Sep 20, 2016

Let’s call out Indian e-commerce for what it is today: An urban-elite indulgence

E-commerce in India has been nothing more than a limited experiment that has worked.

BYTyagarajan S

The Indian e-commerce news reels are buzzing again. The Flipkart vs. Amazon saga is being reported with sensationalism reminiscent of high-profile boxing matches. The festive season and the impending big sale events are ratcheting up the tension. And in the middle of all this Snapdeal has come up with a brand overhaul with a new logo, cover song and everything. After months of quiet brooding over stagnating sales, it would appear that the Indian e-commerce engine is revving up again.
Not really.
To be sure, India’s e-commerce journey has been a mini-revolution. In half a decade, millions of consumers have learnt a new shopping habit (of buying online), and attracted by its unmatched choice, value and convenience, have proceeded to accept it as a part of their lives. Intense competition between e-commerce companies (both Indian and global) has also helped open up affordability immensely.
But the obsession and exaltation around it contradicts a stark reality: E-commerce in India has been nothing more than a limited experiment that has worked. If it were a product, it would be just be a wildly successful alpha release. If it were an autonomous car, it just completed a successful pilot run under test conditions.

E-commerce in India has been nothing more than a limited experiment that has worked

Calling what we’ve seen so far as an e-commerce boom is gross exaggeration. More importantly, extrapolating the e-commerce market dynamics of India based on this is a dangerously lazy exercise, for the following reasons:
1. The so-called e-commerce boom has been a limited-edition release enjoyed by a very small set of Indian consumers, who do not necessarily represent the larger market.
2. It should be more aptly called a mobile-phone and electronics shopping boom.
3. Growing value of e-commerce market is fuelled by unsustainably large amount of money poured into discounting prices (at the cost of innovations).
There are signs that our e-commerce companies are struggling to breach this wall and move beyond. Moving beyond requires fundamental investments with longer term ROI thinking. It requires thinking of India not as a single market but a collection of thousands of markets – each to be won over with careful planning.
In the first part of this two-part article, let us look at the reasons why the current e-commerce market is a fledgling one and not representative of the multi-layered market India is:

1. E-commerce: A limited edition release

As on date, an estimated 350+ million people in India access the Internet. Less than one-third of our population have access to the infrastructure to participate in e-commerce even if you ignore the fact that 80% of this segment connect at slow speeds, through flaky connections and restrictive pricing.
The big e-commerce boom we have witnessed has tapped into a fraction of this connected segment – estimated to be around 150 million customers optimistically (Flipkart has around 80 million customers). When you layer one-time shoppers and infrequent users, the number shrinks even more.
Even by generous estimates, only about 6-10% of the country could be called e-commerce adopters today.
It’s fair to say that this is a subset of Indians that are globalized, more likely living in metros or big cities, better connected, comfortable with English, digitally literate and well integrated into a western outlook of the world. This is the India where Apple’s iPhone release would make news.

Even by generous estimates, only about 6-10% of the country could be called e-commerce adopters today.

It’s a sliver right on top of the Indian pyramid.
Beyond this sliver is a bigger India (estimated to be between 300-400 million strong) sandwiched between the elite-top and the even more massive rural segment below it. This is the untapped market in small-towns and cities that have a thriving local commerce. This is the market focused on local issues and local-language media rules the roost there. This layer goes beyond metro/non-metro divisions. This is a wide range that goes from lower-middle class Indians who can afford basic comforts to Ola/Uber drivers, maids, local electricians, plumbers etc.
This India is not participating in the so-called e-commerce boom.
Sure, the groundwork is being laid for this vast middle layer to become the next wave of consumers for e-commerce in the form of universal identity, unified payment interface, and a hope for a rapid 4G adoption. But, that still doesn’t change the fact that this new potential e-commerce customer has limited discretionary spending and thrives on smaller, more frequent transactions focused on daily sustenance.
Our e-commerce models are not built anywhere close to servicing this segment. If e-commerce has to truly grow in the country, and become an industry that makes sense as a business (and not just as a funnel for eager investors) it has to grow here. And the rules of the road will be drastically different here and expectations completely different.

2. Mobile phones and electronics story

India’s e-commerce growth should be more specifically called a mobile phone and electronics growth story.
Today, mobile phones may account for nearly 50% of the sales (by value) for nearly all top horizontal players (like Flipkart and Amazon). When you add consumer electronics on top (PC, Camera, TV etc.), this goes up to as high as 70% of the total value of sales.
In a sense, smartphones are dream products for e-commerce marketplaces. Although their margins are small, their higher value (relatively), lower cost of shipping (due to smaller size), and high volumes (within a segment) make them perfect candidates to drive top-line without significantly denting profitability.
Fashion has emerged as the only other category (through vertical play) that caters to an even smaller fraction of the needs of this small segment. Myntra, arguably the largest player, has a total estimated customer base of less than 10 million. Other smaller vertical plays like groceries, furniture and jewelry have even smaller niches and continue to be even smaller experiments.
Now consider the bigger second layer of India in this context, and the model falls flat. This is a segment that thrives on low cost smartphones and second hand durables. The average value of purchases will drop and so will the frequency of buying electronics like a mobile phone. A customer in Nellore is much less likely to repeat a mobile phone purchase within a year than a customer in Bangalore.
For e-commerce to be truly be relevant in the lives of Indians, it needs to spread across a larger set of categories. This requires investments across a broad spectrum of areas.

3. Story of discounts powering growth

Disruptive discounting is often good news. It shakes up the accepted pricing normal and drastically improves affordability for customers.
Indian e-commerce, riding on the very Indian craving for discounts, took this to the hilt – for very specific categories (as stated above). Offline book and mobile stores have seen their businesses pulled out from under their feet.
But when discounting is used to solely exploit impulse purchases of a small customer base, it is a recipe for a bubble.
By any estimate, several billion dollars has been spent by Indian e-commerce firms on pure price discounting and not just price competitiveness. Considering that just 15% of the total investments of Flipkart, Amazon and Snapdeal (around $7 billion till date) have gone into discounting gives a figure in excess of $1 billion. This has translated into burn rates ranging anywhere from Rs 200 crore to Rs 250 crore a month (for nearly all e-commerce players).
This brought in customers from the elite, urban segment looking for deals, often on specific periods, to buy certain higher value products. As the discounting dried up, market began to stagnate.
As we approach another festive season we will see all e-commerce players begin their heavy discounting game yet again. Burn rates will shoot up. But, how many of these customers become regular shoppers? And do they wait for discounting events (which may reach profitability only at a scale that is 6-8x of the current numbers) to shop?
Mere price discounting will not transform the market nor grow it. But in the race to win the consumer base that is more readily available, long-term ROI projects have gotten shelved.

So, what’s next?

India’s second phase of e-commerce growth is likely to be the bigger story and one that will define the e-commerce model for India in all its complexity. In a sense, it will be embarking on a journey that modern retail never got an opportunity to do: consolidate the vast middle layer into organized commerce.
But it requires different thinking and a long term frame of mind in addition to a healthy dose of realism on how quickly you can grow. This will require uniquely India-focused innovations and changes as well as patience to wait out longer term ROI projects. It requires deeper execution in fragmented regions and not the mass growth of a national TV advert and a big sale event.
As one top executive from a leading e-commerce market place put it, “If the billions of dollars that were spent on discounts and advertising them were invested in fundamental infrastructure, we may have seen at least one major transformation.”
In short, it may need a truly Indian model of commerce that addresses the needs of this segment and not a Chinese model or an American one. This offers opportunity for Indian startups, perhaps local ones, to capture segments of the market.
In the second part of this analysis, we will look at the range of areas e-commerce firms need to focus on in order to conquer vast Indian middle.
Disclaimer: The views expressed are the writer’s own and do not necessarily reflect those of FactorDaily. 

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Tyagarajan S is a writer of FactorDaily.