Small retail big profit
Retail is big business and India’s retail segment, comprising merchandise segment and services segment, is expected to increase from $585 billion in 2015 to $2,065 billion in 2025. The services segment includes food services, beauty and health and fitness. The merchandise and services segments are expected to increase from $543 billion in 2015 to $1,857 billion in 2025 and $42 billion in 2015 to $208 billion in 2025 respectively. The share of the merchandise segment constitutes 93 per cent of the total retail, whereas services segment constituted seven per cent of the total retail segment in 2015. However, it is expected that the share of merchandise segment will fall to 90 per cent in 2025 and that of the services segment will increase to 10 per cent. Further, the retail segment can also be classified into traditional and organised segments on one hand and rural and urban segments on the other. Retail consumption is spread across various key categories like food and grocery, apparel, jewellery and watches, consumer electronics, pharmacy and wellness, furnishings and fixtures etc. In India, food and grocery constitutes the majority share of the total retail consumption.
In India, 12 per cent of the total population contributes 38 per cent of the total retail spending from the top 74 cities of the country. Delhi and Mumbai clusters contribute about nine per cent of India’s total retail spending, whereas the top 22 cities account for 29 per cent of total retail, and top 74 cities account for almost 38 per cent of the total retail spending in India. The retail opportunity in North India in 2014 is estimated at $121 billion which represents 23 per cent of the total Indian retail opportunity. This opportunity is expected to increase to $260 billion by 2020. Also retail opportunity in two southern states i.e. Karnataka and Andhra Pradesh is currently approximately $72 billion and is expected to increase to $140 billion by 2020.
The new millennium witnessed launch of several e-tailing sites like Rediff, Indiaplaza, Flipkart, Myntra. E-tailing took off in 2007 driven by advancements in quality in Internet access, payments and computing on mobility platforms that dramatically changed consumer behavior towards Internet consumption. Ecosystem creation altered consumer behaviour of sizeable consumer mass referred to as the active Internet user base. By 2020, India’s Internet user base will become similar to China’s 2012-2013 Internet user base. Assuming that India will follow China’s growth trajectory, in an optimistic scenario, Indian e-tail market as a share of total retail can be expected at six per cent, which was the case with China in 2012-2013. Driven by increasing penetration of smartphones and Internet usage on mobile phones, mobile Internet users as a share of total Internet users grew from 16 per cent in 2009 to approximately 60 per cent in 2015. The rollout of 3G and 4G services will enable Internet access through mobile devices providing high data speeds and mobiles are all set to become primary device of online shopping going forward. Online shopper base in India is currently estimated at around 35 million which is 11 per cent of the Internet user base. This base of online shoppers is projected to grow to approximately 180 million by 2020.
In 2007, e-tail in China accounted for 0.7 per cent and grew to 10.1 per cent in 2014 driven by constraints of brick and mortar organised retail. The demand and consumption trend in India will mirror that of China. Due to the inherent challenges with B&M retail in India, e-tail will grow at an even faster pace. Faster adoption of technology and consumption of mobile technology will lead to rapid growth of e-tail. India is expected to go the China way in terms of web-only participants dominating the online market.
As a category, electronics accounts for 30 per cent of the e-tail market although it is barely three per cent of the category market size. Going forward, the category is expected to see e-tailing market share of seven per cent at the expense of offline trade primarily driven by the fact that products are standardised and price becomes the driving factor. For apparel and footwear, e-tailing accounts for one per cent of the category size and is projected to grow to three per cent by 2017. The success of e-tailing for the category is driven by limited penetration of brands in tier 2 & 3 towns, standardised products and discounted pricing. Electronics accounted for 22 per cent, apparel and accessories contributed 19.5 per cent and other categories accounted for 20.8 per cent of the e-commerce in United States in 2014.
Even in mature markets like United States and United Kingdom, food e-tail – as a share of total e-tail – ranges between 2-5 per cent, which in the case of China is less than two per cent as compared to one per cent for India. As a category, food and grocery will see limited e-tail penetration going forward. Although food and grocery accounts for approximately 66 per cent of the retail market and 35 per cent of organised retail, e-tail penetration of the category is only 0.01 per cent and of organised retail market is only 0.2 per cent.
Infibeam Incorporation Limited – an e-commerce company highlighting multi-channel and multi-screen value-added services to merchants – issued equity shares at Rs 360 to Rs 432 per share from March 21 to 23, 2016 for raising Rs 450 crores towards business expansion. Vishal Mehta, MD, said “A very fragmented retail ecosystem exists in India, built out of entrepreneurs who want to provide products; and a very large ecosystem of supplier-based systems. The market is witnessing two models: e-retail and marketplace, but there is a need for store-friendly technology services and the managed marketplace model. Infibeam is stepping in to provide merchants the opportunity to build their own online store and pricing – amidst a very fragmented ecosystem of suppliers and destinations. Also, our “Build-a-Bazar” marketplace allows sellers to showcase their products and services.” Highlighting setting up of a cloud-based Data centre and last-mile logistic centres in areas having good density of demand, including 75 cities, he said that besides increased product consumption, services and e-commerce opportunities, e-tailing in India is expected to increase from Rs 588 million today to Rs 2 trillion in 2025 and that the company is expanding its international operations also in Europe and Middle East.
Currently, India’s e-tailing landscape is dominated by web-only-e-tailers accounting for approximately 98 per cent of – and expected to continue to dominate –the e-tail market. Compared to markets like USA where multi-channel retailers account for approximately 40 per cent of the e-tail market, the share of multi-channel retailers in Indian e-tailing is constrained by factors like relatively small size and footprint of India retailers, lack of investments in technology, issues related to taxation such as lack of clarity on the liability of value added tax (VAT), service tax, etc. The impact of e-tailing on different consumer categories will depend on the category size and the key differentiators that make the category more/less suited to e-commerce.
The impact on key categories in the short term can be assessed in the following manner:
High Impact: E-tail will drive significant Indian urban incremental demand in the next 3-5 years, driven by greater adoption in the category of small electronics and fashion and lifestyle. The rationale behind high impact in these categories includes greater standardisation, low involvement categories and discretionary items.
Medium Impact: E-tail will complement sales through existing channels of commerce in categories like home improvement, white goods, kids, health and jewellery. High involvement categories, higher investment and longer product life are reasons for medium level impact. E-commerce will have medium impact in the immediate run till an integral e-tailing and B&M led service offering is created.
Low Impact: In categories like brown goods, food, etc., e-tail will have limited impact in the next 3-5 years. The rationale behind such low impact includes need based categories and in-adept logistics capability.
Digital adoption is a key enabler for e-tailing’s growth in India, whose online retail is expected to grow from current 0.7 per cent of the total retail market to 3-4 per cent of total retail by 2020, with approximately 60 per cent of the orders placed through smartphones. Factors of digital adoption can be classified under the following broad categories:
Growth of digital penetration: There has been growth in Internet and/or users of Internet,
broadband access and installed base of smart digital devices. India’s Internet user base is estimated to reach 550 million by 2020 with a penetration of approximately 40 per cent from 19 per cent currently.
The number of smartphone users in India is estimated to grow at a CAGR of 35 per cent in the next six years with most of this growth coming off device migration of large user base from feature phones to smartphones. The numbers of mobile phone users have increased from 257 million in 2010 to 487 million in 2014 and is estimated to touch 550 million users by 2020. Similarly, users of smartphones also have increased from 6 million in 2010 to 74 million in 2014 and are estimated to reach 440 million by 2020. The rollout of 3G and 4G services will enable Internet access through mobile devices providing high data speeds.
As compared to broadband users, mobile Internet users have seen much faster growth. This growth is expected to continue given the increase in the penetration of high speed Internet, primarily driven by the rollout of 3G and 4G wireless technology. This will further drive the growth of e-tailing in India. The 3G user base is expected to touch the mark of 300 million by 2019. Also, the rollout of 4G network services will further boost mobile Internet access. Currently, leading mass e-tailers are already registering more than 30 per cent of shopping through mobile devices and – driven by absence of device/Internet access alternatives with consumers as well as convenience (as mobile is a more accessible device) – is set to increase in future.
Internet habitual consumers are rapidly growing in India. There has been a disruptive movement from using the Internet for merely accessing e-mails and casual browsing to more diverse and interactive activities. Convenient online interfaces, an enhanced user experience, attractive offers and services are some of the key enablers for this change.
India has one of the youngest online demographics globally with approximately 35 per cent of the population between the age group of 15 to 35 years. Additionally, the Internet audience has 75 per cent people between the age group of 15 to 34 years and the female population contributes to almost 40 per cent of total users. This age distribution contributes proportionately to consumption. Almost 50 per cent of Internet users between age group of 25-34 years visit e-tailing websites. It is expected that young India will drive the growth of e-tailing in the country and thereby impact consumption of lifestyle categories.
Further, this Internet-habituated consumer will be further enabled by access to debit and credit cards. Already, 300 million debit cards are in circulation, with close to half of India’s population likely to acquire them over the next three years. Mobile banking, an important non-cash payment mechanism for e-tailing’s growth is registering a monthly growth of 5 per cent in volume.
Brick and mortar has been in India for over two decades now. Its contribution total retail is low (approximately 9 per cent in 2014) due to structural issues faced by brick & mortar retail. Organized retail (brick & mortar) is concentrated in top 25-30 cities (where retail consumption is concentrated). Majority of the brick & mortar brands are concentrated in metros, mini metros and tier I cities and are unable to meet the rising aspirations in smaller cities across India. This skewed retail presence is fuelling the growing demand through online channel owing to wide reach and delivery to even smaller cities and towns, where brick and retail stores are either not viable or will take years to reach.
E-tailers have committed significant resources in their attempt to grow the e-tail market through multiple means such as: Discounts & promotions: Cash on Delivery (COD): More products: Information content: Better shopping experience through own warehouse: Easy returns: Faster delivery: EMIs: Offline Activation: Mass Media campaigns and events. Besides e-tailers, the ecosystem is also more geared up to cater to the online channel. For example: Brands are taking online channel more seriously and developing focused strategy for this channel; Service providers like logistics service providers, payment gateway providers, etc are developing and fine tuning their services to cater to the requirement of e-tailers more effectively; and Vendors are upgrading themselves to cater to the demands of marketplaces more efficiently. The biggest challenge – especially in marketplace – is to manage the customer experience. Some of the key issues currently affecting the consumer confidence are order delay, spurious merchandise and post-sales support.
Currently the e-tailer’s expertise lies around technology and not around creating a value proposition for the consumers. There is not much differentiation beyond price which has led to many participants with similar positioning in the e-tailing space. E-tailers are using deals and discounts as a driver for purchase. However, going forward, these are likely to change.