Online retail in India forecast to grow at a CAGR of 19.8% to reach $85.5 billion by 2025: Report

India’s online retail market is forecast to grow at a CAGR of 19.8 per cent to reach $85.5 billion by 2025, according to a report by Forrester.

As India’s retail segment faced supply chain ad operational restrictions and customers began focusing on saving money and lowering discretionary expenses, online retail grew by 5 per cent, adding $1.6 billion in sales in 2020. Forrester projects that the online market rose by $7 billion in 2021.

The growth ahead in the online retail in India will be by a host of factors including massive growth opportunity driven by global investments, a growing online shopper base and evolving customer behaviour, as per the report. In 2020, online accounted for 3.6 per cent of India’s total retail sales. This is projected to rise to 6 per cent by 2025. Forrester’s E-Commerce Readiness Index 2020 categorised India as a large and developing opportunity for online retail.

“This readiness is evident from the more than $8 billion that local and international organisations invested in online retail in 2020 and 2021,” it said. Further, retail tech firms are also growing. Additionally, the number of online buyers in India is also on the rise, growing from 71.5 million in 2016 to 179.5 million in 2020.

“This group’s disposable income has increased, and it boasts the highest percentage of younger consumers — which affects how Indians consume products and services. Half of metro Indian online adults research products or services on smartphones or PCs prior to purchase,” the report said.

About 58 per cent of metro Indian online adults with a smartphone make purchases on that device, versus 47 per cent who use a PC and make purchases on it, as per the Forrester Analytics Consumer Technographics Benchmark Survey, 2021.

“Current use skews to metro areas and top-tier cities, but internet and mobile penetration are steadily increasing in tier three and four towns and cities,” it said. The overall online buyer population in India is set to grow at a CAGR of 10.1 per cent from 2020 to 2025 with smaller towns expected to account for most of this. India’s total online buyers are forecast to reach 291.2 million in 2025.

“Low-cost, highly available data, rising smartphone adoption, and the pandemic are all pushing Indian consumers to think, do, and be digital. Today, over half of metro Indian online adults discover products and brands via social media at least daily. Social commerce start-ups are also gaining traction,” it said.

As per the Forrester Analytics Consumer Technographics Benchmark Survey 2021, metro Indian consumers have also started to use voice assistants to research products and services. 48 per cent of consumers said that they do so at least weekly.

More and more firms are enabling vernacular languages in various channels to cater to diverse audiences. And 77 per cent of metro Indian online adults feel more confident about a purchase when they use a smartphone to do research while they’re in the store “indicating a growing trend of digital and physical integration,” as per the report.

Shift in online spending categories

There has also been a shift in spending categories online amid the pandemic. “Traditionally, smartphones, computer hardware and software, and consumer electronics have seen tremendous growth in online retail sales, whereas grocery and personal care have seen slower growth. The pandemic appears to have turned the tide slightly,” as per the report.

In 2020, online retail sales of smartphones were $13 billion, followed by apparel and accessories ($3.7 billion) and grocery at $2.9 billion. Smartphones accounted for 38 per cent of India’s $34.7 billion in online retail sales in 2020, as per the report.

“As more digital-native consumers join the market, smartphone sales will rise, but longer replacement cycles will limit growth. Chip shortages and logistics costs will also determine price points and thus influence sales,” the report said.

Talking about the grocery segment, “whether the ‘quick commerce’ industry will succeed is yet to be seen, because the core issue is consistency and quality, not speed”. “With investment in the segment rising rapidly, the competition between grocery retailers is heating up more than ever,” it said.

The lifestyle segment is also expected to bounce back after facing major challenges amid the pandemic which had put major stress on discretionary spending. 

“We expect this segment to bounce back stronger after the pandemic, especially because of consumer behavior like ‘revenge buying’. While e-commerce players are making a play for this category by collaborating with and acquiring luxury labels, there has been a larger movement toward sustainable fashion — a trend that brands need to be diligent about addressing in today’s values-based economy,” it said.

Key players

The Amazon-Flipkart duopoly is fast becoming a four-way  competition as Reliance Digital and Tata join the fray, as per the report. It further estimates that Flipkart, Reliance, Amazon, and Tata (FRAT) collectively own more than 80 per cent of India’s online  retail market, “and each is maneuvering to gain market share”.

Further, “smaller players like Nykaa and Paytm Mall are also vying for a slice of the billion-dollar pie,” it said. “Online retail in India has been busy; incumbent retailers, e-commerce firms, private equity and venture capital firms, tech firms, and start-ups are bringing to life concepts like social commerce, livestreaming commerce, authentic direct to-consumer experiences, and quick commerce. Innovation is rife as payment firms bolster online retailers’ digital presence,” the report further said. 

Forrester Analytics data shows that two-thirds of metro Indian adults who purchased products online in the  past three months did so from Flipkart or Amazon, and one-quarter from Paytm. 

“The next wave of online retail growth will come from tier-two cities and beyond. Online retailers understand the value of providing ubiquitous access and greater convenience; they now deliver to 19,100 unique PIN codes with only a marginal difference in average selling prices,” as per the report.

They are also setting up warehouses across India and investing in last-mile delivery. As per Forrester Analytics data, 83 per cent of metro Indian online adults said that their purchases are influenced by the availability of free same-day delivery; 73 per cent by paid same-day delivery; and 56 per cent by the ability to pick up a purchase in a store.

“Rapid e-commerce adoption, fulfillment of same-day or next-day delivery commitments by third-party logistics companies, and the need to diversify supply chains are boosting demand for warehousing and logistics services,” as per the report. Players have also been bullish on local kiranas. Kiranas are expected to generate more than $1 trillion in sales by 2030, as per the report.

Overall monthly online spending across the nation is the highest to date. As per Forrester Analytics data, 64 per cent of metropolitan Indian online adults who have purchased products online in the past three months spent more than ₹5,000 on those purchases. Online retailers will also have to focus on personalisation to achieve differentiation. 

“Affordability, accessibility, discounts, and payment features like cash on delivery for ‘buy now, pay later’ sales will continue to drive online retail in India,” it further added.

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