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The Winds of Change in Indian E-commerce

E-commerce in India saw unprecedented growth in 2014 and is currently valued at $13.5 billion. The stellar growth is expected to maintain its trajectory this year as well with an estimated growth rate of 33 per cent.

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The reasons for this growth are enough and many like rising disposable incomes, expanding middle-class population, increasing Internet penetration, proliferation of affordable smartphones, favourable demographics, emotive marketing campaigns as well as innovations in business and operating models to mention a few.

Although India represents the fastest growing e-commerce market in the Asia-Pacific region, it is still at a nascent stage. While online travel continues to capture the lion’s share (61 per cent) of the e-commerce pie, online retailing or e-tailing continues to be the fastest growing category.

Mobile phones have changed the way we communicate, so it is natural that e-commerce is now increasingly going mobile and has given way to m-commerce. The number of Internet-enabled smartphones stood at 116 million at the end of 2014 and is forecasted to increase to 435 million by 2019. The availability of low-cost smartphones along with declining data rates are helping in making Internet accessible even in remote areas of the country.

Year 2015 is expected to see e-commerce players introducing mobile-first strategies to enhance reach to new demographics and to the masses in the hinterland. A major lifestyle e-commerce player already attracts around 80 per cent of its traffic and nearly 60 per cent of its sales through mobile devices.

E-commerce companies should endeavour to broaden their product portfolio and services in the coming year. Some start-ups as well as established players are already experimenting with new categories such as preventive health care, adult lifestyle and wellness products, home furnishings, car accessories and lunch/ dinner deliveries.

Many market players are also dabbling with online only private labels in order to improve margins but have tasted varied degrees of success. With consumer mindset towards online transactions changing and the per shopper transactions size increasing, a definite shift is foreseen from higher  “decision to delivery” products like apparel or consumer electronics to lower “decision to delivery” items, such as groceries and FMCG products.

Customer acquisition and enhanced reach remain the perceived mantra for increasing valuations. The competitive intensity seems to be at an all-time high and major players are leaving no stone unturned to increase traffic and click-through by increasing the frequency of flash sales and online/mobile shopping festivals to deep discounting on products. This may continue till willing investors keep the tap open for continued flow of capital. Many companies are adding new flavours to the user experience-simulation, virtual reality, social integration and predictive analytics with the objective to shorten purchase cycles.

Several e-commerce players are introducing India-centric innovations given the dynamics and intricacies of the Indian market. A few key players are considering or have already included mom-and-pop stores and/or local MSMEs/SMEs into their existing supplier network to ensure availability of local produce easily. This is significant, given India’s geographical expanse and diversity.

Every region has a distinct product mix which may be significantly different from that of a neighbouring region. COD has been elemental in addressing the trust deficit associated with online transactions and hence getting in more Indians into the fold, but it is considered a necessary evil.

The ecosystem is also evolving to provide the fire-power for the growth of e-commerce. Payment systems have seen improvements coming in with transactions becoming more secure and convenient, thereby, increasing consumer confidence. Innovative measures for financial inclusion and mobile wallets also seem to be aiding in allowing a larger portion of the population to make online transactions.

While e-commerce players are doing their bit to enhance reach by introducing their own logistics services, Indian Postal Services, with its widest reach and years of experience in cash handling, has rolled up its sleeves to support e-commerce, by tying up with major players to make deliveries and COD possible in inaccessible hinterlands.

The positive sentiment around e-commerce in India seems to be attracting strategic and financial investments. One of the world’s biggest and most valuable e-commerce firms has entered the Indian market by acquiring 25 per cent stake in the leading mobile payments platform provider.

The poster boys of Indian e-commerce have been pushing the bar by securing billions in funds. Many smaller players have also found their spot in the sun with the VC/PE firms upbeat about the e-commerce landscape in India. However, consolidation in the sector is in the offing with players with common investors increasingly considering M&As and smaller players with niche offerings becoming attractive targets for acquisitions.

The “me too” marketplace phenomenon, with many a seller for the same product, all vying for a share of the growing but fixed consumer wallet is also expected to contribute to this. In time, creating distinct differentiators can only become more challenging forcing industry players to go down the consolidation route to remain relevant.

Notwithstanding the hoopla around e-commerce, dampeners exist and new challenges are coming to the fore. Increase in the number of transactions, though always welcome, can prove to be a nightmare in terms of logistics and delivery support. In 2014, logistical, operational and technological fiascos faced by key market players, indicate that companies may now have to strategically invest a lot more in the operational backbone and technology application.

Adding suppliers and distributors at local level can also pose challenges in managing the exponentially expanding supplier/distributor network. Amidst these developments, it also remains to be seen how players will make progress in the more intangible areas of consumer satisfaction and loyalty which may well remain the key differentiators.

Author: Ashvin Vellody is the Partner–Management Consulting at KPMG in India

The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.

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