KF_E_Commerce_India_Final_Report_12_12_11

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Report on Indian E-tailing market

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E-Tailing landscape in India: Existing scenario and the way forward:

E-Tailing landscape in India: Existing scenario and the way forward This document is prepared by Knowledgefaber as a part of its research offerings July 2011 December 13, 2011 Prepared by: Amit Goel Vipul Vohra Tricha Sharma Sumit Kumar

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2 December 13, 2011 Table of Contents Contents Slide No. 1. What is E-Commerce? 1.1 Definition of E-commerce 3 1.2 Most significant advantage of online retailers 4 2. Indian E-Commerce Industry 2.1 E-Commerce Industry in India – Stupendous Growth 5 2.2 Evolution of E-tailing in India 6-7 2.3 What things current E-tailers are doing right vis-à-vis past 8 3.Analysis of current trends in Indian E-tailing 3.1 Product categories suitable for E-tailing 9 3.2 Performance metrics for E-tailing and current trends 10-11 4. E-Tailing formats in India 4.1 E-Commerce formats in India 12 4.2 Generic E-tailers 13 4.3 Online store of physical retailers 14 4.4 Niche Players 15 4.5 Daily deal sites 16 4.6 Online travel websites 17 5. VCs and investors – how the money is pouring in? 18 6. Looking into the future 6.1 Existing E-tailers 19 6.2 VCs/investors 20 7. Appendix 21

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3 December 13, 2011 1.1 Definition of E-commerce Use of the term “E-commerce” has expanded to include various business models but primarily it include C onduct of a financial transaction by electronic means or electronic buying of products, services or information using internet as a platform This electronic buying process encompasses all the steps involved in a transaction such as on-line marketing, ordering payment and support for delivery This process also includes electronic provision of services such as after sales and customer care E-commerce: What the term means Physical Retailer Advantages: Provides face to face selling making shopping an experience Customers get access to better product information through in-store sales representatives Disadvantages: Higher costs of operation (real estate costs, store costs, pilferage losses and store sales force costs) than online retailers Online Retailer or E- tailer Advantages: Cost effective as online retailers does not have to invest in physical infrastructure (store, real estate cost, sales force etc.) Provides ease and convenience of shopping at any time and from any location Disadvantages: Have to invest in logistics operations Highly competitive (millions of sites competing against the same set of customers resulting in low customer stickiness) Business models of many online retail formats are still unproven with players struggling to break even Little customer interaction (phone lines, email inquiries) How the business model of online retailers add value compared to physical retailers?

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4 December 13, 2011 1.2 Lower Prices: Most significant advantage of online retailers Huge benefits for online shoppers: Online retailers are looking for customer acquisition mainly and not for profits As a result, Indian online retailers are offering products at just about cost price or at a marginal loss Lower prices of a book coupled with free delivery and Cash-on-delivery option is a huge boon for the customer Example on the left illustrates how consumer is benefitting from low price model of Indian online retailers An Example: How E-tailers are attracting consumers by offering 20-30% lower prices than physical retailers MRP of a book in a physical book store = INR 500 Estimated cost at which online retailer purchases directly from the publisher = ~ 40 – 60% of MRP depending upon economies of scale = INR 200 - 300 Estimated cost of shipping is INR 20-50 + COD charges (Higher of INR 30 or 2.1% of package value) = ~ INR 70 Source: E-commerce in India: The second coming, Forbes.com Note: If a player has its own logistics team, then COD charges are replaced by cash management costs which are very less MRP in physical book store at 10% discount = INR 450 Total estimated cost to the online retailers = ~ INR 270-370 Listed price on the website = INR 324 (Whole profit margins are passed on to the consumers) Total savings for the consumer = INR 126 or 28%

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5 December 13, 2011 2.1 E-Commerce Industry in India – Stupendous Growth Market share of various categories in Indian E-commerce Online travel dominates the online spending by Indians Steep growth in Indian E-commerce Industry Industry witnessing a boom CAGR – 54.6% Indian E-Commerce industry Coming off age in recent years Indian E-commerce industry has come a long way since the tumultuous days of dotcom bubble Floodgates were opened by online travel sites like IRCTC and makemytrip.com which changed the way Indians book travel tickets Rapidly increasing Internet user base and rising middle class with disposable income has contributed to the flourishing of industry Secure online transaction environment, measures like Cash-on-delivery, focus on customer service has motivated Indian consumers to place their trust in online shopping Online Shopping behavior among Indians Based upon survey in 4 metro cities Active User base 17.4 Mn Looked only for information Bought products/ services 13.6 Mn 7.4 Mn Source: Indian E-commerce report, IAMAI Source: Indian E-commerce report, IAMAI Source: Indian E-commerce report, IAMAI

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6 December 13, 2011 2.2 Evolution of E-tailing in India before 2007 2002 1996 1998 2000 2004 2006 2008 Started in 1996 IndiaMart is the oldest and largest online B2B marketplace in India It broke-even in the very first year of its launch & has registered profitable growth in all years of its operations Indiaplaza.in launched a niche portal for selling books. Indiaplaza.in was acquired by Fabmall in 2000, name was retained In 1998, Sify Technologies started its B2C portal targeting growing internet user base. Sify has found it difficult to grow Rediff.com started its online shopping portal in 2001 focusing on electronic market In 2009, Rediff.com generated revenues of INR 120 crore In the year 2006 Network 18 group started Homeshop18.com and compareIndia.com. bsbazaar.com starts operation in 2006. The site is owned by Business standard & indiaplaza.in Future Group started its online shopping portal FutureBazaar.com in 2007. FutureBazaar.com registered revenues of Rs 122 crore i.e., 1.5 per cent of total sales of the Future group eBay entered the Indian market with acquisition of Baazee.com for Rs 230 crore. eBay sells diverse range of products in the Indian market

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7 December 13, 2011 2.2 Evolution of E-tailing in India Post 2007 2007 2011 2009 2008 2010 E-commerce wave in India resurges as players like Flipkart and Infibeam start operation focusing on bridging the gap which exists in customer service and quality of existing e-tailers Launched in early 2010, Snapdeal is the most successful daily deals website in India. It is growing by 40 -50% every month and have more than 400 employees establishing its presence in 50 cities (as of May 2011) Amazon.com, the world’s leading online firm, is also making plans to set up operations in India 2012 Taggle.com, a deal website closed its operations citing ongoing unprofitable price wars in the industry Indian E-commerce industry starts attracting a lot of attention and various new players launches operations Indian E-commerce sector starts generating interest amongst investors and VC firms and funds start flowing in Foreign retailers planning to enter India Different E-commerce formats emerges in Indian market Funds starts flowing in the sector E-commerce sector in India experiences resurgence

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8 December 13, 2011 2.3 What things current E-tailers are doing right vis-à-vis past 2010-2020 in India might become the decade of "Ecommerce". Early entrants in this domain adopted low pricing strategy with little focus on timely delivery. This resulted in slow off-take for the industry. However, in our research studies and consulting assignments in last 3 yrs, we have observed definitive trends wherein a growing number of customers are beginning to buy online, often high value products. Credit goes to few players/enablers whose high attention to detail and process innovations resulted in on-time delivery and quality products.

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9 December 13, 2011 3.1 Product categories suitable for e-tailing Low High Low High Supply Chain complexity Value B2B Commerce – machinery and other high value products B2B Commerce – Corporate gifting, promotional items, stationary etc. Electronics, mobiles, cameras, home appliances, High-end jewelry Vegetables, Poultry products, Automotive spare parts & accessories Books, CDs, Personal Care, Apparels, Shoes, Bags, perfumes Cars, motorcycles, AC (manufacturers selling directly) etc. Supply Chain complexity – includes parameters like ease of procurement, storage, handling, transportation, packaging, delivery and installation/demos (if required) Indian e-tailers are currently operating in quadrants 1 and 4 mainly. Challenge going forwards is to add more and more product categories in these quadrants Quadrant 3 is the category most difficult to sell online but is profitable Quadrant 2 also contains product categories which require robust infrastructure to sell online and some of the categories like grocery, vegetables etc. are also not very profitable 1 2 3 4 Knowledgefaber has categorized various product categories based upon price value and supply chain complexity to analyze current and future product mix in Indian E-tailing market

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10 December 13, 2011 3.2 Performance metrics in E-tailing and current trends Performance Metrics in physical retail Corresponding Performance Metrics in online retail Current trends in Indian E-tailing Number of footfalls Footfall-sales conversion Same-store sales growth New-store sales growth Average basket size Repeat purchase Customer acquisition cost Traffic volume on website Traffic-sales conversion Sales growth from existing product categories Sales growth from new product categories Average cart size Repeat purchase Customer acquisition cost With increasing internet penetration and effective marketing by e-tailing companies, traffic growth has been robust Traffic-sales conversion are bound to be lower than physical retail and currently hovers around 3 – 6% With market in nascent stage, established categories like books, mobile, electronics etc. are experiencing significant growth Current e-tailing players enjoy higher growth from new product categories due to low base effect To increase the average basket size of the customers, e-tailers resort to bundling and dynamic buying recommendations, practices which are still in nascent stage in Indian e-tailing industry Indian e-tailing websites are experiencing high percentage of repeat purchases with 50-70% customers being the repeat purchasers Indian e-tailers are currently in the process of establishing a brand and hence high acquisition costs Knowledgefaber has come up with performance metrics ( analogous to physical retail ) to evaluate the existing trends in Indian E-tailing

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11 December 13, 2011 3.2 Performance metrics in E-tailing and current trends Performance Metrics in online retail Current trends in Indian E-tailing Order Processing Time Shipping Time Return policies/mechanism Average time spent on site per user Site performance It is defined as the interval between the time when an order is received and when it is shipped. Ideally, it should be lesser than 24 hours but no Indian online retailer has been able to achieve this standard currently Time taken to ship order to the customer’s door step. Few players like Flipkart have been able to reduce delivery time greatly by operating their own logistics operations but still no Indian player has achieved “same day” delivery Only few players have implemented consumer friendly return policies. But robust return mechanism is still a missing link for many Indian online retailers With increase in product categories and online catalogues, average time spent by Indian online shoppers has been steadily increasing Many Indian online retailers are constantly investing in up gradation of technology. As a result, user experience in terms of site performance is improving all the time Knowledgefaber has come up with performance metrics ( unique to E-tailing industry ) to evaluate the existing trends in Indian E-tailing

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12 December 13, 2011 4.1 E-Commerce formats in India Generic E - tailers Major E-Commerce Formats in India Online stores of physical retailers Deal aggregators Niche Players Online Travel E-tailing Formats in India

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13 December 13, 2011 4.2 E-tailing formats in India Generic E-tailers Overview Business Model & Target Segment Scalability Strengths Website acts as the sole front end of the respective player where customers can choose from online catalogue and place order. Telephonic sales channels are also established to augment sales E.g. – Flipkart, Infibeam, Letsbuy.com etc. Revenue through online (sometimes inbound telephonic also) product sales Internet savvy customers mostly in Tier I and Tier II cities Low investment needed in front end and hence able to offer lower prices and wider product variety Provides ease and convenience of shopping from any location or at any time Scalability depends upon internet traffic growth rate and a change in consumer buying behavior Existing set of low prices are helping to attract throng of customers and enabling E-tailers to scale up Challenges Needs to have a robust backend to ensure timely delivery and service level Managing return supply chain is a complex challenge for existing players Online stores have to ensure safety and security of payments to abridge trust deficit existing in the mind of consumers

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14 December 13, 2011 4.3 E-tailing formats in India Online stores of physical retailers Many Indian retailers operate online portals to adopt a multi channel retail strategy and complement their physical stores Online stores targets acquiring new customers who are more convenience driven rather than looking for in-store experience Revenue through online (sometimes inbound telephonic also) product sales Existing/new set of customers who prefer convenience more than in-store experience Existing brand in physical domain helps win over the customers Online stores acts as extension of physical business enabling a player to execute multi channel retail strategy Scalability is driven by brand value of the physical retailer and convenience factor demand amongst its consumers Scalability in this model will happen only with a paradigm shift in consumer preference for convenience rather than in-store experience Pricing decisions becomes very critical as offering lower prices on online portal compared to physical stores will give rise to a “price arbitrage” Physical retailer has to invest in backend infrastructure and logistics to ship directly to retail customers Overview Business Model & Target Segment Scalability Strengths Challenges

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15 December 13, 2011 4.4 E-tailing formats in India Niche Players Unlike generic E-tailers, niche players in E-commerce are just focussing on a single product category/type Niche product categories includes apparel, footwear, baby care, personal care etc. Revenue through online (sometimes inbound telephonic also) product sales Internet savvy and price conscious customers mostly in Tier I and Tier II cities Wide product variety at lower prices Ease and convenience of shopping from any location or at any time Scalability is limited as they are catering to niche demands It is imperative to offer a host of products to gain new customers and hence niche players will scale up based upon depth of variety they are offering Niche players are focussing on “touch and feel” intensive products (apparel, footwear etc.) which involves high consumer inertia regarding online buying Maintaining a balance between brand exclusivity and lower prices than physical stores Overview Business Model & Target Segment Scalability Strengths Challenges

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16 December 13, 2011 4.5 E-tailing formats in India Deal Aggregators/Daily Deal Websites Offers discount coupons to consumers for various products and services (restaurants, spas, hotels, travel deals etc.) Front end includes a website where discount coupons can be purchased and a sales force which enlists merchants and deals Revenue sharing/commission received via merchants Internet savvy and price conscious customers mostly in Tier I and Tier II cities Acts as aggregator of demand and enable partner merchants to enjoy economies of scale and higher sales volume Scalability is a function of number of merchants/variety of deals one can bring to the table, which is in turn driven by sales force on the ground. Hence, scalability is limited Merchant ends up making no money on many deals as lack of repeat purchases nullify initial investment by the merchant in the deal Encourages “deal hunting” mind set among consumers lowering her price expectations for the products and services Overview Business Model & Target Segment Scalability Strengths Challenges

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17 December 13, 2011 4.6 Online travel websites This category consists of players who focuses on meeting a single consumer need through wide range of products (air travel, rail travel, hotel accommodation, travel packages etc.) F ocuses mainly on convenience rather than low prices Revenue through online (sometimes inbound telephonic also) tickets/package sales Ease and convenience of shopping from any location or at any time Wide range of choices for consumers and these websites acts as “one stop solution” Travel websites have been able to scale up based upon convenience as the central tenet of their value proposition Highly competitive landscape Players like makemytrip and cleartrip have to compete with end-service providers which operates their own websites (irctc.co.in, indigo.in etc.) Online travel websites Overview Business Model & Target Segment Scalability Strengths Challenges

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18 December 13, 2011 5 . VCs and Investors – How the money is pouring in? VC Funding – Sudden rush to paint the “white space” Company Investor Amount($mn) Yatra Online Intel Capital, Norwest, Valiant Capital 45 Fashion and You Sequoia, Intel Capital, Norwest, Nokia Growth Partners 40 Snapdeal.com (Jasper Infotech) Nexus, IndoUS Ventures, Bessemer 40 Naaptol.com NEA, Canaan Partners, SVB 25 Flipkart Tiger Global 20 VC Funding – Huge growth in year 2011 VC Funding amount by investors Top PE/VC investments in E-commerce for YTD Source: Venture Intelligence Source: Venture Intelligence Source: Venture Intelligence

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E-tailing Players Currently all E-tailing players are focusing more on acquiring customers and shaping purchasing habits rather than profitability However, waging price wars to acquire customers is not a long-term winning formula, as the recent closure of Taggle (a daily deal site) shows Rather existing players needs to focus on building a unique customer value proposition, rather than becoming a “me too” player, through host of measures such as: Building a robust supply chain and logistics infrastructure – Using best practices for inventory optimization I nbound and outbound transportation spend optimization De-bottle necking procurement and shipping operations Implementing industry wide best practices in sourcing and fulfillment operations Wide product variety Keep on adding more and more product categories/merchants to capture more and more of the “long tail” of Indian E-shoppers Develop competitive and innovative “white spaces” to fuel future growth Technology With smartphones and tablets on a high growth path in Indian market, it makes absolute sense to launch a user friendly mobile application (should be as interactive an intuitive as the website) Using web analytics to analyze consumer behavior and strategize future sales and marketing campaigns Geographic expansion Using hub and spoke model of fulfillment, Indian online retailers can look at expanding geographically into other South East Asian markets Increasing customer retention through Customer loyalty Programs Card-based/ reward points based loyalty programs are very helpful in retaining customers and motivating them to make repeat purchases (makemytrip.com has launched a rewards program off late) 19 December 13, 2011 6.1 Looking into the future Looking into the future – What should various e-tailers do to sustain this golden era of Indian E-commerce E-tailers should look at building unique customer value propositions rather than waging price wars Note: Knowledgefaber offers a comprehensive set of consulting services in each of the above mentioned domain and growth areas

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20 December 13, 2011 6.2 Looking into the future Looking into the future – What should various VCs/investors look at for generating returns? VCs/investors should look to back players with robust business models or exciting new players in E-tailing domain VCs/investors Looking at new “white spaces” in the domain VCs and Investors are always looking to invest in high growth unexplored areas (“white space”). But, Indian E-tailing is becoming more and more crowded Hence, it is imperative for VCs/investors to look for new white spaces in this domain rather than backing any “me too/also ran player” Example of white space - Enablers in E-tailing ecosystem like: An analytics player which can provide innovative tools specially designed for E-tailing players (Netflix and Amazon makes extensive use of analytics to develop competitive advantages) A logistics provider/ shipper specially catering to online retailers Or, Players offering new product/service categories like providing skilled labor, auto accessories etc. Backing only those existing players who possess robust business models and better profit margin visibility Currently, no investments in Indian E-tailing are made based upon current profits because none exists Existing players are likely to continue focus on aggressive customer acquisition and next series of funding would be utilized for this only However, going forward, existing players have to focus on profitability to exhibit sustainability and viability of their business models Note: Knowledgefaber offers a comprehensive set of consulting services in PE advisory and growth consulting

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21 December 13, 2011 7. Appendix Appendix

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22 December 13, 2011 7. Appendix Evolution of secure payment gateways has acted as a catalyst for the growth of E-tailing in India Company Cc Avenue HDFC Times of Money DirecPay ICICI Payseal EBS Transecute ABC Payments Pay U (MIH Venture) Paypal Indiapay Payment Solutions List of payment gateways in India

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23 December 13, 2011 7. Appendix E-commerce industry has been growing at a robust pace for past 3 years and is expected to sustain this momentum Growth of E-commerce industry over the years Year Dec 2007 Dec 2008 Dec 2009 Dec 2010(E) Dec 2011(E) Total Market Size 8146 14,030 19,688 31,598 46,520 Online Travel Industry 6250 (77% of total E-commerce market) 10,500 (75%) 14,953 (76%) 25,258 (80%) 37,890 (81%) Online Non- Travel Industry 1896 (23% of total E-commerce market) 3530 (25%) 4,735 (24%) 6340 (20%) 8,630 (19%) E-tailing 978 1,120 1,550 2,050 2,700 Digital Downloads or Paid Content Subscription 238 290 435 680 1,100 Financial Services 1200 1540 2000 Other Online Services (Incl. Online Classified) 680 920 1210 1610 2,150 Source: Indian E-commerce report, IAMAI

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24 December 13, 2011 7. Appendix E-tailing industry is dominated by computers and mobiles Break up of E-tailing industry Source: Indian E-commerce report, IAMAI

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Thank You ! Contact – Amit Goel, CEO, Knowledgefaber www.knowledgefaber.com amit@knowledgefaber.com Registered Office Knowledgefaber, 203, 2 nd Floor, Promenade, Dasarahalli Extension, Bangalore, KA 560024 India Corporate Office Knowledgefaber, 404/405, Prestige Center Point, Cunningham Road Bangalore, KA 560052 India Phone: +91-80- 41231576 25

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