By Aditi Khanna
Edited by Madhavi Roy, Senior Editor, The Indian Economist
With Flipkart claiming a sale of over $ 100 million in a record 10 hours on its one day flash sale titled “The Big Billion Day”, e-retail in India is said to have officially arrived. Having seen a tremendous growth from little under $4bn in 2009 to an expected $16bn in 2015, with an amazing 5 year CAGR (Compound annual growth rate) of 56% (Credit Rating Information Services of India Limited- CRISIL), the e-retailing industry is the poster child of sunrise industries in India today. Couple that with an increasingly favorable demographic scene and rising internet penetration levels, the stage seems set for the Flipkarts and the Jabongs (and now Amazon) to own the incremental retail sales in India.
But is the picture really so rosy for these players? Is there no catch?
Well, there are actually – several hurdles remain before the investors of these firms can actually sit back and afford a relaxed smile. Following are some of them:
- Low Customer Base
This is the biggest drawback of being an online retailer in India today. A CRISIL report suggests that only around 1% of India’s entire retail sales is happening online. Low internet penetration levels mean that out of a potential 1.2 billion people, only around 140 million are accessing internet today. Further, according to a DIPP (Department of Industrial Policy and Promotion) discussion paper, the ratio of online buyers to internet users is only 18%, meaning effectively only around 25 million people are shopping online in India. While this metric looks particularly favorable to the online retailers going 5-10 years in the future, given that it’s set to rise at an impressive 40% (ICICI Market Insight), their existence today is made very tough, as they have to fight over a small pie to stay in business.
The other reason for a low customer base could also be a lack of willingness to make a purchase without seeing and touching the product, something that a large part of the consumer base (that has the purchasing power) is habituated to. There is also the doubt in their minds about the possible difference in the quality of the product that they see and the one that gets delivered to them. Further, there also exists some hesitance regarding the feasibility of returning the products and getting a timely refund. Thus e-retailers have a need to build more customer confidence to convert browsers to buyers.
- Last Mile Delivery
India being such a vast country with huge disparities in the level of infrastructural development from city to city, the last mile delivery problem – i.e. delivering the product to the consumer’s doorstep- is a very real one. While the firms are attempting to enlarge their geographical coverage, often by starting their own logistics arms (ekart by flipkart), it remains a major hindrance in expansion of the potential customer base. Several times they employ local courier services to make this delivery, but this compromises the traceability of the parcel for the consumer (which is a desired feature for her/him).
- Reverse Logistics
One of the main value drivers of the huge surge in online buying is the retailers’ promise of free returns, should the consumer not be happy with the product. But this poses a huge logistical as well as financial strain on the forums (which are, as it is, working on wafer thin margins). Re-listing of such products, the lost shipping charges, and the possible lost sales due to an apparent stock-out of the product are some of the major costs involved.
- Payment Preferences
Anywhere between 50-80% of all online buying happens through the ‘Cash on Delivery’ mode, given the reluctance of the Indian consumers to make online payments, particularly before having physically seen the product. This means the consumer pays anywhere between one and 15 days of the product being dispatched. The courier services take another 2 weeks to transfer this payment to the e-retailer. By this time the firm has already had to invest in more goods as the orders pile up. Thus the CoD preference of Indian consumers poses a perpetual short term liquidity management problem for the firms, which increases their riskiness.
- Marketing Spend
The top e-retailers in the market today have increased their marketing budget at least 250 times from a measly 10 lakhs in 2011 to anywhere between 25 to 75 crores a year. Amazon, the new player on the block, is reportedly spending anywhere between 100-150 crore in FY15 on advertising. This puts further strain on their already tight budgets, but given that it’s an existential question, they have to keep up with competitors.
- Legal Hurdles
Then there is their basic business model which has come under the government’s lens from time to time. FDI in e-retail (in a B2C format) is prohibited in India. However, none of the big retailers today would have reached their present glory without steep investments from foreign players. So these firms floated pseudo companies which get the foreign funding, and the e-retailing front places consumer orders to this pseudo, which fulfills B2B orders. Many of such legal violations are actually in the spirit and not the letter of the law, and hence long drawn out legal battles are already on – ones that could cost these firms dear in the coming months.
Thus, while they do hold a lot of potential, there is still some time before India can produce its own Amazon or Alibaba.
Aditi Khanna is presently pursuing her Post-Graduate diploma in Business Management from XLRI Jamshedpur. She has completed her graduation in Economics (Hons.) from Lady Shri Ram College, Delhi University, where she was a part of the department editorial board. She is an avid reader of anything interesting that catches her eye. Economics stimulates her and baking soothes her. She doesn’t shy away from putting the occasional poetic twist to her words when her restless mind wanders. And when not found anywhere, she must be window-shopping online!