After growing at a galloping pace in 2015, garnering 66 per cent growth in sales, the $45-billion Indian consumer Internet industry hiccuped its way to 29 per cent growth in 2016.

Internal factors such as a sharp focus on bottomlines in order to raise additional funding and stringent cost-cutting, and external factors, including regulations that restricted marketplaces from offering discounts and capping sales from a single vendor at 25 per cent, along with negative investor sentiment as venture capitalists tightened their purse strings, contributed to lethargic growth in 2016.

The total amount of funding received by the top 10 e-commerce verticals, including horizontal e-tailers and niche verticals, in 2016 fell to $2.5 billion, against $4.04 billion in 2015, according to data from e-commerce advisory firm RedSeer Consulting.

Start-up tracking firm Tracxn pegs the total number of funding deals by the top 10 e-commerce verticals in 2016 at 319, slightly higher than the 306 in 2015. However, both the firms confirmed that deal sizes were significantly smaller this year as investors lost the appetite to write out big cheques for start-ups, forcing them to cut costs in order to get unit economics right without incurring operational losses per transaction.

The only bright spark for the industry came later in the year with bumper festival sales in October. E-tailers surpassed all expectations, with gross merchandise value (GMV) of $2.25 billion, with over 65 million units shipped as consumers splurged on deals discounted by 20–70 per cent.

Demonetisation blow As e-tailers were preparing to ride the momentum in the November–January quarter, marked by the Christmas holiday season, New Year festivities and Valentine’s Day celebrations, the Government delivered a jolt in the form of demonetisation, which took the wind out of the sales momentum. The cash crunch led to negative customer sentiment, which in turn triggered a 15-25 per cent drop in sales last month.

“Putting a sluggish growth year behind, the $45-billion e-commerce industry is poised to make a comeback to the high-growth path to get to $65 billion in 2017, growing at 44 per cent year-on-year,” said Anil Kumar, CEO of RedSeer Consulting.

He said OTAs (online travel agents) account for 30 per cent of the Indian consumer internet market; the remaining 70 per cent ($31.5 billion) is distributed among 20 sub-verticals, including e-commerce horizontal e-tailers like Amazon and Flipkart; fashion e-tailers like Myntra, Jabong; furniture e-tailers like Urban Ladder, Pepperfry; third-party logistics start-ups like Ecom Express and Delhivery; foodtech start-ups like Zomato, Swiggy; cab aggregators like Ola, Uber; ddtech like BYJU, Acadgild, and others.

Bharati Jacob, Co-founder and Managing Partner at Seedfund, which made 35 investments for a total of $75 million, noted that “2016 has been a year of sanity for the e-commerce industry: start-ups were forced to figure out their product-mix fit and understand what it takes to get profitable.”

She pointed out that in 2014-15, capital was easily available, and instead of focussing on growth and profitability, start-ups sacrificed one for the other. When capital dried up in 2016, they were forced to get their business fundamentals right.

E-commerce verticals such as cab aggregators, edtech, grocery, foodtech and furniture recorded high growth in 2016 while e-tailing horizontals, fashion and third-party logistics verticals grew at moderately positive rates.

Online shopping has become a way of life for a number of Indians and the total number of online shoppers is estimated to grow 3.5 times to touch 175 million by 2020. Of the 175 million, the top 60 million ‘high-value’ customers will account for 68 per cent of the total spend, says a study by Google and AT Kearney.

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