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The sizzling Indian e-commerce industry - how did we get here and what's next?

Posted by Devin Cole  March 28, 2012 03:00 PM

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India's e-commerce sector is growing at light speed

From US$10 billion currently to between US$125 billion and US$260 billion by 2024-25. That’s the sizzling growth being forecast by research firms as to the size of the Indian e-commerce sector.

To put it in perspective, it still has a long way to catch up with the US e-commerce market which is set to touch US$200 billion in 2013, growing at about 17%. However it’s expected to far outpace it once it reaches there simply because of the population differential.

So what is driving this turbo charged growth?

The Indian economy is slated to grow by upward of 6 percent annually in the next few years which is among the highest rates of any big emerging economy. And quite a lot of this growth would be on the back of domestic consumption of goods and services.
E-commerce is emerging as a great leveler given that organized retail is still not ubiquitous across the length and breadth of the country with large retail chains making up less than 10% of the market.

E-commerce is helping people in smaller towns in India access quality products and services similar to what people in the larger cities have access to. It’s being forecast that close to 60% of online shoppers would come from beyond the top eight large cities by end of this year.

Increasing internet penetration has helped to expand the potential customer pool. Internet penetration is only about 10% (or about 121 million users) as against about 81% in the US and 36% in China. However this number continues to rise at a consistent pace because of falling prices for broadband connections.

Indians are also increasingly taking to mobile devices for not only search but shopping as well. The number of smartphone users is rapidly increasing in India and with 4G services about to take off it’s expected to get even more people going online. There are currently about 900 million mobile subscribers and this number is expected to touch 1.2 billion by 2015. Of these about 27 million are estimated to be active mobile internet users. More importantly, 20% users indicated intent to buy products through their mobile phones as against the current 4% and this number is expected to only increase in the next two to three years.

Innovation is helping e-commerce companies break the inertia for online shopping by offering benefits to customers not traditionally available in a brick and mortar store. Business models include no question asked return policies ranging from 7 days to 30 days, free product deliveries and the industry dynamics changing “cash on delivery” model. The last innovation has really help unlock the potential as people can now order products and pay when they get physical delivery of the product.

This has been a tremendous success because Indians are still reluctant to give their credit/debit card details online and want to have the psychological comfort that they would actually get the product once payment has been made. These innovations have led to further innovations downstream as ancillary businesses are developing to support these initiatives. Some companies have begun to develop support mechanisms for the entire cash on delivery model and are trying to reach the far flung corners of India, including in the interiors where traditional logistics companies are still not completely present. The logistics companies are also shoring up their act and have started to build specific verticals and expertise to address the requirements of e-commerce companies.

Acceptance of online shopping as a secure shopping mode is has also helped to increase e-commerce uptake. Currently only about 10 million people do online transactions out of an approximate population of 200 million credit and debit card holders. However the latest industry report by First Data Corporation and ICICI Merchant Services indicate that there are about 150 million users that are ‘ready’ for e-commerce.

More importantly the report indicates that urban Indian consumers are now confident enough to make online purchases of up to US$500 as against US$40-100 in the recent past. So not only are the numbers of online shoppers projected to increase but there has been a real increase in the total value being spent online.

So what happens next for an industry which is retailing everything online- from flowers to baby products to books, coupons, apparels, music and electronic items to even houses, cars and jewelry? While this e-commerce play is not like the earlier dot com bubble, there are clear signs that order might be coming in amidst all the noise that is out there.

First a slow but sure consolidation is starting to take place in the industry. Experts say that over the next 12-18 months there would be a couple of multi-product generalists who would be successful along with a leader in single product category.

Second, VC’s are starting to be choosy about which business to invest in, basing their decisions on performance as opposed to future predictions. Valuations which went through the roof are now returning to normal levels. According to an Avendus report, about US$829 million was pumped in the sector in the first 10 months in 2011. However this came down to US$16 million in December 2011 and went up only marginally to. US$24 million in January of this year.

Despite all of this, it’s been a very impressive story so far. The poster child of the Indian e-commerce industry is Flipkart.com, a 4 year old venture which modeled itself after Amazon.com and is already commanding a valuation of US$ 500 million and is targeting revenues of US$1 billion in the next two to three years. All of this has caught the attention of Amazon.com which entered the market in February this year. It came in through Junglee.com, a price comparison site and is already amongst the top 10 sites in the country. Everyone is therefore trying to capitalize before the 800 pound gorilla comes in fully on its own which is expected to be sometime around Q3/Q4 this year.

So how can you benefit from this?

There is huge demand for top-notch professional grade web 2.0 consultancy and development. Very few companies have a long term vision around customer acquisition, retention and constant conversations. A lot more can be done in understanding the linkages between design and functionality based on user experience and social integration. However to succeed in a tough market like India your company needs to be open to long term strategic partnerships rather than an upfront “pay for services” model. The upside would be worth its wait.

Divyan Gupta is the Founder and CEO of Keshiha Services Pvt. Ltd, a company with interests in the internet, telecom, healthcare, education and advanced technology businesses. Divyan works closely with entrepreneurs and companies to help them convert ideas into sustainable and profitable business ventures. He can be reached at divyan [AT] keshiha [DOT] com.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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