knowledgefaber e-commerce paper: focus on e-tailing

KnowledgefaberEmerging Opportunities - Emerging Economies

E-Tailing landscape in India: Existing scenario and the way forward

This document is prepared by Knowledgefaber as a part of its research offerings July 2011

December 12, 2011

Prepared by:Amit Goel

Vipul VohraTricha SharmaSumit Kumar

Table of Contents

Contents Slide No.

1. What is E-Commerce?

1.1 Definition of E-commerce 3

1.2 Most significant advantage of online retailers 4

2. Indian E-Commerce Industry

2.1 E-Commerce Industry in India – Stupendous Growth 5

2.2 Evolution of E-tailing in India 6-7

2.3 What things current E-tailers are doing right vis-à-vis past 8

3.Analysis of current trends in Indian E-tailing

3.1 Product categories suitable for E-tailing 9

3.2 Performance metrics for E-tailing and current trends 10-11

KF2December 12, 2011

3.2 Performance metrics for E-tailing and current trends 10-11

4. E-Tailing formats in India

4.1 E-Commerce formats in India 12

4.2 Generic E-tailers 13

4.3 Online store of physical retailers 14

4.4 Niche Players 15

4.5 Daily deal sites 16

4.6 Online travel websites 17

5. VCs and investors – how the money is pouring in? 18

6. Looking into the future

6.1 Existing E-tailers 19

6.2 VCs/investors 20

7. Appendix 21

1.1 Definition of E-commerce

Use of the term “E-commerce” has expanded to include various business models but primarily it includen Conduct of a financial transaction by electronic means or electronic buying of products, services or information using internet as a

platformn This electronic buying process encompasses all the steps involved in a transaction such as on-line marketing, ordering payment

and support for deliveryn This process also includes electronic provision of services such as after sales and customer care

E-commerce: What the term means

How the business model of online retailers add value compared to physical retailers?


Physical RetailerAdvantages:n Provides face to face selling making shopping an

experience n Customers get access to better product information

through in-store sales representativesDisadvantages:n Higher costs of operation (real estate costs, store costs,

pilferage losses and store sales force costs) than online retailers

Online Retailer or E-tailerAdvantages:n Cost effective as online retailers does not have to invest in

physical infrastructure (store, real estate cost, sales force etc.)

n Provides ease and convenience of shopping at any time and from any location

Disadvantages:n Have to invest in logistics operationsn Highly competitive (millions of sites competing against the

same set of customers resulting in low customer stickiness)n Business models of many online retail formats are still

unproven with players struggling to break evenn Little customer interaction (phone lines, email inquiries)

How the business model of online retailers add value compared to physical retailers?

1.2 Lower Prices: Most significant advantage of online retailers

Huge benefits for online shoppers:n Online retailers are looking for customer acquisition mainly

and not for profitsn As a result, Indian online retailers are offering products

at just about cost price or at a marginal lossn Lower prices of a book coupled with free delivery and

Cash-on-delivery option is a huge boon for the customer

n Example on the left illustrates how consumer is

An Example: How E-tailers are attracting consumers by offering 20-30% lower prices than physical retailers

MRP of a book in a physical book store = INR 500

Estimated cost at which online retailer purchases directly from the publisher = ~ 40 – 60% of MRP


Example on the left illustrates how consumer is benefitting from low price model of Indian online retailers

the publisher = ~ 40 – 60% of MRP depending upon economies of scale = INR 200 - 300

Estimated cost of shipping is INR 20-50 + COD charges (Higher of INR 30 or 2.1% of package value) = ~ INR 70

Source: E-commerce in India: The second coming, Forbes.comNote: If a player has its own logistics team, then COD charges are replaced by cash management costs which are very less

MRP in physical book store at 10% discount = INR 450

Total estimated cost to the online retailers = ~ INR 270-370

Listed price on the website = INR 324 (Whole profit margins are passed on to the consumers)

Total savings for the consumer = INR 126 or 28%

2.1 E-Commerce Industry in India – Stupendous Growth

8,146 14,030

19,688

31,598

46,520

-

10,000

20,000

30,000

40,000

50,000

2007 2008 2009 2010 2011Market Size (INR Cr)

Steep growth in Indian E-commerce IndustryIndustry witnessing a boom

CAGR – 54.6%

Indian E-Commerce industry Coming off age in recent years

n Indian E-commerce industry has come a long way since the tumultuous days of dotcom bubble

n Floodgates were opened by online travel sites like IRCTC and makemytrip.com which changed the way Indians book travel tickets

n Rapidly increasing Internet user base and rising middle class with disposable income has contributed to the flourishing of industry

n Secure online transaction environment, measures like Cash-on-delivery, focus on customer service has motivated Indian consumers to place their trust in


Market share of various categories in Indian E-commerceOnline travel dominates the online spending by Indians

Online Travel80%

Digital Downloads

2%

Financial Services

6%

Other Online Services

5%

E-tailing7%

Market Size (INR Cr)motivated Indian consumers to place their trust in online shopping

Online Shopping behavior among IndiansBased upon survey in 4 metro cities

Active User base

17.4 Mn

Looked only for

information

Bought products/ services

13.6 Mn

7.4 Mn

Source: Indian E-commerce report, IAMAI

Source: Indian E-commerce report, IAMAISource: Indian E-commerce report, IAMAI

2.2 Evolution of E-tailing in India before 2007

• Started in 1996 IndiaMart is the oldest and largest online B2B marketplace in India

• It broke-even in the very first year of its launch & has registered profitable growth in all years of its operations

• In 1998, Sify Technologies started its B2C portal targeting growing internet

• Rediff.com started its online shopping portal in 2001 focusing on electronic market

• In 2009, Rediff.com generated revenues of INR 120 crore

• In the year 2006 Network 18 group started Homeshop18.com and compareIndia.com.

• bsbazaar.com starts operation in 2006. The

• Future Group started its online shopping portal FutureBazaar.com in 2007.

• FutureBazaar.com


20021996 1998 2000 2004 2006 2008

• Indiaplaza.in launched a niche portal for selling books.

• Indiaplaza.in was acquired by Fabmall in 2000, name was retained

targeting growing internet user base.

• Sify has found it difficult to grow

operation in 2006. The site is owned by Business standard & indiaplaza.in

• FutureBazaar.com registered revenues of Rs 122 crore i.e., 1.5 per cent of total sales of the Future group

• eBay entered the Indian market with acquisition of Baazee.com for Rs 230 crore.

• eBay sells diverse range of products in the Indian market

2.2 Evolution of E-tailing in India Post 2007

E-commerce wave in India resurges as players like

Launched in early 2010, Snapdeal is the most successful daily deals

Amazon.com, the world’s leading online firm, is also making plans to set up operations in IndiaIndian E-commerce industry

starts attracting a lot of attention and various new

Foreign retailers planning to enter India

Different E-commerce formats emerges in Indian market

Funds starts flowing in the sectorE-commerce sector in

India experiences resurgence


2007 201120092008 2010

resurges as players like Flipkart and Infibeam start operation focusing on bridging the gap which exists in customer service and quality of existing e-tailers

successful daily deals website in India. It is growing by 40 -50% every month and have more than 400 employees establishing its presence in 50 cities (as of May 2011)

2012

Taggle.com, a deal website closed its operations citing ongoing unprofitable price wars in the industry

attention and various new players launches operations

Indian E-commerce sector starts generating interest amongst investors and VC firms and funds start flowing in

2.3 What things current E-tailers are doing right vis-à-vis past

• Cash on delivery has been a successful method to attract Indian consumers who are wary of shopping online because of online scams. This approach has been successful in solving the twin problems – “bridging trust deficit” in the minds of Indian consumers for transacting online and the low penetration of debit/credit card

Introduction to Cash on Delivery and E-wallet

On time Delivery

2010-2020 in India might become the decade of "Ecommerce". Early entrants in this domain adopted low pricing strategy with little focus on timely delivery. This resulted in slow off-take for the industry. However, in our research studies and consulting assignments in last 3 yrs, we have observed definitive trends wherein a growing number of customers are beginning to buy online, often high value products. Credit goes to few players/enablers whose high attention to detail and process innovations resulted in on-time delivery and quality products.


•The consumers refrain from buying online as they do not know when goods will arrive. But, nowadays, Ecommerce companies have been managing quick turnaround and delivery times. Features like order tracking has helped the customers know the status of their order• Still, Indian players have not been able to attain “same day delivery”

• Companies have invested in features like user friendly websites, call center for assisting customers in placing and tracking orders or lodging complaints, customer friendly return policies etc.

User Experience and Customer support

• Ecommerce companies have leaner operations to facilitate direct buying from vendors and cutting down costs which they are able to pass on to the consumers

Branded Products at Heavily discounted Prices

3.1 Product categories suitable for e-tailing

High

Value

B2B Commerce –machinery and other high value products

B2B Commerce –Corporate gifting,

promotional

Electronics, mobiles, cameras, home

appliances, High-end jewelry

Books,

Cars, motorcycles,

AC (manufacturers selling directly) etc.

2

34

Knowledgefaber has categorized various product categories based upon price value and supply chain complexity to analyze current and future product mix in Indian E-tailing market


Low High

Low

Supply Chain complexity

Corporate gifting, promotional

items, stationary etc.

Vegetables, Poultry

products, Automotive spare parts

& accessories

Books, CDs,

Personal Care,

Apparels, Shoes,Bags,

perfumes

Supply Chain complexity – includes parameters like ease of procurement, storage, handling, transportation, packaging, delivery and installation/demos (if required)

n Indian e-tailers are currently operating in quadrants 1 and 4 mainly. Challenge going forwards is to add more and more product categories in these quadrants

n Quadrant 3 is the category most difficult to sell online but is profitablen Quadrant 2 also contains product categories which require robust infrastructure to sell online and some of the categories

like grocery, vegetables etc. are also not very profitable

1

2

3.2 Performance metrics in E-tailing and current trends

Performance Metrics in physical retail

Corresponding Performance Metrics in online retail

Current trends in Indian E-tailing

Number of footfalls

Footfall-sales conversion

Same-store sales growth

Traffic volume on website

Traffic-sales conversion

Sales growth from existing product categories

With increasing internet penetration and effective marketing by e-tailing companies, traffic growth has been

robust

Traffic-sales conversion are bound to be lower than physical retail and currently hovers around 3 – 6%

With market in nascent stage, established categories like books, mobile, electronics etc. are experiencing

significant growth

Knowledgefaber has come up with performance metrics (analogous to physical retailanalogous to physical retailanalogous to physical retailanalogous to physical retail) to evaluate the existing trends in Indian E-tailing


New-store sales growth

Average basket size

Repeat purchase

Customer acquisition cost

Sales growth from new product categories

Average cart size

Repeat purchase

Customer acquisition cost

significant growth

Current e-tailing players enjoy higher growth from new product categories due to low base effect

To increase the average basket size of the customers, e-tailers resort to bundling and dynamic buying

recommendations, practices which are still in nascent stage in Indian e-tailing industry

Indian e-tailing websites are experiencing high percentage of repeat purchases with 50-70% customers

being the repeat purchasers

Indian e-tailers are currently in the process of establishing a brand and hence high acquisition costs

3.2 Performance metrics in E-tailing and current trends

Performance Metrics in online retail Current trends in Indian E-tailing

Order Processing Time

Shipping Time

It is defined as the interval between the time when an order is received and when it is shipped. Ideally, it should be lesser than 24 hours but no Indian online retailer has been able to achieve this standard currently

Time taken to ship order to the customer’s door step. Few players like Flipkart have been able to reduce delivery time greatly by operating their own logistics operations but still no Indian player has achieved “same

day” delivery

Knowledgefaber has come up with performance metrics (unique to Eunique to Eunique to Eunique to E----tailing industrytailing industrytailing industrytailing industry) to evaluate the existing trends in Indian E-tailing


Return policies/mechanism

Average time spent on site per user

Site performance

Only few players have implemented consumer friendly return policies. But robust return mechanism is still a missing link for many Indian online

retailers

With increase in product categories and online catalogues, average time spent by Indian online shoppers has been steadily increasing

Many Indian online retailers are constantly investing in up gradation of technology. As a result, user experience in terms of site performance is

improving all the time

4.1 E-Commerce formats in India

Generic E - tailers

Major E-Commerce Formats in India

Online stores of physical retailers Deal aggregatorsNiche Players Online

Travel

E-tailing Formats in India


4.2 E-tailing formats in India

Generic E-tailers

Overview

Business Model & Target Segment

n Website acts as the sole front end of the respective player where customers can choose from online catalogue and place order.

n Telephonic sales channels are also established to augment salesn E.g. – Flipkart, Infibeam, Letsbuy.com etc.

n Revenue through online (sometimes inbound telephonic also) product sales n Internet savvy customers mostly in Tier I and Tier II cities


Scalability

Strengths

n Low investment needed in front end and hence able to offer lower prices and wider product variety

n Provides ease and convenience of shopping from any location or at any time

n Scalability depends upon internet traffic growth rate and a change in consumer buying behavior

n Existing set of low prices are helping to attract throng of customers and enabling E-tailers to scale up

Challenges

n Needs to have a robust backend to ensure timely delivery and service leveln Managing return supply chain is a complex challenge for existing playersn Online stores have to ensure safety and security of payments to abridge trust

deficit existing in the mind of consumers


Online stores of physical retailers

n Many Indian retailers operate online portals to adopt a multi channel retail strategy and complement their physical stores

n Online stores targets acquiring new customers who are more convenience driven rather than looking for in-store experience

n Revenue through online (sometimes inbound telephonic also) product salesn Existing/new set of customers who prefer convenience more than in-store

experience

Overview



n Existing brand in physical domain helps win over the customersn Online stores acts as extension of physical business enabling a player to

execute multi channel retail strategy

n Scalability is driven by brand value of the physical retailer and convenience factor demand amongst its consumers

n Scalability in this model will happen only with a paradigm shift in consumer preference for convenience rather than in-store experience

n Pricing decisions becomes very critical as offering lower prices on online portal compared to physical stores will give rise to a “price arbitrage”

n Physical retailer has to invest in backend infrastructure and logistics to ship directly to retail customers

Scalability

Strengths

Challenges


Niche Players

n Unlike generic E-tailers, niche players in E-commerce are just focussing on a single product category/type

n Niche product categories includes apparel, footwear, baby care, personal care etc.

n Revenue through online (sometimes inbound telephonic also) product salesn Internet savvy and price conscious customers mostly in Tier I and Tier II cities

Overview



n Wide product variety at lower pricesn Ease and convenience of shopping from any location or at any time

n Scalability is limited as they are catering to niche demandsn It is imperative to offer a host of products to gain new customers and hence

niche players will scale up based upon depth of variety they are offering

n Niche players are focussing on “touch and feel” intensive products (apparel, footwear etc.) which involves high consumer inertia regarding online buying

n Maintaining a balance between brand exclusivity and lower prices than physical stores

Scalability

Strengths

Challenges


Deal Aggregators/Daily Deal Websites

n Offers discount coupons to consumers for various products and services (restaurants, spas, hotels, travel deals etc.)

n Front end includes a website where discount coupons can be purchased and a sales force which enlists merchants and deals

n Revenue sharing/commission received via merchantsn Internet savvy and price conscious customers mostly in Tier I and Tier II cities

Overview



n Acts as aggregator of demand and enable partner merchants to enjoy economies of scale and higher sales volume

n Scalability is a function of number of merchants/variety of deals one can bring to the table, which is in turn driven by sales force on the ground. Hence, scalability is limited

n Merchant ends up making no money on many deals as lack of repeat purchases nullify initial investment by the merchant in the deal

n Encourages “deal hunting” mind set among consumers lowering her price expectations for the products and services

Scalability

Strengths

Challenges

4.6 Online travel websites

n This category consists of players who focuses on meeting a single consumer need through wide range of products (air travel, rail travel, hotel accommodation, travel packages etc.)

n Focuses mainly on convenience rather than low prices

n Revenue through online (sometimes inbound telephonic also) tickets/package sales

Online travel websites

Overview



n Ease and convenience of shopping from any location or at any timen Wide range of choices for consumers and these websites acts as “one stop

solution”

n Travel websites have been able to scale up based upon convenience as the central tenet of their value proposition

n Highly competitive landscapen Players like makemytrip and cleartrip have to compete with end-service

providers which operates their own websites (irctc.co.in, indigo.in etc.)

Scalability

Strengths

Challenges

5. VCs and Investors – How the money is pouring in?

31

82

36 35

16 23

20

40

60

80

100

VC Funding – Sudden rush to paint the “white space”

114

45 55

305

70

140

210

280

350

VC Funding – Huge growth in year 2011 VC Funding amount by investors


-

20

Accel India Tiger Capital IndoUS Venture

Helion Venture

Nexus Venture

Sequoia Capital

Investments from 2009 to 2011 ($ million)

Company Investor Amount($mn)

Yatra Online Intel Capital, Norwest, Valiant Capital 45

Fashion and You Sequoia, Intel Capital, Norwest, Nokia Growth Partners 40

Snapdeal.com (Jasper Infotech) Nexus, IndoUS Ventures, Bessemer 40

Naaptol.com NEA, Canaan Partners, SVB 25

Flipkart Tiger Global 20

45

-2008 2009 2010 2011 YTD

Total Investments ($ million)

Top PE/VC investments in E-commerce for YTD

Source: Venture Intelligence

Source: Venture Intelligence Source: Venture Intelligence

E-tailing Players

n Currently all E-tailing players are focusing more on acquiring customers and shaping purchasing habits rather than profitability

n However, waging price wars to acquire customers is not a long-term winning formula, as the recent closure of Taggle (a daily deal site) shows

n Rather existing players needs to focus on building a unique customer value proposition, rather than becoming a “me too” player, through host of measures such as:

Building a robust supply chain and logistics infrastructure –n Using best practices for inventory optimization

6.1 Looking into the future

Looking into the future – What should various e-tailers do to sustain this golden era of Indian E-commerce

E-tailers should look at building unique customer

KF

Using best practices for inventory optimizationn Inbound and outbound transportation spend optimizationn De-bottle necking procurement and shipping operationsn Implementing industry wide best practices in sourcing and fulfillment operationsWide product variety n Keep on adding more and more product categories/merchants to capture more and more of the “long tail” of

Indian E-shoppersn Develop competitive and innovative “white spaces” to fuel future growthTechnologyn With smartphones and tablets on a high growth path in Indian market, it makes absolute sense to launch a

user friendly mobile application (should be as interactive an intuitive as the website)n Using web analytics to analyze consumer behavior and strategize future sales and marketing campaignsGeographic expansionn Using hub and spoke model of fulfillment, Indian online retailers can look at expanding geographically into

other South East Asian marketsIncreasing customer retention through Customer loyalty Programsn Card-based/ reward points based loyalty programs are very helpful in retaining customers and motivating them

to make repeat purchases (makemytrip.com has launched a rewards program off late)

19December 12, 2011

unique customer value

propositions rather than waging price

wars

Note: Knowledgefaber offers a comprehensive set of consulting services in each of the above mentioned domain and growth areas

6.2 Looking into the future

Looking into the future – What should various VCs/investors look at for generating returns?

VCs/investors should look to back players

VCs/investors

Looking at new “white spaces” in the domain n VCs and Investors are always looking to invest in high growth unexplored areas (“white space”). But,

Indian E-tailing is becoming more and more crowdedn Hence, it is imperative for VCs/investors to look for new white spaces in this domain rather than backing

any “me too/also ran player”


back players with robust business models or

exciting new players in E-tailing domain

any “me too/also ran player”n Example of white space - Enablers in E-tailing ecosystem like:

n An analytics player which can provide innovative tools specially designed for E-tailing players (Netflix and Amazon makes extensive use of analytics to develop competitive advantages)

n A logistics provider/ shipper specially catering to online retailersOr,n Players offering new product/service categories like providing skilled labor, auto accessories etc.

Backing only those existing players who possess robust business models and better profit margin visibility n Currently, no investments in Indian E-tailing are made based upon current profits because none existsn Existing players are likely to continue focus on aggressive customer acquisition and next series of funding

would be utilized for this onlyn However, going forward, existing players have to focus on profitability to exhibit sustainability and viability

of their business models

Note: Knowledgefaber offers a comprehensive set of consulting services in PE advisory and growth consulting

7. Appendix

Appendix


Appendix

7. Appendix

Evolution of secure payment gateways has acted as a catalyst for the growth of E-tailing in India

Company

Cc Avenue HDFC

Times of Money DirecPay ICICI Payseal

EBS Transecute

ABC Payments Pay U (MIH Venture)

List of payment gateways in India


ABC Payments Pay U (MIH Venture)

Paypal Indiapay Payment Solutions

7. Appendix

E-commerce industry has been growing at a robust pace for past 3 years and is expected to sustain this momentum

Growth of E-commerce industry over the years

Year Dec 2007 Dec 2008 Dec 2009 Dec 2010(E) Dec 2011(E)

Total Market Size 8146 14,030 19,688 31,598 46,520

Online TravelIndustry

6250 (77% of total E-commerce market)

10,500 (75%) 14,953 (76%) 25,258 (80%) 37,890 (81%)

Online Non-Travel Industry

1896 (23% of total E-commerce market)

3530 (25%) 4,735 (24%) 6340 (20%) 8,630 (19%)


market)

E-tailing 978 1,120 1,550 2,050 2,700

Digital Downloads or Paid Content Subscription

238 290 435 680 1,100

Financial Services 1200 1540 2000

Other Online Services (Incl. Online Classified)

680 920 1210 1610 2,150


7. Appendix

E-tailing industry is dominated by computers and mobiles

Break up of E-tailing industry

Computer accessories & peripherals

36%

Electronic durables13%

Home & kitchen appliances

4%

Other products (toys, gifts, flowers)

3%


Cameras & mobiles25%

Personal Items19%


Thank You !

KF

Contact �Amit Goel, CEO, Knowledgefaber

www.knowledgefaber.com [email protected]

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Knowledgefaber, 203, 2nd Floor, Promenade,Dasarahalli Extension,Bangalore, KA 560024

India

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Knowledgefaber, 404/405, Prestige Center Point, Cunningham RoadBangalore, KA 560052

IndiaPhone: +91-80- 41231576

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knowledgefaber e-commerce paper: focus on e-tailing

Business

indian online retailers

online spending

online shoppers

ecommerce formats

online travel sites

indian ecommerce industry2

indian ecommercebased

indian etailing3