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Indian E-commerce

Riding High Tides

This report is solely for the use of Zinnov Client and Zinnov Personnel. No Part of it may be quoted, circulated or reproduced for distribution outside the client organization without prior written approval from Zinnov

Zinnov Management Consulting

E-commerce activities in India are rapidly growing


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Huge existing opportunity
Estimated revenues of USD 125-160 bn by 2025

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Wide range of marketing channels used; mobile yet to be leveraged
Mass-media advertising being deployed for brand building; social media effective in driving traffic

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E-tailing to outpace etravel

E-Commerce India Trends

Expected CAGR of etailing 4x that of online travel

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Managed logistics to prevail
E-commerce specific logistic services emerging

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Consolidation unavoidable

Focus on profitability driving new business models

VCs getting cautious of investing; expect consolidation

Scale to drive profitability; companies entering multi-category retailing and launching self-owned brands

E-commerce presents an unparalleled USD 125-260 bn opportunity


Number of people below the age of 35 to reach 828 Mn by 2015

Huge existing opportunity (1/2)

Explosive Growth in E-commerce


Favored Demographics Growing Smart Phone Adoption

~450 Mn smartphone users to by 2015 ~100 Mn 3G users by 2015

Huge Retail Industry

~USD 900 Bn worth retail sector by 2014 Current contribution of online sales: only 0.47%

USD 125-260 Bn
Indian e-commerce revenue projected to reach USD 125-260 Bn for the year 2024-25 Current revenue: USD 10 Bn

Growing Internet User Base ~376 Mn unique internet users by 2015 Current users: 120 Mn

An e-commerce firm can become Indias largest retailer by 2015


Vishal Mehta, CEO, Infibeam
Source: Avendus Report; Morgan Stanley Research; Pricewaterhouse Coopers; Comscore

Consumer preferences echo high growth prospects for e-commerce


Consumer Perception of E-Commerce (based on survey1)
Frequency of Online Purchases During Last Year
Once in 6 months or less 22% Multiple times a month 23.5%

Huge existing opportunity (2/2)

Expected Number of Online Transactions in the Future


Substantial increase 29%

Using Mobile Phone for Shopping


Do not want to use 32% Currently using 25%

Once in 3 months 27%

Once a month 27.5%

No Increase 17%

Some increase 54%

Not aware, but willing to try 7%

Would be using in the future 36%

Over 77% of the respondents shopped online at least once in 3 months Over 50% have shopped at least once in the last month

Over 83% of the respondents forecast an increase in online purchases Only 3.3% respondents do not intend to shop online

Over 68% respondents currently using or willing to use mobile for online transactions
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Source: Zinnov Primary Survey Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behavior towards e-commerce; the survey was conducted during June-July, 2012

E-tailing to grow 4 times as fast as online travel


E-commerce Market segmentation
51%
49%
2015E

E-tailing to outpace e-travel (1/2)

90% 10%
2010

87% 13%
2011E

78% 22%
2012E

E-tailing growing tremendously; will account for ~50% of the e-commerce by 2015 CAGR of E-Tailing = 4x CAGR of online travel (2012E 2015E)

E-Tailing

Online Travel

Category of goods comfortable in purchasing online


Books Travel Tickets Electronics Local Deals 0% 20% 40% 45% 43% 60% 80% 100% 65% 80%

Based on consumer survey1

More people more comfortable with buying books than travel tickets Electronics and Local Deals comparable

Source: Avendus Report; Morgan Stanley Research; Comscore; Zinnov Primary Survey Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

Major obstacles to e-retailing adoption have been addressed


Online Travel vs. E-tailing Online travel, unlike e-tailing
o o o

E-tailing to outpace e-travel (2/2)

required minimal infrastructure investment had a commoditized service offering, helping it take a lead over the latter zero lag time in order fulfillment built trust

Building Trust Discounts Trust built by extensive marketing Offering fraud-proof options, such as COD1 and easy returns Strategic Products Product categories, such as books and electronics, which dont require extensive touch and feel driving growth

Discounts driving
adoption

25% - average product


discount offered2

Why E-tailing will Catch Up?

Key investments in logistics/ supply chain Well supported by 3rd party companies for pan-India coverage Logistics Infrastructure
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Source: Sequoia Capital, Zinnov Primary Research Note: 1Cash on Delivery; 2According to Sequoia Capital

VCs getting cautious after heavy investments last year industry expects consolidation
VC funding - Huge growth in Year 2011
Total Investments (USD Million) VC funding has witnessed a dip since November 2011, compared with the first 8 months of the year which saw heavy investments by VCs

Consolidation unavoidable

VCs are investing in e-commerce companies on the high risk-return probability and are betting on finding strategic partners at a later stage to acquire these companies, Srividya C G, Partner, Valuation Services Fear of missing the bus in a potentially huge market opportunity is causing a herd mentality among VCs. Around 3-4 players will emerge winners over the next few years, Alok Mittal, MD of VC firm Canaan Partners Flipkart and Myntra expected to gain 50% market share by 2014, India E-Retail Market, Companies Revenue Analysis & Forecast to 2015, Bharat Book Bureau

902 105
2009

111
2010 2011

Over 800% growth in VC funding from 2009 to 2011; market, then in its infancy, witnessed emergence of many start-ups

Recent Acquisitions Off-late, VCs have become extra-cautious while investing in the industry; have tightened money supply Consolidation unavoidable in the medium term; acquisitions already happening
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Source: IAMAI, 2011 Report; Avendus; Press Articles

Profitability remains elusive due to multiple hindrances

Focus on profitability driving new business models (1/4)

Expensive Customer Acquisition

High cost of customer acquisition (~INR 1,500 for online acquisition), and small basket size hinder profitability Repeated purchases must to compensate acquisition spending

Capital Intensive Business Key Challenges High Shipment Costs

E-tailing involves heavy investments into supply-chain and warehouses Companies hold extensive inventory of up to 3 months in-order to get discounts from their suppliers

In-house logistics require up-front investments while third-parties are operationally expensive Typically, delivery costs 5-10% of the product value, higher for COD shipments

Focus on Growth

E-tailers burning cash to fuel growth; offering discounts deeper than their pockets and spending heavily on advertising and marketing

Source: News Articles; primary Interviews with senior stakeholders of companies

Scale is imperative for operational profitability


Effect of Increasing Scale Cost split of a typical SKU1 with ASP2 of INR 1,200 Effect of Increasing Scale

Focus on profitability driving new business models (2/4)

Warehousing and Shipping INR 150 Packaging INR 25 Payment Gateway/COD INR 35 Discount or Voucher INR 300
Selling Price 100% 100% 100% Cost of Item 60% 88% 65%

Average Loss Per Transaction


Net Loss INR 90

Indicates decrease in cost with increasing scale Indicates no effect of increasing scale

COGS3 INR 780

Total expense = INR 1,290

Average loss of INR 90 on a typical SKU with


average selling price of INR 1,200

On increasing scale, companies can become profitable by reducing the cost of warehousing,
shipping, and packaging, per shipment Free Shipping 10% 2% 10% Inventory and Write-offs 4% 4% 2% Gross Margin -24% -13% -8%
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Discount 30% 10% 15%

Packaging 1% 1% 1%

COD cost 8% 2% 4%

Warehousing 1% 1% 1%

Manpower 10% 5% 10%

Books Mobile Apparel

Source: Sequoia Capital; News Articles Note: 1 Stock Keeping Unit, 2 Average Selling Point, 3 Cost of Goods Sold

Focus on increasing profitable growth

Focus on profitability driving new business models (3/4)

Money Supply Tightened by VCs Turbulence in Eurozone effecting economic climate all across the world
USD 829 Mn invested in ecommerce from Jan to Oct 2011 Only USD 97 Mn in the between NovDec 2011

Evolving Business Models


Growth no more acceptable at the cost of profits Companies cutting costs and moving to performance driven advertising Increased Focus on Profitable Growth

Modifications in operational strategies and tweaking of business models on a rise

Global Economic Climate Sours

It has now become imperative that companies look at metrics they have till now ignored so they at least start chalking out a road to profitabilityPrashanth Prakash, Accel Partners
Source: News articles; primary Interviews with senior stakeholders of companies

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Companies innovating their business models to attain profitable growth


Multi-category Retailing
Customer acquisition cost too high to make single purchase profitable FirstCry diversified from babycare to beauty care products with Good Life Fashion&You diversified portfolio from women apparel to Home dcor, Electronics, Kids and Mens clothing

Focus on profitability driving new business models (4/4)

Self-owned Brands

E-tailers venturing into lucrative space of selling self-owned brands Myntra plans to sell its own brand of products by 2013 Launched by founders of exclusively.in, SherSingh retails products under its own label
Deals-only websites enter pure-play retailing SnapDeal started selling products after moving into pure-play retailing "We have seen that after expanding our offerings, the frequency of purchase has gone up significantly. Sandeep Komaravelly, VP Marketing, Snapdeal E-tailers acting as digital storefronts for suppliers who stock and ship Aaram Shop tied with local retailers to fulfill customer orders; revenues from ads Drop shipping: Under the model, e-tailers forward customer orders to their suppliers for a margin and offload shipment to them, thus saving logistics & warehousing costs In addition to bulk buying and bypassing intermediaries, companies actively buy off-season products for availing deep discounts We actively buy off-season goods, typically available at 30-50% discount compared with fresh stock Senior Manager Operations, Leading Indian E-tailer
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From Deals to Etailing

Offloading Shipment to Suppliers

Opportunity Buying

Source: News articles; Zinnov Analysis

Upfront investment in in-house logistics is hard to justify


In-house Logistics Third-party Managed Logistics

Managed logistics to prevail (1/3)

Key Parameters Parameter

Capital Expenditure

In-house logistics require heavy upfront investment Logistic networks of third-parties reach the farthest corners of the country Experience and expertise of specialist third-parties is hard to copy Easy to modify logistic strategy and switch partner with third-party logistics Financial & management resources needed to run in-house teams; additional operational risk assumed

Last mile Access


Expertise in Operations Agility to Respond to Dynamic Market Operational Risk & Requirement of Management Delivery Cost
Source: Primary Interviews with senior stakeholders of companies

Managed services are generally costlier; may change with industry growth
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E-tailing headed towards outsourcing model?


Telecom Industry (2004 to Present) BFSI Industry (2010 to Present)

Managed logistics to prevail (2/3)

E-commerce Industry (2011 to Present)

Telecom companies outsource infrastructure installation and management, and IT solutions

Key functions including ATM installation and management, and IT solutions outsourced

E-commerce logistics a prime candidate for outsourcing

Is e-commerce headed towards managed Logistics?


Source: News articles; Zinnov Analysis

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Managed logistic services to prevail

Managed logistics to prevail (3/3)

In-house logistics teams catering only to a few metros1 Poor Access Through In-house Teams Tier-2 onwards cities accessible almost exclusively by third parties2

Specialist e-commerce logistic companies, such as Delhivery, Chhotu, and Holisol, emerging

Emergence of E-commerce Specific Logistic Services

Existing logistic providers, such as DTDC, are creating separate arms for catering to ecommerce business

Note: 1Only exception is Flipkart which has in-house teams in about 27 cities; 2Most companies use India Post for accessing customers unreachable through private logistic players, such as 14 DTDC, Gati and Blue Dart | Source: Primary interviews with senior stakeholders of companies; Zinnov Analysis

Mobile offers much higher potential than currently leveraged


Based on consumer survey1

Wide range of marketing channels used; mobile yet to be leveraged (1/3)

High Willingness

Limited Penetration

Over 68% of respondents willing to shop online through mobile

Only 6% of the respondents using their mobile often to shop online

Small screen (48.7% respondents) Slow internet (41% respondents) Unavailability of apps/mobile websites (31% respondents)

Reduces visibility and usability Deterrents to Low 3G penetration of 4% Mobile E-commerce Most retailers dont have mobile apps or mobile friendly websites
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Source: E-commerce consumer survey conducted by Zinnov Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

Social media is effective in directing web-traffic to e-tailers


Industry Trends

Wide range of marketing channels used; mobile yet to be leveraged (2/3)

Consumer Insights (Based on Survey)

Social Media

Heavy advertisement through social media by e-tailers such as Myntra, Valyoo Technologies and Jabong

50% respondents of survey purchased/ visited


an e-commerce site through social media

44% respondents of survey influenced by


friends and colleagues

Ads targeted towards traffic generation as opposed to brand building

Consumer Reviews

Specialized teams to monitor customer reviews for any negative posts Players approach the authors and try to address their issues Negative SEO techniques used to suppress unfavorable reviews

Snapdeals Facebook Page

70%+ respondents influenced by consumer


reviews to a large extent Customer reviews most influential while purchasing electronics

Source: Primary Interviews with senior stakeholders of companies; E-commerce consumer survey conducted by Zinnov Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

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Focus on mass-media for brand building


Industry Trends

Wide range of marketing channels used; mobile yet to be leveraged (3/3)

Consumer Insights (Based on Survey)

Leading e-tailers, such as Myntra, Jabong and Flipkart, using TVCs, print media and out-of-home promotion

71% of the respondents cited Reputation and


Trust as a major factor in decision making

Mass Media Advertising

Stakeholders believe mass media to be most effective for brand building Ads focused on building trust; highlight easy return policy, money back guarantee and COD Most companies deploy SEO and SEM techniques for traffic generation

63% respondents directly explored ecommerce sites to research about an online purchase; driven completely by brand recall

Flipkart TVC Myntra Outdoor Ad

Online Marketing

However, online customer to e-commerce sites using search engines acquisition remains costly, with each 52% respondents use search engines while costing ~INR 1,500 researching about online purchases

47% of the respondents initiate their first visit

Source: Primary Interviews with senior stakeholders of companies; E-commerce consumer survey conducted by Zinnov Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

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This report is solely for the use of Zinnov Client and Zinnov Personnel. No Part of it may be quoted, circulated or reproduced for distribution outside the client organization without prior written approval from Zinnov

Zinnov Management Consulting