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Jitender Gupta
A warehouse of Jabong.com in Pataudi, Haryana
business: e-retail
Doing A Kartwheel
Online retail is booming, but firms must zero in on a profitable model
COMMENTS PRINT

Online Retail
Non-travel buying on Net is booming

  • Books, Apps, Music Marketshare: 35% Growth: 10-12%
  • Clothing and Accessories Marketshare: 15% Growth: 100%
  • Electronics and Appliances Marketshare: 20-25% Growth: 30-40%
  • Home furnishings Marketshare: 5-7% Growth: 20%
  • Personal - & health-care  Marketshare: 10% Growth: 50-60%

Online travel retail is 80% of the market:

  • Players say traffic is growingexponentially; repeat customers growing
  • Average ticket sizes of Rs 1,500-2,000 have gone up in the past two years
  • Books and music still lead in volumes; consumer goods lead in terms of value
  • Clothing, apparel, accessories poised for huge growth from current small base
  • Discounts, convenience tags are giving way to building consumer trust

***

A month ago, 66-year-old Swati Sinha, a middle-class housewife and retired school teacher based in Aurangabad, discovered a new enticement the internet dangles before her. Even though she’s surfed before to chat, mail and get on social networking sites, shopping online was a first. She bought her daughter a salwar suit for her birthday on the Net. “I was naturally apprehensive about buying something online, but it worked. I think I’ll try it again,” she says.

After a decade of unmet promises, it does seem that buying and selling products on the internet is ready for that big takeoff. In the next couple of years, experts say that the skew between travel and non-travel transactions will equalise (currently 80 per cent of e-commerce transactions are in the travel and tourism segment). So, non-travel e-commerce is predicted to more than double in the next two years. Growth rates are estimated at anywhere between 60 per cent (a conservative estimate) to 300 per cent (the optimistic one) annually.

“For the first time geography is history, for people can buy what they aspire to anywhere in India, sitting at home,” says Harish Bijoor, marketing consultant. Lifestyle-related transactions are expected to lead the growth as more young people choose to buy on the internet instead of going to crowded malls.

Online retail sites like Flipkart, Snapdeal, Myntra, Yebhi, Indiaplaza, Fashionandyou, Jabong and Zovi, to name a few, are out there with big media budgets. The proposition—great rates (often selling at lower than cost), discounting, convenience, cash on delivery (a system only in India and China), and easy return policies. “Real estate is so expensive, infrastructure is poor; consumers have lack of time; and there’s low extent of online reach—all these make room for very rapid growth,” says Darshan Mehta, head of Reliance Brands. “This time around the number of users on the internet is far higher, and climbing,” says K. Vaitheeswaran of Indiaplaza, a pioneer of e-commerce in India.

While this is all great news for the consumer, concerns have been raised on how long this will last. Some scepticism is warranted, given that memories of the 2000 dotcom bust continue to linger. In fact, many say the online retail space will see more churn than growth in the next five years, as it faces challenges in execution, business models and cost overruns. The viability of many of the businesses involved is in serious question. Most are unlikely to break even; consolidation and phase-outs are expected; and in the end, as it has happened in the travel segment, there will be three-four big players to contend with.

But for the moment, there’s a lot of money flowing in. In the last three years, estimates are that over $350 million has come into the online lifestyle segment. Many of these digital retail sites are funded by venture capitalists and private equity funds. Interestingly, even though most of the money flowing in is foreign money, FDI itself isn’t allowed in e-tailing. So, players get investments from these funds in a model where the money actually flows in for the setting up of the back end and logistics of the business rather than the front end.

 
 
“Instead of the discounting and cash-on-delivery, firms should get customers shift to electronic modes of payments.”Prasanth Mohanachandran, Co-founder, AgencyDigi
 
 
The new norms have most players scrambling to distance their business-to-consumers (B2C) and business-to-business (B2B) operations. Industry sources say that going by the rule book, most players in the online retail space are flouting laws since the front end and back end are so intertwined. Jabong co-founder and managing director Praveen Sinha, for instance, refused to get into funding sources citing confidentiality.

Industry sources say it’s easy to spot which of the online retail players have recently received funding—they’re the ones spending money on advertising. “Currently the businesses are not structurally designed to make money because the customers are still looking for value,” says Mahendra Swarup, president at the Indian Private Equity & Venture Capital Association. So, in terms of valuation criteria, the traditional parameters of profitability don’t really come into play—actually, Swarup feels, the number of unique customers matter.

Industry observers say the focus on customer acquisition through massive media spending is wasteful. It increases costs but helps in valuations. Sinha disagrees, and says it helps build the market and awareness of the brand.

There are several other pitfalls. “I think, most of these players have started on the wrong foot with cash-on-delivery, the discounting and the return policy. Instead, there should be more effort in trying to get customers to shift to card or other electronic modes of payment and things like a return-policy that works if the customer buys something of equal value. That will be the next transition,” says Prasanth Mohanachandran, co-founder at online consultancy AgencyDigi.

In general, experts say that there are no fixed models and formulas for the Indian context and it is too soon to tell. A large portion of the business model discussion centres around whether players should follow a warehousing/inventory-based model. For instance, Vaitheeswaran believes that keeping costs low is crucial, which is why a zero inventory model is the only way to make the business viable. Sinha believes a mixed model is the way to go. “You have to be able to control the quality and customer experience and clearly you can only do that if you have some ownership in the process,” he argues.

Will online retail prove to be a significant development for Indian retail? Probably. That’s because it will reach out to people in smaller cities more effectively than organised, traditional retail. “We are seeing greater traction in smaller cities, so clearly online retail does fill a gap,” says Rahul Narvekar of Fashionandyou. Will it replace traditional retail in some categories, like in developed markets? That’s a tougher one to answer.

The market is likely to evolve where traditional players increasingly look at online as a more dominant way to reach out to consumers, but traditional retail will still be crucial for the touch-and-feel and social aspect of retail. “The businesses will make sense once volumes are built and issues like selling at cost or below cost will no longer be the norm,” adds Amitabh Mall, partner & director at Boston Consulting Group. Either way, in these days of clogged traffic and crush on the shopping floor, it’s clear that many consumers are going to think digital while shopping this Diwali.

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