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A Ghalla Bhansali Initiative

October 04, 2011

E-Commerce : GenNext

E-Commerce is one of the most exciting spaces for today’s global online community, and India’s young startup economy is along for the ride. E-commerce in India is still in nascent stage, but even the most-pessimistic projections indicate a boom. It is believed that low cost of personal computers, a growing installed base for Internet use, and an increasingly competitive Internet Service Provider (ISP) market will help fuel e-commerce growth in Asia’s second most populous nation.

India’s E-commerce market is growing at an average rate of 70 percent annually and has grown over 500 percent since 2007. The current estimate of US$ 10 billion for year 2011 is way ahead of the market size in the way back in year 2007 at $1.75 billion. The following chart depicts the growth of E-commerce in India in the last couple of years: Growth in E-commerce over the years (In USD Million)

Apparently, more online users in India are willing to make purchases through the Internet. Overall e-commerce industry is poised to experience a high growth in the next couple of years. The 70 percent year on year growth is expected to continue and India’s e-commerce market is forecasted to reach a whopping $US 10 billion by the end of 2011. However, e-commerce in India has a long road ahead, and e-commerce infrastructure and best practices are in their infancy. India’s 7 to 9 percent Internet penetration lags far behind the 30 to 40 percent that China and Brazil enjoy, and while India’s estimated 100 million Internet users still comprise the third largest online population. The total Indian e-commerce market was approximately 3 percent of the U.S. market last year ($6.7 billion versus $227.6 billion). 1

Critical mass of Internet users: With more than 100 million Internet users. Therefore. this growing middle class is increasingly turning to e-commerce as the primary outlet for sophisticated consumer products and services. such as MakeMyTrip – which started turning these initial Web users into Web consumers – have dominated Indian e-commerce. E-Commerce Market Share Here are four reasons that e-commerce is set to boom in India. 2. Rising middle class with disposable income: Throughout India’s short history. the country is beginning to achieve a critical mass of users who are familiar with web services. Furthermore. over the past few years. industry giants such as eBay and the new crop of e-tailers expect to participate more heavily in this conversion of Web users to Web consumers. after years of false starts: 1. such as Delhi. These consumers are spread across the country. However. and India’s own powerful multinational corporations creating millions of new jobs. In addition. Mumbai. access to many global and domestic brands is limited to major metropolitan regions.A Ghalla Bhansali Initiative October 04. and Bangalore. a new generation of globally-minded Indian consumers has been created. relatively sophisticated online travel agents (“OTAs”). foreign direct investment. the country has been a land of “haves” and “have-nots”. with an estimated 70 percent growth in Indian e-commerce for 2011.48% market share. While these OTAs have accounted for up to 80 percent of Indian e-commerce in the past. 2011 The e-commerce market in India was largely dominated by the online travel industry with 80% market share while electronic retail (E-Tailing) held second spot with 6. 2 . with the rise of small and medium enterprises.

the primary driver for e-commerce anywhere is the user experience.A Ghalla Bhansali Initiative October 04. Customers prefer a trusted relationship with an e-commerce brand. Best practices that have driven e-commerce globally are now a key focus of successful Internet companies. 2011 3. including merchandising. However. the new breed of domestic logistics companies recognize the importance of reliable delivery and technology investment. customer service. and the conveniences and reliability of e-commerce businesses have to outweigh the benefits of traditional retail outlets. companies have started to place more emphasis on investing in the user experience. and a number of new payment gateway companies such as CC Avenue have sprung up to service the growing e-commerce ecosystem. and complex interstate regulations mean that interstate logistics and paperwork is more like international customs. there has been less competitive pressure to force implementation of global best practices. I 3 . In this competitive drive to differentiate via user experience. Logistics companies have been notoriously unreliable. Alternative payment methods such as netbanking and cash on delivery are now mandatory offerings for leading e-commerce platforms and can drive as much as 75 percent or more of transactions. 4. Indians have an aversion to credit cards – only an estimated 2 percent of the nation has a credit card. and sophisticated technical integrations make the experience seamless. the ultimate winner is the Indian online consumer. Payment gateways & logistics: One of the largest challenges to e-commerce in India is the lack of infrastructure to support new businesses. However. user interface design. and guaranteed delivery and return policy. Because there have been a relatively small number of successful consumer Internet companies in India. Additionally. as the number of e-commerce companies has grown. User Experience: Of course.

The amount of money that is being raised and the rate at which valuations are soaring — in some companies’ cases. are starting to raise red flags on a bubble. meaning 11-12 times gross sales compared to 2.5 times for Amazon. after successive rounds of investments into these ecommerce companies. Flipkart is reportedly valued at nearly $250 million. Can a company really create so much value in just six months? Startups are being valued at 8-10 times their gross sales. 2011 Recently Funded Online Services Companies Top Investor in Online Services (2009-2011 year to date) As it stands today. shooting up four-six times within a period of just six to nine months — is reminiscent of 1999. and at times even higher. Canaan and DFJ are relatively restrained in their investments into a still nascent sector.A Ghalla Bhansali Initiative October 04. 4 . But both camps. while Matrix. With estimated revenues of Rs. 100 crore currently. IndoUS and Helion being the die-hard e-commerce believers. there appear to be two venture capital camps with funds like Accel.

While companies spend anywhere from Rs. “Asking us about profits right now is absurd. Blame free shipping. many don’t even make money on a transaction level.” Myntra’s Mukesh Bansal says he will start making net profits when his monthly revenue hits $4-5 million. less funded companies will find it much harder. .000 on search engine marketing to acquire new customers. as they go about adding warehouses. thereby becoming profitable eventually. 2. hiring their own delivery agents and stockpiling inventory is way ahead of current revenue. says Flipkart’s Sachin Bansal.A Ghalla Bhansali Initiative October 04. . It’s a leap of faith to believe they will come back for repeat purchases. While both Flipkart and Myntra. 5 . cash on delivery and a severe deep-discounting price war for much of that. but in categories like books or mobile phones. In addition. none of them make profits as a company. But. 500 to Rs. may be able to wait it out till then. with $31 million and $20 million in venture funding respectively. We are growing at more than 100 percent. Being still young. When growth rates fall below 100 percent then we will look at profits. It’s like going back to 2000 and asking Airtel to become profitable instead of investing for the future. 2011 The Diseconomy of a Sale Most e-commerce players aren’t making money yet.

are fast catching up with the metros in e-commerce. While Delhi emerged as the leading ecommerce hub in the country. Micromax. Ahmedabad. the leading brands on the platform are Sony. Jaipur. Samsung.complete ownership of products and an opportunity to create their own brands are among reasons for these startups to shift from being pure online aggregators. others in the top 10 list were Mumbai. India's new breed of e-commerce firms India's new breed of e-commerce firms such as Inkfruit. Pune and Chandigargh — in that order. Casio. Even as rural growth in e-commerce is higher than that in metros. Kolkata. 6 . Hyderabad. Micromax is the only Indian brand in the list. Seagate. Engrave and Pipal are tapping into the country's growing market for online retail by manufacturing their own products. Apple. 2011 E-commerce gaining steam in towns and villages Rural India. women are increasingly getting active in shopping online by prominently buying lifestyle and electronic items. Higher profit margins -. Nokia. What’s more. Reebok. as well as towns of the tier-II and tier-III category. The exercise — capturing the year-long trends of buying and selling on the eBay platform from July last year — has also revealed that every minute sees four buyers making purchases at the Indian subsidiary of the American internet consumer-to-consumer company.A Ghalla Bhansali Initiative October 04. According to the survey. Bangalore. Chennai. former executives at consumer goods giant Hindustan Unilever.almost double of what they would earn by selling others' products -. a study says. Customized retail merchandise site Inkfruit was one of the earliest to ride the trend. a shift from the conventional model wherein online retailers were mere aggregators of different brands. the purchase proportion is still higher in the metros at 51 per cent of the total. LG and Canon. The portal was started by Navneet Rai and Kashyap Dalal.

there lies a thin wedge of aspirational classes who live in dusty towns. these 100 million spend about 16 hours a week online. the future of E-commerce market in India is quite promising and booming Internet service providers have aided lot more in accelerating growth of e-commerce.A Ghalla Bhansali Initiative October 04. Our estimates are that on an average. It is a big number. 2011 Summing Up…. Between the large unorganised retail (kiranas and unbranded supermarkets) that serves the masses and modern retail that serves the aspirational class in large cities. and India’s young startup economy is along for the ride. Therefore. The economics of physical retailing have always left them short changed. The penetration of ecommerce is low compared to markets like the US and the UK but is growing at a much faster rate with a large number of new entrants. The rise of ecommerce is significant because it shows the limitations of physical retailing and the rise of aspirations of small town India. As Indian e-commerce market is in nascent stage but it will surely amplify in years to come. E-Commerce is one of the most exciting spaces for today’s global online community. because it makes India the third largest internet market in the world by number of users. 7 . India crossed 100 million users last year despite poor internet penetration and sluggish internet speed.

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