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Emerging Opportunities - Emerging Economies

E-Tailing landscape in India: Existing scenario and the way forward

December 12, 2011

This document is prepared by Knowledgefaber as a part of its research offerings

Prepared by: Amit Goel Vipul Vohra Tricha Sharma Sumit Kumar July 2011

Table of Contents
Contents
1. What is E-Commerce? 1.1 Definition of E-commerce 1.2 Most significant advantage of online retailers 2. Indian E-Commerce Industry 2.1 E-Commerce Industry in India Stupendous Growth 2.2 Evolution of E-tailing in India 2.3 What things current E-tailers are doing right vis--vis past 3.Analysis of current trends in Indian E-tailing 3.1 Product categories suitable for E-tailing 3.2 Performance metrics for E-tailing and current trends 4. E-Tailing formats in India 4.1 E-Commerce formats in India 4.2 Generic E-tailers 4.3 Online store of physical retailers 4.4 Niche Players 4.5 Daily deal sites 4.6 Online travel websites 5. VCs and investors how the money is pouring in? 6. Looking into the future 6.1 Existing E-tailers 6.2 VCs/investors 7. Appendix
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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 Advantages:
Provides face to face selling making shopping an experience Customers get access to better product information through in-store sales representatives

Online Retailer or E-tailer Advantages:

Cost effective as online retailers does not have to invest in physical infrastructure (store, real estate cost, sales force etc.) Provides ease and convenience of shopping at any time and from any location

Disadvantages:
Higher costs of operation (real estate costs, store costs, pilferage losses and store sales force costs) than online retailers

Disadvantages:
Have to invest in logistics operations 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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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
MRP of a book in a physical book store = INR 500

Huge benefits for online shoppers:

Online retailers are looking for customer acquisition mainly

Estimated cost at which online retailer purchases directly from the publisher = ~ 40 60% of MRP depending upon economies of scale = INR 200 - 300

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 customer Example on the left illustrates how consumer is benefitting from low price model of Indian online retailers Total estimated cost to the online retailers = ~ INR 270-370

Estimated cost of shipping is INR 20-50 + COD charges (Higher of INR 30 or 2.1% of package value) = ~ INR 70

Listed price on the website = INR 324 (Whole profit margins are passed on to the consumers) 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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2.1 E-Commerce Industry in India Stupendous Growth

Indian E-Commerce industry Coming off age in recent years Indian E-commerce industry has come a long way since the tumultuous days of dotcom bubble Floodgates were opened by online travel sites like IRCTC and makemytrip.com which changed the way Indians book travel tickets Rapidly increasing Internet user base and rising middle class with disposable income has contributed to the flourishing of industry Secure online transaction environment, measures like Cash-on-delivery, focus on customer service has motivated Indian consumers to place their trust in online shopping
Online Shopping behavior among Indians Based upon survey in 4 metro cities
50,000 40,000 30,000 20,000 10,000 -

Steep growth in Indian E-commerce Industry Industry witnessing a boom

46,520 31,598 19,688 14,030 8,146

CAGR 54.6%

2007

2008 2009 2010 Market Size (INR Cr)

2011

Source: Indian E-commerce report, IAMAI

Market share of various categories in Indian E-commerce Online travel dominates the online spending by Indians

Active User base

Looked only for information
Bought products/ services
Source: Indian E-commerce report, IAMAI December 12, 2011

17.4 Mn

Other Online E-tailing 7% Services 5% Financial Services 6% Digital Downloads 2%

13.6 Mn

7.4 Mn
Source: Indian E-commerce report, IAMAI 5

Online Travel 80%

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2.2 Evolution of E-tailing in India before 2007

Started in 1996 IndiaMart is the oldest and largest online B2B marketplace in India It broke-even in the very first year of its launch & has registered profitable growth in all years of its operations In 1998, Sify Technologies started its B2C portal targeting growing internet user base. Sify has found it difficult to grow

Rediff.com started its online shopping portal in 2001 focusing on electronic market In 2009, Rediff.com generated revenues of INR 120 crore

Indiaplaza.in launched a niche portal for selling books. Indiaplaza.in was acquired by Fabmall in 2000, name was retained

eBay entered the Indian market with acquisition of Baazee.com for Rs 230 crore. eBay sells diverse range of products in the Indian market

In the year 2006 Network 18 group started Homeshop18.com and compareIndia.com. bsbazaar.com starts operation in 2006. The site is owned by Business standard & indiaplaza.in

Future Group started its online shopping portal FutureBazaar.com in 2007. FutureBazaar.com registered revenues of Rs 122 crore i.e., 1.5 per cent of total sales of the Future group

1996

1998

2000

2002

2004

2006

2008

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2.2 Evolution of E-tailing in India Post 2007

Foreign retailers planning to enter India Funds starts flowing in the sector
Indian E-commerce industry starts attracting a lot of attention and various new players launches operations

E-commerce sector in India experiences resurgence

E-commerce wave in India resurges as players like Flipkart and Infibeam start operation focusing on bridging the gap which exists in customer service and quality of existing e-tailers

Different E-commerce formats emerges in Indian market

Launched in early 2010, Snapdeal is the most successful daily deals website in India. It is growing by 40 -50% every month and have more than 400 employees establishing its presence in 50 cities (as of May 2011)

Amazon.com, the worlds leading online firm, is also making plans to set up operations in India

Indian E-commerce sector starts generating interest amongst investors and VC firms and funds start flowing in

Taggle.com, a deal website closed its operations citing ongoing unprofitable price wars in the industry

2007

2008

2009

2010

2011

2012

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2.3 What things current E-tailers are doing right vis--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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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
High
Electronics, mobiles, cameras, home appliances, High-end jewelry

3
Cars, motorcycles, B2B AC Commerce (manufactur machinery ers selling and other directly) etc.

Value

high value products

Low

Books, CDs, Personal Care, Apparels, Shoes, Bags, perfumes

B2B Commerce Corporate gifting, promotional items, stationary etc.

1
Low

Vegetables, Poultry products, Automotive spare parts & accessories

Supply Chain complexity

High

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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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 physical retail
Number of footfalls

Corresponding Performance Metrics in online retail

Traffic volume on website

Current trends in Indian E-tailing

With increasing internet penetration and effective marketing by e-tailing companies, traffic growth has been robust Traffic-sales conversion are bound to be lower than physical retail and currently hovers around 3 6% With market in nascent stage, established categories like books, mobile, electronics etc. are experiencing significant growth Current e-tailing players enjoy higher growth from new product categories due to low base effect To increase the average basket size of the customers, etailers 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 percentage of repeat purchases with 50-70% customers being the repeat purchasers Indian e-tailers are currently in the process of establishing a brand and hence high acquisition costs

Footfall-sales conversion

Traffic-sales conversion

Same-store sales growth

Sales growth from existing product categories Sales growth from new product categories

New-store sales growth

Average basket size

Average cart size

Repeat purchase

Repeat purchase

Customer acquisition cost

Customer acquisition cost

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3.2 Performance metrics in E-tailing and current trends

Knowledgefaber has come up with performance metrics (unique to E-tailing industry) Eto 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 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

Order Processing Time

Shipping Time

Time taken to ship order to the customers door step. Few players like 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

Return policies/mechanism

Only few players have implemented consumer friendly return policies. 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

Site performance

Many Indian online retailers are constantly investing in up gradation of technology. As a result, user experience in terms of site performance is improving all the time

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4.1 E-Commerce formats in India

Major E-Commerce Formats in India E-tailing Formats in India

Generic E - tailers

Online stores of physical retailers

Niche Players

Deal aggregators

Online Travel

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4.2 E-tailing formats in India

Generic E-tailers
Overview
Website acts as the sole front end of the respective player where customers can choose from online catalogue and place order. Telephonic sales channels are also established to augment sales E.g. Flipkart, Infibeam, Letsbuy.com etc.

Business Model & Target Segment

Revenue through online (sometimes inbound telephonic also) product sales Internet savvy customers mostly in Tier I and Tier II cities

Scalability

Scalability depends upon internet traffic growth rate and a change in consumer buying behavior Existing set of low prices are helping to attract throng of customers and enabling E-tailers to scale up

Strengths

Low investment needed in front end and hence able to offer lower prices and wider product variety Provides ease and convenience of shopping from any location or at any time

Challenges

Needs to have a robust backend to ensure timely delivery and service level Managing return supply chain is a complex challenge for existing players Online stores have to ensure safety and security of payments to abridge trust deficit existing in the mind of consumers

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4.3 E-tailing formats in India

Online stores of physical retailers

Overview
Many Indian retailers operate online portals to adopt a multi channel retail strategy and complement their physical stores Online stores targets acquiring new customers who are more convenience driven rather than looking for in-store experience

Business Model & Target Segment

Revenue through online (sometimes inbound telephonic also) product sales Existing/new set of customers who prefer convenience more than in-store experience

Scalability

Scalability is driven by brand value of the physical retailer and convenience factor demand amongst its consumers Scalability in this model will happen only with a paradigm shift in consumer preference for convenience rather than in-store experience

Strengths

Existing brand in physical domain helps win over the customers Online stores acts as extension of physical business enabling a player to execute multi channel retail strategy

Challenges

Pricing decisions becomes very critical as offering lower prices on online portal compared to physical stores will give rise to a price arbitrage Physical retailer has to invest in backend infrastructure and logistics to ship directly to retail customers

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4.4 E-tailing formats in India

Niche Players
Overview
Unlike generic E-tailers, niche players in E-commerce are just focussing on a single product category/type Niche product categories includes apparel, footwear, baby care, personal care etc.

Business Model & Target Segment

Revenue through online (sometimes inbound telephonic also) product sales Internet savvy and price conscious customers mostly in Tier I and Tier II cities

Scalability

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 niche players will scale up based upon depth of variety they are offering

Strengths

Wide product variety at lower prices Ease and convenience of shopping from any location or at any time

Challenges

Niche players are focussing on touch and feel intensive products (apparel, footwear etc.) which involves high consumer inertia regarding online buying Maintaining a balance between brand exclusivity and lower prices than physical stores

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4.5 E-tailing formats in India

Deal Aggregators/Daily Deal Websites

Overview
Offers discount coupons to consumers for various products and services (restaurants, spas, hotels, travel deals etc.) Front end includes a website where discount coupons can be purchased and a sales force which enlists merchants and deals

Business Model & Target Segment

Revenue sharing/commission received via merchants Internet savvy and price conscious customers mostly in Tier I and Tier II cities

Scalability

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 is limited

Acts as aggregator of demand and enable partner merchants to enjoy economies of scale and higher sales volume

Strengths

Challenges

Merchant ends up making no money on many deals as lack of repeat purchases nullify initial investment by the merchant in the deal Encourages deal hunting mind set among consumers lowering her price expectations for the products and services

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4.6 Online travel websites

Online travel websites

Overview
This category consists of players who focuses on meeting a single consumer need through wide range of products (air travel, rail travel, hotel accommodation, travel packages etc.) Focuses mainly on convenience rather than low prices

Business Model & Target Segment

Revenue through online (sometimes inbound telephonic also) tickets/package sales

Travel websites have been able to scale up based upon convenience as the central tenet of their value proposition

Scalability

Strengths

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 solution

Challenges

Highly competitive landscape Players like makemytrip and cleartrip have to compete with end-service providers which operates their own websites (irctc.co.in, indigo.in etc.)

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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
350 305 82 280 80 100

VC Funding amount by investors

210

60 36 35 23 16

140

114 55

40

31

70

45

20

2008 2009 2010 2011 YTD Total Investments ($ million) Source: Venture Intelligence

Accel India Tiger Capital IndoUS Helion Nexus Venture Venture Venture Investments from 2009 to 2011 ($ million) Sequoia Capital

Source: Venture Intelligence

Top PE/VC investments in E-commerce for YTD Company Yatra Online Fashion and You Snapdeal.com (Jasper Infotech) Naaptol.com Flipkart
Source: Venture Intelligence December 12, 2011 18

Investor Intel Capital, Norwest, Valiant Capital Sequoia, Intel Capital, Norwest, Nokia Growth Partners Nexus, IndoUS Ventures, Bessemer NEA, Canaan Partners, SVB Tiger Global 45 40 40 25 20

Amount($mn)

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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 look at building unique customer value propositions rather than waging price wars

Building a robust supply chain and logistics infrastructure Using best practices for inventory optimization Inbound and outbound transportation spend optimization De-bottle necking procurement and shipping operations Implementing industry wide best practices in sourcing and fulfillment operations Wide product variety Keep on adding more and more product categories/merchants to capture more and more of the long tail of Indian E-shoppers 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
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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 and Investors are always looking to invest in high growth unexplored areas (white space). But, Indian E-tailing is becoming more and more crowded Hence, it is imperative for VCs/investors to look for new white spaces in this domain rather than backing any me too/also ran player Example of white space - Enablers in E-tailing ecosystem like: An analytics player which can provide innovative tools specially designed for E-tailing players (Netflix and Amazon makes extensive use of analytics to develop competitive advantages) A logistics provider/ shipper specially catering to online retailers Or, Players offering new product/service categories like providing skilled labor, auto accessories etc. 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

VCs/investors should look to back players with robust business models or exciting new players in Etailing domain

Note: Knowledgefaber offers a comprehensive set of consulting services in PE advisory and growth consulting
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7. Appendix

Appendix

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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 Times of Money DirecPay EBS ABC Payments Paypal HDFC ICICI Payseal Transecute Pay U (MIH Venture) Indiapay Payment Solutions

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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

Total Market Size Online Travel Industry Online NonTravel Industry E-tailing Digital Downloads or Paid Content Subscription Financial Services Other Online Services (Incl. Online Classified) 680

Dec 2007
8146 6250 (77% of total E-commerce market) 1896 (23% of total E-commerce market) 978 238

Dec 2008
14,030 10,500 (75%)

Dec 2009
19,688 14,953 (76%)

Dec 2010(E)
31,598 25,258 (80%)

Dec 2011(E)
46,520 37,890 (81%)

3530 (25%)

4,735 (24%)

6340 (20%)

8,630 (19%)

1,120 290

1,550 435

2,050 680

2,700 1,100

1200 920

1540 1210

2000 1610 2,150

Source: Indian E-commerce report, IAMAI

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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

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Thank You !

Contact

Amit Goel, CEO, Knowledgefaber

amit@knowledgefaber.com Corporate Office Knowledgefaber, 404/405, Prestige Center Point, Cunningham Road Bangalore, KA 560052 India Phone: +91-80- 41231576

www.knowledgefaber.com Registered Office Knowledgefaber, 203, 2nd Floor, Promenade, Dasarahalli Extension, Bangalore, KA 560024 India

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