposure of sellers.





 
Infrastructure
There are roughly 154000 pin codes in India. DTDC the largest courier company in India can deliver only to 10000 of the pin codes. People in small towns and rural india (where approximately 70% of population reside) doesn't have access to buy online.  As growth of ecommerce is driven by efficiency of the delivery network this is a major opportunity for growth. Average delivery time for ecommerce companies in India is 2- 4 business days for non-metros and about 1-2 business days for Metros. 

This longer delivery time reduces the desirability to buy online. Also the lack of coverage excludes a vast majority of population from trying the online purchase model.


Crossing the Chasm

Ecommerce industry is at inflection point in India today. So far the growth is driven by the innovators and early adopters who have started using the online buying channel. However to maintain a sustainable growth, ecommerce companies need to cross the chasm and start attracting the early majority users. In order to do this they need to focus increasingly on the following three dimensions:

Mobile: As majority of Indian internet users are being added through mobile it is essential that Indian ecommerce site support all the critical web features on mobile and simplify and improve the mobile site experience significantly. Most mobile phones in India are feature phones with a 2G/GPRS connection and ergo it is imperative to have a Mobile Web led strategy  rather than Mobile App driven strategy. Also there has to be an increased emphasis on innovating on mobile payment solution as low penetration of online payment is the primary hindering factor for scaling online transactions. Additionaly, Indian ecommerce sites should seek new ways of converting the on deck users to off deck users.

Social: Indian internet users spends a disproportionately large amount of time on social networking. Indian internet users who spend time on the networking site are mostly youngsters who have a strong influence on the purchase decision of the family. It is imperative for Indian ecommerce sites to engage with these people through product offerings on social networking sites. Indian ecommerce sites can also use the social networking channel to listen to the opinions and needs of customers. Yet another way by which Indian ecommerce sites can leverage social media to increase adoption of online transactions, is by building features and mechanism to allow customers to engage their social network in the purchase decision.

Local: A primary reason for growth of ecommerce across the world is increase of online presence of traditional retailers. This leads to increased pricing competition and also more convenience for users. In India approximately 1 percent of the 47mn businesses are online which leaves a lot of opportunity for growth for Indian ecommerce sites. Most local retailers, who have built successful brick and mortar business, fundamentally lacks the understanding and capability to build a successful online business. The ecommerce sites can play a pivotal role in building online presence for these retailers - provide a platform to build the online identity of retailers and also on boarding their inventory online; help in branding of the retailers to online consumers; drive traffic to the online stores of retailers. 

I will focus on a more detailed approach for each of the above mentioned dimensions in subsequent posts.