Indian Ecommerce at its Inflection point – Who shall emerge victorious and how?

The ecommerce industry feels like it has been sandwiched between multiple evils. For a growing sector of the economy, these setbacks can make or break the companies, the first being the FDI regulatory law. The FDI law is as fuzzy as the buzz around it. Quite simply put, the FDI law in retail implies that in addition to a number of conditions, a company can receive foreign funding only if the products it sells are of one brand. By extension, ecommerce sites are also bound by this law. This problem results in retailers adopting the marketplace model – whereby they only provide a platform for buyers and sellers to carry out transactions – instead of an inventory model. Coupled with the second problem of raising funds, marketplaces suffer because they have minimal control over service quality. This also leads to a decline in profit margins of e-retailers since dealer margins are way higher than e-retailers’ commissions.

But the marketplace model only solves the aforesaid problem. The next evil facing ecommerce in India is mainly due to the marketplace model, in fact. The recent notice issued by the State government to online sellers that prohibit them from storing their wares at the warehouses of e-marketplaces breaks the semantics of marketplace model. Since the marketplace warehouses cannot be listed as the retailers’ additional place of business, the speed delivery and QC features that marketplaces offer would gradually cease to hold good. The state governments don’t seem to approve of the model, since they deem the marketplace to have bought items from retailers, and then to have sold those items to consumers. This is also the reason why the tax authorities believe the marketplaces should not be exempted from paying VAT and State taxes.

Offering attractive promotional discounts, satisfying certain customers even at the cost of losing money for no fault of their own, competing with the traditional retailers where customers get to touch and feel before making a payment are only some other challenges that are a part of this industry.

Even as these battles are braved, the ecommerce industry continues to grow. From $2.3 billion, in six years the Indian e-tailing market is projected to grow to $32 billion.

“While this is just a beginning of the tussle between the tax and regulatory authorities and e-retail companies, one needs to be mindful of the fact that the sector is growing at estimated compound annual growth rate (CAGR) of 34% and can grow even faster. All it would take to enable the growth is to have adequate sector policies and a definitive tax regime for the virtual world by the Indian government,” said Naveen Aggarwal, Partner, KPMG.

Not just economically, but technologically speaking it seems like e-tailing is here to stay, and grow. The Indian internet users’ base is slated to increase from the current 243 million to 550 million by 2020. The young, tech-savvy demographic of India helps these numbers look good – 75% of Indian internet audience is between 15 and 34 years of age, 64% of who form the core customer base for e-retail. While referring to these young shoppers, the experts from Technopak said, “They are not only internet-habituated but also comfortable with making online transactions. Such favourable young demographics will continue to drive the growth of e-tailing in India.” In about 10 years, a tipping point would be reached, at which point ecommerce sites would have to ensure their relevance in the lives of new youthful customers as well as today’s youthful customers grown middle aged by then.

Another interesting point to note is that most brick and mortar retailers focus heavily on the top metro cities, leaving the tier two and subsequent cities’ market open to e-tailers. Not surprisingly then, over 66% of the urban Indian internet user base is in these non-metro cities, and drives nearly half the e-sales.

“The sheer ability to be able to access such aspirational products, irrespective of whether they are being sold at market price or at discounted rates, is a bliss for people housed beyond these top metros. The demand from customers beyond the top 10 cities is on the rise and we see these shoppers contributing significantly to the e-commerce growth story in the coming years,” said Arun Chandra Mohan, Founder and CEO, Jabong.com in an earlier interaction.

There is still the stiff neck-deep competition, talks of mergers and acquisitions, strategies to expand globally and diversify commercially, slices of market share to be won and lost among other challenges. As Flipkart and Amazon battle it out right at the top, Snapdeal is close at heels, as are Jabong and eBay. The Flipkart-Myntra merger is one of the biggest strategic moves in the Indian e-commerce.

“Vendors are increasingly focused on execution and winning new customers, sometimes at the expense of articulating future vision,” said Praveen Sengar, Research Director, Gartner. “Merger and acquisition activity is increasing, resulting in fewer digital commerceplatform options in the market, but also serving to extend the commerce platforms of the established vendors,” he said.

The ecommerce industry is at an inflection point as it faces these and other challenges. And as we know, an inflection point usually denotes the calm before the storm. Will the drama that follows be violent enough to uproot seemingly strong systems, or will it only weed out that which didn’t deserve to grow in the first place?