15 Mar 2017 20:07 IST

E-commerce: The end of the beginning

The online retail story is here to stay and players are gearing for the second phase of growth

Valuation markdowns, layoffs and shutting down operations — there can be no two opinions on the dire distress faced by Indian e-commerce players. Flipkart, the poster child of the country’s e-commerce segment, had yet another valuation markdown and needs to raise more money to sustain operations. Understandably, experts who cringed when online start-ups were valued sky-high and annual growth of 60 per cent and more was predicted, feel that their concerns were vindicated.

While the sector’s acute woes may seem like the beginning of its end, there are many bright spots. After the initial teething pains are sorted out and buyers get more comfortable with buying things online, the fact is that e-commerce holds immense potential, especially aided by technology to enhance the shopping experience.

Losses galore

The sector’s current woes are due to the colossal losses being raked up as e-commerce start-ups — big and small — bleed red. The reason for the mounting losses is quite simple and obvious — there is no unit economics. It takes more money to sell a product than its sale earns. Hence, the more one sells, the worse the situation becomes. 

To understand, let us consider selling a product with a gross merchandise value (GMV) of ₹2,000. The revenue for the sale is typically 10 per cent, or ₹200. Marketing cost, known as customer acquisition cost, is about ₹170. Logistics costs about ₹170. The cost of holding inventory is over ₹200. There are also employee salaries of about ₹300.  In case of return, there is a reverse logistics cost, that is typically 1.5 times the delivery cost. Effectively, there are severe losses for every item sold.

Things don’t seem to get much bigger as economies of scale kick in. For example, Amazon’s India operations grew 250 per cent in 2015 and 150 per cent in 2016. But it continued to make losses. Niche players — that operate in one segment — are in the same boat. Voonik and Limeroad, in the fashion/accessory space, also raked up losses.

Also, over 50 per cent of e-commerce sales is through cash on demand (CoD). The demonetisation move impacted sales and pushed many small players over the wall. The move to digital is a long-term positive for the sector; but for now, start-ups are coping with the situation by cutting costs. For instance, Snapdeal laid off about 600 employees and its founders decided not to take any pay.

Good potential

Deep losses notwithstanding, e-commerce is still not a bad business to be in. It is quite attractive, given its immense growth potential in India. Globally, online retail in the Asia-Pacific region is growing fast and, at over $1.1 trillion, is nearly twice as large as the US already. India continues to be the fastest-growing online retail market, ahead of South Korea and China, as per Forrester data.

The disappointment in growth was mainly relative. The sector grew 12 per cent in 2016, much lower than the 180 per cent growth in 2015 and expectations of over 70 per cent growth in 2016. Still, the segment is large — at $14.5 billion in 2016. The number of online shoppers increased from 55 million in 2015 to 69 million in 2016, as per data from Assocham. This is expected to cross 100 million in 2017. The value of purchases in various segments also increased in 2016. For example, apparel saw 85 per cent growth in value while mobiles, watches and jewellery saw an over 65 per cent increase.

The big growth is thanks to current levels of very low penetration. In the US, e-commerce accounts for about 8 per cent of all retail sales. The share is about 1 per cent currently in India. So, over the next few years, there is scope to grow revenue substantially in online sales. Even segments such as consumer electronics, with about 15 per cent penetration, will see a tripling by 2025.

And higher online share will be mainly from higher user acceptance. Data from Ovum show that the share of customers who purchase online for convenience increased to 55 per cent in 2015, up from 40 per cent in 2014. As more buyers prefer online shopping in urban and rural areas, the market can grow very big, very fast.

Bringing value

That said, e-commerce players must bring value to buyers to hold on to them. For one, many buyers have lingering concerns about shopping online. For instance, there is not much customer protection and if there are deficiencies in the product or service, getting it addressed is not easy. Also, the segment has low barriers to entry; so, start-ups often woo customers with deep discounts. And with plenty of options and lack of differentiation, buyers have no loyalty to a platform. A few bad experiences, and they become wary of buying online. Online sellers who can build customer trust will get repeat orders and can, hence, reduce marketing costs.

Compared to offline shopping, online platforms can create more personalisation, helped by customer data. Technology can also enhance the shopping experience through virtual and augmented realty trial rooms. Buyers can also get a lot more information — be it through product videos, product comparisons and user reviews — when shopping online to make better choices. This becomes important in more complex products. Instant financing options for e-commerce purchases are also helping bring in newer buyers, especially in the consumer durables space.

Logistics costs, which tend to be high, can be eased with technology such as drones. The logistics segment is seeing a lot of innovation in warehousing and supply chain management that also helps reduce inventory. These could bring in greater efficiencies and reduce operating costs.

Bend and blend

Still, certain segments — where the product is well standardised — may see better penetration than others. For instance, while electronics or branded FMCG products could see higher sales online, owing to buyer comfort, people may prefer to shop offline for, say, vegetables.

Retail stores are also seeing the value in selling online and have rolled out their online store versions. Other models such as in-store digital — where orders can be placed digitally inside the physical store — are also being tried. And partnerships are being forged between online retailers and stores. For example, in the UK, a popular model is to order online and pick up at a nearby retail store. This method — called click and collect — offers the benefits of shopping online along with store experience, in addition to saving logistics cost. Amazon has tie ups with local retail players for its AmazonNow and AmazonPantry segments to ensure quick delivery.

So, with technology, newer business models and customer retention strategies, e-commerce players can gear up for their next growth spurt. The tottering start phase is ending, but the few left standing have miles to go.