E-Commerce is a New Dream for India Inc

Name a business segment which is a decade old, all players, big or small, are losing money and yet investors are ready to pump in more and more funds.

Confused? It is the online retail business or online retail e-commerce (e-com). The 50-player retail e-com is growing at over 40 per cent a year, every month around five new ones jump on to the bandwagon and investors keep cutting cheques with a hope that there is a pot of gold at the end of the road.

Take the case of India’s largest retail e-com company Flipkart.com which recently raised $20 million in its third round of funding from a venture capital (VC), valuing it in excess of Rs 1,000 crore. Though the company has already raised $31 million, there are rumours that a very large VC fund is planning to invest another $150 million in the company raising its valuations to $1 billion or Rs 5,000 crore.

Then there are others like Myntra.com which raised $40 million, Indiaplaza that raised $8 million so far, and daily deals site Snapdeal.com’s parent Jasper Infotech that recently raised $40 million from VCs. Even global majors like eBay.com (entered six years ago) and Amazon.com are present in the Indian space.

Large Indian off-line groups like Future and Times of India are also in the fray. It is estimated that even after investing $300 million in the Indian retail e-com space, VCs are looking out for more exciting ideas with a bagful of money. It is estimated that around 20,000 deal transactions and 50,000 product transactions happen every day from the top 10 retail e-com sites.   

Why are VCs so bullish on e-com? Will it be another bubble like the burst of dot.com companies in the early 2000s? Early stage venture funding company Accel Partners, which has invested in half-a-dozen e-com companies does not think so. “We are very bullish on the future potential of the Indian retail e-com market. Buying online is catching up fast and all our funded companies are gaining traction as planned,” said Accel Partners Partner Prashanth Prakash. 

Drivers of growth
E-com companies and experts believe that several factors will drive e-retailing growth in India. According to a recent report from Internet and Mobile Association of India (IAMAI), total Indian market for e-com is around Rs 50,000 crore, of which 80 per cent or Rs 40,000 crore is captured by travel e-commerce (online train, bus and airline tickets) while non-travel or retail e-com is only 20 per cent or Rs 10,000 crore.

Experts hope that by the year 2025, the total e-com market will reach at least Rs 4,00,000 crore and the share of retail will be half at Rs 2,00,000 crore. “It is this kind of market predictions that is making everyone sit up and make a note,” said Indiaplaza Founder and CEO K Vaitheeswaran. 

Indiaplaza, now one of the top 10 e-com companies in the country, has been around for nearly a decade and re-invented its business model to become a pure play e-retailer. One of the major reasons why e-com has grown very fast in the last 2 to 3 years, Vaitheeswaran believes, is the tremendous growth in internet penetration which has now reached 100 million as against only 3 million in 2001. “Earlier only around 1 per cent of internet users were shopping online, now about 8 per cent or 8 million shop online,” said Vaitheeswaran. 

With the phenomenal spread of mobile telephony and the advent of 3G in the country, buyers from small towns and cities are also buying online in large numbers. It is a fact that internet has dissolved the discrimination factor between the small and the big cities enabling buyers from small towns to have access to the same branded goods, and quality products which earlier was a privilege of large city buyers.

As the economic boom has enhanced purchasing power of the people and competition has pushed prices of manufactured products down, presently, a huge number of shoppers are buying many aspirational products like cameras, mobiles, computers & accessories, apparels, jewellery, home & kitchen appliances, toys, gift items etc online. Till about five years ago, books and music were the largest selling categories online, but not any more. 

Says Myntra.com CEO Mukesh Bansal, “Thanks to the spread of internet, even small town buyers are shopping online for branded products from us. Normally big brands don’t have outlets in small towns, and even if they do, stocks and varieties are limited.” Myntra’s online store, on the other hand, sells all top branded apparels and sports shoes with a wide variation in style, size and price. 

Around 60 per cent of online buying now comes from the top 10 cities and 40 per cent from smaller towns, said Prakash of Accel Partners. This ratio earlier was 80:20.  Travel portals and classifieds (like job search and matrimony), however, have laid the basic foundation of e-commerce, in India. As people started using them, their fear about security and possible fraud in online shopping have largely dwindled. Says sulekha.com CEO and Founder Satya Prabhakar, “Buying tickets online has given people confidence that it is absolutely safe and worthwhile to go online for shopping. The ‘no-questions-asked’ return policy in many portals also helped creating the ecosystem.” 

According to Prabhakar, Sulekha has transformed itself from being an online classified company to a ‘digital market place’ fulfilling users needs in every aspect. It now has a local search with 20 lakh entries for well-rated business, about 1 crore classified advertisements on its site and an e-com vertical for a wide range of consumer products. 

At the virtual market place, it is easier to change a business model depending on how the demand evolves and competition hottens up. While some niche players changed to offer a wider range of products, some ‘sell all’ players changed to niche. BeStylish.com, for instance, claims to be the largest online shoe retailer in the country with 90 brands and 3,000 styles on offer for men, women and children. 

Apart from value-for-money brands, it sells shoes by many exclusive brands. “The huge expected growth in shoes can be attributed to the increased affluence and raised consciousness of Indian consumers about their footwear,” said BeStylish.com CEO Shailen Amin, who added that by 2015, there will be nearly 40 million people transacting online.

Different models
Then there are online specialised retailers like LetsBuy.com (watches, consumer electronic items and home appliances), Caratlane (jewellery), babeezworld.com and babyoye.com (both selling baby products, going up to 120 brands and 1,00,000 products), etc.

Then there are specialised lifestyle brands like ‘Sher Singh’, the first online retailer of fashion for men and women inspired by the rich heritage of the classic cricket style. E-com companies also follow different distribution models for their services. While companies like Flipkart.com, Naaptol.com and Myntra.com are investing heavily in building own warehouse (the former two have six warehouses each) and supply chain logistics, portals like Indiaplaza work only with third party suppliers.
 
E-com survival
“All players are losing money now. For the e-commerce business to survive and make a turnaround, it is important to keep the fixed cost as low as possible. That’s why we work on a lean and mean model,” says Vaitheeswaran. 

Though both have their pros and cons, all e-com players know that the ultimate proof of the right strategy is that they must start making money after the first seven or eight years. In this context, many point to the fact that the global e-retailing giant Amazon.com took 8 years to breakeven. Surely, e-com is a long-haul, volume-driven game.

But operating in a fiercely competitive environment on wafer-thin margins will certainly not be a cakewalk for many. For the venture capitalists too, the gamble is fine: If even two out of ten companies do survive, they will make their money.