A Crowded virtual bazaar

2011 saw online vendors hawking everything from books to apparels,cameras to LCDs.

Written by Archna Shukla | Published: March 4, 2012 2:19 am

Flipkart,a nondescript e-commerce company launched in 2007 by two IIT-Delhi graduates,became a household name in India in 2011. The same year,hordes of vendors set up shop online,creating a buzz that couldn’t be ignored. Indian buyers were suddenly inundated with deals they could not resist. There were books,music,films,mobile phones,digital cameras,pen drives,LCD screens,watches,apparels,perfumes,shoes,accessories—all sold at attractive discounts. To avail of these,all that a customer needed was a screen with Internet access.

E-commerce,after the crash and burn of 2000 and another failed attempt at resurrection in 2005,was back in 2011 and how!

Discounts site snapdeal.com says that on a certain day last year,it sold 300 Gucci wallets,offered at 77 per cent discount,in 45 minutes and 100 telecom prepaid recharge coupons in one minute. “On average,we have been selling 25,000 deals a day for the past several months,” says Kunal Bahl,founder and CEO of the discount site. Binny Bansal,COO and co-founder of Flipkart,the books-music-films online retailer,claims to be shipping 30,000 items a day on average against 3,000 a little more than a year ago. Launched in mid-2010,tradus.in,a shopping portal that also lists deals from other sites,says 70 per cent of its traffic comes from outside the top six metros in the country,which shows that online buying isn’t merely a big city phenomenon.

India,An Internet Biggie?

The Internet and Mobile Association of India (IAMAI),the industry body that tracks online consumption,estimated that by the end of December 2011,there were at least 121 million Indians who had accessed the Internet at least once in their lifetime. This made India the fourth largest Internet market in the world after China,the US,and Japan.

Retail consultancy Technopak estimates the e-commerce market in India is worth $10 billion,or around Rs 45,000 crore,and e-tailing makes for 6 per cent of this. (E-commerce includes all kinds of online dealings such as booking of flights and rail tickets,financial services such as banking and insurance,and other transactions along with e-tailing,which only includes retail goods transactions by end consumers). Though small,it’s a market that’s growing fast. Technopak says it has grown 70 per cent in the last two-three years to $0.6 billion or around Rs 2,700 crore.

But there are no official estimates on the number of online buyers. In the US and Japan,almost 90 per cent of the Internet population has online buying experience and it’s over 40 per cent in China. The corresponding number in India,however,is minuscule.

“Internet connections,Internet usage and online transactions are three different stages of evolution,” says Laxman Narasimhan,Director,McKinsey and Company,India. And the country is at the entry level of the third stage.

E-vendors claim close to 30 million Internet users have bought something online at least once. But some observers have a different take. “There is too much hype in the Internet and e-commerce story,” says Ajay Relan,a private equity veteran who has in the past led the venture capital arm of Citigroup in India and now runs his own private equity company CX Partners. Indeed,of the 121 million users estimated by IAMAI,only around 97 million access the Internet once a month. The number of those logging in everyday is even smaller at around 18 million.

Arguing that the macro factors in India are still fluid,Bejul Somaia,the India Managing Director of Lightspeed Venture Parnters,a US-based venture capital firm,says,“China has more than 250 million broadband connections,India has only around 10 million and the country is not likely to match up to China or the other big countries anytime soon.” Somaia pegs the number of online buyers at around 10 million.

The Real Bargain Hunters

Even at 30 million,the number of online buyers is too small to explain the phenomenon that e-commerce seems to have become in the past 12-18 months. Why are vendors of all kinds rushing to a market where the number of buyers is so small?

A close look at the action on the ground shows that the real deal hunters in the India e-commerce story are not retail customers but investors. “The number of Internet users has been growing steadily for the past few years but it is the investors who turned around the e-commerce story,” says Pradeep Tagare,Investment Director,Intel Capital,India,the venture capital arm of the global chip-maker.

Somaia of Lightspeed Venture says that the $1 billion valuation of travel portal makemytrip.com,a survivor of the 2005 crash,at the time of its listing on Nasdaq in 2010,tickled investors’ imagination. “Because e-tailing in India is so small,it has the potential to grow 100 per cent to 200 per cent year-on-year. It’s a very attractive proposition,especially in today’s market where most other investment options are not too inspiring,” he says.

According to estimates,more than 50 e-tail ventures were launched between 2009 and 2011. These were backed by solid venture capital and private equity investors who parked more than $500 million in these start-ups in 2011 alone. Besides,strategic investors such as Intel Capital and Nokia Growth Partners are also pumping in funds in the sector in the hope that its growth will by default strengthen their own core business such as computing or the sale of smart phones.

“The flow of capital has helped vendors create new categories,strengthen logistics,build brands and improve the quality of their services. All these factors helped the market reach an inflection point in 2011,” says Tagare.

Seeing Is Believing

It is no coincidence that e-commerce companies are today among the most prominent advertisers on television,the most expensive medium to advertise on,and in the print. Naaptol.com,a shopping and price-comparison site,was the second largest advertiser in the print in 2011,right behind Tata Motors and ahead of established names such as General Motors,Maruti Udyog,Samsung and Pantaloons Retail.

“The two things that turned around our business last year were the investments in our back-end operations and advertising,” says Flipkart’s Bansal. Snapdeal’s Bahl says,“Once we were on TV,average buyers were convinced we were not some fly-by-night operators.”

Infused with cash,these companies are now investing in strengthening logistics,hiring talent and devising ways to make customers comfortable shopping online. Flipkart,for instance,introduced the cash-on-delivery model,a risky bet that paid off and now brings in 65 per cent of its revenues. Fetise.com,an online shopping portal for men,has introduced a cash-before-delivery model where its representatives collect the cash from buyers before delivering their orders.

A lot of investment is also flowing into developing technologies that will help customers have the same buying experience that they get when they shop in a store. Several apparel sites,for instance,have features that help customers get a better view of the design and cut and some even have virtual trial rooms,where by using a webcam,customers can try out clothes.

Technopak estimates that by 2020,the e-tail industry will grow to $70 billion and several local factors will push growth. “Unlike most of its rival markets,organised retail in India is still an emerging industry and it is not likely to take off in a big way in the near future because of the high cost of real estate and borrowing funds,” says Saloni Nangia,senior vice president,retail consulting division,Technopak. On the other hand,increased incomes and young consumers will push demand. “This will propel the growth of non-store or virtual formats,” she says.

The Danger Mark

Despite the ambition and the anticipation of the budding industry,the investors,its original believers,are beginning to have doubts. “The game has just about begun and it is already too crowded,” says Somaia.

Relan points out that the industry is replete with me-too players with no differentiated business models and all of them riding on discounts. To be sure,there are already more than a dozen sites peddling coupons or discounted deals largely from local retailers. There are almost a dozen apparels sites selling similar products and brands even as new players continue to enter the scene. In a bid to cast their net wide,offline retailers such as Future Bazaar and the Aditya Birla Group have also entered the fray. There are also global e-commerce operators such as Fiftyone Inc that have begun free shipping to India products from global retailers such as Banana Republic.

“Certain categories like travel and consumer electronics are doing well online. Beyond these,other categories are still in the early stages of development and it will take them time to build traction,” says McKinsey’s Narasimhan.

Till that happens,online players will continue to burn cash to keep themselves going. Companies such as Flipkart,that have the first-mover advantage and are well-funded,have better chances of survival,say observers. Flipkart recently bought one of the largest consumer electronics vendor letsbuy.com,thus getting a head-start in a segment that offers better margins. It expected a 500 per cent jump in its 2011-12 revenues at Rs 450 crore before the acquisition. Insiders,however,point out that most companies quote the total value of orders delivered as the size of their revenues whereas their own margins are a tiny fraction of it.

It is not surprising then that global biggie Amazon is still being cautious about India. After a long wait,the world’s largest online retailer made a fringe entry under the cover of a comparison shopping site junglee.com that it had acquired 13 years ago. The site merely directs customers to third-party retailers listed on its platform instead of selling anything directly. “India is a difficult market. Besides a small base of buyers,it has several local challenges such as tying up with millions of merchandisers,catering to the diverse culture-orientations of consumers,and the small size of sales that make it a volume rather than a value game,” says Krishna Motukuri,Managing Director,tradus.in. Motukuri worked with Amazon for seven years before moving to India and,without naming his former employer,says big fish might find swimming challenging here.

Investors now realise that they will have to wait longer before their bets pay off. “There are no cash flows in the business for the next four to five years and almost everyone is going to bleed,” says Relan. He believes that this is not a business where too many players will survive. “It is clear that it is a space where the winner will take it all and the others are going to fall flat.” There is,however,no telling right now who the winner will be. As of now,everyone is in the race.

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