Knowledgefaber E-commerce Paper: Focus on E-tailing

Knowledgefaber Emerging Opportunities - Emerging Economies December 12, 2011E-Tailing landscape in India: Existing scenario and the wayforward Prepared by: Amit Goel Vipul Vohra Tricha SharmaThis document is prepared by Knowledgefaber as a part of its research offerings Sumit Kumar July 2011

Table of Contents Contents Slide No. 1. What is E-Commerce? 1.1 Definition of E-commerce 3 1.2 Most significant advantage of online retailers 4 2. Indian E-Commerce Industry 2.1 E-Commerce Industry in India – Stupendous Growth 5 2.2 Evolution of E-tailing in India 6-7 2.3 What things current E-tailers are doing right vis-à-vis past 8 3.Analysis of current trends in Indian E-tailing 3.1 Product categories suitable for E-tailing 9 3.2 Performance metrics for E-tailing and current trends 10-11 4. E-Tailing formats in India 4.1 E-Commerce formats in India 12 4.2 Generic E-tailers 13 4.3 Online store of physical retailers 14 4.4 Niche Players 15 4.5 Daily deal sites 16 4.6 Online travel websites 17 5. VCs and investors – how the money is pouring in? 18 6. Looking into the future 6.1 Existing E-tailers 19 6.2 VCs/investors 20 7. Appendix 21December 12, 2011 2 KF

1.1 Definition of E-commerce E-commerce: What the term means Use of the term “E-commerce” has expanded to include various business models but primarily it include Conduct of a financial transaction by electronic means or electronic buying of products, services or information using internet as a platform This electronic buying process encompasses all the steps involved in a transaction such as on-line marketing, ordering payment and support for delivery This process also includes electronic provision of services such as after sales and customer care How the business model of online retailers add value compared to physical retailers? Physical Retailer Online Retailer or E-tailer Advantages: Advantages: Provides face to face selling making shopping an Cost effective as online retailers does not have to invest in experience physical infrastructure (store, real estate cost, sales force Customers get access to better product information etc.) through in-store sales representatives Provides ease and convenience of shopping at any time Disadvantages: and from any location Higher costs of operation (real estate costs, store costs, Disadvantages: pilferage losses and store sales force costs) than online Have to invest in logistics operations retailers Highly competitive (millions of sites competing against the same set of customers resulting in low customer stickiness) Business models of many online retail formats are still unproven with players struggling to break even Little customer interaction (phone lines, email inquiries)December 12, 2011 3 KF

1.2 Lower Prices: Most significant advantage of online retailers An Example: How E-tailers are attracting consumers by offering 20-30% lower prices than physical retailers Huge benefits for online shoppers: MRP of a book in a physical Online retailers are looking for customer acquisition mainly book store = INR 500 and not for profits As a result, Indian online retailers are offering products at just about cost price or at a marginal loss Lower prices of a book coupled with free delivery and Cash-on-delivery option is a huge boon for the Estimated cost at which online customer retailer purchases directly from Example on the left illustrates how consumer is the publisher = ~ 40 – 60% of MRP benefitting from low price model of Indian online depending upon economies of retailers scale = INR 200 - 300 Total estimated cost to the online retailers = ~ INR 270-370 Estimated cost of shipping is INR Listed price on the website = INR 324 (Whole profit 20-50 + COD charges (Higher of margins are passed on to the consumers) INR 30 or 2.1% of package value) = ~ INR 70 MRP in physical book store at 10% discount = INR 450 Total savings for the consumer = INR 126 or 28% Source: E-commerce in India: The second coming, Forbes.com Note: If a player has its own logistics team, then COD charges are replaced by cash management costs which are very lessDecember 12, 2011 4 KF

2.1 E-Commerce Industry in India – Stupendous Growth Indian E-Commerce industry Steep growth in Indian E-commerce Industry Coming off age in recent years Industry witnessing a boom Indian E-commerce industry has come a long way 50,000 46,520 since the tumultuous days of dotcom bubble CAGR – 54.6% Floodgates were opened by online travel sites like 40,000 IRCTC and makemytrip.com which changed the way 31,598 Indians book travel tickets 30,000 19,688 Rapidly increasing Internet user base and rising middle 20,000 14,030 class with disposable income has contributed to the 8,146 10,000 flourishing of industry Secure online transaction environment, measures like - Cash-on-delivery, focus on customer service has 2007 2008 2009 2010 2011 motivated Indian consumers to place their trust in Market Size (INR Cr) online shopping Source: Indian E-commerce report, IAMAI Online Shopping behavior among Indians Market share of various categories in Indian E-commerce Based upon survey in 4 metro cities Online travel dominates the online spending by Indians Other Online E-tailing 17.4 Mn Services 7% Active User 5% base Financial Services 6% Digital Downloads Looked 2% only for 13.6 Mn information Bought Online Travel products/ 7.4 Mn 80% services Source: Indian E-commerce report, IAMAI Source: Indian E-commerce report, IAMAIDecember 12, 2011 5 KF

2.2 Evolution of E-tailing in India before 2007 • Started in 1996 IndiaMart is the • Rediff.com started its oldest and largest online B2B online shopping portal in marketplace in India 2001 focusing on • It broke-even in the very first year electronic market of its launch & has registered • In 2009, Rediff.com • In the year 2006 profitable growth in all years of its generated revenues of INR Network 18 group operations 120 crore • Future Group started its started Homeshop18.com and online shopping portal compareIndia.com. FutureBazaar.com in • In 1998, Sify Technologies 2007. started its B2C portal • bsbazaar.com starts operation in 2006. The • FutureBazaar.com targeting growing internet • eBay entered the registered revenues of Rs user base. Indian market with site is owned by Business standard & 122 crore i.e., 1.5 per cent • Sify has found it difficult to acquisition of of total sales of the Future grow Baazee.com for Rs indiaplaza.in group 230 crore. • Indiaplaza.in launched • eBay sells diverse a niche portal for range of products in selling books. the Indian market • Indiaplaza.in was acquired by Fabmall in 2000, name was retained 1996 1998 2000 2002 2004 2006 2008December 12, 2011 6 KF

2.2 Evolution of E-tailing in India Post 2007 Foreign retailers planning to enter India Different E-commerce Funds starts flowing in formats emerges in Amazon.com, the world’s E-commerce sector in the sector Indian market leading online firm, is also India experiences making plans to set up Launched in early 2010, operations in India resurgence Indian E-commerce industry starts attracting a lot of Snapdeal is the most E-commerce wave in India attention and various new successful daily deals resurges as players like players launches operations website in India. It is Flipkart and Infibeam start growing by 40 -50% every operation focusing on bridging month and have more the gap which exists in than 400 employees Taggle.com, a deal customer service and quality establishing its presence website closed its of existing e-tailers in 50 cities (as of May operations citing ongoing 2011) unprofitable price wars in Indian E-commerce sector the industry starts generating interest amongst investors and VC firms and funds start flowing in 2007 2008 2009 2010 2011 2012December 12, 2011 7 KF

2.3 What things current E-tailers are doing right vis-à-vis past2010-2020 in India might become the decade of "Ecommerce". Early entrants in this domain adopted low pricingstrategy with little focus on timely delivery. This resulted in slow off-take for the industry. However, in ourresearch studies and consulting assignments in last 3 yrs, we have observed definitive trends wherein a growingnumber of customers are beginning to buy online, often high value products. Credit goes to few players/enablerswhose high attention to detail and process innovations resulted in on-time delivery and quality products. Introduction to Cash on Delivery and E-wallet • Cash on delivery has been a successful method to attract Indian consumers who are wary of shopping online because of online scams. This approach has been successful in solving the twin problems – “bridging trust deficit” in the minds of Indian consumers for transacting online and the low penetration of debit/credit card On time Delivery •The consumers refrain from buying online as they do not know when goods will arrive. But, nowadays, Ecommerce companies have been managing quick turnaround and delivery times. Features like order tracking has helped the customers know the status of their order • Still, Indian players have not been able to attain “same day delivery” User Experience and Customer support • Companies have invested in features like user friendly websites, call center for assisting customers in placing and tracking orders or lodging complaints, customer friendly return policies etc. Branded Products at Heavily discounted Prices • Ecommerce companies have leaner operations to facilitate direct buying from vendors and cutting down costs which they are able to pass on to the consumersDecember 12, 2011 8 KF

3.1 Product categories suitable for e-tailing Knowledgefaber has categorized various product categories based upon price value and supply chain complexity to analyze current and future product mix in Indian E-tailing market 4 3 High Electronics, Cars, mobiles, motorcycles, cameras, B2B AC home Commerce – (manufactur appliances, machinery ers selling High-end and other directly) etc. Value jewelry high value products B2B Commerce – Books, Corporate gifting, CDs, 2 promotional Personal items, stationary Care, etc. Apparels, Vegetables, Low Shoes, Poultry Bags, products, perfumes Automotive spare parts 1 & accessories Low High Supply Chain complexity Indian e-tailers are currently operating in quadrants 1 and 4 mainly. Challenge going forwards is to add more and more product categories in these quadrants Quadrant 3 is the category most difficult to sell online but is profitable Quadrant 2 also contains product categories which require robust infrastructure to sell online and some of the categories like grocery, vegetables etc. are also not very profitable Supply Chain complexity – includes parameters like ease of procurement, storage, handling, transportation, packaging, delivery and installation/demos (if required)December 12, 2011 9 KF

3.2 Performance metrics in E-tailing and current trends Knowledgefaber has come up with performance metrics (analogous to physical retail) to evaluate the existing trends in Indian E-tailing Performance Metrics in Corresponding Performance Current trends in Indian E-tailing physical retail Metrics in online retail With increasing internet penetration and effective Number of footfalls Traffic volume on website marketing by e-tailing companies, traffic growth has been robust Footfall-sales conversion Traffic-sales conversion are bound to be lower than Traffic-sales conversion physical retail and currently hovers around 3 – 6% Sales growth from existing With market in nascent stage, established categories like Same-store sales growth books, mobile, electronics etc. are experiencing product categories significant growth Sales growth from new Current e-tailing players enjoy higher growth from new New-store sales growth product categories product categories due to low base effect To increase the average basket size of the customers, e- Average basket size Average cart size tailers resort to bundling and dynamic buying recommendations, practices which are still in nascent stage in Indian e-tailing industry Indian e-tailing websites are experiencing high Repeat purchase Repeat purchase percentage of repeat purchases with 50-70% customers being the repeat purchasers Customer acquisition cost Customer acquisition cost Indian e-tailers are currently in the process of establishing a brand and hence high acquisition costsDecember 12, 2011 10 KF

3.2 Performance metrics in E-tailing and current trends Knowledgefaber has come up with performance metrics (unique to E-tailing industry) E- to evaluate the existing trends in Indian E-tailing Performance Metrics in online retail Current trends in Indian E-tailing It is defined as the interval between the time when an order is received Order Processing Time and when it is shipped. Ideally, it should be lesser than 24 hours but no Indian online retailer has been able to achieve this standard currently Time taken to ship order to the customer’s door step. Few players like Shipping Time Flipkart have been able to reduce delivery time greatly by operating their own logistics operations but still no Indian player has achieved “same day” delivery Only few players have implemented consumer friendly return policies. Return policies/mechanism But robust return mechanism is still a missing link for many Indian online retailers Average time spent on site per user With increase in product categories and online catalogues, average time spent by Indian online shoppers has been steadily increasing Many Indian online retailers are constantly investing in up gradation of Site performance technology. As a result, user experience in terms of site performance is improving all the timeDecember 12, 2011 11 KF

4.1 E-Commerce formats in India Major E-Commerce Formats in India E-tailing Formats in India Generic E - tailers Online stores of Online Niche Players Deal aggregators physical retailers TravelDecember 12, 2011 12 KF

4.2 E-tailing formats in India Generic E-tailers Website acts as the sole front end of the respective player where customers can choose from online catalogue and place order. Overview Telephonic sales channels are also established to augment sales E.g. – Flipkart, Infibeam, Letsbuy.com etc. Revenue through online (sometimes inbound telephonic also) product sales Business Model & Target Internet savvy customers mostly in Tier I and Tier II cities Segment Scalability depends upon internet traffic growth rate and a change in consumer buying behavior Scalability Existing set of low prices are helping to attract throng of customers and enabling E-tailers to scale up Low investment needed in front end and hence able to offer lower prices and wider product variety Strengths Provides ease and convenience of shopping from any location or at any time Needs to have a robust backend to ensure timely delivery and service level Managing return supply chain is a complex challenge for existing players Challenges Online stores have to ensure safety and security of payments to abridge trust deficit existing in the mind of consumersDecember 12, 2011 13 KF

4.3 E-tailing formats in India Online stores of physical retailers Many Indian retailers operate online portals to adopt a multi channel retail strategy and complement their physical stores Overview Online stores targets acquiring new customers who are more convenience driven rather than looking for in-store experience Revenue through online (sometimes inbound telephonic also) product sales Business Model & Target Existing/new set of customers who prefer convenience more than in-store Segment experience Scalability is driven by brand value of the physical retailer and convenience factor demand amongst its consumers Scalability Scalability in this model will happen only with a paradigm shift in consumer preference for convenience rather than in-store experience Existing brand in physical domain helps win over the customers Online stores acts as extension of physical business enabling a player to Strengths execute multi channel retail strategy Pricing decisions becomes very critical as offering lower prices on online portal compared to physical stores will give rise to a “price arbitrage” Challenges Physical retailer has to invest in backend infrastructure and logistics to ship directly to retail customersDecember 12, 2011 14 KF

4.4 E-tailing formats in India Niche Players Unlike generic E-tailers, niche players in E-commerce are just focussing on a single product category/type Overview Niche product categories includes apparel, footwear, baby care, personal care etc. Revenue through online (sometimes inbound telephonic also) product sales Business Model & Target Internet savvy and price conscious customers mostly in Tier I and Tier II cities Segment Scalability is limited as they are catering to niche demands It is imperative to offer a host of products to gain new customers and hence Scalability niche players will scale up based upon depth of variety they are offering Wide product variety at lower prices Ease and convenience of shopping from any location or at any time Strengths Niche players are focussing on “touch and feel” intensive products (apparel, footwear etc.) which involves high consumer inertia regarding online buying Challenges Maintaining a balance between brand exclusivity and lower prices than physical storesDecember 12, 2011 15 KF

4.5 E-tailing formats in India Deal Aggregators/Daily Deal Websites Offers discount coupons to consumers for various products and services (restaurants, spas, hotels, travel deals etc.) Overview Front end includes a website where discount coupons can be purchased and a sales force which enlists merchants and deals Revenue sharing/commission received via merchants Business Model & Target Internet savvy and price conscious customers mostly in Tier I and Tier II cities Segment Scalability is a function of number of merchants/variety of deals one can bring to the table, which is in turn driven by sales force on the ground. Hence, Scalability scalability is limited Acts as aggregator of demand and enable partner merchants to enjoy economies of scale and higher sales volume Strengths Merchant ends up making no money on many deals as lack of repeat purchases nullify initial investment by the merchant in the deal Challenges Encourages “deal hunting” mind set among consumers lowering her price expectations for the products and servicesDecember 12, 2011 16 KF

4.6 Online travel websites Online travel websites This category consists of players who focuses on meeting a single consumer need through wide range of products (air travel, rail travel, hotel Overview accommodation, travel packages etc.) Focuses mainly on convenience rather than low prices Revenue through online (sometimes inbound telephonic also) tickets/package Business Model & Target sales Segment Travel websites have been able to scale up based upon convenience as the central tenet of their value proposition Scalability Ease and convenience of shopping from any location or at any time Wide range of choices for consumers and these websites acts as “one stop Strengths solution” Highly competitive landscape Players like makemytrip and cleartrip have to compete with end-service Challenges providers which operates their own websites (irctc.co.in, indigo.in etc.)December 12, 2011 17 KF

5. VCs and Investors – How the money is pouring in? VC Funding – Sudden rush to paint the “white space” VC Funding – Huge growth in year 2011 VC Funding amount by investors 350 100 305 82 280 80 210 60 140 114 40 36 35 31 23 70 55 20 16 45 - - 2008 2009 2010 2011 YTD Accel India Tiger Capital IndoUS Helion Nexus Sequoia Venture Venture Venture Capital Total Investments ($ million) Investments from 2009 to 2011 ($ million) Source: Venture Intelligence Source: Venture Intelligence Top PE/VC investments in E-commerce for YTD Company Investor Amount($mn) Yatra Online Intel Capital, Norwest, Valiant Capital 45 Fashion and You Sequoia, Intel Capital, Norwest, Nokia Growth Partners 40 Snapdeal.com (Jasper Infotech) Nexus, IndoUS Ventures, Bessemer 40 Naaptol.com NEA, Canaan Partners, SVB 25 Flipkart Tiger Global 20 Source: Venture IntelligenceDecember 12, 2011 18 KF

6.1 Looking into the future Looking into the future – What should various e-tailers do to sustain this golden era of Indian E-commerce E-tailing Players Currently all E-tailing players are focusing more on acquiring customers and shaping purchasing habits rather than profitability However, waging price wars to acquire customers is not a long-term winning formula, as the recent closure of Taggle (a daily deal site) shows Rather existing players needs to focus on building a unique customer value proposition, rather than becoming a “me too” player, through host of measures such as: E-tailers should Building a robust supply chain and logistics infrastructure – look at building Using best practices for inventory optimization unique customer Inbound and outbound transportation spend optimization value De-bottle necking procurement and shipping operations propositions Implementing industry wide best practices in sourcing and fulfillment operations rather than Wide product variety Keep on adding more and more product categories/merchants to capture more and more of the “long tail” of waging price Indian E-shoppers wars Develop competitive and innovative “white spaces” to fuel future growth Technology With smartphones and tablets on a high growth path in Indian market, it makes absolute sense to launch a user friendly mobile application (should be as interactive an intuitive as the website) Using web analytics to analyze consumer behavior and strategize future sales and marketing campaigns Geographic expansion Using hub and spoke model of fulfillment, Indian online retailers can look at expanding geographically into other South East Asian markets Increasing customer retention through Customer loyalty Programs Card-based/ reward points based loyalty programs are very helpful in retaining customers and motivating them to make repeat purchases (makemytrip.com has launched a rewards program off late) Note: Knowledgefaber offers a comprehensive set of consulting services in each of the above mentioned domain and growth areasDecember 12, 2011 19 KF

6.2 Looking into the future Looking into the future – What should various VCs/investors look at for generating returns? VCs/investors Looking at new “white spaces” in the domain VCs/investors VCs and Investors are always looking to invest in high growth unexplored areas (“white space”). But, Indian E-tailing is becoming more and more crowded should look to Hence, it is imperative for VCs/investors to look for new white spaces in this domain rather than backing back players any “me too/also ran player” with robust Example of white space - Enablers in E-tailing ecosystem like: business An analytics player which can provide innovative tools specially designed for E-tailing players models or (Netflix and Amazon makes extensive use of analytics to develop competitive advantages) A logistics provider/ shipper specially catering to online retailers exciting new Or, players in E- Players offering new product/service categories like providing skilled labor, auto accessories etc. tailing domain Backing only those existing players who possess robust business models and better profit margin visibility Currently, no investments in Indian E-tailing are made based upon current profits because none exists Existing players are likely to continue focus on aggressive customer acquisition and next series of funding would be utilized for this only However, going forward, existing players have to focus on profitability to exhibit sustainability and viability of their business models Note: Knowledgefaber offers a comprehensive set of consulting services in PE advisory and growth consultingDecember 12, 2011 20 KF

7. Appendix AppendixDecember 12, 2011 21 KF

7. Appendix Evolution of secure payment gateways has acted as a catalyst for the growth of E-tailing in India List of payment gateways in India Company Cc Avenue HDFC Times of Money DirecPay ICICI Payseal EBS Transecute ABC Payments Pay U (MIH Venture) Paypal Indiapay Payment SolutionsDecember 12, 2011 22 KF

7. Appendix E-commerce industry has been growing at a robust pace for past 3 years and is expected to sustain this momentum Growth of E-commerce industry over the years Year Dec 2007 Dec 2008 Dec 2009 Dec 2010(E) Dec 2011(E) Total Market Size 8146 14,030 19,688 31,598 46,520 Online Travel 6250 (77% of total 10,500 (75%) 14,953 (76%) 25,258 (80%) 37,890 (81%) Industry E-commerce market) Online Non- 1896 (23% of total 3530 (25%) 4,735 (24%) 6340 (20%) 8,630 (19%) Travel Industry E-commerce market) E-tailing 978 1,120 1,550 2,050 2,700 Digital Downloads 238 290 435 680 1,100 or Paid Content Subscription Financial Services 1200 1540 2000 Other Online 680 920 1210 1610 2,150 Services (Incl. Online Classified) Source: Indian E-commerce report, IAMAIDecember 12, 2011 23 KF

7. Appendix E-tailing industry is dominated by computers and mobiles Break up of E-tailing industry Other products (toys, gifts, flowers) Home & kitchen 3% appliances 4% Electronic durables 13% Computer accessories & peripherals 36% Personal Items 19% Cameras & mobiles 25% Source: Indian E-commerce report, IAMAIDecember 12, 2011 24 KF

Thank You ! Contact Amit Goel, CEO, Knowledgefaber www.knowledgefaber.com amit@knowledgefaber.com Registered Office Corporate OfficeKnowledgefaber, 203, 2nd Floor, Promenade, Knowledgefaber, 404/405, Prestige Center Dasarahalli Extension, Point, Cunningham Road Bangalore, KA 560024 Bangalore, KA 560052 India India Phone: +91-80- 41231576 25 KF

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