Indian e-commerce industry: riding on high tides

Indian E-commerce …Riding High TidesThis report is solely for the use of Zinnov Client and Zinnov Personnel. No Partof it may be quoted, circulated or reproduced for distribution outside the client Zinnov Management Consultingorganization without prior written approval from Zinnov

E-commerce activities in India are rapidly growing 1 Huge existing opportunity Estimated revenues of USD 125-160 bn by 2025 6 2 Wide range of marketing E-tailing to outpace e- channels used; mobile yet travel to be leveraged Mass-media advertising being Expected CAGR of e- deployed for brand building; social E-Commerce tailing 4x that of online media effective in driving traffic India Trends travel 5 3 Managed logistics to Consolidation prevail unavoidable E-commerce specific logistic services 4 Focus on profitability VCs getting cautious of emerging investing; expect consolidation driving new business models Scale to drive profitability; companies entering multi-category retailing and launching self-owned brands

Huge existingE-commerce presents an unparalleled USD 125-260 bn opportunity (1/2)opportunity Explosive Growth in Number of people below E-commerce • ~450 Mn smartphone users to by 2015 the age of 35 to reach • ~100 Mn 3G users by 828 Mn by 2015 2015 Favored Growing Smart Demographics Phone Adoption Growing Internet Huge Retail Industry User Base USD 125-260 Bn • ~376 Mn unique • ~USD 900 Bn worth retail sector by 2014 internet users by 2015 • Indian e-commerce revenue • Current contribution of projected to reach USD 125-260 • Current users: 120 Mn online sales: only 0.47% Bn for the year 2024-25 • Current revenue: USD 10 Bn“An e-commerce firm can become India’s largest retailer by 2015” Vishal Mehta, CEO, Infibeam Source: Avendus Report; Morgan Stanley Research; Pricewaterhouse Coopers; Comscore 3

Huge existingConsumer preferences echo high growth prospects for opportunity (2/2)e-commerce Consumer Perception of E-Commerce (based on survey1) Frequency of Online Expected Number of Online Using Mobile Phone for Purchases During Last Year Transactions in the Future Shopping Multiple Currently Once in 6 Substantial Do not times a usingmonths or less increase want to use month 25% 22% 29% 32% 23.5% No Increase Once a Some Not aware, Once in 3 17% Would be month increase but willing months using in the 27.5% 54% to try 27% future 7% 36% • Over 83% of the • Over 77% of the respondents forecast an • Over 68% respondents respondents shopped online increase in online currently using or willing at least once in 3 months purchases to use mobile for online • Over 50% have shopped at • Only 3.3% respondents do transactions least once in the last month not intend to shop online Source: Zinnov Primary Survey 4 Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behavior towards e-commerce; the survey was conducted during June-July, 2012

E-tailing to outpace e-travel (1/2)E-tailing to grow 4 times as fast as online travel E-commerce Market segmentation E-tailing growing tremendously; will account for 51% ~50% of the e-commerce by 2015 90% 87% 78% 49% 10% 13% 22% CAGR of E-Tailing = 4x CAGR of online travel 2010 2011E 2012E 2015E (2012E – 2015E) E-Tailing Online Travel Category of goods comfortable in Based on purchasing online consumer survey1 Books 80% More people more comfortable with buying Travel Tickets 65% books than travel tickets Electronics 45% Electronics and Local Deals comparable Local Deals 43% 0% 20% 40% 60% 80% 100% Source: Avendus Report; Morgan Stanley Research; Comscore; Zinnov Primary Survey 5 Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

E-tailing to outpaceMajor obstacles to e-retailing adoption have been e-travel (2/2)addressed Online • Online travel, unlike e-tailing o required minimal infrastructure investment Travel vs. o had a commoditized service offering, helping it take a lead over the latter E-tailing o zero lag time in order fulfillment built trust Building Trust • Trust built by extensive marketing • Offering fraud-proof options, such as COD1 and easy returns Discounts Strategic Products • Product categories, such as • Discounts driving Why books and electronics, adoption E-tailing will which don’t require • 25% - average product Catch Up? extensive touch and feel discount offered2 driving growth • Key investments in logistics/ supply chain • Well supported by 3rd party companies for pan-India coverage Logistics Infrastructure Source: Sequoia Capital, Zinnov Primary Research 6 Note: 1Cash on Delivery; 2According to Sequoia Capital

ConsolidationVCs getting cautious after heavy investments last year – unavoidableindustry expects consolidation “VCs are investing in e-commerce companies on the high VC funding - Huge growth in Year 2011 risk-return probability and are betting on finding strategic Total Investments (USD Million) partners at a later stage to acquire these companies”, — Srividya C G, Partner, Valuation Services VC funding has witnessed a dip since “Fear of missing the bus in a potentially huge market November 2011, opportunity is causing a herd mentality among VCs. Around 902 compared with the 3-4 players will emerge winners over the next few years”, first 8 months of the —Alok Mittal, MD of VC firm Canaan Partners 105 111 year which saw heavy investments by VCs “Flipkart and Myntra expected to gain 50% market share by 2009 2010 2011 2014”, —India E-Retail Market, Companies Revenue Analysis & Forecast to 2015, Bharat Book Bureau Over 800% Recent Acquisitions growth in VC Off-late, VCs Consolidation funding from have become unavoidable 2009 to 2011; extra-cautious in the medium market, then in while investing term; its infancy, in the industry; acquisitions witnessed have tightened already emergence of money supply happening many start-ups Source: IAMAI, 2011 Report; Avendus; Press Articles 7

Focus on profitability driving new businessProfitability remains elusive due to multiple hindrances models (1/4) Expensive • High cost of customer acquisition (~INR 1,500 for online acquisition), and small Customer basket size hinder profitability Acquisition • Repeated purchases must to compensate acquisition spending Capital • E-tailing involves heavy investments into supply-chain and warehouses Intensive • Companies hold extensive inventory of up to 3 months in-order to get Business discounts from their suppliers KeyChallenges High • In-house logistics require up-front investments while third-parties are Shipment operationally expensive Costs • Typically, delivery costs 5-10% of the product value, higher for COD shipments Focus on • E-tailers burning cash to fuel growth; offering discounts deeper than their Growth pockets and spending heavily on advertising and marketing Source: News Articles; primary Interviews with senior stakeholders of companies 8

Focus on profitability driving new businessScale is imperative for operational profitability models (2/4) Cost split of a typical SKU1 with ASP2 of INR 1,200 Effect of Effect of Indicates Increasing Increasing decrease in Scale Average Loss Scale cost with Warehousing and Per Transaction increasing scale Shipping Net Loss INR 150 INR 90 Indicates no effect of Packaging increasing INR 25 scale COGS3 Payment INR 780 Gateway/COD INR 35 Total expense = • Average loss of INR 90 on a typical SKU with INR 1,290 average selling price of INR 1,200 Discount or Voucher • On increasing scale, companies can become INR 300 profitable by reducing the cost of warehousing, shipping, and packaging, per shipment Selling Cost of Free Inventory and Gross Discount Packaging COD cost Warehousing Manpower Price Item Shipping Write-offs Margin Books 100% 60% 30% 1% 10% 8% 1% 4% 10% -24%Mobile 100% 88% 10% 1% 2% 2% 1% 4% 5% -13%Apparel 100% 65% 15% 1% 10% 4% 1% 2% 10% -8% Source: Sequoia Capital; News Articles 9 Note: 1 Stock Keeping Unit, 2 Average Selling Point, 3 Cost of Goods Sold

Focus on profitability driving new businessFocus on increasing profitable growth models (3/4) Money Supply Evolving Tightened by Business VCs Models Growth no more USD 829 Mn acceptable at the Turbulence in invested in e- cost of profits Modifications inEurozone effecting commerce from operationaleconomic climate Jan to Oct 2011 Companies cutting strategies and all across the costs and moving tweaking of world to performance business models Only USD 97 Mn in the between Nov- driven advertising on a rise Dec 2011 Global Increased Focus Economic on Profitable Climate Sours Growth “It has now become imperative that companies look at metrics they have till now ignored so they at least start chalking out a road to profitability”—Prashanth Prakash, Accel Partners Source: News articles; primary Interviews with senior stakeholders of companies 10

Focus on profitabilityCompanies innovating their business models to attain driving new business models (4/4)profitable growth Customer acquisition cost too high to make single purchase profitable Multi-category • FirstCry diversified from babycare to beauty care products with Good Life Retailing • Fashion&You diversified portfolio from women apparel to Home décor, Electronics, Kids’ and Men’s clothing E-tailers venturing into lucrative space of selling self-owned brands • Myntra plans to sell its own brand of products by 2013 Self-owned Brands • Launched by founders of exclusively.in, SherSingh retails products under its own label Deals-only websites enter pure-play retailing From Deals to E- • SnapDeal started selling products after moving into pure-play retailing tailing "We have seen that after expanding our offerings, the frequency of purchase has gone up significantly.”— Sandeep Komaravelly, VP Marketing, Snapdeal E-tailers acting as digital storefronts for suppliers who stock and ship Offloading • Aaram Shop tied with local retailers to fulfill customer orders; revenues from ads Shipment to • Drop shipping: Under the model, e-tailers forward customer orders to their Suppliers suppliers for a margin and offload shipment to them, thus saving logistics & warehousing costs In addition to bulk buying and bypassing intermediaries, companies actively buy off-season products for availing deep discountsOpportunity Buying • “We actively buy off-season goods, typically available at 30-50% discount compared with fresh stock” – Senior Manager Operations, Leading Indian E-tailer Source: News articles; Zinnov Analysis 11

Managed logistics to prevail (1/3)Upfront investment in in-house logistics is hard to justify In-house Third-party Parameter Key Parameters Logistics Managed Logistics In-house logistics require heavy upfront Capital Expenditure investment Logistic networks of third-parties reach Last mile Access the farthest corners of the country Expertise in Experience and expertise of specialist Operations third-parties is hard to copy Agility to Respond to Easy to modify logistic strategy and Dynamic Market switch partner with third-party logistics Operational Risk & Financial & management resources Requirement of needed to run in-house teams; additional Management operational risk assumed Managed services are generally costlier; Delivery Cost may change with industry growth Source: Primary Interviews with senior stakeholders of companies 12

Managed logistics to prevail (2/3)E-tailing headed towards outsourcing model? Telecom Industry BFSI Industry E-commerce Industry (2004 to Present) (2010 to Present) (2011 to Present) Telecom companies Key functions outsource including ATM E-commerce logistics infrastructure installation and – a prime candidate installation and management, and IT for outsourcing management, and solutions outsourced IT solutions Is e-commerce headed towards managed Logistics? Source: News articles; Zinnov Analysis 13

Managed logistics to prevail (3/3)Managed logistic services to prevail Specialist e-commerce logistic companies, such as Delhivery, Chhotu, and Holisol, In-house emerging logistics teams catering only to a few metros1 Emergence of Poor Access E-commerce Through Specific LogisticIn-house Teams Services Tier-2 onwards cities accessible almost exclusively by Existing logistic providers, such as DTDC, are third parties2 creating separate arms for catering to e- commerce business Note: 1Only exception is Flipkart which has in-house teams in about 27 cities; 2Most companies use India Post for accessing customers unreachable through private logistic players, such as DTDC, Gati and Blue Dart | Source: Primary interviews with senior stakeholders of companies; Zinnov Analysis 14

Wide range of marketingMobile offers much higher potential than currently channels used; mobile yet to be leveraged (1/3)leveraged Based on consumer survey1 High Willingness Limited Penetration Over 68% of Only 6% of the respondents respondents willing to shop using their online through mobile often mobile to shop online Small screen (48.7% respondents) • Reduces visibility and usability Deterrents to Slow internet (41% respondents) • Low 3G penetration of 4% Mobile E-commerce Unavailability of • Most retailers don’t have mobile apps/mobile websites (31% respondents) apps or mobile friendly websites Source: E-commerce consumer survey conducted by Zinnov 15 Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

Wide range of marketingSocial media is effective in directing web-traffic to channels used; mobile yet to be leveraged (2/3)e-tailers Industry Trends Consumer Insights (Based on Survey) • Heavy advertisement through social • 50% respondents of survey purchased/ visited media by e-tailers such as Myntra, an e-commerce site through social media Valyoo Technologies and Jabong • 44% respondents of survey influenced by Social Media friends and colleagues • Ads targeted towards traffic generation as opposed to brand building • Specialized teams to monitor Snapdeal’s customer reviews for any negative Facebook Page posts Consumer • Players approach the authors and • 70%+ respondents influenced by consumer Reviews try to address their issues reviews to a large extent • Customer reviews most influential while • Negative SEO techniques used to purchasing electronics suppress unfavorable reviews Source: Primary Interviews with senior stakeholders of companies; E-commerce consumer survey conducted by Zinnov 16 Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

Wide range of marketing channels used; mobile yetFocus on mass-media for brand building to be leveraged (3/3) Industry Trends Consumer Insights (Based on Survey) • Leading e-tailers, such as Myntra, Jabong and Flipkart, using TVCs, print • 71% of the respondents cited ‘Reputation and Trust’ as a major factor in decision making media and out-of-home promotion Mass Media • Stakeholders believe mass media to • 63% respondents directly explored e- commerce sites to research about an online Advertising be most effective for brand building purchase; driven completely by brand recall • Ads focused on building trust; highlight easy return policy, money Flipkart back guarantee and COD TVC Myntra • Most companies deploy SEO and Outdoor Ad SEM techniques for traffic Online generation • 47% of the respondents initiate their first visit Marketing • However, online customer to e-commerce sites using search engines acquisition remains costly, with each • 52% respondents use search engines while costing ~INR 1,500 researching about online purchases Source: Primary Interviews with senior stakeholders of companies; E-commerce consumer survey conducted by Zinnov 17 Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

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Indian e-commerce industry: riding on high tides

by Zinnov on Jul 30, 2012

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