We are witnessing a transformation in consumer behaviour and buying habits, as consumers become increasingly tech-savvy and the aspirations of the average Indian are on the rise. The Indian telecom revolution was characterised by technology evolution leapfrogging directly into the mobile era. Now the country’s retail space is beginning to witness a similar phenomenon. While the growth of modern retail has been stilted by regulatory constraints, consumers are exploring online shopping for greater variety, convenience and lower prices. Over 41 per cent of the Indian consumers surveyed in KPMG’s 2011 Consumer and Convergence survey said they were likely to buy online.

The digital space in India has seen significant activity over the past year. Over $500 million of venture capital and private equity funding poured into e-commerce ventures in 2011 itself. Interest in the space peaked when Flipkart and Fashionandyou were valued at $850 million and $200 million respectively.

Multiple start-ups have launched, allowing consumers to buy numerous categories of goods online, ranging from electronics to lingerie to gourmet food and everything in between. Key verticals include clothing, lifestyle, shoes, accessories, electronics, home, kids’ merchandise; players in other verticals such as healthcare, insurance, groceries have also gained traction.

Yet, the e-commerce market in India is still nascent compared to the multi-billion dollar online retail markets in the US and the UK. There is enormous potential for growth as more than 400 million users will access the Internet for the first time in India in the next four years, according to the KPMG FICCI 2012 Media and Entertainment report. However, while there is a strong underlying consumer demand driving growth in the online market, the space is becoming increasingly crowded. Consolidation has begun already with Flipkart buying Letsbuy, deals site SnapDeal acquiring online sports goods store eSportsbuy, and lifestyle portal Yebhi purchasing fashion jewellery e-tailer stylishyou, and this trend is expected to continue. Category leaders are beginning to emerge in each sector while others may be forced to shut down. How do e-tailers live up to the expectations of investors and consumers?

In order to be successful in this highly competitive space, companies need to understand the unique challenges in India.

Logistics and supply chain: The availability of quality third-party logistics is a concern in India. Companies should invest in their own logistics network or develop strategic partnerships with logistics players. Additionally, locating addresses is a challenge and may call for technology aids (such as GPS) and additional processes (such as calling customers in advance). This problem is more severe in smaller towns, which account for a significant share of the market.

Customer lifecycle value is likely to be lower in India compared to international markets. This results in additional pressure on margins, making cost-efficient logistics a critical requirement. Innovative contracting, through variable cost contracts and volume discounts, can help lower logistics costs. Given the high dependence on a ‘Cash on Delivery’ model, it is equally critical to manage reverse logistics.

Payment infrastructure: COD was a great way to persuade reluctant Indian consumers to try online shopping. However, it has become an industry standard with a majority of online transactions relying on COD. There are multiple drawbacks to COD including higher rejection rates, increased working capital requirements and additional logistical processes.

As consumers become comfortable with buying online, companies have to incentivise e-payments. The online payment infrastructure is evolving with Net banking becoming a payment option. Indian players could develop innovative payment methods such as Alipay, which allows payments through an escrow account.

Multi-channel retailing: It has become important to reach out to consumers wherever they are. Brands should integrate their online and offline offerings to reach consumers across all platforms with a consistent shopping experience

E-tailers have to focus on building a sustainable business. Many players are offering deep discounts to acquire customers and spend aggressively on brand building and marketing, but to help keep this capital-intensive business funded through successive rounds, players should keep a tight control on funds.

(Ramesh Srinivas is Partner, KPMG)

Related Topics
comment COMMENT NOW