E-commerce in India, 2012 report

1. By Upasna Kakroo
In the last decade, India has made a
name for itself as a tech player. But that
reputation, however well-deserved, belies
important limitations – and these are
having a big effect on the development of
online commerce.
Forastart,Internetpenetrationisstill
verylow,withonly8.4%ofthepopulation
online.ThenthereisIndia’sgreatsize,
unpredictablelogisticsandcreaky
transport.Bricks-and-mortarretailers,
manyofwhomhavecultivatedrichand
long-lastingrelationshipswiththeir
customers,offertoughcompetition.And
finally,90%ofallretailtransactionsare
conductedincash;onlineworksbestwith
plasticorelectronicmoney.Nowonder,
then,thate-commerceaccountsforless1%
oftotalretailsales(comparedtomorethan
4%inBrazil).
Andyet….theopportunityisjusttoo
alluringtoignore.Eightypercentofcurrent
Internetuserssaytheyareplanningto
shoponlineinthenearfuture,forreasons
asvariedasconvenienceandprivacy(for
itemslikelingerie).Moreover,India’s
onlineretailersaremakingprogress.The
e-commercemarkethasgrownanaverage
of34%ayearsince2005andwillcontinue
togrowbrisklyfortheforeseeablefuture,
reaching$2billioninsalesby2015.By
then,itisestimatedthatIndiawillhave38
millionactiveonlineshoppers.
Inacountryof1.3billionpeople,that
isstilladropinthebucket.Butbyany
standard,38millionisanappetizingly
bigdrop.Moneyistalking,too:In2011,
investorspoured$305millionintoIndian
e-commerce.
E-commerce on the move
Sofar,onlinecompanieshavebuiltthe
businessbyplayingtothenaturalstrengths
ofthechannel:focusingonyounger
andmoreaffluentconsumers;offering
aggressivepricing;andemphasizingspeed
andconvenience.
Onecategory,travel,standsheadand
shouldersabovetherest.Nearlyathird
ofIndia’stravelisnowbookedonline,
accountingfor$7billionofthe$23billion
E-commerce in India: Early birds, expensive worms
Consumer and Shopper Insights
July 2012
USD millions
SOURCE: Euromonitor, McKinsey
Exhibit 1:
E-commerce sales, by year and rate of growth
Internet retail in India
SOURCE: Euromonitor; McKinsey
2,054
1,355
930
543
302
108
2005
+34% p.a.
201513110907
Low Internet penetration and high infrastructure barriers are hobbling — but not
crippling — online shopping.

2. market.Twolocalplayersdominate
--MakemyTrip(48%marketshare)and
Yatra(30%). Inonesubcategory,train
reservations,40%ofbookingsare
madeonline,thankstothepopularity
ofIndianRailways’IRCTCsite.The
onlinetravelmarketisideallysuitedto
Indianconditions,becauseticketscan
bedownloaded,andthusthesectordoes
nothavetodealwiththetransportand
logisticalproblemsthatloomsolargefor
otherproducts.
Outsidetravel,themostpopular
categoriesaresimilartothoseseen
elsewhere,suchasmobilephones,books,
computerhardwareandconsumer
electronics.Apparelhas,however,been
slowtotakeoff.Indianconsumerslike
tofeelandtryonbeforetheybuy,and
bespoketailoringiscommon.
Asbefitsayoungandfast-growingsector,
thee-commercemarketisfragmented,
withalargenumberofplayerscompeting
inamultitudeofformats.Thereare
e-tailerslikeFlipkart,Infibeamand
Letsbuy;onlinechannelsofestablished
retailchainslikeNextandShoppers
Stop;nicheplayerslikePerfume2order
andCaratlane;anddealaggregators
likeSnapdealandCrazeal.Inaddition,a
numberofbigplayersintheappliance
andelectricalgoodssectorshavebuilt
dedicatedonlinestorefronts.These
areincreasinglysupportedbysocial
networkingfeatures,fromFacebook
pagestouserforumsandloyaltyschemes.
Finally,thereisthird-partye-commerce.
IndiatimesShopping,forexample,runs
customersupportforaglobalphone
company;thephonesaredelivered
straightfromthemanufacturer.Single-
brandoutlets,however,maystrugglefor
position,becausebargain-huntingIndian
consumers(andthatmeansjustabout
everyone)prefermulti-brandchannels
thatallowthemtocomparepricesand
productfeatures.
Atthemoment,Indianconsumersare
gettingthebetterbargainine-commerce.
Consideronlinebookselling.Ananalysis
inForbesmagazinefoundthatinaneffort
tobuildmarketshareandloyalty,many
onlineretailersaresellingatclosetobreak-
evenorevenataslightloss–essentially
transferringwhatwouldhavebeentheir
profitmarginstoconsumers.Thisis
obviouslynotalastingbusinessmodel.
Pricewarsbetweenonlineplayershave
beenharsh,andsomeearlyentrantshave
alreadybeenforcedout.“Everybodyis
inacut-throatprice,”RutvikDoshitold
theEconomicTimes. “Ifotherplayersare
sellingaproductat85rupeeswhenthe
costitselfis100rupees,itisclearlynot
sustainable.” Heshouldknow:Doshiwas
CEOofTaggle,anonlinegroup-buying
sitethatshutitsvirtualdoorslatelastyear.
Consolidationacrossthesectoris
inevitable,particularlyasoperational
excellencebecomesmoreimportant.Ravi
Adusumalli,managingpartneratSaif
Partners,aDelhi-basedprivate-equity
firm,predicts,“Oneortwocompanieswill
surviveineachsegment;otherswilleither
failorgetacquired.”
Pay now, deliver later?
Muchoftheinvestmentflowingintothe
sectorisgoingintologistics,asretailers
worktoimproveserviceandtoextendtheir
reachbeyondtheTier1cities(ie,Bombay,
Delhi,Madras,Calcutta,Hyderabad,and
Bangalore). Flipkart,forexample,India’s
largestonlinebookseller,planstobuild18
additionalwarehouses(itnowhasseven)
and25moredeliverycenters(upfrom35).
Anumberofe-tailersarealsosettingup
theirownlogisticsoperations.Itwillbe
particularlyinterestingtoseehowAmazon
does,andhowitsentranceshapesthe
market.TheAmericane-commercegiant
recentlyenteredtheIndiane-commerce
spacewithjunglee.com,aplatformfrom
whichconsumerscanbuyarangeof
products,fromdiaperstobeardtrimmers,
fromthousandsofoutlets,bothon- and
offline.Theseller,notAmazon,handles
themoney.
Whichbringsustotheotherbigchallenge:
payment.Eightoutoftenonline
purchasesmadeinIndiatodayarecash-
on-delivery.Thisisaveryexpensivefor
e-tailersandthelackofarequirement
topayup-frontencouragesawkward
consumerhabits.KVaitheeswaran,who
SOURCE: Nielsen, McKinsey
Millions of users
Exhibit 2:
Debit card and credit card users
0
50
100
150
200
250
06-072005-06
Debit cards
Credit cards
2010-1109-1008-0907-08

3. in1999foundedIndiaplaza.com,amulti-
categoryonlinestore, estimatesthat45%
ofproductsorderedonlinearerejected
atthepointofdelivery. Thatisclearlynot
sustainable,either.
TheproblemisthatIndianconsumers
arecharyofplasticandelectroniccash.
Fewerthan1%ofIndiansusecredit
cards,andthatpercentagehasnotbeen
growingmuch.Thehopefulnewsis
thatdebitcardsareclosetobecoming
mainstream,withmorethan200million
incirculation(seeExhibit2).Thelowcost
andhighconvenienceofonlineretailmay
helptoexpandcardownershipfurther;
consumershaveareasontoexperiment
withnon-cashshopping.Butthereisalot
ofconfidence-buildingtobedone:Alarge
percentage(40%andup)ofIndianssay
theyareworriedaboutcyber-security.
E-commerceencapsulatesmanyofthe
economicdynamicsof21st-centuryIndia.
Thepotentialishugeandthewitand
energyoftheentrepreneursinthesector
isimpressive.Butthepromiseisbeing
suppressedbydistinctly20th-century
problems,suchasbadroads.
OnlinecommerceinIndiaisdestinedto
grow,bothinrevenuesandgeographic
reach.Certainly,thereismoneytobe
made.Buttheshakeoutisgoingtobe
brutal,too.Thisisnomarketforwidows
andorphans.
http://csi.mckinsey.com
Upasna Kakrooisaseniorresearch
analystinMcKinsey’sGurgaonoffice.