'E-retail industry will be worth $10 billion in 5 yrs time'

Ashish Jhalani, Founder, Etailing India

Nivedita Jayaram Pawar

Here are some juicy stats that will bring cheer to e-retailers. According to a recent TechnoPak report, e-tailing has the potential to grow more than hundred-fold in the next 9 years, to reach $76 billion by 2021. This growth will be driven by the country's growing Internet-habituated consumer base, which will comprise 180 million broadband users by 2020, and a burgeoning class of mobile Internet users.

Now here's the ugly truth -- a large number of e-retail players in India are still bleeding. Here's another one: e-retail contributes a miniscule 0.50 per cent to the $500-billion retail sector.

So, why is the reality so inconsistent with the numbers? Shouldn't the e-tail space be thriving already?

Ashish Jhalani, Founder, Etailing India (a venture that helps companies who want to make the transition from brick-and-mortar retailing to e-commerce, or improve their online activity), explains just what is holding e-commerce back in India and how retailers and consumers can together make that leap of faith.

India is one of the top retailing markets in the world and among the fastest growing, with an online penetration of nearly 60 per cent, according to a research report by Comscore for Assocham - State of E-Commerce in India. Is online the future of Indian retailing?

An emphatic yes. However, it is not easy to replace the traditional retailing channel. The challenge is to get traditional retailers embrace the Internet as a channel. A good 18 years after the Internet was introduced to India, its true penetration is less than 10 per cent. And, yet, the way we refer to the Internet gives the impression that the Internet is a mass medium. It's not. We have a long way to go.

People need a very strong incentive to get a broadband connection and shop online. E-commerce is the future but it will have to be embraced correctly. Travel is the biggest e-commerce category because airlines started offering heavy discounts online. Reasons like low broadband speeds and an insufficient number of people who subscribe to this medium hold true only outside the metros. It is also a myth that Indians don't want to swipe their credit cards online as many urban Indians are getting good deals and buying from Amazon.com. People need to have a reason to get a computer at home and a broadband connection.

India's Internet base, already the third largest in the world after China and the US, is growing by 40 per cent a year. Despite this, e-commerce continues to underperform with all the major companies bleeding.

It's very simple. A large section of Indian consumers are not yet ready to trust and buy online. The e-commerce industry is yet to build that trust or need. Till this gap is bridged, there will be a huge disparity between the number of Internet users versus the number of online buyers. In the US, 85 per cent of online users transact online versus 8-10 per cent in India.

Another reason e-commerce companies are bleeding is they are acquiring customers at a very high cost and servicing them at a very high cost. We have focused for too long on customer acquisition and have ignored the cost customer acquisition. For instance, offering free delivery and COD erodes the already wafer-thin margins that most e-commerce companies enjoy. Each of these services has a huge impact on the profitability of every transaction's profitability.

The Indian government is considering a move to allow FDI in online retail. How will that change the game?

FDI in online retail will temporarily enhance the issues the industry is facing. As funds become available for investing and there is shortage of sound business models, ventures that do not have sound business models may receive funding. To survive and prove their business models, once again customer acquisition costs will be ignored to gain a customer base. Over the long term, things will settle down and FDI in online retail will allow foreign players to enter the market and only the fittest will survive. Consumers as well as the eco-system will benefit from this change.

It has often been debated whether online retail will make traditional, physical stores irrelevant. What is your view?

Traditional stores will not become irrelevant. Even in established online markets such as the US, this has not occurred. Traditionally, the growth of the retail sector is shared with e-commerce but rarely has e-commerce produced negative growth for physical stores. In most cases, online and physical complement each other. Traditional retailers who are online will have to relook the fundamentals of their business models.

What is the size of the e-retail market in India and at what rate has it been growing?

E-retail in India is $1.4-1.6 billion, excluding travel. It is slated to grow to $6 billion in the next 3 years.  
 
How different is the Indian e-retail sector compared to the global market?

Indian e-retail is significantly different from other global markets. The market that comes closest is Brazil. This is surprising given that India's Internet population is larger than Brazil's while the overall population is substantially greater; but not surprising given that only 60 per cent of the Internet population in India has retail reach versus 77 per cent or more in Brazil. 
Compared to the US... in the US, 85 per cent of online users transact online versus 8-10 per cent in India.

What lessons can learn from mature markets like China, Europe and America?

The biggest lesson is that the basics need to be strong. Acquiring a customer is not enough; re-engaging with that customer is where profitability exists. Customer loyalty, trust and education are very important factors that all mature markets have adopted and need to be seriously adopted in India. 
What are the challenges in the e-commerce growth story of India? How can they be tackled?
 
The challenges are broadly:

• Enablers of Growth - Technology, Infrastructure, Payment Solutions etc. 
• New Business Models for Retailers
• Shift From Web to Mobile
• Back-End Systems

The challenges will lead us to solutions and hence this is a critical phase in the evolution of the e-commerce industry in India.
 
The use of credit and debit cards is still not very high in India. How can small retailers deal with challenges like these while going online?

To tackle the problem in the short-term, e-tailers have adopted COD (Cash on Delivery) as a reliable and safe way to pay for purchases. While this has resulted in building some trust with consumers, it comes at a heavy price to the industry. Not only do e-tailers suffer higher costs of implementation and delays, customers are also more likely to return the goods, which further eats away at net margins. Currently, COD accounts for 55-60 per cent of all online transactions in India.
 
Since COD does not make good business sense but Indian customers are hooked to it, what is the solution?

COD service costs vary from 3.5 per cent to as much as 7-8 per cent of the transaction amount. In an already thin margin environment, this erodes the retailer's margins heavily and causes the economics of COD transactions to turn negative. A bigger problem lies with the delivering companies, who withold payments for more than 15 days, thus affecting churn cycles. India is a decently carded country with more than 20 million credit cards and 300 million debit cards. Instead of cash, the e-tailer could move towards accepting card on delivery.

We need to figure out a way to offer value and build trust with consumers. This is a challenge that will require the government, consumer associations and retailers to work at forming trust seals and other mechanisms by which consumers can evaluate each retailer.

At what scale of business should small retailers take their business online?

If a small retailer has the infrastructure to support an online business, there is no reason they should not opt for it. What matters is the strategy they adopt. They may not want to invest fully in an independent venture and may want to sell on marketplaces to start with. Over time, they can operate individual ventures. Some may stick with the marketplace model. Thus, going online does not mean running your own standalone venture.
 
Where do you see the e-retail industry 5 years from now?

There is no doubt this industry is poised for huge growth, to reach $10 billion in the next five years. As the market matures, we will see many new names leading the pack; some old names still part of the pack; some old names drop out of the pack; and some consolidated businesses. Overall, a huge opportunity awaits current and new entrants in e-commerce.

ALOK KUMAR

PGDM 3rD Sem