E-Commerce Industry in India by SC Next India

Research on E-Commerce Industry in India Is the current E-Commerce Industry attractive to the Business or Consumer? A Research paper Submitted by

ALVIS LAZARUS A For the award of certificate on EXECUTIVE PROGRAM ON LEADERSHIP AND MANAGEMENT

EPLM-07 September 9, 2014

Research by: Alvis Lazarus A

TABLE OF CONTENTS

Topic

Research on E-Commerce Industry in India

Page No:

Abstract

Introduction

Hypothesis

III

Research Scope

Growth Story of E-Commerce Industry

Birth of E-Commerce in India

Current E-Commerce Market in India & Key Players

Capital Funds

E-Commerce Supply Chain Model

E-Commerce Industry attractive for Business or Consumer?

Porterâ&#x20AC;&#x2122;s 5-Forces Model for E-Commerce

SWOT Analysis

Business Challenges

Consumer Value Proposition

Key Issues faced by Consumer

Attractiveness of E-Commerce Industry â&#x20AC;&#x201C; Analysis

Conclusion

VII

References

Description

ABSTRACT The E-Commerce industry in India has seen significant growth in the past years. Specifically, the last 5 years the industry has seen exponential growth marking a CAGR of 59% from the year 2009 to 2013. Though the term E-Commerce is much familiar and in use for more than a decade, the real rhythm of systems and processes started to fall in place only now. The one key factor driving the growth of this E-Commerce Industry is the surge in the number of internet users in the country. The number of internet users is expected to grow from 100 million users in 2011 to 420 million users by 2020. Online travel is the first and foremost category to penetrate fast and as of last year they have a lion’s share of 70% out of the total E-Commerce market. With the forecast of ECommerce market to reach 56 Billion USD by 2023, there is a lot of growth potential for this Industry in the coming years. This potential is visualized much earlier by the Venture capitalists (VC) and Private equity (PE) players and they started investing in E-Commerce sector. As we all know, change is the most sensitive thing to handle and change management is the most critical lever for success. Even this online shopping is a ‘Big Change’ for the customers to move from ‘Touch and Feel – Brick and Mortar’ model. This huge change is made possible only by sensibly handling the sentiments of the people. The key driver of this effective change management is the Cash on Delivery (COD) Model. COD model ensures the customer that their hard earned money is safe and demands payment only after product delivery. Currently COD is accounted for 60% to 70% of online retail sales. Though the Outlook of E-Commerce industry looks so exciting and attractive, the current E-Commerce firms face huge operational challenges and none of the existing E-Commerce companies are profitable. Currently, the prime focus of this Industry is expansion and gaining

proposition for the Consumers and they enjoy multiple benefits like COD Model, Same day delivery, Easy returns, multiple offers, 30-day replacement guarantee, cheaper product than other channels, product variety etc. This growing industry also has growing security concerns of online transactions and also poses threat for the personal data of the customers. This research also aims to solve an exciting question, for whom is this Industry more attractive – Is it for Business or Consumer? This paper carefully evaluates the E-Commerce industry from Business and Consumer standpoint to conclude whether E-Commerce Industry is more attractive for the Business or Consumer.

Research on E-Commerce Industry in India

the maximum market share even at the cost of losing margins. This leads to huge value

Research on E-Commerce Industry in India Is the current E-Commerce Industry attractive to the Business or Consumer?

(I)

INTRODUCTION Electronic Commerce which is commonly termed as E-Commerce is an industry where-

in the trade i.e. buying and selling of products happens over internet. A simple explanation of the E-Commerce model is - The product pictures, product specification and the product price are displayed in the E-Commerce platform. Customer reviews, compares, selects and purchases the product online. Then, the purchased product is delivered to the customer at their door step. Either the cash transaction happens online or it is paid during the delivery of the product. India has become one of the fastest growing ECommerce industries in the world. If we see back years before, the access to Internet in only through computers and thatâ&#x20AC;&#x2122;s the only option available. But now people have multiple options like Mobiles, Laptops, Notebook, Tablet, and Smartphone to access internet. The current situation is, itâ&#x20AC;&#x2122;s tough to see any hand phones with-out a data

Research on E-Commerce Industry in India

connection and data connectivity (Internet) has become a key part of our life. This change in

culture keeps attracting more and more people in and slowly people started to heavily rely on the internet for their day to day needs. The bottom line is the penetration of internet is the key trigger for this growth of E-Commerce industry and this penetration is aided by lower cost for data connectivity and growth of smart phone market. Keeping these internet users as base, so many businesses started to develop around. Be it Social networks or Android market, all these business models are successful and these models depend heavily on addition of internet users for their growth. E-Commerce is one such market which slowly but steadily penetrated and now has taken a Himalayan growth past years. Seeing this huge potential, lot of global investors also started investing in this market. This research intended to provide the growth story of Indiaâ&#x20AC;&#x2122;s ECommerce market, current market conditions, key challenges faced by the industry and the real

value proposition for the business and the consumers. This research paper also focuses on the Online Retailing segment within the E-Commerce Industry when trying to evaluate the attractiveness of this industry from business and consumer standpoint. There are multiple channels of distribution available in India and currently E-Commerce is one among them. And, E-Commerce is seen as highly convenient model since it saves time in purchasing a product.

(II)

HYPOTHESIS

The research idea is to get insight into E-Commerce Industry to establish (1) Growth story of E-Commerce Industry in India (2) Is the Indian E-Commerce Industry attractive for Business or Consumers? With tremendous growth potential in the coming years and good availability of funds are seen as positive for Business (B2C E-Commerce Players) and on other hand, multiple selection options and easy of shopping are the positives for the Consumers (Online Buyers). For whom is this Industry more attractive?

(III)

RESEARCH SCOPE

The scope of this paper is to research on the current E-Commerce Industry in India. This research has two sections to it. Section-1 captures the growth story of the E-Commerce Industry, Current Market share, Growth potential, Supply Chain Model etc. Then, this paper discuss Further, the paper focuses on the growth story of E-Commerce from year 2000, Current Market share, Growth Trend, Major

Section-2 evaluates the booming B2C E-Commerce (Retail) from Business and Consumer standpoint to conclude whether the current E-Commerce Industry is attractive for the Business or the Consumer.

(IV)

GROWTH STORY OF E-COMMERCE INDUSTRY IN INDIA

Electronic Commerce (E-Commerce) is a platform in which buying and selling of goods is done and for this internet is needed. Based on the Buyer and Seller, there are 3 types of ECommerce:

Research on E-Commerce Industry in India

Players in the Industry, Penetration by Categories, volumes etc.

• C2C (Consumer to Consumer): C2C transactions happen between customers. The E-Commerce players provide the platform and the processes, through which the transaction takes place. A commission on the transaction value will be the gain for the E-Commerce player. Example of C2C businesses are – Online auction (E-Bay), Online Classifieds, Online Real estate (Commonfloor.com, Magicbricks.com, and 99acres.com). • B2B (Business to Business): B2B are the transactions between businesses. Examples of this model are – Indiamart.com, TradeIndia.com, and Sulekha.com. • B2C (Business to Consumer): B2C is the most common form of E-Commerce in which a variety of goods are available. Few categories to name are Electronics, Apparels, White goods, Footwear, Stationery, and services like Online Travel Booking and Online Matrimonial websites. Few key players at different categories of B2C are Flipkart, Snapdeal, Amazon, Cleartrip, Expedia, Ibibo, IRCTC, MakeMyTrip, Yatra, Jabong, Myntra, Yepme, Zovi, FabFurnish, PepperFry, UrbanLadder, Zansaar, BigBasket, EkStop, LocalBanya and ZopNow. Main Flows in E-Commerce: There are 4 key flows in E-Commerce and they are (1) Product

Research on E-Commerce Industry in India

Flow, (2) Cash Flow, (3) Information Flow, and (4) Reverse Product Flow.

Product Flow: This is the movement of the goods from the suppliers till the customers. Logistics players play a key role in moving products through this chain. Cash Flow: Cash flow is from the customers back to Suppliers through the multiple stakeholders in the E-Commerce model i.e. from Customer to E-Commerce players and Supplier through intermediaries. Information Flow: This information flow happens in both the directions and a key flow which is vital for the proper functioning of the end to end activities in the E-Commerce model. Reverse Product Flow: This specifically means the product returns and damages which has to be picked from the customer and returned to the supplier through the E-Commerce player.

a) Birth of E-Commerce in India If we go back and analyze the birth of E-Commerce in India, the start of dot com companies started in the mid-1990s and B2B E-Commerce portals are introduced by 1996. Less awareness, meagre Internet penetration and no confidence in online payment systems were reasons for E-Commerce not gaining momentum.

online shopping web platforms. The IT crisis of 2000 caused all these initiatives to be turned down and there were no major activities happened in the E-Commerce space for next 5 years. From year 2005, the real growth of E-Commerce has kicked off and the first category to penetrate well is the â&#x20AC;&#x2DC;Online Travelâ&#x20AC;&#x2122;. At 2006, online travel booking is enabled by the entry of LCC (Low Cost Carriers) in airline industry and selling of tickets through the Online Travel Agents (OTA). By this same time, the e-ticketing had been already started by Indian Railways. Year 2007 marked the start of multiple online retailers and e-tailing is leveraged to provide a differentiated service and enhance customer experience. Group Buying started in the year 2010 and Social commerce is used as a medium to reach out to customers.

Research on E-Commerce Industry in India

Second wave of E-Commerce started way back in the year 2000 through some small

b) Current E-Commerce Market in India & Key Players From the year 2010, E-Commerce has seen

tremendous

growth which is aided by the

growing

penetration. staggering

internet With

CAGR

a of

34.58% from 2009 to 2012, the Industry has expanded from USD 2.5 Billion to USD 16 Billion in a matter of four years from 2009 to 2013 (Source: www.dazeinfo.com). According to a survey by ASSCHOM, ECommerce grew at an enormous 88% in 2013 to USD 16 Billion and expected to reach USD 56 Billion by 2023. It is more appropriate to name the key players in each of the segment since most of the them are niche players in various segments like books, consumer electronics, fashion, apparel, furniture, grocery, deals etc. Hence, it is more meaningful to explain the current trend and key players segment wise. Out of the total E-Commerce pie â&#x20AC;&#x201C; Online travel contributes for 70% and specifically ETailing contributes estimated

(Online for

Retail) 16%.

current

The

market

share of E-Commerce (Online

Research on E-Commerce Industry in India

Retail) is INR 12,000 Crore

and the key players and market leaders are specific to each segment. Multi category segment is the largest in the online retail industry and currently attracting most of the investments and the top players in the market place in multi category segment are Flipkart,

Snap-deal

and

Amazon. Travel sector, which is estimated at around 8 Billion USD accounts for around 70% of the overall Indian E-Commerce market in 2013 (Source: IAMAI). In the travel sector the key players are Clear trip, Expedia, Ibibo, IRCTC, Make My Trip and Yatra. This travel segment is also seeing some signs of consolidation. In Fashion and Lifestyle category the major players are Jabong, Myntra, Yepme and Zovi. In Furniture, FabFurnish, PepperFry, UrbanLadder and Zansaar are the key players. Furniture is expected to become the third largest segment after Electronics and Fashion. This segment is expected to grow almost 4-5 times this year. Market place player, Snapdeal has already launched furniture and Flipkart & Amazon may start Furniture soon and they are currently exploring. In Grocery segment, the major players are BigBasket, EkStop, LocalBanya and ZopNow. Grocery market potential is expected to be around 400 Billion USD and that would pose all attributes to become the largest sector. Though the number of transactions is very healthy, the major challenge in this sector is ‘Managing Inventory’ and ‘Logistics’.

c) Capital Funds One another key fuelling

the

factor

E-Commerce

growth in India is the Venture There

Capital are

Funds.

hundreds

Venture

capitalists

currently operating in India but out of them the top 7 have

the

cream

investments, they are Accel

Nexus

Ventures,

Tiger

Global, Kalaari Capital, IDG Ventures,

and

According

SAIF. Venture

Intelligence and a report from Economic times, these seven VCs account for 222 of the 414 investments or

Research on E-Commerce Industry in India

Partners, Helion Ventures,

54% of the deals that have materialized in the ecommerce space since 2007. Accel Partners is the leader, with 54 investments out of the total. It is followed by Helion Ventures, Nexus Ventures and Tiger Global, respectively. These capital risk funds have a major stake in the growth of India E-Commerce Industry. With Flipkartâ&#x20AC;&#x2122;s recent one billion dollar fund raising and Amazon allocating two billion dollars of funds for investment at Amazon India, Indian E-Commerce industry is all set to pose like a war field. These VC also demands key part in the decision making. For example, Accel and Tiger who has a stake of 40% in both Flipkart and Myntra, would have obviously triggered their merger. These kind-of happening is not new. As we remember Flipkart acquired Letsbuy.com and Myntra acquired Exclusively.in; what is common in these is, these companies have common investors and hold a good stake in the companies.

d) E-Commerce Supply Chain model Under the E-Commerce supply chain model, the types of business models, Customer touch points, Supply chain model are explained below: i. Business Model - There are two different business models in E-Commerce â&#x20AC;&#x201C; (1) Buy &

Research on E-Commerce Industry in India

Sell and (2) Market place.

In Marketplace, products from multiple vendors are displayed in the online platform (Website) and the products could be from Brand, Shops or even Individual person. The marketplace provider takes care of the marketing and attracting customers, ensuring track of transactions and the user interface, whereas the vendor who is displaying his product will take care of availability of product and shipping. Marketplace provider takes a percentage of the sale as his revenue from the vendor. Marketplace doesnâ&#x20AC;&#x2122;t hold any physical inventory and thereby avoiding holding costs. Hence, Marketplace can offer a wide variety of products but the major concern for this model is the real time data and information flow between vendor and market place systems and product quality.

In Buy and Sell model, the products are purchased by the E-Commerce organization and stocked at their warehouses. Those procured products are displayed on the website and once the customer purchases the product, the product is delivered to the customer at his/her doorstep. In this model, huge inventory holding cost is a major setback but the benefit is the product can be delivered quickly to the customer and also highest level of customer experience can be provided since the E-Commerce provider manages and accountable for the delivery and quality of the product. ii. Customer Touch Points - In E-Commerce there are 5 main customer touch points. They are Marketing, Front End, Payment, Customer Service and Product Delivery. All these 5 main touch points are so critical since they impact the Customer experience and Satisfaction.

First and most important touch point is the marketing. E-Commerce depends heavily on marketing. Way back in 2010-11, the Ad spends of E-Commerce companies are INR 10 Lakhs which has grown taller to reach INR 25-75 Crores in 2014 (Source: Economic Times). On an average, online retailers spend 10-15% of annual revenue on advertising and marketing. The current trend in E-Commerce industry is personal and digital marketing and with growing importance of marketing, E-Commerce companies are also hiring marketing firms like Lowe and

campaigns. "It's mainly in countries like India that online brands need to use traditional media to propagate the use of the online service, especially if the larger pie of the consumers is not necessarily online," said Kartik Iyer, CEO at Happy Creative Services. (Source: Economic Times). Front end to the customer is the â&#x20AC;&#x2DC;Websiteâ&#x20AC;&#x2122; which is the face of the organization and a critical tool to attract more customers. Search engine optimization and web maintenance directly impact the traffic to the website and the click to conversion rate of customers. User interface, web design, catalogue and content management are the key things to ensure a seamless user interface and experience.

Research on E-Commerce Industry in India

Partners, Scarecrow Communications and Happy Creative Services to steer their marketing

Payment processing is another customer touch point where the customer pays the product cost through the payment processing gateway. There are basically two types of payments – Online payments or Cash on Delivery. Online payment is made upfront when the product is purchased and before the product is delivered. In Cash on delivery, the payment is done when the product is delivered to the customer and another model which is almost similar to this is the Card on delivery model where the payment is made through card during the delivery of product. Customer Service plays a role right from order till delivery of the product. Customer service team takes calls to clarify on product specification or related information, it also updates the status of the order when asked by customer, and it also supports the customer on post sale clarifications, product returns and any other concerns. The final and most critical touch point with the customer is the last mile delivery where the company customer associate (CA) or Field executive (FE) will carry the product and deliver the product to the customer. This touch point is so important since the entire brand name of the organization relies on CA/FE’s communication, attitude and behavior when he is at the customer’s place. iii. E-Commerce Supply Chain A basic supply chain model for the Buy and Sell online business is shown in the

Research on E-Commerce Industry in India

schematic diagram below.

The Sales and Operations planning (S&OP) team of the E-Commerce organization does the Demand and Supply planning. This planning takes into account the forecast from the category teams and the available and planned capacity from the Operations planning team. Based

the

S&OP,

the

purchase

orders

are

released

the

Vendors/Suppliers/Brand/Manufacturers. Basis the schedule, the products are delivered at the Warehouses or Distribution centre of the E-Commerce organization. From there, the products are distributed as per plan and need. The customer uses the web to view and select the product he/she needs from the E-Commerce organizationâ&#x20AC;&#x2122;s website and purchases the product. Once the customer has ordered the product, the order reaches the nearest warehouse. The orders are consolidated based on a pre-defined cut off which depends on the service levels committed to the customer and based on the optimum performance of the operations. Consolidated orders are picked, packed, labelled and invoiced. The products are delivered to the customer at their door step and that is called the â&#x20AC;&#x2DC;Last Mile Deliveryâ&#x20AC;&#x2122;. There are a lot of ways the Last Mile delivery is planned and few time slot based deliveries are explained below: (1) Scheduled delivery In scheduled delivery, Customers can select any specific date for delivery within a specified time period after placing an order. For example, Flipkart offers a window of 7 days within which customer can select a delivery date. (2) Same-day / Next-day delivery If customers do not prefer a scheduled delivery, they can opt for SDD (Same Day Delivery) or NDD (Next Day Delivery). E-Commerce players offer this option for most tier 1 and tier 2 cities. Though it is the most preferred option of the customer and they need the ordered products immediately, this needs a well-coordinated logistics planning and execution. To

the lanes where this SDD/NDD options are offered. (3) Slotted Delivery Customer can pick a preferred delivery slot and the slot timing can vary from 2-4 hours. BigBasket.com offers 2 hours slot and offers around 4 slots in a day. After the order is placed by the customer, they display the available slots for the same day and the next day for the customer to choose from.

Research on E-Commerce Industry in India

achieve optimum logistics cost in this model, substantial volumes are needed every day on all

(4) Open Box Delivery One of the major challenges faced by the E-Commerce players is ‘Product Returns’. These returns could not be questioned or argued with customer since the product is not seen during delivery and it can badly impact the customer experience and may end up in losing market share. Around 30-40% of the return reasons are product damages and the solution to this is ‘Open Delivery’. In this model, the product is unpacked and displayed to the customer. Also the customer signatory would be received in an online form using a tab or a hard copy of a form. This can be a valid proof and means to solve most of the post-sale issues coming out of product damages. Though ‘Open Box Delivery’ is not going to solve all the issues, it will certainly solve most of them. For example, a customer who signed off on a form after receiving his brand new laptop as open delivery can’t come back and complain that the laptop screen is fully broken. Another great advantage of this model is – Any genuine intact shortages or damages found out during Open Box Delivery, can be taken back in the same delivery vehicle avoiding extra reverse logistics cost and we can avoid customer waiting time significantly since the replacement product can be initiated immediately. Open Box Delivery will increase your delivery time a bit and may negatively impact the number of deliveries per vehicle/trip. Currently, this model is not used by any E-Commerce players but definitely this is in pipeline. (5) Plug and Play The final model is the ‘Plug and Play’. As the name implies, the product is plugged and played during the forward flow itself. This would not only sort out the product damage claim during post sales but also ensures that the product is in working condition during the time of delivery. Though it sounds great, effective implementation of this is a big challenge. The reason

Research on E-Commerce Industry in India

is – this model expects the field executives (FE) to actually set up a product and shows it

working condition which demands high quality people and training for the FE(s). Hence, Plug and Play has to be evaluated sector-wise and can be switched-on on segments where it will be effective. Even this model is not in practice but we can experience them soon.

(V)

IS THE E-COMMERCE INDUSTRY ATTRACTIVE FOR BUSINESS OR CONSUMERS?

Attractiveness of the E-Commerce industry is analyzed through Porter’s 5-Forcse model (Competition within Industry, Threat of new entrants, Threat of substitutes, Bargaining power of suppliers and Bargaining power of customers), SWOT (Strength, Weakness, Opportunity and Threat) analysis, Challenges faced by the business, Consumer value proposition and the issues faced by the customer.

a) Porter’s 5-Forces Model for E-Commerce Using Porter’s 5 Forces model, the current E-Commerce industry is analyzed for the rivalry within the industry, threat of new entrants, threat of substitute products, bargaining power of suppliers and the bargaining power of buyers. THREAT: ENTRY No barriers for new entrants Initial capital investment is less Lot of funding options for further expansion Initial set up of business is not complex Huge growth opportunity since industry is at nascent stage RIVALRY Competition within E-Commerce and other Brick & Mortar models FDI in B2C can fuel up the competition High exit cost for inventory based business model

BUYER: BARGAINING POWER Multiple options to choose from Low switching cost Price information easily available

THREAT: SUBSTITUTES Lot of alternatives available No product differentiation No switching cost for the Buyer

Threat of New Entrants: Current E-Commerce industry has a lot of potential for growth for all the players. With E-Commerce industry estimated to reach 56 Billion USD by 2023 there is wealth of opportunities for lot of new players to gain market share and expand their business.

Research on E-Commerce Industry in India

SUPPLIER: BARGAINING POWER E-Commerce is one among the multiple channels for selling the products to the customers Higher chances for forward integration Low switching cost for the ECommerce companies

There are no entry barriers for starting up a new E-Commerce business and all you need is well managed platform to showcase your products, swift operations team to deliver product quickly and a customer service team to excel in customer satisfaction. In addition, the initial capital investment needed for starting an E-Commerce business is very less and for most of the startups with around 100 SKUs (Stock Keeping Unit), the capital needed us well within INR 10 Lakhs. With 51% of FDI allowed in multi brand retail for market place, there is lot of funding options for the new players when they look for expansion. All these factors pose a huge threat of new entrants to the current E-Commerce Industry. Threat of Substitutes: In the E-Commerce industry, that too specifically in the Market place, there are a lot of options and varieties available for the same product with less differentiation. Since there are a lot of suppliers competing in the same space, pricing plays a vital role in gaining more market share. With no switching cost for the buyers, the current E-Commerce industry has a huge threat from substitute products. Bargaining power of Suppliers: For the manufacturers, E-Commerce is one among multiple channels for selling the product to the customers. The bigger manufacturers who are already having a good brick and mortar presence can easily forward integrate to start the online retail channel also on their own. Bargaining power of Customers: With E-Commerce industry in full expansion mode, there are a lot of campaigns, policies and processes to gain and retain customers. Customers have access to pricing information across different E-Commerce players. With no product differentiation there is no switching cost. Cash on delivery, Easy returns, Cheap price, Exchange offers and Same day delivery etc. â&#x20AC;&#x201C; all these are initiatives towards gaining more and more customers. With more intense completion in this E-Commerce industry, Customers have good bargaining

Research on E-Commerce Industry in India

power.

Rivalry within Industry: With high threat of new entrants and no entry barriers, the competition in the E-Commerce industry is so intense and getting more intense day by day. Business have to come up with new initiatives every often and spend more in marketing to be in the competition. With high chances of forward integration on few segments by large manufacturers/suppliers and the competition from the traditional brick and mortar business fuelled the competition still more.

c) Business Challenges Though the current E-Commerce industry is seeing explosive growth and showing tremendous potential, it is facing a lot of business challenges also. Key challenges currently faced by this industry and the challenges ahead for the E-Commerce industry is described below. i.

Cash On Delivery (COD)

As we all know, change is the most sensitive thing to handle and change management is the most critical lever for success. Even online shopping is not an exemption and they have to

Research on E-Commerce Industry in India

b) SWOT Analysis

manage ‘Big Change’ of the move from ‘Brick and Mortar’ (Touch and Feel) model to Online Model. This huge change is managed by a key driver named the Cash on Delivery (COD) Model. COD model ensures the customer that their hard earned money is safe and demands payment only after product delivery. Currently COD is accounted for 60% to 70% of online retail sales (Source: study by Internet and Mobile Association of India and audit firm KPMG). This huge dependency on cash-on-delivery model is proving to be so costly for the E-Commerce players who offer this mode of payment. This huge percentage of COD transactions clearly shows that the growing E-Commerce customer base is not proportional with the adoption of payments through credit or debit cards. Also, this COD model has a negative hit on the bottom-line in multiple ways. “The COD payment transactions add about 3% additional costs to the E-Commerce firm," said Ashish Jhalani, founder of e-Tailing India. This additional cost can climb up-to even 25-30% when the product is returned by the customer. Typically as a cost per delivery, COD transactions incur an additional expense of INR 35-65 for every transaction involving cash on delivery and it is as high as INR 100 in cases of returns in COD model (Source: Study by market research arm of Avendus Capital). To implement COD model, lot of effort is needed and most E-Commerce companies have spent years putting the processes deal with these issues. But, COD model is not a business friendly model for the very reason it involves cash handling. This increases the cost and also increases the cash receiving cycle by 10-14 days. Most E-Commerce companies have currently restricted the value of goods that can be bought on COD model. For example, Flipkart has kept the limit at about INR 50,000. In addition, the maximum percentage of customer returns is from cash on delivery model. Having said all these, current E-Commerce players are relying on COD model for penetrating into market and there are struggling to remove or replace with other options.

Research on E-Commerce Industry in India

ii.

Profitability of the Industry

We have discussed much about the booming E-Commerce sector and the potential growth we can expect in the coming years. But the other side of this story is – ‘No E-Commerce players are profitable’. Most of the E-Commerce players are working out ways to be profitable in next 2 years but that is going to be a tough ride since this current industry is primarily driven by customer value proposition and specially the product cost. In fiscal 2013, Snapdeal posted losses of Rs 120.1 crore and reported losses of Rs 81.2 crore in fiscal 2012 (Source: Company's financials filed at the Registrar of Companies). Flipkart India reported a loss of Rs 281.7 crore before extraordinary items and tax in fiscal 2013, according to documents filed with the MCA, compared with a Rs 109.9 crore loss in fiscal 2012.

(Source: Ministry of corporate affairs' (MCA) website). Even if we look at Amazon founded way back in 1994, is never been profitable till now. The general belief is that E-Commerce has become a successful distribution channel. That is too early to conclude keeping in mind that online retail is just <1% of the total retail sales and the logistics model is not scalable when E-Commerce companies tries to become profitable.

iii.

Channel Conflicts

As the E-Commerce has seen explosive growth and as more products move through the E-Commerce channel, conflict arises between the traditional Brick and Mortar model and the ECommerce model. The root of this conflict is pretty straightforward – Online channel is capturing market by offering the lowest price and they are quite able to do that because Online Channel chops off all the intermediate channel partners like the distributors, stockiest etc. and most of the E-Commerce players are having enough funds in the pocket and their prime focus is to expand the market and not the

matched by the traditional Brick and Mortar players and this is the reason for the conflict. Due to this, the big handed traditional players put tremendous pressure on the brand and this force the brand to an extent where they ask the customers not to buy from online players. Few examples of these conflicts are – Toshiba India stating that “they don’t have any tie ups with ECommerce players and they are not authorized to represent quality of Toshiba branded products”. Director from Lenovo India quoted as saying “Largely due to market place kind of set up, there are a lot of resellers that have got added up, which are selling at very low prices. These we believe may or may not be an authorized or genuine product”. Nikon also went ahead and

Research on E-Commerce Industry in India

profitability. This product pricing can’t be

publishing a similar statement last year. We can also notice a small board carrying the picture (sample picture attached above) is displayed in all Nikon showrooms and at the retailers place. It states â&#x20AC;&#x153;Please note that E-Commerce websites like Flipkart and Snapdeal are not our authorized partner/dealer in India, we advise you to check the warranty entitlements while buying from online portalsâ&#x20AC;?. Though these statements seem to preserve the customer interests, the real intention is to create panic and discourage buying products through online channel. These conflicts pose a huge challenge for this industry. iv.

Reverse Logistics

Reverse logistics is the collection of all processes that come into play for goods that move in the reverse direction, i.e., from the customer to the business. The reverse logistics process flows are Retrieve -- Transport -- Receive -- Inspect -- Sort -- Act. Reverse Logistics is of great challenge for the E-Commerce players. In the forward flow, only the sign off for the product receipt is given by the customer and this creates a lot of grey areas related to the right quality of the product received. With forward flow concentrating on only the number of deliveries and on-time delivery and product quality is not verified during delivery, the E-

Research on E-Commerce Industry in India

Commerce player has to rely on the customerâ&#x20AC;&#x2122;s claim and honor all the return requests.

The most important activities of Reverse Logistics are explained below:

Physical Movement of Goods: Once the return request is authorized, there are different methods by which the goods are received back from the customer. Some E-Commerce organizations organize a pick-up of the product at the door step of the customer and few

organizations asks the customer to mail in the goods and they do send the return slips with address during the forward flow itself. Store: The physical goods that are returned by the customers are received at the return warehouses and they are accounted for tracking and stored. All the inventory accountability best practices of the warehousing on forward flow are followed for the return products also. These warehouses normally will have the capability of packing, refurbishing and testing so that the proper action needed on the return product can be done. Sort: Once the products are received and stored at the warehouse, they are sorted based on their condition and fitness for use. Most of the products in good condition which are returned the same day due to order cancellation or any other reasons will be checked and sent back to good stock. This is called the â&#x20AC;&#x2DC;Return to Originâ&#x20AC;&#x2122; and even the undelivered products falls into this category. Most of the products returned are due to damages or product not fit to use; these products are repaired or sent back to Supplier based on the terms with the supplier. Other products are either sold as defective products or they are scrapped off. Repair: It is a key step in the reverse logistics supply chain. Predominantly, E-Commerce players are leaving this to a third party who buys these products at lowest price, refurbishes it and then sells them in the second market. The reason is the E-Commerce players could get blocked and stuck with huge returned goods and huge money could get blocked on the return products. Major percentage of reverse logistics involves rejecting and scrapping the goods collected from customers. This needs a lot of policies related to environment to be followed. As a result, a third party specialist provider is needed so that he can dispose them off in a fashion which is compliant with regulation. v.

Tax Structure

and specifically in Buy and sell model, these transactions are more. The basic taxes are the VAT and CST. Value added tax (VAT) is charged by the state government and this is charged on the products sold within a state from the warehouse/facility located within the state. Central sales tax (CST) is charged by Central government and CST is levied at those cross border sale transactions. Non-uniform VAT rates across different state governments, CST and the retention of VAT in case of inter-state stock transfers makes the tax structure so complex; this makes the network planning and the warehouse location planning so tedious. These puts the E-Commerce firms to come up warehouses at each state to avoid paying CST and avoid a cost head on their logistics cost. But, this makes the overall operations so

Research on E-Commerce Industry in India

At E-Commerce Industry, inter and intra state movement of goods are most common

complex. Implementation of Goods and Services tax (GST) is expected to solve this issue but still the implementation of GST is under question and there are a lot of state related issues to be sorted out. The introduction of GST is still under discussion and debate. No conclusion is arrived at yet in GST. There are a lot of issues and call outs raised by each state has to be addressed. The key issue is related to petroleum which constitutes to 26% of the state revenue and the state wants this to be out of the GST scope. Also, the crux of the issues is, state fear that they loss their revenue and may lose their self-sufficient status; hence they want a compensation from the centre. These critical issues have to be sorted out before GST goes live.

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vi.

Foreign Direct Investment (FDI)

As per current FDI norms, 51% of FDI is allowed in multi brand retails and 100% FDI is allowed in single brand retail. These FDI norms also have some pre-conditions like 50% of the foreign investment to be invested in back end infrastructure (logistics, cold storage, soil testing labs, seed farming and agro-processing units), minimum sourcing of 30% from SME’s. The above policies are as such applicable for E-Commerce industry also. So defining the policy for E-Commerce industry - As per Exchange Maintenance Act (FEMA), foreign companies can only invest in B2B (Business to Business) companies. But in ‘Buy and Sell’ model such foreign investments are not allowed. This adds a lot of complexity to the working model for the E-Commerce companies. In order to establish compliance, both Flipkart and Myntra have

moved into a marketplace model, thereby aligning them compliant to foreign funding. Even Amazon which is been into Buy and Sell model, has entered into Indian market as a Market place model to be compliant. Another classic example is, Flipkart creating a separate entity called ‘WS Retail’ and on-boarded WS Retail as a seller in the Flipkart’s market place platform. Also adding to the pain, there are consistent notices from ED for improper routing of FDI into the systems and we have also huge fine being posted for E-Commerce companies in the recent past. Most recent one, June 2014 – Flipkart and Amazon are under the radar by the ED for the same reason. d) Consumer Value Proposition The current E-Commerce Industry is much customer focused since it is it expansion mod; the ECommerce whose going to win the maximum customer pie is going to the clear winner. At this industry retaining the customers is tough since there is no switching cost and multiple options are available and the only way to retain the customers is to have a unique value proposition to the customers. Hence, the current E-Commerce Industry provides a lot of value proposition for the customers to give them the value for money, seamless customer service and an excellent shopping experience. Few of the key value propositions for the customers are explained below: i.

Product Cost

In the traditional model of Brick and Mortar, the product is manufactured by the manufacturer and he adds a Mark-up on his Cost of Goods sold and sells to the Distributor. Likewise Distributor and Retailer add in Mark-up before it is sold to the customer. On an average, these distribution Mark-ups vary from 20-50% depending on the product category. These markup at each stage adds up to the product cost and

these channel partners are much needed for the distribution of the product. In E-Commerce model, the channel markups are avoided and specifically on the products which are directly sourced from the brand, huge channel mark-ups are saved. This is one of the reasons how the E-Commerce firms are able to give jaw dropping prices for the customers. In addition to this, E-Commerce industry is in

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this is not avoidable in traditional channel, since

Expansion mode and the prime focus is to capture the market and the focus is not profitability. With the back-up of the funding available, E-Commerce players cut off on their margins to provide the best price to the customers and capture the market. At the present scenario, no other traditional channels can match the product pricing in the E-Commerce channel. ii.

Product Catalogue

Variety is another key value-add for the customers. Specifically, in the market place model huge numbers of suppliers are on-boarded to provide a variety of options to the customers. Amazon which has started operation in India on June 2013 has quickly set up the market place model and currently offers around 17 Million products across 28 categories and it has around 9,000 sellers on-boarded. Bangalore based, Indian E-Commerce player – Flipkart has moved into market place model last year and currently has 30 Million products across 70 categories and has around 3,000 sellers. This provides a huge variety of options at one platform for the customers so that they can select, compare and choose the right product at ease. iii.

Other Value Adds

Apart from the Product costing and the variety, E-Commerce model has much to offer for the customers. With Free home delivery, Same day delivery, Easy Returns, 30-Day replacement options, Product Exchange, Special offers etc., E-Commerce industry is providing a lot of value proposition for the customer to gain and retain the maximum pie of the market share. e) Key Issues faced by consumer i.

Online Fraud and Security Concerns

In E-Commerce model, the customer has to make the payment for the product through a payment gateway. The exceptions are the post pay options like Cash-On-Delivery, Card-OnDelivery and Check-On-Delivery where-in the payment is paid during the product delivery. In all Research on E-Commerce Industry in India

there instances, the payment is made online through the payment gateway. A payment gateway

service authenticates and passes on electronic payments made by online customers to ECommerce merchants i.e. the movement of funds from the Customer’s account to the Merchant’s account. It allows E-Commerce merchants to accept credit cards on their websites. Also there are two different types of payment gateways – (1) Merchant side Application programming interface (API) and (2) Secure Order Form. In the former, the processing code resides in the merchant’s website and uses API and in the latter, the codes resides on the payment gateway provider and from the merchant’s website the customer’s will be re-directed to the payment gateways provider’s website to make the payment and then return back to the E-Commerce merchant’s website.

Security is one of the growing concerns that restrict customers from engaging with ECommerce. The integration with third party service providers introduces new security challenges due to the complexity of it. Due to the increase in warnings and growing security concerns and cases of identity theft and financial fraud being reported in news, most customers stay away from performing online transactions and prefer not to shop online or prefer the cash on delivery model. ii.

Product Quality

Most E-Commerce players are able to provide a wide variety of products by being in the market place model where they don’t have to hold stocks. The E-Commerce players rely on this huge network of vendors for availability of products and the product quality in the market place model. Right contracts and terms are to be in place to ensure that the genuine product reaches the customer. Though E-Commerce players ensures that they replace any product damages and attend any post sales related issues immediately, this link has good probability for fake products to enter into market. iii.

Shopping Experience

Though E-Commerce has a lot of benefits and value proposition for the customer, the one critical disadvantage is non-availability of the ‘touch and feel’. Specifically for products like Home appliances, Furniture etc., the touch and feel of the product is much needed. E-Commerce companies are trying their best to match to the touch and feel experience. For example, In Lenskart we can upload our picture and test the available frames by wearing it on the picture and most of them gives the options of 360deg rotation and Zoom options on the product pictures. Having all this, still the shopping experience in a brick and mortar model couldn’t be matched. For now, this negative in E-Commerce model is compensated with unbelievable

f) Attractiveness of E-Commerce Industry - Business Vs Consumer i.

5 Key Point - Value Analysis

The E-Commerce Industry is analyzed and also the previous discussion points in this research paper are consolidated against 6 points for Business and the Consumer. From the Business standpoint, the value is analyzed against 5 key indicators namely, (1) Attractiveness of the Industry, (2) Growth, (3) Profitability, (4) Government Policies, and (5) Customer Loyalty; From the Consumer standpoint, the value is analyzed against 5 key indicators namely (1) Variety, (2) Product Cost, (3) Product Quality, (4) Reach & Security, and (5) Shopping Experience.

Research on E-Commerce Industry in India

product pricing, product variety and excellent seamless customer service.

Business - 5 Key Point Analysis (1) ATTRACTIVENESS OF THE INDUSTRY

Negative

With intense competition within the industry, no entry barriers posing threat of new entrants, no product differentiation posing huge threat from substitute products, huge possibility for suppliers to forward integrate and huge bargaining power of customers makes the current E-Commerce industry unattractive.

(2) GROWTH

Positive

With E-Commerce grown at a CAGR of 59% from 2009 to 2013 and estimated to reach 56 Billion USD by 2023. This industry has huge potential for explosive growth in the years to come.

(3) PROFITABILITY

Negative

E-Commerce is in expansion mode and all Top E-Commerce companies in India are profitable. This is certainly a huge task ahead and all the players are trying to be profitable in another 1-2 years.

(4) GOVERNMENT POLICIES

Negative

Complex taxation structure (CST/VAT) and FDI norms makes the processes and

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operations so complex to manage. Though FDI norms is going to support the home grown

companies to have the advantage, at a larger picture easier taxation norms and FDI policies are needed for E-Commerce companies to grow at good pace.

(5) CUSTOMER LOYALTY

Negative

With no switching cost, no product differentiation, variety of options and all information of product available at ease in the platform, customers have huge bargaining powers. This industry is hugely driven by product cost and customer loyalty is very less. E-Commerce players have to spend huge marketing cost and provide unique value proposition to retain customers which is not an easy task.

Consumer - 5 Key Point Analysis (1) PRODUCT VARIETY

Positive

Top E-Commerce companies like Flipkart and Amazon offers more than 1 Crore products across 40+ Categories. Certainly, E-Commerce platform is an easier way to view, compare and select the right product. Specially market place model where-in there is no need of inventory to be bought and stored, onboard multiple vendor across country to provide a huge variety of products to the customers.

(2) PRODUCT COST

Positive

E-Commerce model, by cutting the distribution mark-ups is able to provide the best product cost in the market. In todayâ&#x20AC;&#x2122;s scenario, no other channel is able to match the ECommerce product costing and that is the unique advantage currently E-Commerce model has.

(3) PRODUCT QUALITY

Negative

Though there are no much reported quality issues and E-Commerce players have excellent policies around Customer returns and product quality, still this is an area of concern with E-Commerce from the Consumer stand point.

(4) REACH AND SECURITY

Negative

good pie out of the overall market. Also, more security concerns surfacing out at this nascent level of the E-Commerce industry; security related issues are real show stoppers for growth.

(5) SHOPPING EXPERIENCE

Positive

Certainly, Touch and feel is missing in the E-Commerce industry. But, with the maximum value for customers through Cost, Variety, Free Home Delivery, Same day delivery, Easy product exchange, 24x7 Customer Service, and Easy product returns â&#x20AC;&#x201C; E-Commerce provides excellent shopping experience on all the categories it operates.

Research on E-Commerce Industry in India

E-Commerce is yet to penetrate well into Tier-III cities and overall it is yet to grab a

ii.

E-Commerce Customer Survey

To understand the Consumer behavior and the current sentiments of this Industry, a quick survey is sent to E-Commerce customers. A total of 3067 responses are received from the survey and the results are shared below:

Survey Question # 1: Reasons for Buying Product Online?

Response:  65% of online shoppers responded that the reason is “they find cheaper products online” 

18% of online shoppers

said the reason is “they save time”  10%

responded

the

reason is “they get more variety” OVERALL 93% OF ONLINE SHOPPING IS DRIVEN BY COST, VARIETY AND TIME SAVGINS

Survey Question # 2: A product (Say a Laptop) is available with a well-established ECommerce player like Flipkart, Snapdeal or Amazon etc. and you see the same product (Same Laptop) at a cheaper price with a New E-Commerce player. With all other conditions remains the same, except the product is cheaper with the New E-Commerce player, with whom you will make the purchase?

Research on E-Commerce Industry in India

Response:

 88% of respondents say “they will purchase with the New E-Commerce

Player”.

Out

which, 21% will buy even if COD option is not available  12%

still

prefers

established players

PRODUCT COSTING DRIVES THE CURRENT E-COMMERCE INDSUTRY

the

(VI)

CONCLUSION

Considering the research findings and the survey responses, there are few things which are evident. 1.

Current E-Commerce Industry is driven by Cost as a key driver

With no switching cost and product differentiation, customer loyalty is very less in this Industry

With ease and high visibility of product information, Customer bargaining power is much high in this industry

Customers value propositions are the only option to gain market and retain customers, even at the cost of losing margins

With no entry barriers, Suppliers have a huge opportunity to forward integrate and reach out to customers directly

With immense pressure from Risk Capital funds, E-Commerce organizations have a tough path ahead to become Profitable soon

Year 2009 till 2014 is seen as the years of tremendous growth of E-Commerce Industry and from mid-2015 will be the years of tough ride for the E-Commerce players. The main agenda would be  To provide the same value proposition to the customers and also be profitable to keep the investors happy  Set right all the systems legally compliant  Stay in the competition; Compete not only with the E-Commerce players but also with the traditional Brick and Mortar model who will certainly forward integrate

With Business having a list of challenges to work on, Consumers can continue the ‘Value Proposition’ offered in this E-Commerce Industry and can keep demanding for more and this research paper concludes…

“Current E-Commerce Industry is much attractive for the Consumers”

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and start their own E-Commerce vertical.

(VII)

REFERENCES

Rebirth of E-Commerce in India by Milan Sheth (Ernst & Young Pvt. Ltd)

Ernst & Young Report 2012: Rebirth of e-commerce in India

Google India Study Report combining data from Google Trends and online research conducted by TNS Australia

The Boston Consulting Group Report: From Buzz to Bucks: Capitalizing on India's Digitally Influenced consumers

http://www.iamwire.com/2012/04/india-to-be-the-fastest-growing-e-commerce-marketin-asia-pacific-market-set-to-grow-to-8-8-billion-by-2016/

http://in.myinfoline.com/forum/reply/2065

http://articles.timesofindia.indiatimes.com/2013-04-26/internet/38842529_1_indianinternet-internet-shopping-internet-penetration

www.zdnet.com/.../india-e-commerce-industry-faces-consolidation-7000...

http://indiaranker.com/websites/ecommerce

10. http://www.ibm.com/news/in/en/2012/12/17/j586238s98768m83.html 11. http://articles.economictimes.indiatimes.com/2013-11-24/news/44412771_1_ecommerce-space-marketplace-model-cent-fdi 12. http://www.business-standard.com/article/economy-policy/government-plans-to-allowfdi-in-e-commerce-before-april-113123000754_1.html 13. IBEF Report on E-Commerce 14. ASSOCHAM Report on E- Commerce 15. http://articles.economictimes.indiatimes.com/2013-11-04/news/43658867_1_indiatimesshopping-flipkart-courier-companies 16. http://www.mxmindia.com/2013/12/40-preferred-cod-in-their-online-diwali-shopping-

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iamai/#sthash.VlYNoC8R.dpuf

17. http://articles.economictimes.indiatimes.com/2014-03-28/news/48662657_1_lowelintas-advertising-agency-happy-creative-services 18. http://www.digit.in/internet/e-commerce-vs-brands-a-serious-conflict-23040.html 19. http://articles.economictimes.indiatimes.com/2014-05-26/news/50098927_1_idgventures-india-tiger-global-lee-fixel