Knowledgefaber research report on E-tailing Industry in India. Looking at current trends and future outlook with a set of recommendations for online retailers and investors

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

2. 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 21
December 12, 2011 2 KF

3. 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)
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4. 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 less
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5. 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, IAMAI
December 12, 2011 5 KF

6. 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 2008
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7. 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 2012
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8. 2.3 What things current E-tailers are doing right vis-à-vis past
2010-2020 in India might become the decade of "Ecommerce". Early entrants in this domain adopted low pricing
strategy with little focus on timely delivery. This resulted in slow off-take for the industry. However, in our
research studies and consulting assignments in last 3 yrs, we have observed definitive trends wherein a growing
number of customers are beginning to buy online, often high value products. Credit goes to few players/enablers
whose 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 consumers
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9. 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)
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10. 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 costs
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11. 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 time
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12. 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 Travel
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13. 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 consumers
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14. 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 customers
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15. 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 stores
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16. 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 services
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17. 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.)
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18. 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 Intelligence
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19. 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 areas
December 12, 2011 19 KF

20. 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 consulting
December 12, 2011 20 KF

21. 7. Appendix
Appendix
December 12, 2011 21 KF

22. 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 Solutions
December 12, 2011 22 KF

23. 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, IAMAI
December 12, 2011 23 KF

24. 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, IAMAI
December 12, 2011 24 KF

25. Thank You !
Contact Amit Goel, CEO, Knowledgefaber
www.knowledgefaber.com amit@knowledgefaber.com
Registered Office Corporate Office
Knowledgefaber, 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