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case.zipAmazon is the most preferred e-commerce website for sellers.pdf
Amazon is the most preferred e-commerce website for sellers: Study PTI | Jun 13, 2016, 03.58 PM IST
Printed from
MUMBAI: Amazon followed by Filpkart and Snapdeal were the most
preferred e-commerce websites among sellers, with highest top of the
mind recall, a recent study has revealed.
The findings came as a result of a study by Nielsen for the January-March
quarter, which surveyed 1,184 online sellers.
It revealed that 39% of online sellers "explore two or more e-commerce
websites as an option to sell products on and grow their business.
A high level of familiarity along with in-depth knowledge of an e-commerce
website is the most important factor that drives brand equity, the report
said.
While Amazon had the highest top of the mind recall (25%), Flipkart stood second (21%) and Snapdeal (20%), it added.
"With the e-commerce industry growing in double digits, there is surge in demand by customers, and an evolving online seller
category that is fuelling supply on portals," said Dolly Jha, executive director of Nielsen India.
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"To ensure the equilibrium of demand and supply, it is essential for e-commerce portals to focus on developing an inviting
platform for online sellers in the country. Sellers are also increasingly discerning when it comes to reaching their customer and
meeting business needs," Jha added.
The first wave of the newly launched study was conducted in 16 markets with a population of over 10 lakh, and a sample size of
1,184 respondents. It aims to understand the inclination and experience of selling products on e-retailing platforms.
The study also gauges the brand equity of e-commerce websites amongst connected online sellers, and of those who intend to
sell their products online in the next few months.
"Considering the juncture at which the category is, it is now very critical for e-tailers to understand push and pull factors that
make sellers pick one website over the other," Jha said.
Other key factors that impact brand equity are certain perception of the e-retailers like they help the sellers stay relevant and
ahead of competition, provide new market opportunity, and help minimise costs to reach out to more customers, it said.
In terms of overall awareness, 86% respondents in the study voted Amazon, 82% voted Flipkart and 75% respondents voted
Snapdeal, followed by others.
As per the study, intent to sell on the e-commerce website, which was also a key parameter, saw Flipkart (58%), and Amazon
(55%) as the leading brands.
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Amazon Plans India Investment.pdf
Amazon Plans $3 Billion India Investment The announcement brings the e-commerce giant’s total planned investment to $5 billion
By GREG BENSINGER June 7, 2016 11:17 p.m. ET W all Street Journal
Amazon.com Inc. plans to invest an additional $3 billion in India, which is emerging as a critical area of growth for the e-commerce
giant. Chief Executive Jeff Bezos announced the plan at a meeting of business leaders Tuesday with the Indian prime
minister, Narendra Modi, in Washington. Amazon sees “huge potential in the Indian economy,” Mr. Bezos said in a statement. The
announcement brings Amazon’s total planned investment in India to $5 billion, since it announced a $2 billion infusion in 2014. An
Amazon spokesman declined to provide details such as how the new funds would be allocated or over what period.
Amazon operates a pure marketplace in India, due to local rules, selling only goods offered through its website by third parties. It
nonetheless has warehouse and delivery technologies there that are particularly attuned to the local market, where internet connectivity
can be spotty or nonexistent and many consumers don’t have credit cards.
At the technology-focused Code Conference in California last week, Mr. Bezos said Amazon does most of its own deliveries to
customers’ doors in India, in contrast to the U.S. where it relies heavily on the U.S. Postal Service, United Parcel Service Inc. and
others.
“We’re adapting to the local model,” Mr. Bezos said at that conference, noting Amazon has smaller and more numerous warehouses
than other markets. In China, Amazon didn’t sufficiently model its business to suit local preferences, he said, and the company has
struggled to gain market share there. Overall, Amazon’s international segment, which includes all markets outside North America, is
growing much more slowly than its home base.
Overseas sales rose 5.7% in 2015 to $35.4 billion, compared with 25% in North America to $63.7 billion. Amazon also logged a $91
million operating loss abroad, compared with a $2.75 billion operating profit in its home market. Amazon doesn’t break out results by
country. Amazon said last summer it planned to open a data center in India to serve what it said were tens of thousands of customers
in the world’s second-most populous country.
Amazon faces competition in India from local startups Flipkart Internet Pvt., which was valued at $15 billion as of last June, and
Snapdeal.com, with a valuation of about a third of that, according to Wall Street Journal data. Amazon’s planned investment is
especially large in comparison to India’s still tiny, but rapidly growing online shopping market. Indians bought $16 billion worth of
goods online last year, up from $6.3 billion a year earlier, according to Morgan Stanley estimates.
Amazon is injecting money into its Indian arm at a time when its local competitors have found it difficult to raise cash.
Investors have tightened the purse strings in recent months as startups burned through millions of dollars every month fundin g deep
discounts on everything from smartphones to religious idols. In response, local e-commerce companies have reined back on discounts,
laid off workers and reneged on offers to new hires in an attempt to start making a profit.
CASE India EBay.pdf
eBay Can the US E-tailer Recoup in India?
Case Study This case was written by Vasudha M and reviewed by Dr. A Saravanan Naidu, Amity Research Centers Headquarter, Bangalore. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2016, Amity Research Centers Headquarter, Bangalore. To order copies, send an email to [email protected]./[email protected]. Website: www.amity.edu/casestudies/ No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
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e [email protected] e [email protected] case centre
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eBay: Can the US E-tailer Recoup in India?
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Author: Vasudha M
eBay: Can the US E-tailer Recoup in India?
Abstract: In the mid 1990s, the global online auctioneer eBay was a game changer and a pioneer with its auction website and marketplace model. However, by 2015, when it celebrated its 20
th
anniversary, the e-commerce giant had morphed into an ‘outdated on-line e-commerce conglomerator’ with its growth stalling. eBay was not seeing the kind of growth and revenues that competitors such as Amazon were experiencing. This situation was mirrored in one of its major markets in India, in the Asia Pacific region, where eBay had been present for a decade. While eBay was the first global e-commerce player to enter the Indian market in 2004, by 2015 it was the likes of home grown players such as Flipkart and Snapdeal and the global e-commerce giant Amazon which had dominated the market. This was due to the deep discounts offered by these players to boost sales in spite of incurring heavy losses. Experts opined that the pioneer had entered a growth stall phase, missed the major trends in the market and let competition lead customers in newer directions. They also wondered if this market shift would render eBay’s offerings obsolete. They questioned whether eBay will be able to take advantage of the booming Indian e-commerce market and gain market share. What new strategies should the brand adopt in order to recoup its position in the Indian market?
Case Study “As we celebrate the 20
th anniversary of our amazing company, our marketplace has never been
larger, never had more choice for consumers around the world, and never been more vibrant than today. We’re just getting started.”
1
– Devin Wenig, Chief Executive Officer, eBay
“eBay India does not have any pressure of impressing private or institutional investors. Some competitors here have a fascination to burn lots and lots of cash. We don’t have that kind of fascination. What we are trying to do is to create a long-term sustainable business.”
2
– Latif Nathani, Managing Director, eBay India
In a global e-commerce market which grew at the rate of 22% in 2014 to reach $1.3 trillion, eBay’s marketplace business was estimated at $8.8 billion with a growth of just 6.4%, while Amazon grew at
1 “eBay Celebrates 20 Years, Introduces New App Experience”, https://www.ebayinc.com/stories/news/ebay-
celebrates-20-years-introduces-new-app-experience/, September 8 th
2015 2 Jain Varun, “eBay India is not in the race for burning cash: Latif Nathani”,
http://articles.economictimes.indiatimes.com/2015-06-24/news/63782797_1_ebay-india-latif-nathani-global-supply, June 24
th 2015
“© 2016, Amity Research Centers HQ, Bangalore. All rights reserved.”
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eBay: Can the US E-tailer Recoup in India?
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more than three times that of eBay’s growth rate. In addition to aggressive competition from Amazon and a host of startups which were taking business away from eBay, the e-commerce giant was also adversely affected by a cyber attack in 2014. A Google algorithm change also affected its prospects. In spite of these events, the company saw tremendous value in its customer base (157 million in 2015), its leadership in countries such as the UK, Germany and Korea and its ‘highly profitable marketplace model that comes from not holding inventory’.
3
The Indian e-commerce industry also showed tremendous growth driven by the deep discounting strategy adopted by the newer players (such as Flipkart
4 Snapdeal
5 and Amazon
6 ) in spite of this
resulting in losses. eBay the pioneer in this space in India had lagged behind. The company claimed that it adapted a slow and steady approach and practised responsible e-commerce. Experts criticised this decision ‘to not match the aggressive strategies’ employed by its rivals. This was countered by the argument that eBay did not have to deal with investor pressure to be aggressive. eBay also insisted that a slow and steady approach would help it ‘stand the test of time, as e-commerce in India reaches a tipping point’.
7 Market watchers were waiting to see what steps the e-commerce
pioneer would take in order to establish a strong presence in the Indian market.
The Indian e-Commerce Market In 2014, the Indian e-Commerce sector saw unprecedented growth. This growth was driven by rapid adoption of technology promoted by the increased usage of hand held devices such as smartphones and tablets. Favourable demographics and increased access to the internet through broadband, 3G also resulted in an increased online consumer base. The growth shown by ‘home grown players’ such as Flipkart and Snapdeal which generated huge investor interest in these companies was proof of the immense potential of the market. Experts predicted that the entry of international giants such as Amazon and Alibaba, equipped with deep pockets, strong domain knowledge and international experience, would further intensify competition. Hence the Indian players were focusing on expanding their seller base, selection on their platforms, innovating on ‘multiple customer touch points’ and delivery services.
8
The Government of India’s ambitious Digital India project and the plans to modernise India Post
9 was
also expected to affect the e-commerce sector. The Digital India project proposed to offer a one-
3 Levy Ari, “What’s left for eBay after the PayPal breakup?”,
http://www.cnbc.com/2015/07/16/whats-left-for-ebay-after-paypal-breakup.html, July 16 th
2015 4 Flipkart is an Indian e-commerce company headquartered in Bengaluru, Karnataka. It was founded by Sachin Bansal
and Binny Bansal in 2007. In its initial years, Flipkart focused on online sales of books, but later it expanded to electronic goods and a variety of other products. Flipkart offers multiple payment methods like credit card, debit card, net banking, e-gift voucher, Cash on Delivery and Card Swipe on Delivery. 5 Snapdeal.com started in February 2010, is an online retail website, headquartered in New Delhi, India, as a daily deal
platform, but later expanded into product retailing across various categories. Snapdeal claims to have a subscriber base of more than 20 million and has a presence across 4000+ towns and cities. In 2013, Snapdeal has started moving away from product retailing towards pure marketplace model. 6 Amazon launched its Indian website on June 5
th 2013 with the third party marketplace model instead of selling directly
as it did in other markets. At the time of launch, the Amazon site sold items such as books, movies and TV shows. The online retailer was planning to add mobile phones and electronics in the near future. By end of June 2013, Amazon also made available its Kindle tablet and e-readers on its site. 7 CNBC-TV18, “Will ‘slow & steady’ motto win race for ebay?”,
http://www.moneycontrol.com/news/cnbc-tv18-comments/will-slow--steady-motto-win-race-for-ebay_1259023.html, December 22
nd 2014
8 “eCommerce in India - Accelerating growth”,
https://www.pwc.in/en_IN/in/assets/pdfs/publications/2015/ecommerce-in-india-accelerating-growth.pdf, 2015 9 The Department of Posts, trading as India Post, is a government-operated postal system in India; it is generally referred
to within India as ‘the post office’.
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eBay: Can the US E-tailer Recoup in India?
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stop shop for government services with the mobile phone as the ‘backbone of its delivery mechanism’. In addition this project was also expected to boost Indian e-commerce market by increasing the penetration of internet and broadband. This was in turn expected to increase trade and facilitate efficient warehousing thus presenting a potentially huge market for goods to be sold.
10
As of 2013, only 16% of India’s total population was online and of the online users only 14% or 28 million bought goods online. Indian e-commerce was thus still at a nascent stage of evolution. While China was said to be in an ascending stage at 50%, Japan (69%), Australia (57%) and South Korea (70%) were in the mature stage.
While the Chinese market was dominated by a few players such as
Alibaba owned Taobao and Tmall, the Indian market was highly fragmented with a number of players each with their own business model.
11
Since 2009, Indian e-commerce grew at a CAGR of 34% to reach $16.4 billion in 2014. The sector was expected to grow to $21.3 billion in 2015 (Exhibit I). The number of mobile subscribers in India saw a rapid jump from 261 million in 2007-08 to 910 million in 2013-14. The number of rural internet users showed an annual growth of 58% driven by the increase in the number of smartphones and 3G subscriptions. The number of smartphone users was expected to grow at a CAGR of 91% from 29 million in 2012 to 382 million in 2016. While 3G subscribers showed a CAGR of 84% from 23 million to 266 million during the same period.
12 The online travel
13 sector contributed more than 50% of
Indian e-commerce and also had the highest number of start-ups. 14
Exhibit I Growth of Indian e-commerce (2009 – 2015) in $ Billion
Source: “eCommerce in India - Accelerating growth”,
https://www.pwc.in/en_IN/in/assets/pdfs/publications/2015/ecommerce-in-india-accelerating-growth.pdf, 2015
The political stability in the country with the new government being elected boosted business confidence. Hence, 2014 saw aggressive funding by investors in this sector due to strong growth
10
“eCommerce in India - Accelerating growth”, op.cit. 11
ibid. 12
ibid. 13
The online travel industry includes sale of domestic air travel, international air travel, hotel bookings, railway tickets, bus tickets, tour packages and travel insurance. The eTailing segment, which came second, includes purchases of durable products such as electronic items, home and kitchen appliances as well as personal items such as apparel and jewellery. 14
Chakraborty Kahini, “Online travel start-ups join e-commerce fray”, http://www.financialexpress.com/article/lifestyle/travel-tourism/online-travel-start-ups-join-e-commerce-fray/80727/, June 5
th 2015
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eBay: Can the US E-tailer Recoup in India?
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prospects (Annexure I). In addition to the traditional online formats such as retail and lifestyle, newer online business categories such as classifieds, real estate, grocery and healthcare also gained popularity.
15 Bengaluru-based Flipkart with a market share of 44% was the leading player; Delhi-
based Snapdeal (32%) came second followed by Amazon (15%). 16
(Exhibit II).
Exhibit II Major Players in Indian e-commerce
Source: Mishra Digbijay, “Flipkart has biggest piece of Indian e-tail pie”,
http://www.business-standard.com/article/companies/flipkart-has-biggest-piece-of-indian-e-tail-pie- 115032100041_1.html, March 21
st 2015
Flipkart and Snapdeal were also among ‘the most funded companies
17 in Indian e-commerce’.
18 The
Indian e-commerce industry saw huge growth since 2012 mainly due to the deep discounting strategy adopted by newer players regardless of the heavy losses they incurred. The combined losses of Flipkart, Snapdeal and Amazon were more than `9.85 billion
19 for FY 2013-14. The
combined sales of Flipkart and Snapdeal were over $4 billion.
eBay one of the first online marketplaces in India lagged behind Flipkart and Amazon on revenues from seller commissions. Experts said eBay India was ‘mostly lying low and hasn’t been actively participating in recent mega sale events’.
20 (Exhibit III).
15
“Online travel start-ups join e-commerce fray”, op.cit. 16
Mishra Digbijay, “Flipkart has biggest piece of Indian e-tail pie”, http://www.business-standard.com/article/companies/flipkart-has-biggest-piece-of-indian-e-tail-pie- 115032100041_1.html, March 21
st 2015
17 In 2014, Flipkart raised $2 billion while Snapdeal raised over $1 billion. Both were planning to raise more funds from
investors. Amazon was said to be in talks with fashion portal Jabong to gain an edge in this segment 18
“Flipkart has biggest piece of Indian e-tail pie”, op.cit. 19
These numbers are not sales from actual goods sold on their portals but are transaction and listing fees from the sellers as well as advertising revenue which is the actual revenue of e- commerce sites. eBay declined to comment on its financials. While eBay and Amazon did not disclose income from merchandise sales, Flipkart India, the website’s wholesale arm, said sales more than doubled to `28.46 billion in the year ended March 2014, against `11.8 billion in the previous year ending March 2013. 20
Malviya Sagar, “eBay lags behind Amazon and Flipkart in commission revenues”, http://articles.economictimes.indiatimes.com/2014-12-16/news/57112180_1_amazon-india-ebay-india-latif-nathani, December 16
th 2014
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Exhibit III Performance of Major Players
Source: Malviya Sagar, “eBay lags behind Amazon and Flipkart in commission revenues”,
http://articles.economictimes.indiatimes.com/2014-12-16/news/57112180_1_amazon-india-ebay-india- latif-nathani, December 16
th 2014
eBay: The Growth Story eBay facilitated transactions between buyers and sellers through a business model which was ‘asset- light, requiring fewer investments on warehousing, distribution, delivery centers, etc.,’. This also made it possible for the company to reap higher margins and cash flows. In 2014, eBay’s free-cash flow and operating income as a percentage of its revenue was 26% and 20%, respectively. While that of Amazon with its inventory-owned model was at 1.3% and 0.1% respectively. Analysts thus concluded that in spite of the problems faced by eBay, in its marketplaces segment, in terms of generating return for shareholders, eBay was more successful than Amazon.
21
This is how the eBay story began in the early 1990s. French-born Iranian computer programmer
22
Pierre Omidyar (Pierre) founded eBay in his apartment in 1995. Pierre felt that the internet could enable the creation of a perfect marketplace where all players would be equal and the market would set the price.
23 1997 was the year when the company saw rapid growth and decided to transition
from a web experiment to a real company. 24
In January 1997 AuctionWeb hosted 2,000,000 auctions while the whole of 1996 had seen only 250,000.
25 AuctionWeb got venture funding
26 , changed its
name to eBay, started looking for a CEO and also started considering an IPO. Meg Whitman 27
(Meg) impressed by the potential of the website joined as CEO of the new company. The popularity of the
21
“Here Are The Key Drivers And Barriers For eBay’s Business (Part 1/2)”, http://www.trefis.com/stock/ebay/articles/269932/here-are-the-key-drivers-and-barriers-for-ebays-business-part- 12/2014-12-15, December 15
th 2014
22 Mathur Vishal, “Ebay turns 20: From auction house to marketplace”,
http://www.livemint.com/Companies/bOTZdgZCoSd53UWA6V7dPN/Ebay-turns-20-From-auction-house-to- marketplace.html, September 5
th 2015
23 Maney Kevin, “10 years ago, eBay changed the world”, http://usatoday30.usatoday.com/tech/news/2005-03-21-
eBay-cover_x.htm, March 21 st
2005 24
ibid. 25
“The history of eBay”, http://www.telegraph.co.uk/finance/personalfinance/8451898/The-history-of-eBay.html, April 15
th 2011
26 It received $6.7 million from venture capital firm Benchmark Capital.
27 Harvard graduate Meg Whitman was General Manager of Hasbro’s Preschool Division in Rhode Island, overseeing
product lines such as Playskool and Mr. Potato Head.
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internet grew and eBay could barely keep up with the growth in the number of listings. 28
In 1997, eBay started selling Beanie Babies (Annexure II) and in 1998, the company made its first acquisition (Annexure III).
In March 1998, eBay had 30 employees, half a million users and $4.7 million in revenues in the US market and in September eBay went public.
29 Under Meg’s guidance and Pierre’s business acumen,
eBay transitioned from collectibles into nearly every type of market. eBay’s vision for success evolved ‘from one of commerce – buying and selling things – to one of connecting people around the world together’.
30 The company saw similar growth in 1999 also.
31
In June 2001, eBay evolved from an auction site into a ‘proper shopping store’. The stores were called eBay Stores and allowed users to set up their own digital store to sell products. Users ranged from small business owners to large corporations selling expensive goods.
32 In 2003, the company
earned various accolades 33
, 34
and saw good growth into 2004 as well 35
. 36
But after 2004 its share price started a steady decline
37 . 38
(Annexure IV).
The San Jose, California headquartered company had two core businesses, the payments business with PayPal
39 as its flagship brand and the marketplaces business of which eBay marketplace and its
international versions was the flagship brand. The acquisition of Skype in 2005 added a third core business in the communications space.
40 2005 also saw the entry of John Donahue (John) as
President of eBay Marketplaces. He took over as the President and CEO of eBay from Meg in 2008. 41
eBay’s global expansion was well in place by early 2008
42 , the company had hundreds of millions of
registered users, more than 15,000 employees and revenues touched $7.7 billion. 43
eBay featured in the list of Top 100 Best companies to Work for released by Fortune in 2008 and 2009. In 2008, eBay was one of the first companies to launch an iPhone app
44 and again in 2010 was one of the first to
launch the iPad app as well. 45
28
“10 years ago, eBay changed the world”, op.cit. 29
“The history of eBay”, op.cit. 30
Hsiao Aron, “How did eBay start?”, http://ebay.about.com/od/ebaylifestyle/a/el_history.htm 31
“10 years ago, eBay changed the world”, op.cit. 32
“Ebay turns 20: From auction house to marketplace”, op.cit. 33
In Q3 of 2003 eBay was ranked by Fortune as the 8 th
Fastest growing company worldwide. 34
Hsiao Aron, “Our History”, https://www.eBayinc.com/our-company/our-history/ 35
By 2004, eBay’s revenue was $3.3 billion. It had crossed this mark much faster than Microsoft, Cisco or Dell. With a total of 135 million users, its market cap was four times that of Amazon and 25% in excess than Yahoo, two other internet stars which also came into being in the 1990s. 36
“10 years ago, eBay changed the world”, op.cit. 37
eBay’s share price which saw steady growth (from $18 in 1998 to $58 in 2004) till 2004 with a YOY revenue growth of 30%, started declining steadily. 38
Hsiao Aron, “eBay Corporate Profile”, http://ebay.about.com/od/allaboutebay/a/Ebay-Company-Profile.htm 39
eBay was the dominant e-commerce player on the web, and PayPal was an upstart payment service that had squeezed out eBay’s in-house payment option. 40
“eBay Corporate Profile”, op.cit. 41
“Our History”, op.cit. 42
eBay had entered China and Japan in the early 2000s but failed to take due to intense local competition and lack of understanding of the local mindset. After shutting down its Chinese site in 2006 it re-entered China in 2007 and Japan in 2008. 43
“The history of eBay”, op.cit. 44
According to John in its first year the iPhone app did more than $600 million in volume. In 2010 it did between $1.5 billion and $2 billion. More than 14 million people have downloaded eBay’s iPhone application—it’s by far the largest m- commerce application in the world. 45
“Our History”, op.cit.
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But the company’s YOY growth had slowed and most of its overall growth was from the payments business. After the departure of Meg, eBay’s core marketplace business suffered
46 . 47
The marketplaces business was hindered by reorganisation and strategic changes introduced by John. This was what John had to say about the changes he introduced, “Well, auctions provide price transparency and help items of uncertain value establish a market price. With the emergence of product search on the internet, that role is no longer needed, so a lot of the changes I’ve made over the past couple of years have been to make our marketplace indifferent to format. If a buyer and a seller want to transact in a fixed-price format, they can. If they want to transact in an auction format, they can. A couple of years ago we saw fixed-price sales surpass auctions for the first time; I expect the ratio to settle at about 70% fixed price and 30% auction. But that will require a complete re- architecting of almost every element of the business system: pricing, incentive and feedback policies, search algorithms, seller tools and onloading.”
48 The introduction of new transaction options
49 led to
the steady decline of auction sales. 50
(Exhibit IV).
Exhibit IV Ebay Sales: Auction Vs. Fixed Price
Source: “Off the block”, http://www.economist.com/news/finance-and-economics/21662595-economists-
may-idolise-auctions-most-people-do-not-block, August 29 th
2015
In 2008, there was a round of restructuring and layoffs within the company which temporarily boosted the company’s revenue. Increased competition from players such as Amazon and Google
46
This was mainly due to ‘poor user experience and the rise of alternative e-commerce distribution channels’. Small businesses were resorting to competitors such as Amazon and Google Adwords. The payments division of eBay saw steady growth during this ‘dark period’. In Q3 of 2012, PayPal contributed $1.37 billion in sales, which was just over 40% of all eBay Inc’s net revenue. Because of this the company saw a YOY revenue growth of 22%. This led to the speculation that soon PayPal would become a major part of eBay overtaking the marketplace business 47
Jackson M Eric, “How eBay’s purchase of PayPal changed Silicon Valley”, http://venturebeat.com/2012/10/27/how-ebays-purchase-of-paypal-changed-silicon-valley/, October 27
th 2012
48 Ignatius Adi, “THE HBR INTERVIEW: HOW EBAY DEVELOPED A CULTURE OF EXPERIMENTATION”,
https://hbr.org/2011/03/the-hbr-interview-how-ebay-developed-a-culture-of-experimentation, March 2011 49
In 2000, giving in to the popular demand from users, eBay introduced hybrid auctions. In 2002, eBay allowed its sellers to post objects in fixed prices sales without any form of auction. Later in 2005, it allowed sellers to post objects at a fixed price giving buyers the choice to haggle. 50
“Off the block”, http://www.economist.com/news/finance-and-economics/21662595-economists-may-idolise- auctions-most-people-do-not-block, August 29
th 2015
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and the prevailing economic conditions also took a toll on eBay causing a drop in revenue, profit, listing volume, and share price in 2008 and 2009. After this the ‘new strategic orientations both in core businesses and marketplace platform structure, pricing, and policy’ resulted in a turnaround.
51
2011 saw the entry of Devin Wenig (Devin) as President of eBay Marketplaces. In 2014, eBay and PayPal announced plans to split in order to enable both “to sharpen their strategic focus and hone in on innovative growth opportunities in their respective markets”. Devin took over as CEO of eBay in 2015 as the company celebrated its 20
th anniversary
52 (Exhibit V). In 2015, the company had 25
million sellers registered on the platform globally, 157 million active buyers 53
and more than 800 product listings for sale at any given point of time (Exhibit VI). eBay was also present across 180 countries
54 (Exhibit VII).
In February 2015 eBay’s online auction sales dropped
55 by 26.2% while direct sales increased by
8.6%. An increasing number of sellers were seen to be moving to Amazon, which was known for its fulfilment services along with free two-day shipping for its Prime members.
56 eBay’s immediate plans
was to prove to investors that even without PayPal, ‘its core marketplace business is still thriving by providing value for both buyers and sellers’ (Exhibit VIII). Its Q2 revenue was down 3% to $2.1 billion
57 . The good news was that eBay’s marketplaces active buyers grew by 6% and the company’s
revenue in 2015 was $9 billion. eBay was still suffering from the effects of the massive data breach in 2014 which forced its 145 million users to change their passwords. Again the same year, a new Google algorithm crippled eBay’s listings in search results. This pushed eBay listings to the second or third page in search results resulting in reduced sales.
58
In 2014, sales through mobile was $28 billion contributing to 34% of the total volume. In the first half of 2015 mobile commerce had already contributed about $16 billion which was about 40% of overall sales. According to Devin eBay’s positioning was different from that of its main competition Amazon, “We don’t want to do and sell everything. That’s not the winning hand.” eBay planned to expand geographically and acquire talent through the inorganic route. In 2014, eBay led a $133 million investment in Snapdeal. Southeast Asia, India and Latin America were major growing markets for eBay.
59
51
“eBay Corporate Profile”, op.cit. 52
“Our History”, op.cit. 53
“Infographic: The Business of eBay”, https://www.eBayinc.com/stories/news/infographic-the-business-of-eBay/, July 19
th 2015
54 “Ebay turns 20: From auction house to marketplace”, op.cit.
55 Scot Wingo, CEO of ChannelAdvisor commented, “Auctions are not convenient, and they’re really only good for a
niche part in today’s e-commerce world. This trend has been going on for quite a while where auctions are waning with consumers. As e-commerce has gone mainstream, people are less into it for treasure hunting.” 56
“AUCTION SALES ON EBAY DOWN SHARPLY IN FEBRUARY 2015”, http://www.pymnts.com/news/2015/ebay-auction- sales-down-sharply-in-february-2015/#.Ve_GpxGqqko, March 12
th 2015
57 Revenue actually was up 5% in the quarter excluding unfavorable currency fluctuations.
58 Rao Leena, “For eBay, a new chapter begins”, http://fortune.com/2015/07/19/ebay-independence/, July 19
th 2015
59 ibid.
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Exhibit V eBay: 20 Years of History
Source: “EBay: 20 years of trading”,
http://www.economist.com/blogs/graphicdetail/2015/09/daily-chart-1, September 3 rd
2015
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Exhibit VI eBay: Total Active Buyers
Source: “Number of eBay's total active buyers from 1st quarter 2010 to 2nd quarter 2015 (in millions)”,
http://www.statista.com/statistics/242235/number-of-ebays-total-active-users/
Exhibit VII
eBay’s Global Marketplace
Source: “Infographic: The Business of eBay”,
https://www.eBayinc.com/stories/news/infographic-the-business-of-eBay/, July 19 th
2015
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Exhibit VIII Future Plans of eBay
Source: “Infographic: The Business of eBay”,
https://www.eBayinc.com/stories/news/infographic-the-business-of-eBay/, July 19 th
2015
Will eBay India Emerge from the Growth Stall Phase? eBay India, the Indian subsidiary of the US company, entered India three years before Flipkart made a ‘non-descript beginning as an online book store’. eBay India bought baazee.com the local auction platform for $55 million in 2004 and thus ‘transplanted its American business model’ to India.
60 The
online retail market in India was at a nascent stage with only 3.9 million Internet users. In India, eBay adopted Baazee’s business model which allowed customers to buy and sell products amongst themselves. But as the Indian market evolved, eBay adopted a model which linked the merchants and consumers. As competition came in and players such as Flipkart and Amazon focused on roping in merchants, eBay focused on providing a platform to small businesses in India to sell their goods in the global market place.
61 But still the company was unable to gain market share and boost sales.
60
Singh Shelley, “Why e-Bay India is missing in e-commerce conversation despite coming before Flipkart, Amazon & Snapdeal”, http://articles.economictimes.indiatimes.com/2014-09-09/news/53730647_1_ebay-india-latif-nathani-flipkart-and- amazon, September 9
th 2014
61 Sen Sunny, “Window to the World”, http://www.businesstoday.in/magazine/features/ebay-india-website-helps-
small-business-expand-global-reach/story/212398.html, December 7 th
2014
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According to a former country head 62
of eBay India, “When eBay started in India, it was ahead of its time. The Internet user base was less than 10 million and few people were willing to shop online. However, things changed in the last few years and eBay has been surprisingly indifferent.” eBay was reluctant ‘to pivot with the times’ to take advantage of the booming Internet users in the country. eBay India was the last to switch to cash on delivery (COD) which was the mode of payment much preferred by Indian consumers. The company adopted COD only in mid 2015.
63
This reluctance to adapt to regional preferences was attributed to its unique business model. eBay India was an open marketplace (OMP) which was a technology-based, asset-light model. The site only hosts sellers, of new as well as a small percentage of used goods, and connects them to buyers. It did not handle logistics but only sent an alert to its partners via an automated process. While its competitors Flipkart, Amazon and Snapdeal followed the managed marketplace model (MMP). The MMP controlled delivery and returns, and did not sell used goods. Sanjeev Aggarwal, Senior Managing Director of Helion Venture Partners felt that marketplaces went through three phases of evolution. The first was an inventory-led phase in which the e-tailer had control of everything. The second was MMP, where the products were not owned by the e-tailer but had control over delivery, quality and returns. While in the OMP model the e-tailer was just a hosting platform. He said, “India is now migrating to the second stage. A pure OMP is about a decade away.”
64
By April 2012, exporters
65 formed one-third of the total sellers registered with eBay India. The Indian
subsidiary had tied up with FIEO 66
to provide small and medium businesses access to global markets. These exporters who were registered with eBay India were also required to set up separate accounts on various eBay sites globally on order to sell their products in global markets. eBay India charged these merchants listing fees and commission on sales. The first 50 listings were free. For every additional listing the merchant had to pay five US cents (about `3) for books, DVDs and movies, music, and video games. While for other listings the listing fees was three cents. When the product was sold the merchant paid a commission of 10% of the transaction value to eBay India.
67
With the number of sellers increasing, in order to standardise the logistics, ebay India launched Powership
68 in 2012, for domestic buyers.
69 Though exports through e-commerce sited were
expected to grow in the near future, the exporters faced multiple challenges. Merchants had to fill up seven forms for every item shipped outside the country. eBay India and FIEO have jointly prepared a single-page form that could be used for custom clearances which was awaiting government approval. eBay India and FIEO also jointly conducted joint training programmes for the merchants. This has helped eBay in gaining access to regional traders. But the downside was that these merchants were not recognised by the central government as exporters and hence could not
62
One of the six eBay has had in 10 years. 63
“Why e-Bay India is missing in e-commerce conversation despite coming before Flipkart, Amazon & Snapdeal”, op.cit. 64
ibid. 65
Most merchants exporting via eBay are artisans or craftsmen, selling products such as jewellery, apparel, ayurvedic medicines and tea. 66
Federation of Indian Export Organisations. 67
“Window to the World”, op.cit. 68
A platform where all Indian courier companies were integrated. Once an order got placed, the Powership platform would alert the courier company that had the best service in the area of delivery. Powership Global an offshoot for global sellers was soon created which worked on the same concept but had fewer courier companies such as FedEx and DHL. In order to avoid leakages the payment mechanism was also standardised. All payments were made through eBay’s PayPal unit. The sellers’ bank account was linked with PayPal in order to transfer money. Apart from helping customers to set up PayPal accounts the company also had learning centres to provide training in English and six regional languages. In order to help sellers who were not tech savvy, eBay India had business development executives ‘who handhold these merchants for 90 days’ and helped them set up accounts on various eBay sites to list their products. 69
“Window to the World”, op.cit.
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avail any benefit that traditional exporters could avail. eBay India along with FIEO was lobbying with the government for recognition of these exporters.
70
Arvind Singhal, a retail industry veteran and founder of Technopak opined, “They are trying the same model that they have practised elsewhere in the world whereas Flipkart, Snapdeal and even Amazon, continue to evolve and respond to India-specific challenges. Be it categories, payment gateways, mobile wallets, logistics, getting brands on board, or in some cases, financial support to merchants.”
71 Latif Nathani (Latif), Managing Director, eBay India disagreed saying, “eBay India has
been at the forefront of ecommerce innovation across many areas such as payments (PaisaPay 72
), consumer protection (eBay Guarantee
73 ), shipping (Powership) and seller training (ePro
74 ). The
Indian ecommerce opportunity is large, diverse and constantly evolving. eBay India’s place in that dynamic mix is to grow a healthy domestic and global marketplace that will stand the test of time.”
75
In spite of these efforts the performance of eBay in India was lagging and the site was losing traffic.
76
(Exhibit IX). Experts felt that frequent changes in the leadership team could also be one of the reasons affecting its performance. Latif the Managing Director in 2014 was the fourth head in the past five years since 2009.
77
Exhibit IX
eBay Vs Competition
Source: Singh Shelley, “Why e-Bay India is missing in e-commerce conversation despite coming before
Flipkart, Amazon & Snapdeal”, http://articles.economictimes.indiatimes.com/2014-09- 09/news/53730647_1_ebay-india-latif-nathani-flipkart-and-amazon, September 9
th 2014
70
70
“Window to the World”, op.cit 71
Kakkar Himanshu, “eBay Bids To Get Back Into The Game”, http://www.outlookbusiness.com/strategy/trend/ebay-bids-to-get-back-into-the-game-1923, September 8
th 2015
72 An eBay India owned, safe and secure payment service; PaisaPay enables Buyers to pay for their purchases using
Credit Card, Debit Card, Online Bank Transfer or Cash on Delivery. 73
If there is a problem with a purchase, the eBay Money Back Guarantee ensures that buyers receive the item they ordered or get their money back. Buyers can use the eBay Money Back Guarantee either when they do not receive an item or when they receive an item that does not match the listing description. 74
ePro is a unique certification course which aims to provide a detailed understanding of selling online. 75
“eBay India is not in the race for burning cash: Latif Nathani”, op.cit. 76
“Why e-Bay India is missing in e-commerce conversation despite coming before Flipkart, Amazon & Snapdeal”, op.cit. 77
“eBay lags behind Amazon and Flipkart in commission revenues”, op.cit.
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Latif elaborated on the plans eBay had for the Indian market, “We have big aspirations and are working towards it. If the competition is to see who can burn cash as fast as possible, then we are not part of that kind of competition. We are quite substantially focused on what we are doing and if we are able to keep our stakeholders happy, we are doing a fine job. Every player has its business plans and so do we. Thus we are quite happy with the way our business has grown and so are our stakeholders. We will not focus on non-sustainable practices of predatory pricing, which actually, if continued, can be damaging to the overall growth of the ecommerce industry and can create a false consumer promise.”
78
eBay India planned to continue its focus on building cross-border business. In India, eBay had about 20,000 sellers exporting to over 206 countries. Latif felt eBay India was ‘uniquely positioned to bring in global supply to Indian consumers’ thus enabling Indian consumers to buy global products at an all-inclusive price in Indian rupees. While lifestyle would continue to be a key focus area, the e-tailer would not compete on fashion labels, but would focus on categories growing at over 100% plus and where eBay enjoyed leadership in terms of supply and share.
79
The company also treated partnerships, with players like Oxigen
80 and banks like HDFC, AXIS and
Citibank, as an opportunity to bring in first-time buyers. Being an ‘open and responsible marketplace’ the company did not have any plans to compete with its sellers. Its seller community consisted of large format retailers such as Croma, e-zone and Sangeetha as well as small retailers from areas such as Chandni Chowk, Yamunanagar and Meerut.
81
eBay India had a total of over 65,000 eBay sellers in India, over 3.5 million Indian buyers and a listing of 30 million products across 2,000 categories. About eBay India’s plans to capitalise on the growth Latif said, “... ebay.in will continue to invest in brand, people and product. However, we will do that in an eBay way. It’s not our intention to copy what other players are doing in India - we want to carve out our own destiny in what will eventually be one of the world’s largest ecommerce markets with room for multiple players and offerings”.
82
Towards the end of 2014, eBay tied up with India’s top refurbishing companies hoping to bring these goods to the price-conscious buyers in tier 2 and tier 3 cities. While refurbished goods accounted for 26% of goods sold, on eBay in India it was just 4%.
83 eBay India announced its MoUs with the
Governments of Gujarat and Odisha. Latif explained the purpose behind these MoUs, “... what we’re doing as a part is, India has approximately 35 million artisans and so, we are bringing these artisans online. And we are allowing them to export. We are talking to a lot more governments. And at the same time we are talking to industry bodies as well. Earlier in the year we signed a MoU with the Confederation of All India Traders. That’s not all. Focusing on tier-2 and tier-3 cities, women shoppers and mobile commerce top the list of ebay’s priorities.” Mobile commerce was expected to drive growth in the near future. In 2014 mobile commerce contributed to 43% of the traffic on the online market place.
84
Experts felt that eBay India’s customer connect was not as good as that of competition. eBay India hoped to rectify that soon with the cash inflow from the part stake sale in Snapdeal which was
78
“eBay India is not in the race for burning cash: Latif Nathani”, op.cit. 79
ibid. 80
Oxigen Wallet offers money transfer, load cash on your mobile, online mobile recharge, DTH Recharge, bills payment, online shopping and lots more instantly. 81
“eBay India is not in the race for burning cash: Latif Nathani”, op.cit. 82
ibid. 83
ibid. 84
“Will ‘slow & steady’ motto win race for ebay?”, op.cit.
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expected to be about $200 million. Latif explained, “While we retain a significant portion of our original investment, over the past two years, the valuation of Snapdeal has significantly increased. This sale will enable us to strategically redeploy it into other areas of our business.” He hoped that ‘the strategic redeployment will help it regain lost ground in India’.
85 Experts also contended that
eBay was still in the race for the Indian online retail market which was big enough to accommodate a handful of big players.
86
Annexure I
Top Deals in Indian e-commerce in 2014
Source: “eCommerce in India - Accelerating growth”,
https://www.pwc.in/en_IN/in/assets/pdfs/publications/2015/ecommerce-in-india-accelerating-growth.pdf, 2015
Annexure II Products and Features Introduced on the site
Year Product/feature Remarks
1997 Beanie Babies Ty Warner’s line of cuddly stuffed animals, take the world by storm. $500 million worth are sold on eBay alone, representing more than 6% of total volume.
Seller Feedback The Feedback Forum which allowed members to rate their transactions and create a virtual community of openness and confidence was introduced.
1998 My eBay Customising the eBay experience
eBay Foundation The first corporate foundation to be endowed with pre-IPO stock, underscoring the company’s longstanding commitment to philanthropy.
85
“eBay Bids To Get Back Into The Game”, op.cit. 86
“eBay lags behind Amazon and Flipkart in commission revenues”, op.cit.
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2000 eBay Motors The online automotive marketplace
eBay University Started the eBay University course, teaching users how to become master sellers.
Buy it Now A new fixed-price feature, “Buy It Now,” which allows users to buy an item instantly at a set price.
eBay API First Application Programming Interface (API) goes live. Now developers across the world can harness the power of eBay by building their own custom interfaces with unique functionality.
2001 Oldest pair of Levi jeans
Sells on eBay for more than $46,000 to Levi Strauss & Co., making fashion history.
eBay Store eBay Stores, a new online storefront directory, launches as a way for people to have their own customized online businesses for just a few dollars a month.
eBay Live! Conference
Anaheim, California hosts the first eBay Live! Conference, bringing together sellers, buyers, journalists, developers, and lovers of all things eBay for action-packed days of learning and networking.
Jet A Gulfstream jet sells for $4.9 million, setting a new price record for eBay.
Auction for America
Auction for America unveiled enabling more than 100,000 users to raise over $10 million for the victims of September 11 and their families.
2003 Giving Works To raise money for charities.
PayPal Buyer Protection Services
eBay transactions become even more secure as PayPal’s Buyer Protection services are implemented for all transactions on the site.
eBay Bible The Official eBay Bible by Jim Griffith, Employee #11, is published.
2005 Kijiji
A local classified advertising site called Kijiji. Named for the Swahili word for “village,” Kijiji connects users with their 16 neighbours in search of goods and services in almost a dozen countries. In 2015 Kijiji was a part of eBay Classifieds.
eBay inc. Main Street
Main Street program launches as a grassroots community of ecommerce advocates interested in how public policy may affect their ability to buy and sell online.
2006 Gigayacht A Frank Mulder designed gigayacht becomes the most expensive item ever sold on eBay, auctioning off for $168 million, according to news reports.
PayPal Mobile App PayPal debuts its first mobile application, allowing millions of PayPal users to send money on the go.
2007 eBay Green Team Promote sustainable business practices, inspire environmentally conscious actions and volunteer for green projects in their communities.
2008 eBay App eBay is one of the first companies to launch an iPhone application and is featured during the Apple app store launch.In 2015, the app is available on other operating systems including Android.
BillMeLater
Web-based payment platform Bill Me Later, offering buyers even greater flexibility in their online purchasing. Soon after, eBay and PayPal team up to offer customers a “Bill Me Later” option during checkout. In 2015, the service is known as PayPal Credit, joining PayPal Working Capital to offer consumers and businesses a powerful range of flexible credit solutions.
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2009 Deals App Launches its Deals app, offering buyers and sellers great deals every day.
2010 iPad App iPad app takes advantage of the tablet’s stunning visuals to build a beautiful and easily shoppable venue. The app is one of the first featured at the Apple keynote debuting the iPad.
2012 PayPal Here The first mobile payment solution that allows small businesses to accept nearly any form of payment, no matter their size.
Global Shipping Program
Global Shipping Program, helping US sellers grow their businesses by more easily shipping to international buyers.
2013 PayPal Working Capital Initiative
PayPal pilots its Working Capital initiative, a new loan program for Small Business. By the end of the year, Working Capital enables thousands of SMBs to borrow tens of millions of dollars. In 2014, the program expands to Australia and the U.K.
Digital Storefronts Unveil three connected storefronts at San Francisco’s Westfield Shopping Mall. Customers can browse items in a virtual window, pay using PayPal, and arrange for free home delivery
2014 Machine Translation Tools
Help drive cross-border commerce, enabling the company to reach consumers in markets like Russia and Latin America.
Superman Comic A well-preserved copy of Superman #1 is sold for $3.2 million on eBay. It’s the most expensive comic book ever sold.
Source: “Our History”, https://www.eBayinc.com/our-company/our-history/
Annexure III
Acquisitions by eBay
Year Company Remarks
1998 Jump Inc. First acquisition by eBay - Jump Inc. and its person-to-person online trading site, Up4Sale.
2000 Half.com A site trading in movies, music, books and games online.
2002 PayPal An online payment site. Spun off as a separate entity in 2015.
2004 Rent.com The leading website for rental housing in the U.S. In 2012, sold Rent.com to Primedia.
2005 Gumtree A leading global classified-listing site.
2007 StubHub! Online marketplace for tickets
Skype Pioneering Internet communications company Skype. In 2009, Skype was sold to a group of investors while retaining a 30% stake in the company.
2010 Milo A leader in web-based local product search, helping launch local products on eBay.
2011 GSI Commerce
Acquisition of ecommerce specialist GSI Commerce, now known as eBay Enterprise. eBay Enterprise provides commerce technologies, omni-channel operations and marketing solutions to brands and retailers of all sizes.
GittiGidyor Announced that will purchase a majority stake in Turkey’s principal online marketplace, GittiGidyor.
Magento To facilitate even stronger open platforms, announced plans to acquire Magento, a leading toolset for open-source ecommerce.
Zong Expanded mobile capabilities and announced acquisition of Zong, a leading mobile carrier billing-based payments platform.
2013 Shutl A same-day delivery start-up in the UK, which uses a ‘click and collect’ model that allows shoppers to pickup their eBay purchases from
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retailer Argos. Meanwhile, for same-day deliveries, Shutl uses local couriers.
Braintree To strengthen PayPal’s online payment capabilities, added an innovative payment platform, Braintree.
Bloom Energy Servers
Advancing commitment to cleaner energy sources, opened the world’s first data center to use Bloom Energy Servers™ as the primary, on-site power source, instead of the traditional electric utility grid.
2015 Twice An online marketplace for second-hand clothing.
Compiled by the author from various sources
Annexure IV eBay: Stock Price
Source: “Stock chart”, https://investors.eBayinc.com/stockquote.cfm, Accessed on September 1
st 2015
Annexure V
eBay’s Net Revenues by Type and Geography ($ millions)
Net revenues by type Year ended Dec 31
2014 2013 2012
Net transaction revenues
Marketplace 6995 6569 5834
Payments 7218 6096 5146
Enterprise 985 898 850
Total net transaction revenues 15198 13563 11830
Marketing services and other revenues
Marketplace 1822 1715 1564
Payments 686 532 428
Enterprise 253 268 271
Total marketing services and other revenues
2761 2515 2263
Elimination of inter- segment net revenue
(57) (31) (21)
Total net revenues 17902 16047 14072
Net revenues by geography
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US 8495 7712 6778
UK 2633 2183 1889
Germany 2107 1930 1679
Others 4667 4222 3726
Total net revenues 17902 16047 14072 Source: “eBay Inc. 2014 Annual Report”,
https://investors.ebayinc.com/secfiling.cfm?filingid=1065088-15-54&cik=1065088
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Case Questions eBay in India.docx
Case Analysis Project BUS 470
EBay in Indian
Read the case assignment on Blackboard
Directions: Answer the following questions. Begin a new page for each question and identify the question as the heading on that page. The length of your answer is not the determinant of your grade; quality, accuracy, insightfulness, analysis, and thoroughness of each answer are the basis for your grade. That means that each answer should be substantial . Outside research may be necessary however it will not be a lot.
NOTE: This is an individual effort, not a group project. The project must be 100% your own work. Cheating, plagiarizing, or even sharing of work, will result in failure of the paper and the class (therefore preventing graduation). The paper must be pledged in accordance with Methodist’s honor code and policy. A copy must be submitted through TurnItIn.com and a hard copy turned in to the professor. You may have it reviewed by the writing center.
1. Perform a PEST analysis on India’s ecommerce industry as it relates to eBay. PEST is an acronym that stands for Political, Economic, Social and Technological. These are four key areas to focus upon when conducting an environmental scan for an organization. Use the matrix format presented in class and your book to perform a “P.E.S.T.” analysis.
2. Perform a Porters 5 forces analysis for India’s ecommerce industry as it impacts eBay. The Five Forces model, developed by Michael Porter, is used to assess the competitive forces at work in a given industry and determine the overall attractiveness of that industry. The five forces are: Internal industry competition, Threat of New Entrants, Threat of Substitute products, Bargaining Power of Suppliers, and Buyer Power. Use the matrix format presented in class and your book to perform a “Five Forces” analysis.
3. Perform a SWOT / EFE analysis for eBay’s India business: SWOT is an acronym that stands for Strengths, Weakness, Opportunities, and Threats. EFE is an acronym that stands for External Factor Evaluation. Identify only the “O and the T” (external factors) from SWOT and use them to complete an EFE analysis. Use the EFE matrix format presented in class and your book; including assigning weights, ratings and score.
4. Discuss the business opportunities, challenges, and trends prevailing in the Indian ecommerce market.
5. What are the reasons for eBay’s difficulty in the Indian market?
6. Discuss eBay’s future in the Indian ecommerce market, given the background of the evolving Indian market scenario and eBay’s difficulty in other Asian countries.
a. If you say exit, what should eBay do next, i.e. how should they refocus their resources and global business strategy
b. If you say stay or expand, what should eBay’s strategy be to achieve success in the relatively low income Indian market?
Please provide a printed copy of your paper to Professor Wayland as well as an electronic copy to TurnItIn.com (to ensure your originality of answer).
E-tailing_in_India.pdf
Unlocking the Potential E-tailing in India
The Need for India to Analyze E-tailing on its Own Merit
A W H I T E P A P E R P U B L I S H E D B Y
About the Whitepaper E-tailing is a subset of e-commerce, which encapsulates all “commerce” conducted via the Internet. It refers to that part of e-commerce which entails the sale of product merchandise and does not include sale of services viz. railway tickets, airlines tickets, job portals, etc. In 2012, the size of India’s e-commerce market was USD 10 billion, while that of the e-tailing market was USD 0.6 billion. The current small size of e-tailing has led to it rarely being assessed on a standalone basis. It is either clubbed with e-commerce or with brick & mortar retail, which, while not incorrect, does not allow for e-tailing’s evaluation on its own merit.
This whitepaper is an attempt to evaluate and highlight the potential e-tailing holds and the role it can play in context of emerging Indian consumers, and economy. Our inferences in this whitepaper support the thesis that e-tailing needs to be viewed objectively and individually. The following key points summarize the findings discussed more broadly in this whitepaper.
• In India, e-tailing has the potential to grow more than hundredfold in the next 9 years to reach a value of USD 76 billion by 2021. The country’s growing Internet-habituated consumer base, which will comprise ~180 million broadband users by 2020, along with a burgeoning class of mobile Internet users, will drive the e-tailing story.
• E-tailing can provide employment to ~1.45 million people by 2021. Its growth will spur the creation of new capabilities and human skills in the areas of logistics, packaging, and technology. Additionally, such growth will promote the rise of service entrepreneurs who will have the potential to earn ~USD 7.5 billion, annually, by 2021. It will open up international markets for the SME sector and can become an important facilitator for the growth of the telecom and domestic air cargo industries.
• The growth of e-tailing in India will be complementary to the growth of traditional retail, and in no way be at cross- purposes. On the contrary, it will improve efficiencies and reduce transaction costs in retailing and thereby boost the productivity of manufacturers (SMEs) and service providers.
• The potential of India’s e-tailing will continue to remain untapped if the current mindset, of exclusion and seeing e-tailing as a “passing fad”, prevails. E-tailing is different from retail and therefore requires a different mindset and fresh thinking from the policy makers as well as the private sector.
3
II. I.
V.
III.
IV.
WHY IS IT IMPORTANT fOR E-TAILINg TO gROW IN INDIA?
WHAT WILL ENABLE E-TAILINg’S DISRUPTIvE gROWTH?
INTRODUcTION
cONcLUSIONWILL E-TAILINg’S gROWTH BE AT THE cOST Of TRADITIONAL RETAIL?
Contents
Authors
Ankur Bisen | vice President | [email protected]
Pragya Singh | Associate Director | [email protected]
Ashima Anand | Senior consultant | [email protected]
Design & Development
Arvind Sundriyal | Assistant Manager-Design | [email protected]
May 2013 | E-tailing in India: Unlocking the Potential
1
I. Introduction In 2012, India’s Gross Domestic Product (GDP) was ~USD 1.7 trillion, at current prices, of which private consumption constituted nearly 60%. USD 490 billion was the size of the merchandise retail market in India, which accounted for nearly half of private consumption. The high share of private consumption in India’s economy, which is not expected to change much in the coming decade, also implies that India’s retail growth rate will mirror the country’s GDP growth rate. As per Technopak’s estimates, India’s GDP growth, in real terms, will average nearly 6% over the next decade. This growth will therefore translate to an increase in merchandise retail market, from the current ~USD 490 billion, to USD 810 billion, by 2021, in real terms, and USD 1.4 trillion in nominal terms (assuming a 7% inflation rate).
There are three types of destinations that address retail sales in any market:
• Traditional Retail: Brick & Mortar
• Corporatized Retail: Brick & Mortar
• Corporatized Retail: E-tailing
In India, the retail market is, at present, primarily served by traditional brick & mortar stores which make up 93% of the total market. Corporatized brick & mortar retail caters to ~7%, while e-tailing’s share is ~0.1%. In the coming decade, these three retail destinations will behave differently in terms of their share of total retail sales (Exhibit 1).
Technopak estimates that, by 2021, the share of total corporatized retail, even in the best-case scenario, will increase from the current ~7% to 20%. This implies that, on one hand, private consumption will continue to grow annually at ~6%, in real terms (or 13% in nominal terms), while on the other hand traditional retail will still capture the bulk of the increase in consumption. In absolute terms, traditional retail will grow from USD 455 billion in 2012 to USD 1152 billion in 2021. The growth of traditional retail, in the current form, implies the growth of neighborhood convenience stores in new urban centers and clusters, and the continued growth of informal retail (primarily of the Food & Grocery segment).
Corporatized brick & mortar retail will increase in value from USD 34 billion to USD 212 billion by 2021, and its share of the total retail pie will just over double from the current ~7% to 14.7%. However, this type of brick & mortar retail will continue to face structural issues within the retailing ecosystem, which will be a challenge for retailers to address individually. These issues viz. real estate, labor, sourcing and supply chain, were extensively debated in Technopak’s previous whitepaper on Foreign Direct Investment (FDI) in retail, and its impact on the Indian retail sector, and the Indian economy at large.
Indian Retail Market SizeExhibit 1
Source: Technopak Analysis
* Retail market size for 2021 is at nominal growth
Traditional Retail: Brick & Mortar Corporatized Retail: Brick & Mortar Corporatized Retail: E-tailing
455
USD~490 bnTotal Retail Market Size
Total Retail Market Size USD ~1440* bn
(93%)
1152 (80%)
34 (6.9%)
212 (14.7%)
0.6 (0.1%)
76 (5.3%)
2012 2021
2
E-tailing will emerge as a viable third alternative by which corporatized retail can expand its share of the total retail pie. Technopak estimates that e-tailing in India will grow from the current USD 0.6 billion to USD 76 billion by 2021, i.e., more than hundredfold. The key reason for this disruptive growth lies in the fact that the market-enabling conditions and ecosystem creation for e-tailing will outpace the same for corporatized brick & mortar retail. This growth will offer many advantages to the Indian economy, besides bringing in immense benefits to consumers.
In this light, it is imperative to have an objective debate on e-tailing. Unfortunately, the current debate on e-tailing has largely to do with e-tailing’s current share of the total Indian retail pie, which is just ~0.1%. Moreover, the debate also lacks rigor in terms of data and analysis in visualizing the impact of e-tailing on India’s economy.
The fact that e-tailing’s growth is going to be disruptive, is supported by several factors. This paper, in the first part, establishes these factors.
The presently small size of e-tailing has not prompted any discussion on the benefits that its growth can bring to the economy. The second part of this paper therefore takes a futuristic stance in outlining e-tailing’s true impact on the Indian economy.
E-tailing is also viewed with suspicion from the standpoint that its growth will be at the cost of traditional retail. The third part of this paper is an analysis, from which it can be inferred that these fears are unfounded.
The paper concludes with some key messages and issues to be kept in mind as these will ensure that the e-tailing growth story in India is sustainable.
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Given that e-tailing’s growth all over the world has been disruptive, it is not incorrect to say that its historical performance has been of little use in projecting its future state.
The growth of e-tailing in three countries (Exhibit 2) outlines the trends underlying e-tailing’s growth under different economic and retail scenarios.
• The US, where ~90% of retail sales is accounted for by corporatized retail, has witnessed e-tailing’s double digit growth against the backdrop of sluggish economic growth, which challenged brick & mortar retail whose growth was clocked at a little over 2% between 2008 and 2012. This is further accentuated by the fact that, in 2002, the size of e-tailing market in US was ~USD 45 billion, implying that its size has surged fivefold in the past 10 years.
• The UK, which is another developed brick & mortar retail market, has struggled with nearly flat economic growth rates for the past four years. However, it has also seen e-tailing market grow by nearly 8% annually; during the same period, brick & mortar retail registered a decline.
• China, on the other hand, has not been challenged by slowing of economic growth and corporatized brick & mortar retail forms around 20% of the total retail market. It has witnessed a disruptive growth of e-tailing market in the past four years, at a CAGR of over 83%.
The tipping point in all these and other similar case studies has been the convergence of two factors. The first of these is the rise of a sizeable class of Internet-habituated consumers, while the second is the creation of an ecosystem essential for e-tailing’s growth. In India’s case, both these factors are poised to fall into place rapidly. From our analysis, we conclude that the tipping point for the growth of e-tailing in India will occur sooner rather than later.
A. Internet-Habituated Consumer Base
In any country where e-tailing has achieved reasonable success, consumers have shown signs of evolution on two dimensions which has enabled e-tailing market’s growth- access to the Internet and Internet usage beyond browsing. In India, consumers are displaying positive traction on both of these. In 2012, ~120 million Indian consumers accessed the Internet at least once a month (also referred to as active user base). This number is often critiqued for the quality of users. For instance, it is argued that very few (<15%) have access to the Internet via broadband (assuming that the number of users is equal to the number of broadband connections), and may thus be insignificant for e-tailing. This argument is not completely incorrect- the quality of Internet access does play a key role in enabling consumers to shop online. Therefore, it is important to look at access to the Internet in conjunction with the quality of access (which we will address in the subsequent point, along with how broadband access needs to be interpreted).
II. What will enable E-tailing’s disruptive growth?
E-tailing Market in Other CountriesExhibit 2
E-tailing Market (USD bn) E-tailing (% of Retail)
country 2008 2012 2008 2012
US 140 225 3.6% 5%
UK 65 85 8.6% 13%
china 16 180 ~1% 6%
Source: US Department of Commerce, Center for Retail Research, China Ministry of Commerce
4
The Internet browsing behavior of Indians has dramatically changed in the past two years. This change has been almost disruptive - Indian consumers today are not only spending longer hours on the Internet, but also conducting myriad activities that were non-existent a few years ago. Internet browsing is becoming a habit for a sizeable population in urban India, i.e. cities, towns, and semi-urban clusters (Exhibit 3).
There are many ways to interpret Exhibit 3. One, the Internet is rapidly becoming a part of more and more Indian lives across the spectrum of “online” activities. Second, India’s Internet users are rapidly graduating to complex and interactive Internet usage, from merely accessing e-mails and casual browsing in the past. Over time, Indian consumers are becoming more transactional online; this is only expected to grow.
The pace of this change can be gauged by mapping examples like the spurt in the number of monthly Internet banking transactions registered by the State Bank of India. This number has grown nearly 5 times, from 7.1 million in January 2010, to 34.2 million in November 2012 (that is, in under three years).
For the creation of this vast user base, credit is due to the travel portals, e-tailers (estimated 200+ active e-tailing sites), social media, and the migration to the Internet of government services like Indian Railways reservations and online filing of income tax returns. Over the past few years, they have invested time, money, and effort to ensure that consumers transact online through multiple means; they have offered convenient online interfaces, attractive offers and services like cash-on-delivery, EMIs, hassle-free returns, etc., and advertised in the mass media. These Internet users are imperative for the growth of Indian e-tailing. Technopak estimates that the increasing number of such Internet- habituated consumers will continue to grow unabated driven by increasing access, use of interactive options, and migration of essential services to the Internet.
This proliferation of Internet usage will alter the manner in which such Internet-habituated consumers (especially urban) will pick up trends, form opinions, learn about new things, and consume merchandise.
An important aspect of this trend is the rise of the Internet-habituated consumer in cities and towns beyond the top 20 cities. Only about a third of India’s Internet users reside in the top 8 cities (Exhibit 4). While there is a concentration of demand in the top 8-10 cities, Indian e-tailing companies have also registered a long list of customers in other cities and towns, which account for nearly 50% of the sales for several players.
No. of active Internet users (mn)
50 75 120
No. of facebook users (mn)
~1 8 71
No. of Indian Railways tickets booked online per annum (mn)
19 72 116
Number of income tax returns filed online per annum (mn)
2 5 16
Exhibit 3
Source: IAMAI, Income Tax Department- Government of India, Indian Railways, Facebook, Industry Sources, Technopak Analysis
Evolving Internet Users in India
Online Activities
• E-mails
• News
• E-mails
• News
• Travel
• Social Media
• E-mails
• News
• Travel
• Social Media
• Shopping
• gaming
• video Streaming
• Application downloads
• Mobile / Internet Banking
2008 2010 2012
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What makes the growth of e-tailing more compelling is the fact that such an Internet-habituated consumer is currently spread across India, i.e. is geographically dispersed. This dispersion does not allow for the accumulation of enough demand for brick & mortar retailers to open stores. Yet these same consumers, aggregated at a pan-India level, become an attractive opportunity for e-tailers.
There are two key reasons why such trends emerge. The first is India’s demography- India is predominantly young with a median age of 26 years. This will continue to be the case for the next ten years, with the projected median age of 29 years in 2020. By 2020, 40% of India would have been born after the launch of the Internet and mobile phones in the country. Thus, for a sizeable mass of Indians, access to the Internet and the use of mobile phones will be a norm to which they won’t have to make transition to, unlike previous generations. For these young consumers, spending time on the Internet will be as normal as watching television is for today’s consumers. This key pillar is thus quickly falling into place to facilitate the growth of India’s e-tailing sector.
Another reason lies in the quality of urbanization which forces urban consumers to look for convenience in all modes of living, including shopping. Each day is increasingly packed with an ever greater range of activities, leaving ever lesser time for such discretionary activities as shopping. As per Technopak’s estimates, 66% of the urban Indian’s time is taken up by sleep, time spent at work, and commuting to work, resulting in just a third of their time for other activities like socializing, household chores, spending time with children, health, leisure and entertainment, and shopping. These consumers are therefore seeking alternatives that can free up more time in their crunched schedules. This trend is accentuated by the increasing participation of women in the workforce. Most of these consumers also spend significant time at work and home with access to both the Internet and Internet-enabled devices. Thus, there is a disruptive growth in the adoption of Internet and mobile banking, online travel bookings, etc.
By 2020, 35%, or 465 million, of Indians will reside in urban India, compared to the current 31% (375 million). The scale and quality of urban living will result in a compelling case for the growth of e-tailing.
B. E-tailing Enabling Infrastructure
There are two key infrastructure elements which will enable the growth of e-tailing:
a. Penetration of devices through which to access the Internet
b. Proliferation of technologies enabling Internet access
a. Penetration of devices through which to access the Internet
Access to the Internet requires Internet-supporting devices, which can be broadly classified into PCs/laptops, mobile phones (smartphones), and tablets. The penetration of these devices is rapidly increasing (Exhibit 5).
Urban Internet Users in India (2012)Exhibit 4
Source: IAMAI
Top 8 metros
Towns with >1 mn population
Towns with 0.5-1 mn population
Towns with 0.2-0.5 mn population
Towns with < 0.2 mn population
32%
18%
10%
11%
29%
6
The usage of laptops and PCs is growing steadily, driven by increasing affordability and need. By 2020, it is projected that 150 million users will have either a laptop or a PC. However, a disruptive change is expected to be brought about by the proliferation of smart devices, i.e. smartphones and tablets. In 2012, India had over 900 million mobile subscriptions across 380 million mobile phone users. By 2020, mobile phone users are projected to increase to ~600 million. However, these mobile phone users will switch from feature phones (phones that lack data processing capability) to smartphones (phones that can process data). This will happen because of the availability of good quality smartphones at sub INR 5000 (~USD 100) price points.
The penetration of tablets will also follow a similar trend. Currently, there are 4 million tablet users, but an equal number is getting added every year. If the trend continues, there will be 36 million tablet users by 2020. However, if tablet makers break the price barrier and make a functional tablet available at under USD 100, then the number of tablet users in India will increase manifold by 2020.
As per eMarketer estimates, mobile devices (tablets and smartphones) accounted for 11% of all US retail e-commerce sales in 2012, and are expected to reach 15% this year. Mobile devices can be an important e-tailing driver for India too.
There are three reasons why smart mobile devices are critical for the growth of e-tailing in India. One, these devices are becoming more affordable. Second, these devices are also more accessible for use vis-à-vis laptops and PCs. Third, technological advancements have made it easy to access the Internet via these devices.
The use of mobiles to access the Internet is a fast growing phenomenon. As per industry sources, of the over 70 million mobile Internet users, there are 20 million mobile-only Internet users in India. Half of these, or 10 million, use smartphones to access the Internet. With the growth of the mobile-only Internet generation, this number is projected to grow manifold over the next few years making mobile commerce (m-commerce) a potentially important channel in India.
b. Proliferation of technologies enabling Internet access i. Broadband /Narrowband connections
ii. Mobile Internet
Source: Industry Sources, Technopak Analysis
Internet Enabling Device Users
Mobile Phone Users Smartphone Users
PC/ Laptop Users Tablet Users
Exhibit 5
2012 380 mn
600 mn 2020
2012 50 mn
150 mn 2020
2012 40 mn
450mn 2020
2012 4 mn
36 mn 2020
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i. Broadband/Narrowband connections Currently, India has nearly 24 million wired Internet subscribers comprising broadband and narrowband subscribers. Broadband connections (> 256 kbps) are 1.6 times more than narrowband connections (< 256 kbps).
Often, broadband access to the Internet (~15 million connections) is critiqued for having a low base relative to India’s population. This is also cited as a bottleneck to e-tailing’s growth. There are two key dimensions of analysis in Exhibit 6. One is that broadband connections comprise subscriptions by households, educational institutions, public access areas, and small and medium scale enterprises. This does not include Internet access via leased lines to big corporations and government institutions.
Second, each broadband connection provides access to more than one person (referred to as user connection ratio). Households have a lower ratio compared to educational institutions or access points in public areas. At an overall level, each broadband connection provides access to four Internet users (excluding public access points). This implies that there are 60 million Indians who have access to the Internet through broadband.
Given that the number of broadband connections grew by 15% between 2011-12 and assuming the same growth rate for future projections, by 2020 ~180 million Indians will have access to broadband-based Internet (Exhibit 7).
This will be supported by government’s National Broadband plan that aims to increase the penetration of wired (broadband-based) Internet access to eventually provide connectivity to 250,000 gram panchayats.
ii. Mobile Internet As per the web traffic analysis tool StatCounter, Internet access through mobile phones surpassed desktop-based Internet traffic in August 2012, in India. An estimated 30% of all online shopping queries were made through mobile phones in 2012.
India, the second largest mobile phone market in the world, is poised to record a manifold increase in the penetration of high speed Internet, primarily driven by the rollout of 3G and 4G wireless technology. 3G services are a key driver of Internet access through mobile phones, providing high data speeds for downloads, content streaming, making video calls, etc.
Broadband and Narrowband Connections in India Exhibit 6
Connections (mn) 2010 2011 2012
Broadband 10.3 12.8 14.7
Narrowband 7.6 8.2 9.3
Total 17.9 21 24
Source: TRAI (Connections in Q2 of each year)
Source: TRAI, Technopak Analysis
Broadband Connections and Users
2012 2020
Exhibit 7
15 mn
60 mn Broadband Connections
Broadband Users
45 mn
180 mn Broadband Connections
Broadband Users
8
A telecom operator’s business model is based on voice and non-voice revenue sources. While the voice business provides scale, non-voice revenue is key for building a sustainable telecom business. Thus far, for Indian telecom operators, voice has been the primary revenue driver, with non-voice revenue only accounting for ~11%. This is less than half the levels achieved in countries like the US, UK, and China.
Raising the share of non-voice revenue is thus a vital imperative for the growth and sustainability of telecom operators in India. Exhibit 8 compares e-tailing’s share of the total retail market across countries, so as to demonstrate that e-tailing’s growth in India can lead to it becoming an attractive non-voice revenue source for telecom operators.
Telecom companies in India have committed USD 15 billion to acquire licenses for 3G networks. Data usage by users (i.e. access to the Internet) is the fundamental premise for these investments. The current penetration of 3G networks is at ~6% of India’s population, or ~70 million users (Exhibit 9), and is projected to reach an estimated 370 million users by 2017 as per industry sources. Also, the rollout of 4G network services will further boost mobile Internet access.
Notwithstanding the current uncertainty, we believe that telecom companies will continue to push for the rollout of 3G and 4G services, which will lead to an estimated 410 million 3G/4G users by 2017, thereby providing high quality access to the Internet.
Share of Non-Voice Revenue of Telecom Operators and E-tailing Across Countries (2012)Exhibit 8
Country Non-Voice Revenue (% of total Telecom Revenue) E-tailing (% of Retail)
US 30% 5%
china 27% 6%
UK 21% 13%
India 11% 0.1%
Source : TRAI, Technopak Analysis * Non-voice revenue excludes SMS
3G and Dongle Users (2012) Exhibit 9
Users (mn)
3g/4g Networks 70
Dongles / Wireless data cards 2.7
Source: IAMAI, WCIS, Industry Sources
May 2013 | E-tailing in India: Unlocking the Potential
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The formalization and growth of e-tailing will play a pivotal role in bringing sustainability and economic viability to many facets of the economy. It will provide both direct and indirect employment as well as support such infrastructure industries as logistics, telecom, etc. by creating demand. It will spur entrepreneurship by providing business opportunities to merchandise vendors and service providers, and reduce transaction costs (tax leakages, distribution costs, etc.) by providing accessibility to quality products / solutions in an efficient manner.
In summary, the growth of e-tailing in India will positively have four broad impacts:
A. Generate employment
B. Facilitate growth of allied industries
C. Promote entrepreneurship
D. Reduce transaction costs
A. Generate Employment
E-tailing’s employment potential, which is rarely discussed because of its current size and scale, entails two dimensions- the absolute volume of employment, and the attractiveness of e-tailing as a destination for high quality talent. As per Technopak’s estimates, e-tailing has the potential to generate direct employment for nearly 1.45 million people by 2021 (Exhibit 10).
Employment in logistics is presently generated by third party logistics (3PL) providers who are engaged in order deliveries, and, in some cases, with e-tailers who have in-house last mile delivery expertise. However, these are severely limited in terms of capabilities and scale. With the growth of e-tailing to the projected size of USD 76 billion by 2021, the logistics industry will witness the emergence of players with scale. To tap this opportunity, some of the existing players may grow in size, while other established logistics solution providers may tweak their business models. Many new players may also emerge. In either case, the spurt of e-tailing will call for delivery capabilities that will in turn require the deployment of a vast number of feet on the ground, creating a potential 0.8 million jobs by 2021.
III. Why is it important for E-tailing to grow in India?
Current and Projected Employment in E-tailing Exhibit 10
Source: Technopak Analysis * Others include customer care employees, merchandisers, HR, finance, etc.
Logistics Warehousing Technology Others*
1,450,000
12,500
Total Employment
800,000 5,000
250,000
3,500
300,000
2,500
100,000
2012 2021
23,500
Total Employment
10
Warehousing jobs demand the deployment of people in order processing centers that are engaged in the function of integrating orders from various vendors with orders received from the customers. Orders are received from a large base of customers in small units (typical basket size of 1-2). However, orders are placed with a large number of vendors in high volumes. In some cases, orders are directed to vendors who ship the products directly to the customer. This is a high precision process that requires order picking and processing capabilities with minimal room for error.
In mature e-tailing markets, this function is carried out by fulfillment centers. These centers are nearly 250,000 sq. ft. in size and resemble a factory-like setup of complex assembly lines. An average fulfillment center or warehouse in the US employs 800 to 1800 workers during non-peak times which can increase by 50% or more during the peak period. India currently lacks this capability. Currently, the system is improvised by e-tailers to meet the immediate demand. If e-tailing in India has to grow to the projected size, it will require massive warehousing and order processing capabilities. There will, however, be one difference in this capability generation - India may not take a high-end technology adoption route due to its relative advantage in terms of labor costs. This function will therefore have the potential to generate employment for nearly 0.25 million people by 2021.
Technology jobs for e-tailers require a large number of technical experts that are primarily deployed in three functions:
a. Developing & improving the e-tailer’s online interface in order to enhance customer experience on the web portal
b. Developing proprietary algorithms to increase online traffic (i.e. more customers visit the website) and improve conversion (more customers buy on the site), and also measuring and analyzing consumer behavior for proactive targeting
c. Building in more efficiency and control in the supply chain
In mature e-tailing markets, these technology-related functions have evolved to such high levels of complexity that many e-tailing companies view themselves as specialists in web technology and analytics. It is not surprising then that, even with the small current size of e-tailing in India, the industry has managed to attract the best engineering and management brains. In Technopak’s estimate, the e-tailing market will emerge as a destination for highly-skilled technology jobs employing nearly 0.3 million people by 2021.
Besides the above functions, e-tailing will require employees in several other roles like customer care, merchandising, vendor management, and content development, as well as in regular corporate functions like HR, finance & accounts, administration, etc. These will add nearly 0.1 million employees to the workforce by 2021.
India’s education system will need to create a vast pool of people who will bring to these e-tailers and their service providers the requisite skills, which may vary from the highly creative to the highly technical (Exhibit 11). The current size of e-tailing, however, neither generates traction for this talent in large numbers nor will it prompt the development of e-tailing-focused curriculums and courses. Unless e-tailing grows to a sizeable scale, its ecosystem will not proliferate to a critical mass that can become an attractive employment destination for these skills. For instance, today, the simple need of creating a vernacular website, i.e. one customized to the local dialect, is constrained by the lack of capable content writing service providers.
Key Skillset Requirements in E-tailing (Illustrative)Exhibit 11
Role Skillset Requirments
creative - Web Design and Development • Proficiency in visual arts, flash, animation, etc. • Knowledge of web design software
Technology - Web Design and Development • Understanding of different technology platforms • Programming language skills • Software and tools – Web analytics, statistical, BI, etc.
Online Merchandising • Understanding of merchandising and category management • Knowledge of online trends and how consumers shop online • creative flair, with ability to design web content
content and Photography • creative/copy writing, editing and proof reading skills • visual art skills with proficiency in Photoshop, corel, flash, etc.
Search Engine Optimization (SEO) • Understanding of SEO tools and techniques, on and off page
activities, social media optimization, etc. • Sound technical knowledge
Source: Technopak Analysis
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B. Facilitate Growth of Allied Industries
E-tailing becomes a viable business model when it efficiently generates demand, sources products from vendors, and delivers them to consumers. Conceptually, this is not very different from traditional brick & mortar retailing. However, unlike brick & mortar retailing, e-tailing does not require the opening of physical stores to capture consumer demand. Instead, it needs an effective and inspiring website through which customers can access product information and place orders. This requires the coming together of many stakeholders so that the website stands out amid the crowd of the Internet, anticipates customer needs to display the right products, and holds the customer’s imagination all the way to a purchase. Once the order is placed, it passes through another set of stakeholders who bring the ordered product to the customer’s doorstep. Most e-tailers therefore view themselves as supply chain and technology integrators who manage a complex web of many stakeholders (besides direct employees), each of whom brings in specialist skills and roles to the e-tailing process (Exhibit 12).
• Airlines (Domestic cargo) • Third Party Logistics (3PL) providers
• Warehouse Owners
• Packaging Material Suppliers • Technology Device Suppliers
• Merchandise Suppliers/ Vendors • Freelance Designers/ Boutiques
The E-tailing Ecosystem and Key Stakeholders (Illustrative) Exhibit 12
Customers
Customer Care
E-commerce Website
Marketing
Warehousing & Packaging Merchandise
• Technology - Web designers & developers - IT professionals - Freelance developers - SMEs in technology solutions space - Hardware/software providers
• Payment Gateways - Banks - Credit card companies - Telecom operators
• Photographers, Content Writers, Stylists & Models
• Marketing and promotion agencies
• Entrepreneurs – Application developers, bloggers, third-party website owners • Search engines
•Call Centers •Telecom Operators
12
Exhibit 13 illustrates the share split of INR 100 of revenue earned by a typical e-tailer across the various stakeholders in a steady state. This demonstrates that the biggest beneficiaries of growth of e-tailing will be:
• Merchandise suppliers
• Infrastructure & service provider firms viz. logistics, warehousing, banking, technology, and marketing
• People employed in the e-tailing industry
At present, no e-tailer has achieved a steady state. The development of capabilities of these industries/functions is primarily dependent on the trajectory of e-tailing’s growth. Therefore, the notion that e-tailing’s growth will create an inequitable revenue share in favor of the e-tailer is not true. On the contrary, the growth of e-tailing will enable the growth of these allied industries and functions.
Here it is important to highlight the interdependence of the evolution of the logistics industry on e-tailing’s growth and vice-versa. Logistics solutions for e-tailing demand the creation of the capability to service orders directly to customers. It requires central warehousing capabilities in order to receive merchandise in bulk from the vendors, and pick up and process this merchandise as individual orders.
Given the geographical complexity, suboptimal infrastructure and regulatory variations across the country, logistics in India has always been challenging. It has also been more of a B2B service, with the result that the B2C logistics ecosystem, which requires customer interaction, cash handling (cash-on-delivery being ~50-60% of all deliveries), and returns handling, is still a new and underdeveloped capability for third party logistics (3PL) providers.
Some of the more established e-tailers have invested in setting up their own last mile delivery networks, which is the only ‘tangible’ customer interaction, and also because most 3PL players are still in the process of developing efficient and comprehensive logistics networks.
This is however changing. Many 3PL providers are now geared up to service e-tailing clients and building dedicated verticals for this purpose while many others are fast adding the capabilities required for this sector. Many new e-tailing focused players have emerged. Some e-tailers are transitioning their logistics arms into service providers for other e-tailers as well. This move is the outcome of necessity, given the lack of viable alternatives. Ideally, e-tailers will be more than happy to outsource last mile delivery to a specialist viz. a 3PL provider. This sector has the potential to benefit by ~USD 5 billion annually by 2021.
It is interesting to envisage a role for India Post in the last mile delivery. India has ~ 21000 pin codes, and most 3PL players are able to reach about 8000-10000 pin codes at best. India Post, with its formidable network across urban and rural India, and its already established mechanism to handle money orders, can harness this opportunity in a big way. Recent media reports indicate that it already has its eyes on this emerging space.
Share of Revenue Split of E-tailers in a Steady State (Illustrative)Exhibit 13
Source: Technopak Analysis
65%
6% 8%
2% 4.5%
6.5%
2% 3%
3%
Vendors Technology Marketing & Promotions
Payment Gateways
Warehousing Logistics Packaging Others Margin
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Internationally, case studies of the US Postal Service (US) and Deutsche Post (Germany) demonstrate that these organizations have attempted to remain relevant in the changing times by tapping into and benefitting from the growth of e-tailing in their respective countries. Both these organizations are significant players in delivering parcels to e-tailing customers (Exhibit 14).
A similar interdependence should be explored between the growth of e-tailing and benefits to other industries like domestic air cargo, telecom, and banking.
C. Promote Entrepreneurship
One of the most successful arguments in favor of e-tailing’s business model is its ability to boost entrepreneurship. Many of today’s leading e-tailing businesses were start-ups a few years ago. This trend continues as more and more names join this list. However, it is a less talked about fact that the growth of e-tailing creates enabling conditions for entrepreneurship across the entire e-tailing value chain. E-tailing will positively impact the development of entrepreneurship in India in two ways:
a. It will provide easy access to consumer markets (new and existing), which will enable the growth of merchandise vendors
b. It will open up opportunities for entrepreneurs to become service providers to the e-tailing business
a. Easy Access to Consumer Markets
The growth of e-tailing will result in the emergence of tremendous opportunities for merchandise vendors to explore new consumer markets, both domestic and international, and also achieve scale. This will not only attract existing vendors to e-tailing but it will also witness the creation of new businesses that will want to tap this opportunity.
India is a base for many vendors that service world-renowned brands and retailers. The country is also a base for proprietary and ethnic merchandise products that have a vast global appeal. However, existing structures and transaction costs do not allow these vendors to fully explore domestic and global opportunities. E-tailing can emerge as an enabling platform for vendors to tap such opportunities as cross border tie-ups which either leverage e-tailing’s reach to access regional markets, reach out to leading e-tailers for vendor opportunities, or launch own e-tailing routes and directly reach out to customers. Such a range of possibilities can prove to be a boon to the pockets of numerous local artisans who make a myriad of products ranging from fashion wear to home improvement e.g. Shekhawati furniture, Moradabad brassware, Kolhapuri footwear, Channapatna toys, etc. Such opportunities will not only spur the demand for an increased vendor base but will also catalyze the deployment of capital required to increase the capabilities needed to service this demand.
The mention of an online Indian ethnicwear player is merited to support this argument. In its ten year-long journey, this India-based player has managed to build a successful e-tailing business that focuses on Non-Resident Indians (NRIs), i.e. Indian-origin people living outside India. The player procures and customizes ethnicwear for women and men from over a 1000 vendors, and sells these products directly to customers. The business earns foreign exchange, is understood to be profitable, and has successfully created a market with direct access to NRIs in over 30 countries. An evolved e-tailing business environment can thus serve as a strong catalyst for merchandise vendors to explore many such direct-to-customer global opportunities in a number of ways.
Share of Postal Systems in E-tailing DeliveryExhibit 14
Organization Country Share of E-tailing Delivery Market (%)
US Postal Service US 15%
Deutsche Post germany 41%
Source: Company Reports, Secondary Sources
14
b. Create opportunities to build new capabilities as service providers
While some e-tailing interventions are similar to those of brick & mortar retail, the key difference for an e-tailer lies in the technology, marketing, packaging, and logistics interventions.
We have already highlighted how e-tailing is leading to the emergence of newer players in the logistics space. The growth of e-tailing also creates numerous opportunities for entrepreneurship in the technology, packaging, and marketing domains. In many instances, e-tailers require these functions to provide very specific and nearly customized solutions, which may lack scale and thus not attract big service providers. Then again, there are cases wherein vendors simply don’t exist to cater to such needs. Therefore, many freelancers, start-ups and small enterprises move in early to leverage this opportunity. This scenario has fuelled the start-up culture around e-tailing in mature markets.
A similar scenario will play out in India; Technopak estimates that, by 2021, such firms, small enterprises, and freelancers will have the potential to earn ~USD 7.5 billion annually by providing services to e-tailing businesses. The profiles of such entrepreneurial ventures will be as diverse as the services they provide (Exhibit 15), and they will require specialized skills ranging from creative writing to statistics.
Currently, such service providers (for e-tailing in India) are in the early stages of building capabilities. The inflection point will come with the growth of e-tailing along projected lines. Until such time, service providers will remain dormant, waiting to be tapped. It is often argued that the growth of e-commerce (without e-tailing) can also fuel this growth. But the experience of mature e-tailing markets suggests that e-commerce without e-tailing lacks the potency to allow such service providers to thrive. For instance, the bulk of the work done by the analytics industry, in developed e-tailing markets, is driven by merchandise retail.
D. Reduce Transaction Costs
One of the biggest advantages of e-tailing’s business model is its ingrained ability to reduce transaction costs. Transaction costs here refer to the costs incurred in making an economic exchange, which, in retailing, involve three elements:
• Cost of distribution of goods
• Use of leverage (credit) in the supply chain
• (Un)certainty of tax receipts
Retailing in India involves high transaction costs. Market structure and infrastructure inadequacies are the key reasons for this high cost. A normal retail transaction in India involves the movement of goods through a multi-layered distribution system from the producer/manufacturer to the customer. These layers of the distribution system entail distributors, wholesalers, dealers, etc. who sit across geographies in a layered hierarchy. There are three challenges with such a structure.
Services for E-tailing (Illustrative)Exhibit 15
Function Service Providers Services Rendered
Analytics Analytics firms / individuals Analyze consumer behavior and other information for insights and decision making inputs
Marketing freelance blog writers, independent website owners
Attract new customers to the website
content Development content writers Write content for the website and for the merchandise on the website
continuously update it for relevance
Web Design & Development Web design & development agencies Design and develop websites that are constantly upgraded for a superior customer experience
Packaging Small packaging design and manufacturing firms
Develop, design, and manufacture packaging solutions
Source: Technopak Analysis
May 2013 | E-tailing in India: Unlocking the Potential
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The first challenge is that each layer of distribution adds an extra cost in making the goods reach the final consumer. In this process, this structure makes the price of the goods higher for both the consumer and the manufacturer (due to a fixed price regime).
The second challenge is the existence of credit in the system which strains the working capital of all stakeholders. Many a times, the layers in the system primarily act as financers to facilitate the movement of goods from manufacturers to consumers. One key reason for the presence of such an arrangement is the lag between the time of sale at the customer end and the time the manufacturer becomes aware of it.
The third challenge is that most retail transactions at point of sale are in cash. This creates a leeway in the system for tax leakages, viz. under-invoicing, under-reportage of sales, etc.
The projected growth of e-tailing in India will successfully address all the three challenges. The cost of distribution will reduce because the multi-layered distribution system will be replaced by an order fulfillment process arranged in a hub and spoke model. The layers of distributors will not be required here as this role will be fulfilled by warehousing and logistics operations which offer margin enhancement opportunities for manufacturers and better prices for consumers.
Again, given that e-tailing is made possible by the electronic medium of the Internet, the immediate recording of point of sale data and payment receipts, and the absence of intermediaries in e-tailing chain allows smoother and faster flow of money and information from the customer to the e-tailer and subsequently to the manufacturer. This has the potential to drastically improve the manufacturer’s and the e-tailer’s ability to manage business with lesser working capital and reduces the credit levels in the system.
Finally, e-tailing’s business model provides a transparent retailing environment for both the customer and the e-tailer. E-tailing provides an electronic point of sale that records sales and thereby creates a certainty in the system about the actual volume/value of sales. Even if the customer decides to pay in cash (i.e. through cash-on-delivery), this eliminates any scenarios of under-invoicing and under-reportage. An explicit advantage of this system is that it increases the certainty of tax receipts (i.e. of VAT, CST, etc.). By Technopak’s estimates, such tax collections are projected to be USD 7.6 billion in 2021 (Exhibit 16).
E-tailing Tax ReceiptsExhibit 16
2012 2021
E-tailing market size (USD bn) 0.6 76
Tax receipts @ weighted average tax rate of 10% (USD bn) 0.06 7.6
Source: Technopak Analysis
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One reservation against e-tailing has been its perceived threat to traditional retail. As per Technopak’s estimate, corporatized retail (of which e-tailing is a subset) will grow from the current level of ~7% of the total retail market to around 20%, by 2021, even in a best case scenario. Of this 20%, e-tailing will constitute a 5.3% share, worth USD 76 billion. One key reason for this rather low share is the fact that Food & Grocery (which forms 67% of the total retail market) will not migrate to e-tailing.
World over, e-tailers have struggled to develop a successful business model for Food & Grocery (F&G) e-tailing (Exhibit 17). The nature of consumer behavior, product perishability, and supply chain issues relating to sourcing and storage are some of the issues due to which Food & Grocery has not found a viable e-tailing route. In India, the consumption patterns and supply chain issues pertaining to Food & Grocery are even more complex. Consequently, e-tailing’s growth in India will mirror the trends of more mature e-tailing markets and will be driven by non-food categories.
Another supporting fact is that while 67% of India’s total retail is comprised by Food & Grocery, only 3% of this can be attributed to corporatized brick & mortar retail; this will at best increase to 5% by 2021. This implies that ~95% of the Food & Grocery market will remain with traditional retail even a decade from now.
At present, electronics, apparel & lifestyle, and books/music/video categories dominate the e-tailing space in India. While these categories will continue to dominate, many other non-food categories will be successful in exploring e-tailing as a viable medium. It is noteworthy that many of these non-food categories are already sold through corporatized brick & mortar stores, as can be seen in Exhibit 18. These categories (like apparel, footwear, and electronics) have already registered a high degree of penetration in corporatized retail and as a result, the threat of e-tailing’s growth at the cost of traditional retail is unfounded. Thus, the growth of e-tailing in non-food categories will see two scenarios unfold:
IV. Will E-tailing’s growth be at the cost of traditional retail?
Category Share in E-tailing Market (2012)Exhibit 17
Source: Citi Research, eMarketer (Sept. 2012) Source: Technopak Analysis
22%
18%
9%8% 7%4%
4%
2%
26%
USA India
Consumer Electronics
Others
Apparel Books/Music/Video Auto Parts Consumer Electronics Apparel & Lifestyle
Books/Music/Video OthersFurniture & Home Furnishings
Office Equipment & Supplies
Toys & Hobbies Food & Beverages
30%
30%
15%
25%
May 2013 | E-tailing in India: Unlocking the Potential
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a. E-tailing will complement existing corporatized retail, with many such retailers exploring e-tailing as a compelling additional channel of distribution
b. E-tailing will capture incremental non-F&G retail consumption which will get created by the sustained economic growth and high share of private consumption
Despite e-tailing’s strong growth, traditional retail will grow in value from the current USD 455 billion in 2012 to USD 1152 billion in 2021. It is estimated that another 9 million people will get added to traditional retail in the next decade, taking the number of direct employees from 22 million in 2012 to 31 million by 2021. Thus, e-tailing will neither impact traditional retail value growth, nor cause employment loss in any notable manner.
While e-tailing’s growth is not going to adversely impact traditional retail stores, the challenges in the Indian retail sector have less to do with fragmented points of sale (traditional retail stores), and more to do with an inefficient and broken supply chain. The go-to-market approach for any merchandise brand in India requires the brand to build its own distribution network for its goods to reach the desired retail shops. This is not only an undesirable cost but also limits that brand’s access to an optimum number of retail shelves. This also diverts the brand’s capital away from product innovation to distribution.
E-tailing can play a crucial role in consolidating wholesale & distribution, and in developing India-specific business models. By virtue of the advantages discussed in previous sections, e-tailing can bring down the cost of distribution and can complement the growth of traditional retail.
Categories Retail Sales via Corporatized Brick & Mortar Formats (%)
footwear 27%
Apparel 20%
consumer Durables 20%
Personal care 17%
Exhibit 18
Source: Technopak Analysis
Corporatized Brick & Mortar Penetration across Categories in India
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The current growth in e-tailing was driven by start-ups, and backed by venture capital and entrepreneurship. While the Indian e-tailing market is yet to achieve a steady state, these initial entrants have succeeded in capturing the imagination of a sizeable consuming class. These have also acted as a catalyst in the creation of an ecosystem necessary for the growth of e-tailing.
E-tailing’s potential cannot be tapped on the premise that investments by a few organizations will unlock this opportunity. Going forward, the projected size of e-tailing by 2021 will not be composed of pure e-tailing companies, as is largely the case today. According to Technopak’s estimates, e-tailing’s opportunity will be captured by three set of players:
• Some of the existing, pure e-tailing businesses will manage to build sustainable businesses and grow in size. Many new pure play e-tailing start-ups will also tap the market
• Many of the current brick & mortar retailers (both traditional and corporatized) will succeed in viewing e-tailing not as an extension but as an important business growth driver
• Similarly, many consumer brands will also build e-tailing businesses as a direct go-to-market approach
E-tailing is an integrator of technology, logistics, and infrastructure, and creates a relatively efficient marketplace for vendors and consumers. At present, the Indian e-tailing market is limited by its incapability to play the role of an efficient integrator. Technopak’s projection for the growth of e-tailing over the next decade is based on the premise that the current capability of e-tailing will be significantly transformed, which will require the infusion of both capital and knowledge. This role has been played in other places by retailers, technology companies, venture capitalists, and private equity investors. Given the fact that the current share of corporatized retail is under 10%, and that the domestic venture capital industry is still in its infancy, policymakers will need to seek a rapprochement with investment and expertise from overseas players.
E-tailing has to be viewed in the context of the profile of India that is poised to emerge over the next decade. This emerging India will comprise consumers who will have the desire, need, and conviction to use the Internet for a host of reasons, of which shopping will be one.
E-tailing has been often clubbed with corporatized brick & mortar retail. While there is no denial of the fact that it serves the same end purpose, it also cannot be denied that the entire ecosystem within which e-tailing operates is completely different from brick & mortar retail, as are its enablers. Therefore, it deserves to be considered on its own merit, instead of being clubbed with brick & mortar retail. This will necessitate an appropriate response from policymakers to facilitate the growth of an ecosystem conducive to e-tailing and should include:
• Opening up of e-tailing for international capital and knowledge infusion
• Facilitating the smooth rollout of wireless data access and broadband connectivity
• Incentivizing B2C logistics and warehousing capability building, including the option of building B2C capabilities into India Post
• Implementing the Goods and Services Tax, or GST
It also demands a spirited response from the private sector involving:
• Capital deployment in B2C logistics, domestic air cargo services, and warehousing industries
• Adoption of e-tailing as a key growth driver by retailers and consumer products companies
• Promotion of entrepreneurship to create relevant technology, analytics, and packaging solutions
• Building sustainable and India-specific e-tailing business models, especially in wholesaling and distribution
• Aiming for “best in class” capabilities across the e-tailing value chain to compete in the global arena
V. Conclusion
May 2013 | E-tailing in India: Unlocking the Potential
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However, this leap of faith will not happen on its own. If e-tailing continues to be regarded by policymakers as being insignificant, and by business organizations as a “passing fad”, Technopak’s estimates of e-tailing’s growth will only remain aspirational statistics.
E-tailing’s current growth is like the birth of a new industry and akin to the birth of telecom and IT services in the 1990s. Both started small and recorded disruptive growth that changed our lives in many ways. That e-tailing needs to be viewed through a reformist lens is the premise for Technopak’s projections of e-tailing’s growth. E-tailing will have to be viewed as a vehicle that will drive efficiency, create new capabilities, and shun mediocrity; this is also fundamental to Technopak’s optimism about e-tailing over the next decade.
E-tailing possesses the potency to create new capabilities which India needs and offer viable employment to Indian youth over the next decade. It has the prowess to act as a catalyst and support the growth of new skills and industries. If e-tailing is ignored as a non-descript and trivial entity, it will be another case of a birth with congenital disorders, akin to brick & mortar retail.
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About Technopak India’s leading management consulting firm with more than 20 years of experience in working with organizations across consumer goods and services.
Founded on the principle of “concept to commissioning”, we partner our clients to identify their maximum-value opportunities, provide solutions to their key challenges and help them create a robust and high growth business models.
We have the ability to be the strategic advisors with customized solution during the ideation phase, implementation guide through start-up and a trusted advisor overall.
Drawing from the extensive experience of more than 150 professionals, Technopak focuses on four major divisions, which are Fashion (Textile & Apparel), Retail, Consumer Products & E-tailing, Education, and Food & Agriculture.
Our key services are: Business Strategy: Assistance in developing value creating strategies based on consumer insights, competition mapping, international benchmarking and client capabilities.
Start-Up Assistance: Leveraging operations and industry expertise to ‘commission the concept’ on turnkey basis.
Performance Enhancement: Operations, industry & management of change expertise to enhance the performance and value of client operations and businesses.
Capital Advisory: Supporting business strategy and execution with comprehensive capital advisory in our industries of focus.
Consumer Insights: Holistic consumer & shopper understanding applied to offer implementable business solutions.
May 2013 | E-tailing in India: Unlocking the Potential
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Market and Consumer Segmentation
• Market Size, Growth and Segments Assessment
• Online Consumer Segments Identification and
• Shopping Behaviour Analysis
Overall Category Assessment (Brick & Mortar & Online)
• Category size and Growth Assessment
• Category Segmentation
• Seasonality Study and Calendar Plan Development
• Sizing Standardization
• Value Chain Mapping
Private label Strategy & Implementation
• Private Labels Strategy (lifestyle space)
• Private Labels Implementation (apparel space)
» Sourcing Centers Identification
» Vendors Identification and Evaluation
» Vendor Tie-ups Facilitation
Performance Assessment & Enhancement (Fulfillment)
• Warehousing Operations & Inventory Control
• Packaging Material Assessment
• Logistics & Delivery Optimization
B2B Opportunity
• Online B2B Opportunity Assessment
• Target group Identification
• Business Model Development
Capital Advisory & Strategic Alliances
• Commercial and Operational Due Diligence
• Strategic Alliances Facilitation
Services We Offer in E-tailing
Start-up Assistance Developing concept to meet the business objectives and leveraging operations and industry expertise to “commission the concept” on a ‘turnkey’ basis.
A. Concept Formulation
• Positioning and Target Segments Definition
• Products & Services Definition
• Business Volume Estimation
• Geographic Reach and Fulfillment Model Feasibility
• Operating Model Development
• Financial Planning
B. Implementation Assistance
• Overall Project Management
• Service Providers Selection
» Web design & IT services agency
» Marketing agency
• Business Partners Selection
» Logistics partner
» Payment gateway partner
• Organization Design & Creation
• Beta-site trial run
About E-tailing, Retail & Consumer Products Division
Technopak aids leading e-tailers, retailers and consumer products companies in formulating growth strategy and performance enhancement mandates. Over the past few years, we have worked on various facets such as entry into the Indian market, development of new category, activation of new retail formats, channel development, product extension, region expansion etc. One key reason why Technopak is considered the industry leader is the relentless focus on the Indian Market. We help clients understand the market dynamics in India and help them arrive at the best method to grow business in India. Our expertise helps gain a competitive edge by providing execution capabilities and corporate strategies.
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Services We Offer in Retail & Consumer Products
Capital Advisory Supporting business strategy and execution with comprehensive capital advisory in our industries of focus
• M&A
• Due Diligence – Commercial
Business Strategy Assistance in developing value creating strategies based on market & industry insights, competition mapping, International benchmarking and clients capabilities
• Organic Growth Strategy
• Growth through Partnerships, JVs and Acquisitions
• Real Estate Planning
Consumer Insights Holistic consumer understanding applied to offer implementable business solutions
• Shopper Insights
• Trend Insights
• Design and Innovation Insights
• Marketing Communication
Start-Up Assistance Leveraging operations and industry expertise to ‘commission’ the ‘concept’ on a turnkey basis
• Project Management
• Sourcing and Buying Implementation
• Organization Design and Creation
• Supply Chain and Logistics
• Retail Operations Framework
• Post Implementation Assistance
• Franchisee Identification
Performance Enhancement Operations, industry and MOC expertise to enhance the performance and value of client businesses
• Productivity Enhancement
• Merchandising and Category Management
• Sourcing and Supplier Management
• Pricing, Promotions and Range Architecture
• Private Label Programmes
• Transformation & change
May 2013 | E-tailing in India: Unlocking the Potential
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Our Other Divisions
Fashion (Textile & Apparel)
With almost 20 years of experience in delivering end-to-end solutions to the entire gamut of the textile industry, right from fibre to retailing, the Fashion& Textile division at Technopak assists the textile and apparel organizations in optimizing their profits through enhancement and expansion. Many leading Indian and international Textile manufacturers and Apparel brands have benefited from our offerings in the areas of business planning and strategy, apparel operations, supply chain management and strategic alliances. Our team consists of top calibre advisors who have worked closely with a diverse group of clients comprising textile manufacturers, apparel retailers, garment manufacturers and exporters, apparel sourcing organizations, trade promotion councils, industry associations, international development bodies, and financial institutions as well as central and state governments.
Food & Agriculture
Technopak’s Food Services & Agriculture team comprises of established domain experts who build and enhance the business performance of organizations which are either working in the sector or are willing to enter this space. Our end-to-end solutions are customized as per the business’s requirements and capabilities. We continuously strive to create strong industry relationships and work for a global footprint by delivering a wide range of services to organizations that operate or wish to operate in the Food and Agriculture sector, in India as well as internationally.
Education
Technopak Education division has a vast understanding of the sector in terms of industry environment, growth potential, regulation and policy, which has enabled us to become a thought leader in the sector. Technopak caters to all the education segments – K-12, Higher Education, Vocational Training and ancillaries. Innovative business models and government thrust on privatization has led to assertive participation by private organizations. Such participation spans various levels of investment and operational scale, be it organization planning for expansion in the country or foreign institutions aiming to foray into the Indian education sector.
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Disclaimer • This information package is distributed by Technopak Advisors Private Limited (hereinafter “Technopak”) on a strictly private and confidential and on
‘need to know’ basis exclusively to the intended recipient. This information package and the information and projections contained herein may not be disclosed, reproduced or used in whole or in part for any purpose or furnished to any other person(s). The person(s) who is/are in possession of this information package or may come in possession at a later day hereby undertake(s) to observe the restrictions contained herein.
• The information contained herein is of a general nature and is not intended to address the facts and figures of any particular individual or entity. The content provided here treats the subjects covered here in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions . No one should act upon such information without taking appropriate additional professional advise and/or thorough examination of the particular situation. This information package is distributed by Technopak upon the express understanding that no information herein contained has been independently verified. Further, no representation or warranty (expressed or implied) is made nor is any responsibility of any kind accepted with respect to the completeness or accuracy of any information as maybe contained herein. Also, no representation or warranty (expressed or implied) is made that such information remains unchanged in any respect as of any date or dates after those stated here in with respect to any matter concerning any statement made in this Information package. Technopak and its directors , employees, agents and consultants shall have no liability (including liability to any person by reason of negligence or negligent misstatement) for any statements, opinions, information or matters (expressed or implied) arising out of, contained in or derived from, or of any omissions from the information package and any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this information package and/or further communication in relation to this information package.
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EBay India revenue growth falters even as rivals thrive.pdf
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Fri, Jan 15 2016. 01 24 AM IST
EBay’s revenue reflects the commission earned by the company from sellers and not the value of goods sold.
EBay India revenue growth falters even as rivals thrive EBay’s revenue grew 23% to Rs.132.10 crore in FY15. Its revenue had grown 33% to Rs.107.60 crore in FY14 from Rs.81 crore the year before
Bengaluru: EBay India Pvt. Ltd, the Indian arm of California headquartered ecommerce firm eBay Inc., saw a slowdown in growth for the year ended 31 March 2015, at a time when rivals such as Flipkart, Snapdeal and Amazon are more than doubling their sales annually.
According to documents available with the Registrar of Companies (RoC), eBay’s revenue grew 23% to `132.10 crore in FY15. Its revenue had grown 33% to `107.60 crore in FY14 from `81 crore the year before.
In comparison, Flipkart Internet Pvt. Ltd, the entity which runs Flipkart’s marketplace business, posted a revenue of `772.49 crore in FY15, up from `179 crore the year before, according to documents available with RoC.
EBay’s revenue reflects the commission earned by the company from sellers and not the value of goods sold. Ecommere firms charge sellers anything between 5% and 20% of the value of goods
as commission, said industry experts. By that measure, gross annual sales at eBay could be in the range of `1,5002,000 crore.
EBay entered India in 2004 by acquiring Bazee.com, an auction site, much before the likes of Flipkart and Snapdeal (Jasper Infotech Pvt. Ltd) saw the light of day and Amazon set up shop in India. Flipkart was started in 2007, Snapdeal in 2010 and Amazon launched its India operations in 2013.
EBay ceded its earlymover advantage to local rivals who went on a fundraising spree and spent heavily on customer acquisition. It’s growth in India was crippled by multiple exits at the top management level and limited infusion of funds by the parent.
For instance, the RoC documents show that eBay Inc. pumped in about `650 crore into the India business last year. In comparison, Flipkart raised about $1.4 billion from institutional investors in the last 13 months, while Snapdeal mopped up $1.1 billion in about the same time.
Amazon (Amazon Seller Services Pvt. Ltd) chief executive Jeff Bezos announced in July 2014 that the firm will pump in $2 billion into India. According to documents filed with RoC, Amazon has infused `2,437 crore into its India arm since June.
Such aggressive investment, much of it on customer acquisition and inorganic expansion, has helped these firms drive past eBay. “EBay behaves like a pure platform while the others (Flipkart, Amazon and Snapdeal) behave like retailers. They are going after specific categories and new product launches, so their growth rates are bound to be higher,” said Pinakiranjan Mishra, head of the retail and consumer products practice at EY India, a consultancy firm.
“Hence, for the others, you see more focus on category management, brand building, advertisement and hiring of domain experts, say somebody from an apparel brand. The fundamental philosophy is different, because of which eBay may be growing at a slower pace,” he added.
EBay declined to comment.
“We are in our quiet period till 27 January and therefore not at liberty to respond to your queries,” a company spokesperson said in an email response.
Flipkart reported a 150% yearonyear increase in unit sales in August, while Snapdeal’s gross merchandise value, or value of goods sold
on the site, surged 222% in the AprilJune quarter, Mint reported on 11 August. The etailers also made a killing during the festive season. Flipkart claimed gross sales of $300 million during the Big Billion Day sales in October, while Amazon said last Diwali was the “largest ever” since its entry into India, without giving out numbers.
To be sure, Flipkart, Amazon and Snapdeal’s growth has come on a much higher base than eBay’s.
The company tried to firm up its position in India by investing in Snapdeal. Its stake purchase in Snapdeal in April 2013 was seen as eBay’s best bet for building a meaningful presence in India. It held close to a 9% stake in Snapdeal when Japan’s SoftBank Group announced a $627 million investment in the Indian company in October 2014.
EBay sold a third of its stake in Snapdeal for about $50 million to Taiwanbased phone parts manufacturer Foxconn Technology group when Snapdeal raised $500 million last August, Mint reported on 19 August.
eBay sells Snapchat stake.pdf
Recode
eBay Sells Part of Its Stake in Snapdeal, the Alibaba of India EBay has essentially earned back its investment, and is now playing with "house money" with
its remaining stake. BY JASON DEL REY AUG 18, 2015
EBay has sold a chunk of its stake in India’s e-commerce marketplace Snapdeal, as the American company looks to
hedge its bets and reinvest money in its own Indian shopping site, the company will announce on Tuesday. The sale of
the partial stake will earn eBay about the amount it invested in Snapdeal for all of its shares, while still giving it the
upside to earn more with its remaining stake, according to a person familiar with the deal. Exact terms of the deal were
not disclosed.
EBay has invested in several Snapdeal financing rounds, including a $133.7 million round it led in 2014. At the time,
eBay’s Devin Wenig told Re/code that there was the potential for eBay to someday buy all of Snapdeal. But as interest in
Indian e-commerce has skyrocketed, Snapdeal’s valuation has grown to a reported $5 billion. As a result, eBay
executives recognized that an eventual acquisition would likely be too expensive for the company’s taste. Selling its
stake allows it to get its money back; executives view the remaining stake as “house money,” the source said.
It’s not clear whether the stake was sold in the $500 million round Snapdeal recently raised from Alibaba, Foxconn and
SoftBank, which Re/code first reported, or in a separate transaction.
Snapdeal was founded in 2010 and has undergone several iterations since then, including one as a Groupon clone.
Today, it’s an online shopping marketplace that sells a wide range of general merchandise and competes against
Flipkart, a homegrown Indian competitor currently valued at around $15 billion, and Amazon, which is investing billions
into its site there. The three companies are engaged in a highly expensive customer acquisition battle in which
undercutting on price has become one of the sole forms of differentiation.
Snapdeal has been trying to change that and has started to develop an ecosystem of sites by acquiring companies such
as FreeCharge, a prepaid phone payment site, and RupeePower, a comparison shopping site for credit cards and loans.
This strategy has been strongly influenced by the success of China’s Alibaba, which operates a host of different
marketplaces engaged in various forms of commerce.
EBay will use some of the proceeds to invest in its eBay India site, which is not among the top three shopping sites in
India, but which the company is still committed to. And for good reason. The e-commerce industry in India is expected
to grow more than 50 percent for the next several years, fueled by a new generation of people connecting to the
Internet for the first time on affordable mobile phones.
ecommerce-in-india-accelerating-growth.pdf
eCommerce in India Accelerating growth
www.pwc.in
Content list Industry on an upturn p4/Key developments in 2014 p10/Industry speak p12/ PwC perspective p13 /Outlook 2015 p14/Conclusion p17/
Foreword The eCommerce sector has seen unprecedented growth in 2014. The growth was driven by rapid technology adoption led by the increasing use of devices such as smartphones and tablets, and access to the internet through broadband, 3G, etc, which led to an increased online consumer base. Furthermore, favoured demographics and a growing internet user base helped aid this growth. In terms of highlights, the growth shown by homegrown players such as Flipkart and Snapdeal and the huge investor interest around these companies displayed the immense potential of the market.
With the entry of eCommerce behemoths such as Amazon and Alibaba, the competition is expected to further intensify. Both these international players come with deep pockets and the patience to drive the Indian eCommerce market. Also, their strong domain knowledge and best practices from their international experience give them an additional edge. Additionally, these companies have been part of markets where they have seen the eCommerce market evolve and are aware of the challenges and strategies to address issues thereof.
Indian companies realise this, and are therefore aiming to continue their focus on expanding sellers and selection on their platforms, innovating on multiple customer touch points, and providing seamless and rapid delivery services in order to compete with the international entities. Competition is expected to continue, with these eCommerce companies experimenting with different ways to attract customers and increase online traffic.
The Indian government’s ambitious Digital India project and the modernisation of India Post will also affect the eCommerce sector. The Digital India project aims to offer a one-stop shop for government services that will have the mobile phone as the backbone of its delivery mechanism. The programme will give a strong boost to the eCommerce market as bringing the internet and broadband to remote corners of the country will give rise to an increase in trade and efficient warehousing and will also present a potentially huge market for goods to be sold.
For India Post, the government is keen to develop its distribution channel and other eCommerce related services as a major revenue model going ahead, especially when India Post transacted business worth 280 crore INR in the cash-on-delivery (CoD) segment for firms such as Flipkart, Snapdeal and Amazon. Both these projects will have significant impact on increasing the reach of eCommerce players to generally non-serviceable areas, thereby boosting growth.
India’s overall retail opportunity is substantial, and coupled with a demographic dividend (young population, rising standards of living and upwardly mobile middle class) and rising internet penetration, strong growth in eCommerce is expected. From an investment perspective, the market is a primarily minority stake market, with maximum traction in early-stage deals. Such early stage funding will help companies develop a strong foundation to start from. With such strong market prospects and an equally upbeat investor community, we look forward to many more eCommerce companies from India entering the coveted billion-dollar club.
This report has attempted to showcase the current state of the eCommerce landscape in India and industry concerns. Additionally, it looks at PwC’s interpretation of the industry’s key drivers and challenges, and suggests efforts which will help eCommerce companies accelerate and sustain growth.
I hope you find this report interesting and look forward to your suggestions.
Sandeep Ladda
Leader, Technology Sector Practice, PwC India
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Industry on an upturn
In 2013, Asia-Pacific emerged as the strongest business-to- consumer (B2C) eCommerce region in the world with sales of around 567.3 billion USD, a growth of 45% over 2012, ranking ahead of Europe (482.3 billion USD) and North America (452.4 billion USD). The top three were followed by Latin America, and the Middle East and North Africa (MENA) region, according to Ecommerce Europe1. Globally, B2C eCommerce sales increased by 24% over 2012. This reflects the huge untapped potential of eCommerce by retail companies, both in their country of origin and across borders.
eCommerce or electronic commerce, deals with the buying and selling of goods and services, or the transmitting of funds or data, over an electronic platform, mainly the internet. These business transactions are categorised into either business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C), consumer-to-business (C2B) or the recently evolved
business-to-business-to-consumer (B2B2C). eCommerce processes are conducted using applications, such as email, fax, online catalogues and shopping carts, electronic data interchange (EDI), file transfer protocol and web services and e-newsletters to subscribers. eTravel is the most popular form of eCommerce, followed by eTail which essentially means selling of retail goods on the internet conducted by the B2C category.
According to Ecommerce Europe, country-wise, the US, UK and China together account for 57% of the world’s total B2C eCommerce sales in 2013, with China having total sales of 328.4 billion USD. As against this, India had sales of only 10.7 billion USD, 3.3% of that of China in 2013 with fifth position in Asia- Pacific. This is despite the fact that India enjoys high demographic dividends just like China. India’s internet penetration with total e-households at 46 million against China’s 207 million is one of the reasons behind India’s poor B2C sales growth.
0 500 1,000 1,500 2,000 2,500
China
India
USA
Indonesia
Brazil
Russia
Japan
Mexico
Egypt
Germany
Total population (million)
Number of households
Number of e-households
Top 10 countries in terms of population and corresponding e-households
Source: Ecommerce Foundation, 2014
1 Ecommerce Europe and Ecommerce Foundation are independent non-profit organisations, started by national eCommerce associations and online and omni-channel selling companies from industries such as retail, travel and finance.
eCommerce in India 5
India’s eCommerce and eTail growth
Source: IAMAI, CRISIL, Gartner, PwC analysis and industry experts
According to Forrester Research, an independent technology and market research firm, only 16% of India’s total population was online in 2013 and of the online users only 14% or 28 million were online buyers. India, therefore, was still in a nascent or immature stage of evolution of online retail spending. China was in ascending stage at 50%, whereas Japan (69%), Australia (57%) and South Korea (70%) were in mature stage.
India’s growth potential Since the eCommerce industry is fast rising, changes can be seen over a year. The sector in India has grown by 34% (CAGR) since 2009 to touch 16.4 billion USD in 20142. The sector is expected to be in the range of 22 billion USD in 2015.
21.3
0.4 0.6 1 1.5 2.3 3.5
63.8 5.3 7
9.5 12.6
16.4
21.3
2009 2010 2011 2012 2013 2014 2015 (estimated)
eCommerce (including eTail) eTail
eCommerce ecosystem
Online travel, ticketing, etc.
Online retail
Online marketplace
Online deals
Online portals classified
Ticketing for air, rail, bus, movies, events
Retail products sold through online route
Platform where sellers and buyers transact online
Deals purchased online, redemption may or may not happen online
Includes car, job, property and matrimonial portals
Currently, eTravel comprises 70% of the total eCommerce market. eTailing, which comprises of online retail and online marketplaces, has become the fastest-growing segment in the larger market having grown at a CAGR of around 56% over 2009-2014. The size of the eTail market is pegged at 6 billion USD in 2015. Books, apparel and accessories and electronics are the largest selling products through eTailing, constituting around 80% of product distribution. The increasing use of smartphones, tablets and internet broadband and 3G has led to developing a strong consumer base likely to increase further. This, combined with a larger number of homegrown eTail companies with their innovative business models has led to a robust eTail market in India rearing to expand at high speed.
2 Internet and Mobile Association of India (IAMAI), CRISIL, Gartner, PwC analysis and industry experts
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Factors that will fuel growth A significantly low (19%) but fast-growing internet population of 243 million in 2014 is an indicator of the sector’s huge growth potential in India.
641
279 243
109 107 84
China US India Japan Brazil Russia
46%
87%
19%
86%
53% 59%
China US India Japan Brazil Russia
Internet users by country: In million (2014)
Internet penetration as percentage of population (2014)
Source: Internet Live Stats website accessed on 9 December 2014
It is evident that in absolute terms India’s internet users are short by only 36 million as compared with 279 million in the US and higher than that in Japan, Brazil and Russia. However, in relation with its population, only 19% Indians use the internet. This indicates the potential of internet use in India and as internet penetration increases, the potential of growth for the eCommerce industry will also increase.
eCommerce in India 7
Demographic profile of India online users (as on September 2013)
Geographical distribution of internet users in India (million)
Source: Statista website accessed on 9 Dec 2014
Source: IAMAI-IMRB
An analysis of the demographic profile of internet users further testifies that eCommerce will rise rapidly in India in coming years. Around 75% of Indian internet users are in the age group of 15 to 34 years. This category shops more than the remaining population. Peer pressure, rising aspirations with career growth, fashion and trends encourage this segment to shop more than any other category and India, therefore, clearly enjoys a demographic dividend that favours the growth of eCommerce. In coming years, as internet presence increases in rural areas, rural India will yield more eCommerce business.
9%
16%
38%
37%
Other
35-44 year olds
25-34 year olds
15-24 year olds
99 130
165 21638
60
92
138
June 2012 June 2013 June 2014 June 2015 (estimated)
Urban Rural
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Share of eTail in Indian retail
Orders per month (in million)
Source: Technopak; Accel Partners
By 2020, eTail in India is expected to account for 3% of total retail. Further, orders per million are expected to more than double from five million in 2013 to 12 million by 2016, which will mean more opportunities for both consumers and eTail companies. While the share of online shopping in total retail has increased at a fast pace in the last few years, it is still miniscule compared to the figure in China, where the share is 8-10%.
91.6%
83%
8.0%
14%
0.4%
3%
2014
2020
Independent retail Brick and mortar retail eTail
12
5
4
2016 Estimated
2013
2012
Online business models To get the maximum benefit from eCommerce business, a large number of companies are adopting different innovative ideas and operating models including partnering with online marketplaces or setting up their own online stores. Some key operating models include the following:
• Marketplace and pick-up & drop is a model where sellers often partner with leading marketplaces to set up a dedicated online store on the latter’s website. Here sellers play a key role of managing inventory and driving sales. They leverage on high traffic on the marketplaces’ website and access their distribution network. However, the sellers have limited say on pricing and customer experience.
• Self-owned inventory is a model where the eCommerce player owns the inventory. The model provides better post- purchase customer experience and fulfilment. It provides smoother operations due to ready information on the inventory, location, supply chain and shipments, effectively leading to better control over inventory. On the flipside, however, there are risks of potential mark downs and working capital getting tied up in inventory.
• Private label reflects a business where an eCommerce company sets up its own brand goods, which it sells through its own website. This model offers a wide-ranging products and pricing to its customers and competes with branded labels. Here, margins are typically higher than third-party branded goods.
• White label involves the setting up of a branded online store managed by the eCommerce player or a third party. The brand takes the responsibility of generating website traffic and providing services by partnering with payment gateways. It helps build trust, customer affinity and loyalty and provides better control of brand and product experience.
eCommerce in India 9
Top 20 PE deals in the eCommerce sector in 2014
Source: Venture Intelligence
Investments in the eCommerce sector With the new government being elected, business confidence has significantly improved. In 2014, investors aggressively funded the eCommerce sector due to strong growth prospects. Apart from the traditional online formats of retail and lifestyle, newer online business segments such as classifieds, real estate, grocery and healthcare were also tapped.
Date Company Amount (million USD) Key investors
Jul-14 Flipkart 1,000 Morgan Stanley, GIC, Tiger Global, Accel India, Iconiq Capital, DST Global
Dec-14 Flipkart 700 Tiger Global, Iconiq Capital, DST Global, Steadview, Qatar Investment Authority
Oct-14 Snapdeal.com 637 Temasek, PremjiInvest, SoftBank Corp
May-14 Flipkart 210 Tiger Global, Iconiq Capital, DST Global
Oct-14 Olacabs 210 Tiger Global, Matrix Partners India, SoftBank Corp, Steadview
Feb-14 Snapdeal.com 134 Kalaari Capital, Intel Capital, Nexus Ventures, Bessemer, Saama Capital
May-14 Snapdeal.com 100 Temasek, PremjiInvest
Nov-14 Housing.com 90 Helion Ventures, Nexus Ventures, Qualcomm Ventures, SoftBank Corp, DST Global, Falcon Edge Capital
Mar-14 Quikr 90 Warburg Pincus, Norwest, Matrix Partners India, Nokia Growth Partners, Omidyar Network, Kinnevik
Sep-14 Quikr 60 Warburg Pincus, Norwest, Tiger Global, Matrix Partners India, Nokia Growth Partners, Omidyar Network, Kinnevik
Nov-14 Zomato Media 60 Sequoia Capital India, Vy Capital
Feb-14 Myntra 50 Kalaari Capital, Tiger Global, IDG Ventures India, Accel India, PremjiInvest
Aug-14 Snapdeal.com 50 Ratan Tata
Jul-14 Olacabs 41.6 Sequoia Capital India, Tiger Global, Matrix Partners India, Steadview
Nov-14 Proptiger Realty 37 SAIF, Accel India, Horizen Ventures
Sep-14 Freecharge.in 33 Sequoia Capital India, Ru-Net Holdings
Sep-14 BigBasket 32.7 Helion Ventures, Ascent Capital, Zodius Capital, Lionrock Capital
Jun-14 Amazon.com India 30 Catamaran Ventures
Oct-14 CarTrade.com 30 Warburg Pincus, Tiger Global, Canaan Partners
Sep-14 CommonFloor 30 Tiger Global
The eCommerce businesses will continue to attract investor interest. Several of India’s blue-chip PE firms, which previously avoided investing in eCommerce, are now looking for opportunities in the sector. The focus is mainly on ancillary service providers—companies involved in support functions ranging from delivery, logistics and payments—with investments largely driven by the relatively lower valuations and smaller amounts of capital required.
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Key developments in 2014 The last year has seen several developments that have given a fillip to the eCommerce industry.
Mobile to be the most influential aspect of eCommerce
With mobile apps being developed by most eCommerce websites, smartphones are increasingly replacing PCs for online shopping. In 2013, only 10% of the mobile users used smartphones, and only 5% of the eCommerce transactions were made through a mobile device. This figure has more than doubled, and more than 13% of all eCommerce transactions today happen via mobile3. According to some industry players, over 50% of the orders are being placed through mobile apps, which is not only leading to substantial customer acquisition but also building customer loyalty for various brands. However, most mobile transactions so far are for entertainment, such as booking movie tickets and music downloads. This trend will change soon with more and more merchandise being ordered online.
More business coming from smaller towns
eCommerce is increasingly attracting customers from Tier 2 and 3 cities, where people have limited access to brands but have high aspirations. According to eCommerce companies, these cities have seen a 30% to 50% rise in transactions.
Enhanced shopping experience
Besides general online shopping, customers are also shopping online for weddings and festivals, thanks to wider range of products being offered and aggressive advertisements. The free and quick shipment and wider choice of products, along with the ease of shopping online as compared to in-store shopping, is also helping eCommerce gather momentum.4 Further, eCommerce companies are doing rapid business due to sales.
New concepts such sales on weekends, holidays and festivals are attracting a lot of new customers and building customer loyalty among existing customers. Television and social media, particularly Facebook, are playing a proactive role in promoting eTailing through aggressive advertisements. This has helped several eCommerce companies build substantial brand image.
3 IAMAI-IMRB
4 Outlook 15: What Indian niche e-commerce companies plan to do in 2015, Medianama http://www.medianama.com/2015/01/223-outlook15-niche-e-commerce/
eCommerce in India 11
Exclusive partnerships with leading brands
Over the year or so, there has been a trend of exclusive tie-ups between eTailers and established boutiques, designers, and high-end lifestyle and fashion brands. For instance, in 2014, Jabong added international fashion brands such as Dorothy Perkins, River Island, Blue saint and Miss Selfridge, along with local fashion brands through Jabong Boutiques. Similarly, Myntra benefited from exclusive tie-ups with brands such as Harvard Lifestyle, Desigual and WROGN from Virat Kohli.
Expanding the product basket
There is a recent trend of relatively newer products such as grocery, hygiene, and healthcare products being purchased online. Similarly, lingerie and Indian jewellery has also been in great demand among customers outside India. Export comprises 95% of cross-border eCommerce, with the US, UK, Australia, Canada and Germany being the major markets.5
Key market factors to be evaluated before entering a new eCommerce business
To achieve their vision, eCommerce companies will need to understand the intricate landscape of new markets in addition to their own internal capabilities and limitations. The following factors must be considered:
• Market size: Before moving too aggressively into a new market, it is important to consider how sizable the overall opportunity is.
• eCommerce readiness: It is essential to fully understanding the payment and logistical infrastructure, consumer behaviour, retail opportunity and technological developments.
• Scope of growth: It is also important to look at the internet penetration, demographics of the online buying population and understand which phase of development each market is in.
• Barriers to entry: Players should understand the regulatory environment and connect with solution providers, content distribution networks, and digital agencies.
• Competition: There is also a need to do an in-depth assessment of what competitors are doing, their online strategy and the nature of each offering.
4 The Paypers, Netherlands-based leading independent source of news and intelligence for professionals in the global payment community
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Industry speak
Certain eCommerce players and industry observers have raised concerns that deep discounts, free shipping, intense competition and higher rejection rates due to cash on delivery (CoD) have impacted online eTailing adversely. Some of these concerns are specific to India and are more difficult to overcome than issues such as internet penetration and getting more people to shop online.
Some of the key concerns are listed below:
• Generation and sustenance of traffic: Competition from established eCommerce players is making it difficult for private label brands to generate traffic on their white-label websites.
• High customer acquisition cost: The customer acquisition costs have been rising due to intense competition by the relatively better off companies with more funds.
• Last-mile delivery: Poor last-mile connectivity, especially in remote areas with larger population, is another problem faced by Indian eTailers.
• High payment cost: CoD services impose substantial financial cost. In India, unlike in developed markets, CoD continues to be a preferred route of payment.
• Low profitability: Profitability is negatively impacted by high customer acquisition costs, free shipping and high rejection rate of CoD orders.
• Regulatory barriers: Regulatory barriers in the Indian eCommerce market are higher as compared to more mature markets.
• Skilled manpower: Lack of talent availability and high attrition are causing manpower crunch, which is fast becoming a hurdle.
eCommerce in India 13
PwC perspective
While the growth in this sector excites entrepreneurs and financial investors alike, some serious challenges are beginning to weigh down on the sector. eCommerce players in India need to address eight key aspects of their business, both internal and external.
Product and market
strategy
Customer and digital experience
Payments and transactions
FulfilmentOrganisation scaling
Tax and regulatory structuring
Risk, fraud and cyber security
Compliance framework
eCommerce Drivers and Challenges
In te
rn a
l e le
m e
n ts E
x te
rn a
l e
le m
e n
ts
External challenges
External forces impact how eCommerce companies plan their growth strategy and provide seamless customer experience onsite and post- transaction.
• Product and market strategy: eCommerce companies have to address issues pertaining to rapidly evolving customer segments and product portfolios; access information on market intelligence on growth, size and share; manage multiple customer engagement platforms; focus on expansion into new geographies, brands and products; and simultaneously tackle a hypercompetitive pricing environment.
• Customer and digital experience: Companies have to provide a rich, fresh and simple customer experience, not geared towards discovery; manage inconsistent brand experience across platforms; manage proliferation of technologies; and handle time-to-market pressure for new applications. In the recent past, social media has become more influential than paid marketing.
• Payments and transactions: eCommerce companies may face issues around security and privacy breach and controlling fictitious transactions. Further, RBI restrictions for prepaid instruments or eWallets act as impediments. From a transactions perspective, cross-border tax and regulatory issues, and backend service tax and withholding tax can have serious implications.
• Fulfilment: Companies will need to check if the physical infrastructure gets affected by the internet speed. Also, the lack of an integrated end-to-end logistics platform and innovation-focused fulfilment option could cause delivery issues. Challenges around reverse logistics management and third party logistics interactions could also act as barriers to growth.
Internal challenges
Internal forces impact how eCommerce companies can organise to drive and sustain growth.
• Organisation scaling: eCommerce companies will have to make sure organisation design keeps pace with the rapidly evolving business strategy, along with fluid governance, strong leadership and management development. From a growth perspective, identifying acquisition opportunities, fund raising and IPO readiness becomes necessary. From a technology perspective, it is important to transform IT as an innovation hub and address the lack of synergy between business, technology and operations functions of the enterprise.
• Tax and regulatory structuring: Companies will need to address issues around sub-optimal warehouse tax planning; imbalance between FDI norms vis-à-vis adequate entity controls; inefficient holding, IPR or entity structures; and international tax inefficiencies. Future challenges include the new Companies Act, policy on related-party transaction pricing, and the uncertainty around GST roadmap.
• Risk, fraud and cyber security: From a risk perspective, eCommerce companies could face issues around brand risk, insider threats and website uptime. Issues around employee-vendor nexus, bribery and corruption make companies vulnerable to fines. Cyber security also raises some concerns around website exploitation by external entities.
• Compliance framework: eCommerce companies have to comply with several laws, many of which are still evolving. Potential issues around cyber law compliance, inefficient anti-corruption framework, legal exposure in agreements or arrangements, indirect and direct tax compliance framework and FEMA contraventions and regularisation could pose problems. Also, uncertainty around VAT implications in different states due to peculiar business models could cause issues.
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As the customers progress from research to purchase to fulfilment stages, their expectations change fast. eCommerce companies need to understand these change drivers and adapt their proposition accordingly. Easy transitions between ordering on tablets, mobile phones or PCs will have to be facilitated. Besides, convenient multichannel returns and delivery options need to be developed along with the provisions of touch and feel the product before buying. They should also ensure sufficient after sales service and support. Online product reviews and ratings, videos, more advanced sizing and fitting tools should be provided.
As the customers progress from research to purchase to fulfilment stages, their expectations change fast. eCommerce companies need to understand these change drivers and adapt their proposition accordingly. Easy transitions between ordering on tablets, mobile phones or PCs will have to be facilitated. Besides, convenient multichannel returns and delivery options need to be developed along with the provisions of touch and feel the product before buying. They should also ensure sufficient after sales service and support. Online product reviews and ratings, videos, more advanced sizing and fitting tools should be provided.
eCommerce companies constantly have to upgrade their offerings with changing technology. For instance, shopping through mobiles have truly arrived, they need to devise easy to use mobile apps for their websites. They need to ensure that their websites have the required speed to do fast business, especially during sale, deals and discounts. Solutions enabling seamless integration of back-end and front-end infrastructure, customer experience enhancement initiatives, integrated inventory management and analytics would be crucial for the eCommerce firms.
Outlook 2015
In 2015, eCommerce players see mobile commerce as the most preferred route with mobile wallet as the preferred way of payment. With 4G services expected to be launched in 2015, internet penetration is likely to take a significant leap, which is likely to give another boost to mobile commerce. Changes in lifestyle and shopping choices will see buyers preferring online and mobile channel over physical channel to save time and seek wider range and possibly comparative pricing. For mobile wallets, improvements on the payments front with multiple payment instruments and increase in payment gateways aided by enhanced security with multiple authentication layers will help the consumers with a seamless mobile experience.
Niche categories are also expected to gather momentum including cars and real estate. Premium and international brands are likely to join eTail, purchases from Tier 2 and 3 cities will continue to rise and differentiated products such as exclusive brands by designers will grow. Riding high on the growth prospects eCommerce companies will look at more ways to raise funds such as IPOs. Some consolidation will also happen with the leaders focusing on high growth and smaller players finding their own niche.6
Top 10 things the eCommerce companies need to do to accelerate growth
Customer experience
Convergence of online and off line channels
Technological advancements
4 Outlook 15: What Indian niche e-commerce companies plan to do in 2015, Medianama http://www.medianama.com/2015/01/223-outlook15-niche-e-commerce/
eCommerce in India 15
With lack of integrated end to end logistics platform, the eCommerce industry is facing issues related to procurement operations and transportation. Online purchases from Tier-2 and Tier-3 cities are expected to significantly increase, thanks to the emergence of low cost smartphones, however, poor lastmile connectivity could act as a deterrent. Keeping control on logistics and on ground fleet management, especially courier companies, is essential for growth.
Delivery experience
India continues to be a cash-based society due to limited banking and credit card penetration. This, combined with a lack of consumer trust in online merchants, has forced companies to offer CoD services, which imposes significant financial cost for firms in the form of labour, cash handling and higher returns of purchased items. Data protection and the integrity of the system that handles the data and transactions are serious concerns. Companies should take necessary action for management even if this imposes a cost on them.
Payments and transactions
Laws regulating eCommerce in India are still evolving and lack clarity. Favourable regulatory environment would be key towards unleashing the potential of eCommerce and help in efficiency in operations, creation of jobs, growth of the industry, and investments in back-end infrastructure. Furthermore, the interpretation of intricate tax norms and complex inter-state taxation rules make eCommerce operations difficult to manage and to stay compliant to the laws. With the wide variety of audience the eCommerce companies cater to, compliance becomes a serious concern. Companies will need to have strong anti-corruption programs for sourcing and vendor management, as well as robust compliance frameworks. It is important for the eCommerce companies to keep a check at every stage and adhere to the relevant laws, so as to avoid fines.
Tax and regulatory environment
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Business models have been evolving rapidly in the eCommerce sector largely due to heightened competition and the inability of players to sustain high costs. Companies in eCommerce will need to adapt and innovate constantly to sustain their businesses. Furthermore, several of these companies entered into the eCommerce industry as startups and have grown to a huge size aided by the continuous growth in the market but lack well defined capabilities and organisational structure. System building, financial and talent management become key.
The customer acquisition costs in Indian eCommerce have been climbing rapidly due to intense competition between multiple well-funded players. Only 2% of website visits currently result into transaction. Thus, there is a gap between potential and actual buyers. Coupled with high transaction costs, this area could pose serious problems. In the US, 75% of consumers have stated that they will usually switch between brands, and for the rest of the world, this rate is 60%, according to Ecommerce Foundation.7 This suggests companies should constantly work on their brand positioning.
Operational framework
Customer acquisition
Digital disruption has driven change in the eCommerce industry with shoppers embracing multiple touch points in their purchase journeys. Companies should spend enough resources on technology development as also advertising and branding, especially because the younger population is demanding. In the journey toward digital business transformation, embedding SMAC technologies in the business becomes crucial.
To grow their businesses, the Indian eCommerce sector needs to closely watch the growth of their markets in the Tier 2 and 3 cities. They need to improve their logistics and supply chain management in these cities, do an effective demand management to keep an eye on what products are being sought in these cities. With eCommerce largely being a borderless activity companies need to keep in mind that customers always have the option to buy across the border if they cannot fulfil customers’ expectations.
Digital infrastructure
Addressable markets
7 Global B2C E-commerce Report, 2014
eCommerce in India 17
According to the PwC report Future of India - The Winning Leap, emergence of new technologies, especially mobile, in India has sparked a social change that’s difficult to quantify. While mobile, internet, and social media penetration and growth can be quantified, describing the changes in social values and lifestyles that have accompanied those trends is far more challenging.
New technologies such as virtual walls and virtual mirrors will further help improve the retail customer experience, thereby encouraging greater consumption. Virtual mirrors let shoppers ‘try on’ clothes and accessories virtually before making buying decisions. Virtual walls help customers scan barcodes for items on an electronic wall using their mobile phones and place orders with retailers. Tesco in South Korea was an early adopter of this technology. In India, HomeShop18 has launched India’s first virtual-shopping wall. Scan N Shop at New Delhi’s international airport uses a similar technological interface.
A key outcome of the technology revolution in India has been connectivity, which has fuelled unprecedented access to information. Millions of people who had little means to join the national discourse can now gain new insights into the world around them. Farmers know crop prices. Consumers understand global standards of product and service quality. Rural Indians recognise the differences between the opportunities available to them and those available to their urban counterparts. And citizens have a mass forum for expressing their political opinions. The upshot of this connectivity revolution has been empowerment of Indians.
The number of mobile subscribers in India jumped from 261 million in 2007-2008 to 910 million in 2013-2014. Along with telephony, internet penetration is soaring in rural and urban India. Moreover, the number of rural internet users is growing by 58% annually. Increases in the number of smartphones and 3G subscriptions are further driving this growth. Indeed, the number of smartphone users is expected to grow at a CAGR 91% from 2012 through 2016, jumping from 29 million to 382 million. Similarly, the number of 3G subscribers could expand at a CAGR of 84%—from 23 million to 266 million—during the same period.
Thanks to rising internet penetration, the gross number of online users in India now exceeds the number of people who have completed primary education. This shift emphasises the increasing relevance of India’s digital economy. The number of internet users soared from approximately 20 million in 2004 to nearly 250 million in 2014. By contrast, the number of people who have studied beyond the eighth standard is about 200 million, indicating that even uneducated people
Conclusion
are accessing the internet. While increases in the use of traditional options for gaining knowledge, such as education, may be linear, the proliferation of knowledge through the use of new digital technologies appears exponential.
The eCommerce industry in India may currently be behind its counterparts in a number of developed countries and even some emerging markets. However, with India’s GDP growth pegged at 6.4% by the International Monetary Fund and the World Bank, it is expected to grow rapidly. Moreover, the Indian eCommerce industry has access to funds from within the country and international investors. Overall, the eCommerce sector is maturing and a number of serious players are entering the market.
What differentiates the Indian eCommerce market from that of a country like China is that while market concentration in China is largely on account of Alibaba-owned Taobao and Tmall (with these players holding a higher percentage of market share than the top players in most of the other major markets), in India the market share is divided amongst several ecommerce companies, each coming up with its own business model. As a result, customers have a wide range of products and services to choose from.
In our view, there is humongous potential for eCommerce companies owing to the growing internet user base and advancements in technology. However, this will not be without its share of challenges, be it operational, regulatory, or digital. How a company prepares itself to meet these challenges will decide whether or not it succeeds.
Notes
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Authored by:
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PD 325 - February 2015 e- commerce report.indd Designed by Corporate Communications, India
evolution-of-e-commerce-in-india.pdf
Evolution of e-commerce in India Creating the bricks behind the clicks
2 PwC
Evolution of e-commerce in India: Creating the bricks behind the clicks 3
Foreword Acknowledgement
Recent years have seen a remarkable transformation in the way India shops and trades. E-commerce has taken the world of retail by storm and captivated the imagination of an entire generation of entrepreneurs, with e-commerce ventures with various business and commercial models. The explosive growth in the last few years has already catapulted the biggest firms among these ventures past the billion-dollar territory. The sector has grown three times in four years to nearly 12.6 billion USD in 2013. Various industry estimates project that the sector will further growth five to seven times over the next four to five years.
Online retail, while today representing a small fraction of the e-commerce space is one of the fastest growing segments. It is also the most challenging in fulfilling its fundamental proposition of transcending physical boundaries to deliver a variety of products to the customer’s doorstep. Logistics and infrastructure in e-retailing becomes the very backbone of the fulfilment network and the basis on which stringent service level expectations are set and met, and customer mind-space among competing alternatives is won. In India, these are arguably the weakest links, and therefore the enhanced need for greater attention and management bandwidth to these critical functions.
We estimate that a large proportion of investment in e-commerce retail will flow into logistics and infrastructure. In the absence of an incumbent ecosystem, e-commerce providers are beginning to build these functions from scratch. This will also spawn infrastructural investments into allied sectors such as warehousing, air cargo, road and rail-based transport transportation. As delivery reach and fulfilment networks become more entrenched and increasingly complex, opportunities will emerge for logistics service providers and 3PL players. All of these trends point to a bright future for talented entrepreneurs, operational managers as well as greater employment opportunities for blue-collared workers.
On behalf of ASSOCHAM I would like to thank the team at PwC for preparing a comprehensive and neutral white paper ‘Evolution of e-commerce in India: Creating the bricks behind the clicks. The e-commerce industry is one of the fastest growing sectors in the country today, spurring first generation entrepreneurs, large scale manufacturing by SMEs, jobs and most importantly impacting the infrastructure growth of the country.
We hope that this paper will be read by all the relevant stakeholders of the industry and that they will benefit from its extensive research.
Manish R Sharma Logistics Leader, PwC India
D S Rawat ASSOCHAM
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Evolution of e-commerce in India
The rapid growth of e-commerce in India Over the last two decades, rising internet and mobile phone penetration has changed the way we communicate and do business. E-commerce is relatively a novel concept. It is, at present, heavily leaning on the internet and mobile phone revolution to fundamentally alter the way businesses reach their customers.
While in countries such as the US and China, e-commerce has taken significant strides to achieve sales of over 150 billion USD in revenue, the industry in India is, still at its infancy. However over the past few years, the sector has grown by almost 35% CAGR from 3.8 billion USD in 2009 to an estimated 12.6 billion USD in 20131.
Industry studies by IAMA2 I indicate that online travel dominates the e-commerce industry with an estimated 70% of the market share. However, e-retail in both its forms; online retail and market place, has become the fastest-growing segment, increasing its share from 10% in 2009 to
an estimated 18% in 20133. Calculations based on industry benchmarks estimate that the number of parcel check-outs in e-commerce portals exceeded 100 million in 2013. However, this share represents a miniscule proportion (less than 1%) of India’s total retail market, but is poised for continued growth in the coming years. If this robust growth continues over the next few years, the size of the e-retail industry is poised to be 10 to 20 billion USD by 2017-2020. This growth is expected to be led by increased consumer-led purchases in durables and electronics, apparels and accessories, besides traditional products such as books and audio-visuals.
E-commerce logistics models: A radical shift from regular logistics The strong emergence of e-commerce will place an enormous pressure on the supporting logistics functions. The proposition of e-commerce to the customer is in offering an almost infinite variety of choices spread over an enormous geographical area. Firms cannot compete solely based on sheer volumes in today’s ever-evolving, information symmetric and globalised world of e-commerce. Instead, the realm of competition has shifted to delivering to ever-shortening delivery timeliness, both consistently and predictably. Negligible or zero delivery prices, doorstep delivery,
Growth in e-commerce and e-tailing Commodity distribution in e-tailing
1. Source: Internet and Mobile Association of India research report 2. Source: IAMAI report titled‘e-Commerce Rhetoric, Reality and Opportunity’ 3. Source: PwC analysis
0.4 0.6 1.0 1.5 2.3
10-20
3.8 5.3
7.0
9.5
12.6
2009 2010 2011 2012 2013 2017 - 20(E)
E- tailing E-commerce
Source: Crsil, IAMAI, PwC analysis and Industry experts
53%
29% 32%
29%
57% 53% 37%
58% CAGR 40-50%
In billion USD
Source: Internet and Mobile Association of India research
Apparels and accessories 30%
Electronics 34%
Baby products 2%
Healthcare 3%
Home and furnishing
6%
Beauty and
personal 10%
Books 15%
Evolution of e-commerce in India: Creating the bricks behind the clicks 5
Conventional retail model
E-tail model
traceability solutions and convenient reverse logistics have become the most important elements of differentiation for providers.
While the current logistics challenges relating to manufacturing and distribution of consumer products and organised retail are well-known, the demands of e-commerce raise the associated complexities to a different level. E-commerce retailers are well- aware of these challenges and are cognizant of the need to invest in capital and operational assets.
Reaching the customer: Going beyond the traditional definition The essence of e-retailing is in its ability to transcend physical boundaries and reach customers in a manner different from the traditional brick-and- mortar stores, to their very doorstep. However, the base of the e-retailing model is technology and logistical solutions that facilitates the customer acquisition and the final ‘reach’ process. E-commerce further brings to the table vagaries in customer orders accompanied with difficult scenarios such as free delivery, order rescheduling, cancellation, returns and cash-on-delivery.
Additionally, an expected minimised turn-around-time (TAT) which will potentially lead to word-of-mouth publicity, feedback and customer retention to the e-portal or website. An information network which shares updated information with respect to inventory status, demand schedules and forecasts, shipment schedules and promotion plans among all the stakeholders of the supply chain will form the backbone of an e-retailer.
Domestic suppliers
Master warehouse Regional distribution centers
Retail store 1
Retail store 2
Retail store 3
Retail store 4
Domestic suppliers
Domestic suppliers Parcel hub / sortation center
E-fulfillment center
Delivery Pick-up point
International suppliers
Need for different management of physical infrastructure The business model of the conventional retailers and e-commerce providers differ significantly. The conventional infrastructure model relies on increasing depth and breadth of coverage through several inventory nodes, warehouses and stocking points connected by based on various other factors ranging from
production cycles, nature and variety of the SKUs to even local taxation laws. The conventional order point occurs at retail stores and static customer fronts located at the end of the chain, and inventory requirements are predicted empirically based on several months or years of past data. In fact, competing sales channels may also duplicate infrastructure, an indication of the typical sub-ordination of the logistics function within the overall sales and distribution process.
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On the other hand, e-commerce providers operating either through inventory-led or marketplace models, are entering an entirely different paradigm of operations, where management of the supply chain is core to the business of creating more business. With real-time demand and tight delivery expectations, the supply chain needs to be built from the customer-end, with the fundamental difference being the proliferation of delivery points and the need to move large number of orders of small parcels (one or two goods) across the length and breadth of the country at an affordable cost.
In India, foreign direct investment (FDI) within the business-to-consumer (B2C) e-commerce segment is not allowed where as foreign investment in the business-to-business (B2B) e-commerce segment is allowed. This means that inventory led e-retailing model cannot attract FDI whereas market-place based e-retailing model can still attract FDI. Most e-retailers have started practicing the market-place business model with suppliers storing on their behalf and delivering as per the requirement and thus falling under the B2B category.
The need to build infrastructure for increased agility The key to success in e-commerce is an efficient last-mile network to ensure time- bound delivery while maintaining agility in the logistics chain. The fundamental SKU at the delivery point is a ‘parcel’, of varying shapes and sizes, while the pin-codes of the operation become the determinant of the last-mile network model. The up-stream infrastructure will then need to be built as a layer over this last-mile network with strategic location choices of fulfillment centers proximal to delivery modes. The operations will need to be tightly controlled in such a way that the inventory stocks are converted to parcels and pushed down the chain efficiently, as well as that the fulfillment centers are replenished. The balance between inventory and supply chain costs is therefore a dynamic decision to be taken, considering both cost and service level considerations.
While the conventional logistics models have evolved in a way to expand reach for businesses at the lowest cost in a ‘push’ model, e-commerce businesses will feel the need for greater agility in their supply chain that will be more responsive to customer demands that are variable and less predictable. The sheer variety of the product and destination choices and fulfillment modes will mean that the provider cannot afford to stock the entire supply chain with sufficient inventory to fulfill customer needs. The customer order point will need to be pushed further upstream, from where ‘pull’ from the customer is recognised, tracked and met through rapid fulfillment methods.
The implications of product choices on infrastructure networks The network design and the agility of the supply chain will also be influenced by the products carried. E-retailers have been able to attract significant customers to online buying but these are still limited to very exclusive categories such as consumer electronics, apparels and lifestyle, books, music and video. In the future, other categories such as food and beverages, departmental store, home furnishings, autoparts, healthcare and office equipment will also see increased e-commerce activity.
It is important to note that each product category will have its own customised logistics requirements which can alter the balance between inventory and supply chain costs.
Within the apparel and lifestyle category, for example, localised suppliers or warehouses can be used to good effect in tune with the buying patterns and ensuring seasonal inventory replenishment. For books, music and video, a large centralised inventory for a large region may be better suited. For consumer electronics and durables, which have lesser SKU proliferation, higher product value and higher security and handling needs, a JIT and direct fulfillment model may need to be put in place. For hot and cold merchandising, localised sourcing and continuous availability of temperature controlled infrastructure throughout the supply chain becomes the critical need. The challenge is to ensure that the supply chain needs of the specific product segments are married with customer propositions that offer better customer value than traditional retail models.
Logistics infrastructure to be the weakest link in the Indian e-commerce story Logistics in developing economies such as India may act as the biggest barrier to the growth of the e-commerce industry. Till date, logistics models developed in India target the metropolitan and the Tier-1 cities where there is a mix of affluent and middle classes and the internet penetration is adequate. In India, about 90% of the goods being ordered online are moved by air, which increases the delivery costs for the e-retailers.
Most e-retailers were initially dependent on third party delivery firms. However as the market evolves and customer expectations increase, city or geography centric service levels are becoming the need of the hour. Moreover, issues specific to e-retailing such as the problems associated with fake addresses, cash-on-delivery and higher expected return rates have made e-retailers consider setting up their captive capital intensive logistic businesses. For instance, Flipkart has set up several regional warehouses and is constantly increasing the supplier base across the country to achieve low transportation cost by ensuring delivery from the
nearest supplier or regional warehouse. Flipkart is growing its logistics arm E-Kart whereas Amazon India is building capacities with its logistic arm Amazon Logistics.
While establishing the captive logistics infrastructure was a consequence of need for better service delivery by actively controlling the logistics chain, it has pushed up the delivery costs. According to industry benchmarks, the delivery cost in the captive logistics models are 10 to 20% expensive than the 3PLs whose expertise lies in quick delivery at an affordable cost. Further, the logistics set-up and requirements in developing countries are also dependent on the purchasing behaviour of the customers
Chief characteristics of the e-commerce market which impact the logistics models
• ‘Cash-on-delivery’: India has been a vibrant cash economy where the consumer’s purchasing behaviour involves an initial overall inspection of the product from different perspectives and paying subsequently. Further, customers in India do not extend much trust on the transit facilities for the delivery of the products. This has resulted in ‘cash-on -delivery’ (COD) as a preferred payment option of majority of the Indian consumers buying online.
• Consumers in India expect the return process to be seamless and convenient. However, with an expectation of return of the items purchased online, online shoppers have made available the option to return the purchased goods at the behest of the retailer. Retailers have considered this option of return to develop trust and confidence which results in seamless subsequent purchases and positive word-of- mouth support.
• Free and quick home delivery is another characteristic of the e-commerce industry in India. E-retailers offer free delivery of the products within a promised timeline. Though this may be unsustainable in the long run but e-retailers have to offer the same convenience of free and quick shipping to compete with other retailers.
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These factors will call for strengthening the logistics infrastructure and increased number of failing which the e-retailers will have to start up or strengthening their own logistics counterparts. Higher delivery costs can result in withdrawal of free delivery by e-retailers on the back of high delivery costs and complex business models threatening already wafer-thin business margins.
Infrastructure will demand a large proportion of investment in e-commerce Active management of logistics, infrastructure and service levels is core to the e-commerce business in any market. E-retailers need to have a hybrid model of their own captive logistics arm which takes care of their specific business model needs and strictly monitored service level agreements with 3PLs to rationalise the delivery costs.
The future competitors and winners in the e-retailing space will be the ones which will use both bricks and clicks and not bricks or clicks alone.
This is evident from the evolving logistics and storage strategy of Amazon in the US. Amazon has changed its logistics network from the ‘sell all, carry few’, model to the ‘sell all, carry more’ model and increased the number of warehouses across the US. This eventually proved beneficial for Amazon as the increased number of warehouses led to both better reach and range for the suppliers and customers which eventually resulted in faster service delivery and increased customer retention. Amazon is further investing 14 billion USD in increasing its warehouses’ base by 50 in the US.
Strictly monitored service level agreements with 3PLs which have developed the expertise and skills to handle the vagaries of the customers in the e-commerce space has proven beneficial for e-retailers as they are able to outsource the skills best suited to the 3PLs. A successful example in terms of usage of SLAs with 3PLs is of eBay which has partnered with couriers and allied service providers for the logistics with closely controlled SLAs.
Flipkart (inventory-led model)
Flipkart has started as a price comparison online portal with an initial investment of 8,000 USD and later turned into an e-retailing giant which recently ticked the 1 billion USD in gross merchandise volume. It started with a consignment model where goods were procured on demand and turned into inventory e-retailer supported by registered suppliers since it provided better control on the logistics chain.
Flipkart established warehouses in Delhi, Bangalore, Mumbai and Kolkata managing a fine balance between inventory and cost of delivering goods. Facing difficulties from the 3PLs in the form of higher delivery cost, late deliveries and faulty products delivered resulting in return and customer dissatisfaction, it has started its own logistics arm named e-Kart.
E-Kart provides a robust back-end support to Flipkart and ensures timely deliveries. To achieve the economies of scale, recently e-Kart started providing back-end support to other e-retailers. It has consolidated the market and added strengths by acquiring We Read, Mime360, Chakpak.com, Letsbuy. com and Myntra along the way. The company employs around 13,000 employees and plans to add 10,000 to 12,000 more in next one to three years after a recent acquisition of Myntra.
Amazon India (marketplace model)
Amazon started practicing the market place model by launching its site in early 2013 in India. It started registering electronics goods sellers and ended FY 2013 offering nearly 15 million products.
Amazon India has two fulfillment centers in Mumbai and Bangalore and plans to start five new fulfillment centres across the country. Known for its strong last-mile delivery network, Amazon India has set up a logistics arm named Amazon Logistics and started offering same day delivery.
Evolution of e-commerce in India: Creating the bricks behind the clicks 9
The above requirement will only increase in magnitude when operating in India. The exponential growth in e-retailing will also attract 3PL majors like DHL, FedEx, UPS and Gati to play a crucial role in the last-mile delivery. DTDC has already started offering customised services to e-retailers under the name Dotzot. To cater to this potential explosive growth in the absence of a ready-built industry structure, significant investments will need to flow into creating back bone logistics infrastructure from e-commerce providers or 3PLs. Industry interactions indicate that market place operators typically invest 10 to 20% of their revenue to build self-owned infrastructure.
Investments in infrastructure and operating models of the future The growth in e-retailing will spawn several investments in logistics infrastructure including large fulfillment centers and warehouses, downstream parcel and sortation centers, focus will be on equipping these nodes with state-of-the-art technology and modern warehousing practices promoting visibility across the logistics chain. The kind of infrastructure will not only be bare bone shells but will focus on specific handling requirements of the commodities transacted.
As times becomes the essence of delivery, quicker modes of transportation and reduced transit times will increasingly become the key demands. Currently, India operates at a very low level of air cargo penetration characterised by only a few airports equipped to handle large volumes of express delivery parcels. As the race to the market moves to the Tier 2 and Tier 3 cities a day may not be far off when there is an increasing demand of expanding air cargo connectivity to smaller towns through various merry-go round aircrafts using charter airplanes and general aviation. Airport operators including the Airport Authority of India(AAI) needs to carefully evaluate this particular category of air cargo on par with other categories of airport infrastructure development.
Similarly, for certain product categories, railways movement can also be explored. The Indian railways is exploring various schemes like parcel trains and increasing the competitiveness of parcel loads in passenger trains. For certain commodities on the short haul routes, railway can become a predictable and low-cost transport choice. Therefore the whole transportation paradigm of the future may evolve around a judicious mix of rail, road and air transport modes.
Economic potential due to the rise of e-commerce logistics The rising growth and complexity of e-commerce categories and delivery networks is expected to have a large spill-over to infrastructure and logistics investments which will include more warehouses, sortation and delivery centers and employment. Based on current productivity trends and growth estimates, it can be estimated that over the next three to four years, there will be an addition of 7.5 to15 million sq ft4 in the
4. PwC analysis 5. Based on estimates from Knight Frank Logistics and Warehousing Report, 2013-14 6. Technopak report on E-tailing in India: Unlocking the Potential
form of additional central fulfillment centers alone with an average size of 80,000 to 1,50,000 sq ft each. This, by itself represents an additional 6 to 12% of all the space available in the form of organised warehousing in India and almost 25 to 50% of all incremental addition of consumption-driven warehousing space5 in the same period. To enhance the reach further to match the growth in warehousing, additional sortation and delivery centers will also be critical. Such additional centers with each measuring around 10,000 to 20,000 sq ft will be added. Industry estimates6 reveal that the total spend on warehousing and sortation centers could be as high as 3 to 6% of top-line revenues, which represents an cumulative spend of over 450 to 900 million USD of spend in warehousing till 2017-2020. The industry is expected to spend an additional 500 to 1000 million USD in the same period on logistics functions, leading to a cumulative spend of 950 to 1900 million USD till 2017-2020.
Warehousing requirements
1.7
15
Source: Industry experts and PwC analysis in million sq.ft
335%
2013 2017-20 (E)
770%
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It is also estimated that currently over 25,000 people7 are employed in e-retailing warehousing and logistics. Even with efficiency improvements in individual performance and productivity (IPPs) in the delivery networks, it is estimated that there will be an additional employment of close to 75,000 people in these two functions alone8 by 2017-2020, representing an increase in employment by almost three times.
Trends to watch out for • Evolution of logistics landscape in
the country will be a very important factor in determining the course for the e-retailing industry. Logistics evolution will be necessary to realise the potential robust growth.
• Despite a huge potential, long- term profitability of the e-retailing industry in the country is still under question. After so many years of operations, all the major e-retailers are yet to start making profits. In the wake of wafer-thin margins and sub-optimal infrastructure resulting in higher delivery cost, the long-term profitability still seems a distant possibility.
• FDI in the inventory-led retail will also be an important factor in shaping up the future of the industry. In the current scenario, global e-retailing giants like Rakuten and Alibaba are eyeing an entry into Indian e-retail market. Amazon has recently announced a 2 billion USD investment operating on marketplace model. FDI allowance could be a vital factor in attracting significant investments resulting in better infrastructure and
robust supply chains. • Evolution of taxation policies in the
country will in a large way effect the way industries practice warehousing. With uniformity in taxation laws across the country, e-retailers are expected to move closer to consumption centers with an aim to address the duplicities in the logistics chain by removing the overlaps in form of delivery and sortation centers which are traditionally closer to the consumption centers. It will also result in uninterrupted access to the e-retailing market. In a recent case, a south Indian state had sent a tax notice to e-retailers resulting in all e-retailers withdrawing services in the particular state because of differing tax policies.
• The evolution of the existing logistics providers and more players entering the 3PL domain will result in realisation of the huge potential of the e-retailing industry. Major 3PL players (such as FedEx, DHL, UPS, Gati, etc) will have to gear up to the increasing demands of the e-retailing industry thereby helping in rationalisation of delivery costs and provide much needed balance between using captive logistics network and 3PLs. To take the opportunity and help the e-retailing industry to overcome infrastructural bottlenecks, resurrection of the Indian Postal Service can be a game changer. Collaborating the strong last-mile capability with technological upgradation will ease the dependence on the other modes of transportation.
After taking a holistic view of the industry trends, e-commerce is poised for an exciting period of exploding growth in a period of three to five years. This is expected to lead to substantial investments in supporting infrastructure and innovative and game changing business models.
7. Technopak report on E-tailing in India: Unlocking the Potential 8. PwC analysis
Evolution of e-commerce in India: Creating the bricks behind the clicks 11
Contacts
ASSOCHAM acknowledged as Knowledge Chamber of India has emerged as a forceful, pro-active, effective and forward looking institution playing its role as acatalyst between the government and industry. ASSOCHAM established in 1920 and has been successful in influencing the government in shaping India’s economic, trade, fiscal and social policies which will be of benefit to the trade and industry.
ASSOCHAM renders its service to over 4,00,000 members which includes multinational companies, India’s top corporates, medium and small scale units and associations representing the interest of more than 400 chambers and trade associations from all over India encompassing all sectors.
ASSOCHAM has over 100 national committees covering the entire gamut of economic activities in India. It has been especially acknowledged as a significant voice of Indian industry in the fields of Corporate Social Responsibility, Environment & Safety, e-Commerce, Corporate Governance, Information Technology, Agriculture, Nanotechnology, Biotechnology, Defence, Cyber Security, Entertainment and Media, Pharmaceuticals, Telecom, Banking and Finance, Company Law, Corporate Finance, Economic and International Affairs, Tourism, Civil Aviation, Infrastructure, Energy Power, Education, Legal Reforms, Real Estate, Rural Development etc. The Chamber has its international offices in China, Sharjah, Moscow, UK and USA. ASSOCHAM has also signed MoU partnership with Business Chambers in more than 75 countries.
Mr. D.S Rawat Secretary General ASSOCHAM Phone: 011- 46550555 Email: [email protected]
About ASSOCHAM About PwC
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In India, PwC has offices in these cities: Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India’s service offerings, visit www.pwc.in
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Contacts Bharti Gupta Ramola Markets Leader, PwC India Phone: +91-124-3306020 Email: [email protected]
Manish R Sharma Logistics Leader, PwC India Phone: +91-124-3306007 Email: [email protected]
www.pwc.in Data Classification: DC0
This publication does not constitute professional advice. The information in this publication has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this publication represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.
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AK 241 - August 2014 E-Commence Evolution in India: Creating the bricks behind the clicks.indd Designed by Corporate Communications, India
How Multinationals Can Win in India(1).pdf
1
M A R C H 2 0 1 2
How multinationals can win in India
Companies should avoid simply imposing global business models and practices on the local market.
Vimal Choudhary, Alok Kshirsagar, and Ananth Narayanan
s t r a t e g y p r a c t i c e
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Over the past 20 years, multinational companies have made considerable inroads into the Indian market. But many have failed to realize their potential: some have succeeded only in niches and not achieved large-scale market leadership, while others haven’t maximized economies of scale or tapped into the country’s breadth of talent. The experience of a leading multinational consumer goods company illustrates the challenge: its revenue in India has grown by 7 percent compounded annually in the past seven years—almost twice the rate of the parent company in the same period. Nevertheless, the company’s growth rate in India is only about half that of the sector.
For multinationals, the key to reaching the next level will be learning to do business the Indian way, rather than simply imposing global business models and practices on the local market. It’s a lesson many companies have already learned in China, which more multinationals are treating as a second home market.1 In India, this trend has been slower to pick up steam, although best-practice examples are emerging:
• A leading beverage company entered India with a typical global business model—sole ownership of distribution, an approach that raised costs and dampened market penetration. The company’s managers quickly identified two other big challenges: India’s fragmented market demanded multiple-channel handoffs, and labor laws made organized distribution operations very expensive. In response, the company contracted out distribution to entrepreneurs, cutting costs and raising market penetration.
• A big global automobile company has become the one of the largest manufacturers in India, growing at a rate of more than 40 percent a year over the last decade, by building a local plant, setting up an R&D facility to help itself better understand what appeals to Indian customers, and hiring a well-known Indian figure as its brand ambassador.
To realize India’s potential, multinationals must show a strong and visible commitment to the country, empower their local operations, and invest in local talent. They must pay closer attention to the needs of Indian consumers by offering the customization the local market requires. And multinational executives must think hard about the best way to enter the market. More and more, that will mean moving beyond the joint-venture approach that so many have adopted and learning to go it alone. (For a localization-assessment tool, see sidebar, “Winning in India: An illustrative scorecard.”)
It’s essential that multinationals raise their game in India: the country’s economy is expected to grow by upward of 6 percent annually in the next few years, among the highest rates of any big emerging economy. In several product and market categories—mobile handsets, for example—India could account for more than 20 percent of global revenue growth in the next decade. In other words, the future of many multinationals depends on their ability to succeed in India.
1 See Jeff Galvin, Jimmy Hexter, and Martin Hirt, “Building a second home in China,” mckinseyquarterly.com, June 2010.
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Empowering the Indian organization Many multinationals in India are stuck in a profitability trap characterized by a lack of commitment to build country-specific operations and management systems. When expatriate company heads are brought in, their efforts often fall victim to short rotation cycles that inhibit the execution of long-term strategy.
One important differentiator is the ability to demonstrate a commitment to India through the economy’s inevitable cycles and volatility. Policy makers and local entrepreneurs have long memories, and “state visits” by global CEOs and chairmen are not sufficient if a company doesn’t follow through on its commitments.
Winning in India: An illustrative scorecard
Web 2012 MNCs in India Exhibit 1 of 1
1. Ensure top- leadership support and commitment through cycles
a. Set bold and explicit aspirations over next 5 years (eg, 3x–5x growth in India) b. Send global CEO and relevant senior executives to India 3–4 times a year; engage in regular dialogue with top Indian clients c. Maintain appropriate local investments even through business cycles
2. Customize offerings to suit Indian market and customer needs
a. Gain deep understanding of 4–5 target client segments and the initiatives that will deliver against a 3x–5x growth goal (ie, beyond just niche markets) b. Set high market share goals (eg, 15% or more) for the targeted client segments c. Tailor product/service packages to client segments’ needs and local market differences
3. Create innovative and localized business model
a. Commit to products that have 30% less functionality and that cost 50–70% less without compromising quality b. Build distribution network that mirrors customer targets; plan to expand it by 20–30% c. Employ robust supply chain in India (eg, reliable vendors conforming to quality specifications)
4. Scale up via deals and partnerships
a. Assign a business-development/M&A team to scout for opportunities in India periodically b. Develop strong local partners and joint ventures; manage results proactively every quarter (ie, no arms’-length relationships)
5. Leverage India for global products, services, and talent
a. Make India team a key R&D hub with sufficient resources to deliver results b. Deploy business-model and technical innovations from India in other relevant markets c. Global operations benefit from India’s cost advantage, scale, and talent pool
6. Manage perceptions and regulation
a. Maintain strong relationships with top 10 external stakeholders (government and regulators); don’t rely on external agencies for this b. Achieve premium positioning for brand in India over local competitors; ensure that brand has sufficient Indian attributes (ie, not just a foreign label)
7. Empower local organization; offer a compelling people proposition
a. Make India head a senior officer and part of global executive committees b. Provide India-based CEO with own investment budget and autonomy for most day-to-day decisions c. Include top 5 India executives in the global top 200 executives; monitor their career development at a global level d. Recruit 10% of global top 500 leaders from operations in India e. Achieve reputation as preferred employer (eg, place among top 100 employers in India)
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One global electronics manufacturer offers a successful example of the benefits of a leadership commitment in India. After the company’s efforts to set up a joint venture ran aground, it decided to do business on a stand-alone basis. The company launched an aggressive marketing campaign, but rather than raise product prices in India to pay for the effort, global headquarters financed it. Headquarters also helped the Indian subsidiary to source inexpensive components until it could take command of its own operations. The support and commitment of the global office in those early years made this company one of India’s leading electronics manufacturers.
But a multinational power and automation technology company learned the hard way what happens when senior executives lack commitment to India. In the late 1990s, the parent company paid marginal attention to local operations there and was unwilling to adapt to changing market conditions. The performance of the Indian unit declined—it lacked autonomy and faced hierarchical and bureaucratic roadblocks in its dealings with global headquarters. Finally, in early 2000, headquarters gave the Indian operations a high level of autonomy, and in response revenues rose by 30 percent (compounded annually) between 2001 and 2005.
Empowering local management is also critical for attracting and retaining talented staff. Many multinationals are moving toward the creation of a strong Indian business unit and, in the process, moving away from functions or global products as the primary axis of governance. These companies are investing in top talent: the head of the Indian unit is experienced and knowledgeable about the market and has a direct line of communication with the global company’s CEO. This direct connection to global management—combined with the ability to make decisions on capital spending, products, and pricing—holds a local leader more accountable and facilitates the sharper development and execution of strategy.
Likewise, a global conglomerate faced with declining sales in India recently consolidated all its business units there under one country head, who has direct profit-and-loss responsibilities. This top executive makes all major decisions, including headcounts, pricing, and product customization. All local business unit heads in India now report to him rather than to their global business unit leaders, as they had in the past. This change has helped concentrate resources and enabled faster decision making, allowing the company to better serve local customers and, ultimately, to grow more quickly.
Local empowerment should extend beyond the country head to lower levels of management, which can help drive innovation and entrepreneurialism on the ground and decrease times to market for new products. But structure is not enough. Multinationals need the right people—especially in middle management, a group critical to the successful execution of a growth strategy. Given the vast array of opportunities available in India and its relative shortage of management talent, multinationals have had to revise their models significantly. With the continuing professionalization of Indian companies, the country’s
5
stronger managers have less incentive to work for a branch of the multinationals, which must look beyond short-term tactical measures to attract high-quality people.
The most progressive global companies are moving in three directions. First, they create more globally visible local roles, which may include representation on executive committees. Such positions emphasize entrepreneurialism and greater authority and offer higher compensation. Second, these companies promote a meritocratic culture: accelerated career tracks, fair and transparent advancement processes, the absence of a “glass ceiling” for locals, a performance-based system that motivates self-starters, and differentiated incentives for high performers. Third, progressive global companies offer mobility and tailored leadership programs. Structured global rotations for strong performers and leadership-development courses (especially with some form of certification) are proving to be effective recruiting and retention tools.
Innovating for India Multinationals are learning that many different Indias exist within the subcontinent. The big differences—the haves and have-nots, languages, literacy, and geography (including the urban–rural divide)—make it difficult for a global brand to satisfy all of the country’s consumers. Multinationals also face the challenge of low-cost local competitors.
Indian consumers demand sophisticated products and services found in the West, but at lower prices. A one-minute call from a mobile phone, for instance, costs one to two cents in India, much less than it does in the United States. This aspect of competition in India means that innovation is occurring not only through localized products and services but also in business models and processes.
To strike a balance between global brands and local positioning, multinationals can introduce sub-brands or models with features suited to Indian needs. They could also work with local suppliers to reduce costs, which would allow them to offer cheaper prices to the end consumer. Although many of these ideas are not new, multinationals have been slow to implement them in India. The key is that customization has to be a game-changing strategy rather than an incremental one: multinationals must aim to cut costs by 60 to 80 percent, with just a 30 percent reduction in features.
One of the classic examples of customization is the success of a Western farm equipment maker that builds and sells relatively low-cost, no-frills tractors in India. These are far less elaborate than most of the machines the company sells in the United States. As a side benefit, it started marketing a version of a lightweight tractor in the US market to farmers and others who wanted a less expensive yet sophisticated product.
Televisions offer another example. Marketing a consumer durable as straightforward as a TV poses a lot of challenges in India’s rural market. Some consumers who don’t speak
6
or read English can afford to buy a TV but use it primarily to listen to music, so they want high-quality sound. A leading global electronics manufacturer has met this demand by offering television sets with menus in Hindi and five other important regional languages. It has also adapted some models by enhancing their sound systems to provide a better listening experience.
Similarly, a leading car manufacturer has set up a team of people to understand customer requirements and redesign the features of its products. Its design-to-value approach is becoming increasingly common: in India, multinationals devote more than 10 percent of their product-development resources to such efforts. We also find that best-practice international companies take talented employees from India and rotate them through the product-development organization globally. In this way, “frugal engineering” becomes an embedded capability—and frugal can mean both inexpensive and innovative.
Choosing the right entry strategy One of the first and most important issues for a multinational considering doing business in India is ownership structure. Multinationals that enter the country on a stand-alone basis, our experience shows, generally fare better than those that use Indian partners to create joint ventures. Most global companies that opted for them have exited the Indian market, while some have purchased the stakes of their partners or established majority shareholdings. One global consumer goods company, for example, bought out its Indian partner because of differences over product marketing and brand positioning. The multinational is now doing well in all the segments where it competes.
Multinationals that choose joint ventures as their entry vehicle into India think that a local partner can better navigate the market’s complexities and manage regulatory issues. There is some truth to that idea, but in practice, joint ventures often tend to emphasize short-term performance over long-term goals, long-term commitment, and an alignment between the interests of the global and local partner. Without management control and a clear path to ownership, global companies may have no alternative but to exit the market. Joint ventures can be beneficial in some cases, but they are not essential if a multinational regards India as a priority market and regulations allow the company to have majority or complete. When joint ventures are necessary, multinationals should ensure that they have real management control and a clear path to ownership should that become necessary.
Partnerships with Indian companies need not be limited to joint ventures— multinationals should also consider strategic alliances with local players. An international technology manufacturer and an Indian company, for example, set up a local manufacturing plant that went on to double its production volumes every 18 months. This achievement set it on the path to becoming the largest of the multinationals’ plants in India, with the world’s lowest costs and high profit margins. From the multinational’s point of view, the success of this
7
strategic alliance moved India from the “nice to have” category into an essential part of its international operations.
A global pharmaceutical company established itself as a stand-alone entity but developed strategic alliances with a local manufacturer in licensing and supplies for the generic and off-patent segments. These agreements helped the multinational to enter India’s fast- growing market for low-cost, easily accessible branded generics and off-patent medicines.
Winning in India requires an intense and concerted effort. The multinationals need top leaders willing to make a commitment to the Indian operation and to localize and empower it. They must adapt to the Indian consumer’s demand for innovative, low-cost delivery systems and high value for money products, as well as identify and implement an appropriate ownership model. Finally, senior executives of these companies should not neglect the management of local stakeholders, such as regulators and activists. The best efforts to localize an Indian business model will come to naught if these influential groups are overlooked.
Vimal Choudhary is a consultant in McKinsey’s New Delhi office, Alok Kshirsagar is a director in the Mumbai office, and Ananth Narayanan is a principal in the Chennai office; all the authors are coleaders of McKinsey’s Asia Center. Copyright © 2012 McKinsey & Company. All rights reserved.
Impact-of-e-Commerce-on-Indian-SMEs.pdf
MANAGEMENT CONSULTING
Impact of e-commerce on
SMEs in India
kpmg.com/in
Foreword
Small and Medium Enterprises (SMEs) are said to be the backbone of India’s economy and I cannot imagine a more interesting time for these enterprises. The future is full of possibilities for SMEs and it is up for grabs by the virtue of opportunities afforded by the e-commerce boom in India. Online marketplaces have been hailed by many as a catalyst for growth and this report, Impact of e-commerce on SMEs in India, examines the profound influence of e-commerce on SMEs in effecting efficiency gains and in changing the way they interact in the global market. However, the existing digital divide which inhibits adoption of e-commerce by SMEs calls for a concerted effort by various players in the ecosystem including the industry associations as well as regulatory bodies.
The analyses and point of view presented in the report have been validated through discussions conducted by KPMG with sector experts and industry associations.
I take this opportunity to thank the Snapdeal team for making this endeavour possible by bringing in important insights and industry perspective.
I hope you find this report helpful.
Ashvin Vellody Partner ITA-CIO Advisory KPMG in India
Small and medium enterprises (SMEs) are the engine of economic development that create jobs and reduce poverty by empowering the bottom of the pyramid. Sustained and healthy growth of this sector is essential, since it is difficult to imagine rising overall living standards and social peace without such development.
The growing internet base, with more than 343 million internet users has a direct correlation to the growth of commerce in the country. The Indian entrepreneurs have started setting up their shops online even before a physical set up. We are witnessing a new trend with many SMEs taking the e-commerce route to establish themselves in the Indian market and are using internet not only as a marketing tool but also as a tool to enable them to understand if a unique product has high demand in the market. Indian SMEs are looking at e-commerce as an innovative tool to build fresh business models.
The onus lies on the online marketplaces to enable these SMEs to showcase their products across the country, giving them access to a wider audience and helping them grow their business. For sustainable business and economic growth, all the e-commerce players should collaborate and reduce business barriers for these SMEs to enable e-commerce adoption.
Impact of e-commerce on SMEs in India | 2
Kunal Bahl Co-founder and CEO Snapdeal
03 | Impact of e-commerce on SMEs in India
contents Table of
Impact of e-commerce on SMEs in India | 04
Foreword 01
Executive summary 06
e-commerce in India to cross USD80 billion by 2020 07
MSME/SMEs fuelling growth of the Indian economy 09
Impact of e-commerce too real to ignore 15
The e-commerce ecosystem steps up to support SMEs 21
All aboard – full throttle 27
Closing thoughts 29
About KPMG in India 31
About Snapdeal (Jasper Infotech Pvt Ltd) 32
Impact of e-commerce on SMEs in India | 06
• The e-commerce sector in India is projected to cross USD80 billion by 2020 and USD300 billion by 2030 and is already changing the way small and medium businesses operate in India.1
• The SME sector accounted for more than 17 per cent of the GDP in 2014 while contributing to 45 per cent of the nation’s industrial output and 40 per cent of the total exports2. The SMEs in India add over 1.3 million jobs per year.3
• By adopting e-commerce, SMEs shall achieve significant advantages such as increased revenues and margins, improved market reach, access to new markets, cost savings in marketing and communication spend, customer acquisition and improved customer experience.
• SMEs that use the internet extensively tend to export approximately twice as much by export
value when compared to SMEs using the internet sparingly.4
• Although SMEs in India may or may not have online presence, 43 per cent of them participate in online sales in India.5
• The Indian regulators, industry bodies and e-commerce players recognise the challenges faced by SMEs and are doing their bit in enabling thousands of SME sellers to explore a new channel for marketing, sales and customer service.
• The Indian government’s initiatives such as ‘Make in India’, ‘Digital India’ and ‘Skill India’ are all aimed at facilitating growth of SMEs in the country, and enable them to tap into the potential of e-commerce.
Executive summary
1. ‘India internet – Unlocking the potential of a billion digital users’, Goldman Sachs, 04 May 2015
2. SMEs employ close to 40% of India’s workforce but contribute only 17% to GDP, Economic Times
3. The Indian SME Survey, 2014-15, Firstbiz-Greyhound Knowledge Group Initiative
4. The great transformer: The impact of the internet on economic growth and prosperity, Mckinsey Global Institute
5. India’s SMEs: missing an online trick, Financial Times
Source: KPMG in India analysis, Goldman Sachs 2015, industry discussions conducted by KPMG in India, 2015
01
07 | Impact of e-commerce on SMEs in India
e-commerce in India to cross USD80 billion by 2020
Impact of e-commerce on SMEs in India | 08
e-commerce in India is on an unprecedented growth trajectory
The e-commerce sector in India is expected to be a USD80 billion sector by 2020.1 Increasing internet penetration, growing adoption of smartphones and increased market awareness shall further accelerate the growth of e-commerce in India. In the year 2014, India had around 281 million internet users, and the number is expected to increase to 640 million by 2019.2
India is projected to outpace the United States to become the second largest internet user base by 20163. The number of mobile internet users is also on the rise with 173 million users in 20142. This number is projected to grow by more than 2.5 times to touch 457 million in 20192. Availability of affordable smartphones and dropping data tariffs have fuelled the ‘second screen’ phenomenon with 70 per cent users accessing internet from their mobile phones.2
The growth of the Indian e-commerce sector is pivoted on a number of drivers but real and tangible challenges exist which must be addressed for this sector to boost the Indian economy as intended. The key challenges faced by the sector include
patchy internet connectivity due to underdeveloped infrastructure, a general lack of awareness about the benefits that e-commerce offers and a lack of trust among organisations considering to go online.
1. ‘India Internet – Unlocking the potential of a billion digital users’, Goldman Sachs, 04 May 2015 2. #shootingforthestars, FICCI-KPMG in India report on Media and Entertainment, 2015 3. India to have second largest online user-base after China by 2016, Business Standard, eMarketer, November 2014
e-commerce market size in India (FY figures in USD billion)
Source: ‘India Internet – Unlocking the potential of a billion digital users’, Goldman Sachs, 04 May 2015
02 MSME/SMEs fuelling the growth of the Indian economy
09 | Impact of e-commerce on SMEs in India
Impact of e-commerce on SMEs in India | 10
SMEs: Backbone of the Indian economy
MSMEs/SMEs in India contribute around 17 per cent to the country’s GDP. They also make a significant contribution to India’s exports and industrial output at 40 per cent and 45 per cent respectively1. While the definition of SMEs varies from country to country, in India, SMEs are those establishments that have limited investments in fixed assets and relatively low operational costs.*
The country’s SME sector currently comprises of 1,157 industrial clusters and 6,000 micro-enterprise clusters2. It is characterised as highly fragmented and unorganised and is dispersed across vast geographies.
Currently, there are approximately 48 million SMEs operating in India and the sector employs around 40 per cent of the country’s labour.3. A large portion of the employment generated by SMEs is in the manufacturing and services sectors which are growing at impressive rates of 18 per cent and 34 per cent year-on-year, respectively4. SMEs contribution of 17 per cent to India’s GDP is much lower when
compared to the corresponding figure in other major economies but it is projected to touch 22 per cent by 20205. In addition, the number of new entrants in the SMEs sector is growing at an average of 23 per cent in manufacturing and 31 per cent in the services sector6.
1. SMEs employ close to 40% of India’s workforce but contribute only 17% to GDP, Economic Times 2. India SMB Market: Monetising Emerging Markets, Nasscom, Frost & Sullivan, 2014 3. The Indian SME Survey, Firstbiz-Greyhound, 2014-15 4. The new wave Indian MSME, KPMG and CII, 2014, Ministry of Micro, Small and Medium Enterprises (MSME) Annual Report 2013-14 5. http://www.business-standard.com/article/companies/smes-to-contribute-22-to-gdp-by-2020-govt-111112500165_1.html 6. The new wave Indian MSME, KPMG and CII, 2014
SME definition in India is asset based SME contribution to employment
* For detailed definition of MSMEs and SMEs refer to the figure below
Source: Ministry of Micro, Small and Medium Enterprises, Annual Report, 2013-2014
Manufacturing Services
Profile Investment in plant and machinery
Investment in equipment
Micro Under INR25 lakh
Under INR10 lakh
Small INR25 lakh to INR5 crore
INR10 lakh to INR2 crore
Medium INR5 crore to INR10 crore
INR2 crore to INR5 crore
Growth rate of employment
Growth rate of number of enterprises
Manufacturing
18% 23%
Services
34% 31%
Source: Ministry of Micro, Small and Medium Enterprises, Annual Report 2013-2014 as on 15th June 2015
11 | Impact of e-commerce on SMEs in India
7. The Status of e-commerce Among Indian MSMEs, SMEStreet Survey, 2015 8. The Internet Economy in the G-20, BCG Analysis 9. The great transformer: The impact of the internet on economic growth and prosperity, Mckinsey Global Institute
The achievements stated above have been made possible, mainly, due to the increasing internet penetration in India wherein the SME community has begun exploring its options as online sellers who have access to consumers and shoppers across the country. Globally, cross-border e-commerce is a major revenue opportunity which many SMEs are eager to explore. The Government of India is also taking initiatives to increase competitiveness of SMEs in the international market.
Internet offers tangible benefits to SMEs
The internet has emerged as a game changer for businesses across the world, during the last decade. SMEs in India have traditionally been dependent upon domestic trade but with access to internet technologies they have started to explore the opportunity to trade globally. Although, SMEs in India may or may not have own online presence (such as a website), 43 per cent of SMEs participate in online sales in India. Web-enabled SMEs, in general, make higher profits, have enhanced customer reach and improved employment opportunities. As per a survey, around 56 per cent of SMEs believe that the use of internet technologies is critical for business growth while 22 per cent are completely ignorant about the potential of internet for their business7. It was observed that high-web SMEs amongst SMEs in India grew at 19 per cent (historical three year sales growth), when compared with low-web SMEs who registered a lower growth figure of 13 per cent8. A similar pattern was observed across other countries wherein the SMEs using a wide range of internet tools to operate, registered higher growth rates compared to SMEs having only a website or social networking site or no web site at all. Further, SMEs who use the internet extensively have also been shown to export approximately two times more by export value when compared to SMEs who use the internet sparingly9.
Source: • Statatisa.com, May 2015 • e-commerce Rhetoric, Reality and Opportunity, KPMG-IAMAI • 100 million online shoppers in India by 2016: Report, Livemint, November 2014 • Unleashing the Potential, FICCI and Nathan Associates
billion internet users worldwide
million internet users in India in 2015
million new internet users shall log into the digital world by mid- 2015
million of the 100 million online shoppers in India shall belong to tier I and tier II cities in 2016
of SMEs using the internet are engaging in e-commerce
of SMEs report an increase in customers due to the internet
2.9
348
52
50
27%
69%
Impact of e-commerce on SMEs in India | 12
Adoption of e-commerce among SMEs in India vis-a-vis other countries
SMEs have begun to recognise the potential of e-commerce and understand that its adoption could play a major role in enabling growth for their business, both in domestic and international markets. When Indian SMEs are compared to those from other emerging countries such as China, Brazil and Indonesia, it is found that on an average 100 per cent of the high-web SMEs have a website, use the internet for online advertising and transact using e-commerce10.
This is also at par with SMEs in developed countries such as the U.S. and the U.K., wherein the high-web SMEs showcase a similar pattern. However, when compared with the SMEs in India who are considered low-web, only 5 per cent of them have a website, while approximately 50 per cent in the same category own a website in the developed economies of the U.S. (46 per cent) and the U.K. (53 per cent)11.
Yet another important observation is that, while 100 per cent of India’s high-web SMEs have e-commerce presence, 75 per cent of the low-web SMEs also adopted e-commerce9. A similar trend can be observed when drawing comparisons with other developing countries as can be seen in the figure. This implies that even SMEs with limited online presence, at least in the developing markets, are beginning to realise the potential of e-commerce or having online presence. As the e-commerce ecosystem develops and cross border trade improves, the online export market shall also expand
for SMEs that leverage internet technology for growth and sustenance.
While traditional SMEs have focussed on their core operations without experimenting with new and advanced technologies, e-commerce has helped technology enabled SMEs to challenge the status quo and grow significantly over the last few years. While 98 per cent of technology enabled SMEs in India participate in the country’s share of export revenues, only 11 per cent of the traditional SMEs export goods and services10.
high-web SMEs - These companies use a wide range of internet tools to market, sell and support low-web SMEs - These companies have a website or a social networking site or have no website at all Source: The Internet Economy in the G20, BCG
10. The Internet Economy in the G20: The $4.2 Trillion Growth Opportunity, BCG Analysis 11. Commerce 3.0 for Development, eBay
U.K. U.S.
U.K. U.S. e-commerce
high-web SMEs low-web SMEs
13 | Impact of e-commerce on SMEs in India
One of the primary reasons for the difference in contribution to export by online vis-a-vis offline SMEs is that e-commerce transcends geographic boundaries and levels the playing field by enabling visibility and trade across buyers and sellers who are located in distant geographies. Further, online transactions supported/enabled by reputed e-commerce
organisations also allay any fears rooted in perceived trust deficit. With features such as rating systems, feedback mechanisms, blacklisting, payment options and tools, security and trust certificates, the online ecosystem builds enough trust in the market, almost immediately as compared to the years of effort required in the offline market.
Impact of e-commerce in China: Drawing parallels
Over the last few years , China has witnessed an unprecedented growth in its e-commerce market and currently stands as the largest e-commerce market in the world. At the same time, SMEs have been playing a key role in the Chinese economic development. The number of private sector SMEs in China grew from one million in 1990s to 400 million in 2012, out of which five million were exporters. Today, SMEs account for 90 per cent of all firms in China and contribute 60 per cent to the GDP, 75 per cent to urban employment, and 75 per cent to the industrial value addition of the country.
e-commerce has offered significant opportunities to SMEs, specifically for exporters, to enter distant markets and to communicate globally with consumers, distributors and suppliers. SMEs engaging in e-commerce have witnessed increased income, with their business income growing 1.35 times than that of enterprises not engaging in e-commerce. The largest marketplace in China has a seller base of approximately seven million, and has assisted aspiring entrepreneurs with little seed capital to tap into the national as well as global market.
China acts as a good example, and holds useful lessons for the Indian e-commerce sector. By connecting small businesses, including local artisans, to a national and global marketplace, e-commerce can help cultivate a new class of entrepreneurs and create jobs for tens of millions of Indians.
Source: National Bureau of Statistics of China; ‘Trade and Employment – China’s Development Process’ presentation at WTO Public Forum, October 2014; Forbes; International Journal of Economics and Finance, 2014
In India 98 per cent of technology enabled SMEs participate in the export economy in India
Source: Commerce 3.0 for Development, eBay
Technology enabled Traditional
Chile
100%
18%
France
98%
15%
India
98%
11%
Indonesia
4% 10%
Jordan
100%
25%
Peru
100%
15%
Thailand
100%
75%
Ukraine
100%
11%
USA
98%
2%
South Africa
100%
19%
03 Impact of e-commerce too real to ignore
15 | Impact of e-commerce on SMEs in India
Impact of e-commerce on SMEs in India | 16
e-commerce: An agile engine for growth of SMEs in India
We have witnessed a remarkable transformation in the way Indians shop and in the modus operandi trading by SMEs. Despite significant contribution to the Indian economy, SMEs are faced with a number of challenges including competitive pressures, locally, nationally and internationally. In this highly competitive market, in order to keep their position intact and their businesses sustainable, SMEs need to improve access to new customer segments and
reach customers in all corners of the world. This is where e-commerce comes in to improve their competitiveness and provides businesses a platform to acheive on a truly global scale. Eighty-five per cent of the SMEs who adopted e-commerce believe that it is a cost effective medium to grow sales1.
Around 77 per cent of the SMEs who have adopted e-commerce were listed on online marketplaces1. It has been found that SMEs who actively adopt the internet for business activities boast 51 per cent
higher revenues, which results in 49 per cent more profit and a 7 per cent broader customer-base than their offline-only counterparts2. Despite this, only 27 per cent of online SMEs use e-commerce3.
1. SMEStreet survey - The Status of e-commerce Among Indian MSMEs (MSME Insights), 2014 2. Unleashing the potential, internet’s role in the performance of India’s small and medium enterprises, FICCI and Nathan Associates 3. Industry discussions conducted by KPMG in India, May 2015
SMEs who adopt the internet for business activity report
of online SMEs use e-commerce
27%
which results in... but only...
More profits
49% Higher revenues
51% Broad customer support
7%
Key factors for e-commerce adoption among SMEs
Source: : SMEStreet survey- The Status of e-commerce among Indian MSMEs (MSME Insights), 2014
02
17 | Impact of e-commerce on SMEs in India
Increase in revenues
Offline SMEs are limited by their geographical reach and more often than not, make incremental efforts in expanding the consumer base which is acquired over a long period of time. e-commerce aids SME businesses in conducting transactions at a global level by offering a platform that can be accessed across geographies thereby increasing the volume of sales handled and the revenue generated. The improved speed to market, global consumer base and flexibility to conduct business can potentially boost the SME revenues to the tune of 51per cent along with e-commerce specific advantages such as online referral systems for acquiring even more customers, insight- based personalisation to improve customer acquisition, service and feedback channels to ensure all lessons learnt are immediately incorporated to improve future sales experience4.
Increase in profit margins
Adoption of e-commerce enables SMEs to take advantage of third party trading platforms (e-commerce marketplaces) with limited or no investment in developing and hosting online storefronts and in managing infrastructure/operations for packaging, logistics, warehousing, etc. This may boost the profit margins (up to 49 per cent) by reducing overhead costs and upfront capital investment. Reduction in costs allows for a more competitive pricing strategy, which, in turn, can positively impact sales volumes. Increase in transaction volumes further adds to overall profit values. e-commerce platforms allow SMEs to engage directly with consumers without the need for any middle man or agent which further results in reduced transaction costs.
Lower marketing and distribution spend
Since competition in the e-commerce space has increased significantly, e-commerce players are spending heavily on both digital and traditional media for improving site traffic, acquiring customers, building customer relationships, and ultimately for improving sales. SMEs could reduce expenses on call centres, trade shows and even offline advertising thereby optimising the overall marketing and sales spend to the tune of 60 to 80 per cent reduction in spend5. Additionally, e-commerce adoption reduces the costs associated with traditional marketing as well as any incremental cost required for opening additional stores at multiple locations.
Improved geographic reach and accessibility
The internet transcends all geographic boundaries and provides an opportunity for SMEs to connect with several buyers and sellers across geographies. This enables them to enter international markets at a fraction of the cost and gives them the opportunity to directly compete with global giants within their industry, thereby contributing to the government’s ‘Make in India’ campaign. Snapdeal has over 100,000 SMBs doing business on its platform currently, thousands of these sell goods worth more than USD250,000 annually6. As geographical boundaries disappear in the virtual marketplace, SMEs are selling 24x7 across the world without any time zone restrictions, and with limited investments.
Potential benefits of e-commerce to Indian SMEs
4. SMEStreet survey - The Status of e-commerce Among Indian MSMEs, 2015 5. Industry discussion conducted by KPMG in India, May 2015 6. Future of e-commerce: Uncovering Innovation, ASSOCHAM, 2015
Impact of e-commerce on SMEs in India | 18
Shorter time to market
The window of demand for a particular product category can be very short, and if companies fail to respond to the demand in the given time, they could miss out on the opportunity. The ability to introduce a product into the market before a competitor does, could be a key success factor and there are few sectors in which this is more conceivable than in e-commerce. Adopting e-commerce enables faster communications between SME sellers and buyers and helps to avoid potential chaos in the supply chain. They can streamline communications, eliminate redundant processes, and improve order management capabilities, thereby increasing the market relevance and product visibility.
Improved customer experience
Intense competition in the e-commerce environment nudges and at the same time encourages the SMEs to operate within the paradigm of ‘customer first’ business philosophies. The e-commerce companies support these SMEs in their quest to offer better customer experience across the customer life cycle by helping them institute customer-focussed processes enabled by tools and technologies. Quicker response to customer inquiries, interactive order taking processes and better after-sales service to customers are just few of the improvements which over a period of time lock-in a loyal consumer base and eventually turn them into strong brand advocates.
7
At SMEStreet, we are committed to understanding the issues and opportunities of the MSME sector and in this regard, we conducted a survey on the topic of ‘How Indian MSMEs are consuming e-commerce’. The data of this survey showed us that the biggest driver for e-commerce among MSMEs is the fact that entrepreneurs from smaller organisations want to evaluate maximum possible options for their buying or sourcing needs. Secondly, from the seller’s perspective, MSMEs want to reach out to newer markets in a cost effective manner.
Faiz Askari Editor and CEO SMEStreet
7. SMEStreet survey - The Status of e-commerce Among Indian MSMEs, 2015
19 | Impact of e-commerce on SMEs in India
Ignore e-commerce at your own risk
e-commerce in India is gaining traction at an accelerated pace. SMEs who are offline may realise, albeit a tad bit late, that adopting e-commerce could cause more good than the perceived harm. Technology and innovation bring positive change which can drastically improve the way small and mid-sized businesses operate and not doing so may increase the effort to stay in the game.
• Not having an online presence or presenting a poorly designed website can put the business at a serious disadvantage especially in consumer centric sectors such as retail, export and tourism.
• Ignoring technology or adopting solutions which are not an appropriate fit can leave the business crippled and without the competitive edge it needs to survive in the market today.
• An increasing number of SMEs today lack an organised central database of customers and sales records. This makes it difficult to carry out marketing and communication related activities while a significant portion of the target segment remains unaddressed.
e-commerce is no longer a passing trend but a business reality that can no longer be ignored or contained. With the online consumer demand already at an all-time high, the market expects a fulfilling environment which is seamlessly on autopilot. While e-commerce is only the bottom stair to this pyramid, SMEs who remain oblivious or determined to ignore the online transaction market may have to compete with organisations who have capabilities far beyond theirs.
SMEs still wary of going online – Understanding the adoption challenges
The Indian SME sector is on an ambitious growth curve. Recent years have seen a progressive change in the mind-set of SME business owners towards the adoption of e-commerce. Despite its high potential, a large number of Indian SMEs are still not ready to move away from the
traditional business model(s). The slow growth of e-commerce adoption in SMEs has been attributed to several adoption barriers which have been listed down in the subsequent section below.
e-commerce provides vital commercial linkages for SMEs from marketing, sales and procurement standpoint. This increased access to suppliers and customers can help SMEs scale up their businesses at much lower levels of investments in fixed assets and human capital, thus dramatically altering their cost structures. However, SMEs would need to quickly make significant changes to their business models to suitably take advantage of the opportunities presented by e-commerce.
Anand Ramanathan Director BPS-S&O-Strategy KPMG in India
Impact of e-commerce on SMEs in India | 20
Technological cost transparency
A long held belief within the SME community is that e-commerce is prohibitively expensive to implement and operationalise. The belief is based on the perception that technology adoption, traditionally, has been a capital intensive affair and that the technology partners seldom clearly elucidate the Total Cost of Ownership (TCO). This gives way to apprehensions around the high cost of technology maintenance and a related concern that the initial investment may have to be written-off if upgrading to newer technologies is considered. The notion, however, is far from reality since SME businesses today can start leveraging digital platforms and online marketplaces for as low as INR3,0008. There are also other models available wherein an online presence can be established with an investment of INR99 which includes a customised domain name, professional email address and 24x7 support9. There is, however, a need to ensure that SMEs understand a transparent and effective cost structure with a clear picture on TCO and ROI when considering the adoption of e-commerce.
Lack of awareness
A large number of SMEs in India are unaware of the potential benefits of e-commerce primarily due to lack of exposure to IT products and services and the e-commerce ecosystem as a whole. Several other ancillary factors such as language barriers, preconceived notions about technological complexities, etc. also inhibit adoption. The important reason for lack of awareness, however, is the lack of a concerted, nationwide SME engagement programme which spells out the meaning and relevance of e-commerce along with its benefits and impact stories. China, for example, spreads awareness among its SMEs by using cluster education programmes. Each SME cluster forms a microcosm of its regional business (automobile manufacturing, textiles, agriculture, etc.) and the SME community is invited to set up their businesses, leverage common resources and share success stories about their experience in e-commerce and the benefits derived from it.
Inadequate financing
SMEs in India face a significant financial gap where current issues such as unavailability of desired loan collaterals, high interest cost and lack of a systematic credit rating facility has caused a rift between the organised lending sector and the SME community. This in turn has caused SMEs to obtain unorganised capital which is unsustainable and plagues the ecosystem with lending practices which harm them in the long run.
Approximately 41 per cent of SMEs in India do not have access to bank loans or other products offered by financial institutions with a financing gap of more than INR2.93 trillion in the SME sector.10
Training and support
Any new technology in the market needs to prove its worth before it is widely adopted by the target community and e-commerce has been no exception. Although web-based selling has proved itself in terms of an economic benefit in the market, there are reservations held by business owners regarding the benefits which can be visibly felt and the means to track and attribute it. While measures to increase awareness around e-commerce and its usage can help, the community also needs continued training programmes and support to help change its current myopic view of technology which in all probability leads to skewed expectations of instant gratification.
Despite the roadblocks that the SME e-commerce ecosystem is faced with, there is a deliberate and widespread support that the SME community has received in India recently. The future of e-commerce adoption among SMEs is no longer speculative and with the spotlight turned on, the ecosystem is changing to pivot the SME community’s role in India.
8. Internet has Transformed SMEs, Now it’s Time to Grow Beyond, SME Street, March 2015 9. GoDaddy and Microsoft Brings Unbeatable Offer for Indian SMEs, SME Street, February 2015 10. India’s 1st online financing platform for SME sector launched, The SME Times, November 2014
e-commerce offers potential benefits in the form of enhanced participation in international value chains, increased market access and improved efficiency, as well as low transaction costs. From being a phenomenon mostly reserved for large enterprises, changes in the ICT landscape are creating greater opportunities for SMEs. Therefore it is on the e-commerce ecosystem players to collaborate and provide a conducive business environment so as to enable adoption of e-commerce by SMEs.
Mehul Gupta Associate Vice President Internet and Mobile Association of India (IAMAI)
21 | Impact of e-commerce on SMEs in India
The e-commerce ecosystem steps up to support SMEs04
Impact of e-commerce on SMEs in India | 22
The ecosystem has launched several initiatives to boost e-commerce adoption
The importance of the SME sector has been recognised by the Indian Government, industry associations and e-commerce players alike. Its growth and e-commerce enablement have been adopted as key themes across policy reforms, industry initiatives and e-commerce partnerships.
Barriers addressed
# Initiative Awareness Technology Financing Training
Initiatives by industry bodies
1 An industry association representing digital businesses in India organised an event titled ‘Free for SMEs’, in collaboration with one of India’s leading B2B marketplaces.
2 A non-government, not-for-profit, industry-led and industry-managed organisation, playing a proactive role in India’s development process collaborated with a global online marketplace and signed a MoU to foster greater economic engagement between Chinese and Indian SMEs.
3 Federation of Indian Exports (FIEO) Organisation entered into an MoU with leading e-commerce ecosystem players to promote export opportunities among SMEs.
Initiatives by e-commerce players
4 An e-commerce player launched a capital assistance programme which offers low cost financing options to sellers transacting on its platform.
5 A leading marketplace player has tied up with Federation of Indian Micro and Small andMedium Enterprises (FISME) and National Centre for Design and Product Development(NCDPD) to guide SMEs
on brand building and product marketing.
6 e-commerce players are partnering with various institutes, such as National Institute of Electronics and Information Technology (NIELIT) and National Institute for Entrepreneurship and Small Business Development (NIESBUD) to support skill development within SMEs, consequently contributing to Government’s ‘Skill India’ initiative.
Government initiatives
7 The ‘Technology Centre Framework’ initiative aimed at facilitating access to various transformative technologies such as cloud-based platforms for SMEs.
8 The ‘Digital India’ initiative targets to drive internet accessibility across the country. The successful implementation of this programme is expected to boost India’s GDP by 20-30 per cent by 2025.
23 | Impact of e-commerce on SMEs in India
04
23 | Impact of e-commerce on SMEs in India
e-commerce players focus on SME growth Initiatives launched by leading e-commerce players are helping SMEs across key Indian states connect to a larger, global audience while improving sales and sector awareness:
Himachal Pradesh
Development of a special e-commerce zone in Dharamshala to promote traditional handicrafts produced in the state by bringing local artisans on the marketplace, conducting workshops to educate them to online selling processes, and setting-up a special pick-up facility to transport their products across the country.
Uttar Pradesh
Collaboration with weavers from Varanasi in order to link SMEs with their large customer base online.
Rajasthan
Tie up with the Government of Rajasthan Small Industries Corporation (RAJSICO), government of Rajasthan, for online promotion and selling of traditional handicrafts, through an exclusive store.
Maharashtra
Association with a not-for-profit organisation for an online handicraft e-commerce portal to source and offer products created by local craftsmen and artisans from Dharavi.
Karnataka
Partnership with the government of Karnataka to develop a seller platform where SMEs can connect and sell their products.
Tamil Nadu
Partnered with the Tamil Nadu Handicrafts Development Corporation to give exposure to rural artisans and enable online sales.
Puducherry
Collaboration with Puducherry State Co-op Handloom and Handicrafts Federation to assist local artisans with technical and operational insights to enhance SME reach.
Odisha
Collaboration between the Odisha State Co-operative Handicraft Corporation Ltd and a leading handicraft corporation in the state to sell its products online.
Madhya Pradesh
Tie up with the non-profit Digital Empowerment Foundation to monetise sales across verticals including textiles, handicrafts, weaving, etc.
North-East
Association with the North Eastern Handicrafts and the Handloom Development Corporation (NEHHDC), for selling traditional handicrafts on an exclusive e-commerce website.
Impact of e-commerce on SMEs in India | 24
Source: KPMG in India analysis based on industries discussion, 2015
Testimonials: The online marketplace impact
Connecting with consumers: 7 years to 2 days
“When we started doing business with one of the leading online marketplaces in India, we had 50 units to sell. Now we have over 4000 products and 18 different categories to cater to. In offline markets, creating a brand presence is very tough which is why we chose an online model to directly connect to our customers. We are thankful since the technology provided by the marketplace allows us to run 18 disparate businesses from a single laptop.”
Category: Multiple
Business scales from 300 to 1000 orders a day
“After joining hands with one of the leading online marketplaces in India, in July 2014, the growth has been remarkable. Initially I had listed about 500 products which gave me about 400 orders a day but now I have listed more than 1000 products online which gives me almost 800 to 900 orders a day. With services enabling sellers to stock inventory at fulfilment centre that make shipment possible within two hours, the sales have definitely improved. The team takes care of all back office operations such as packaging, quality checks, etc. giving me time to focus on the product itself.“
Category: Home furnishings
300 per cent Quarter on Quarter(Q-o-Q) growth
“Growth is always measured by sales figures and I am highly motivated when I see a 300 per cent quarter-on-quarter growth in my sales number after partnering with an e-commerce organisation who has been a pioneer in the online markeplace model in India. I am very confident that they will help me build the future I envision and help transform my local commodity into an international brand“
Category: Kids clothing
A decade old offline business grows 8x with one of the leading online marketplaces in India
“One of my main concerns with conducting business online was that I was unsure of the payment terms and delivery schedule. But after partnering with with the online marketplace we have noticed that not only have our sales grown by more than eight times, all our payments and delivery schedules are ahead of time.”
Category: Apparel
Turning casual businesses into serious business ventures
“This was a business idea inspired by my four year old. I have seen the number of orders grow from five to six a day to 70 orders in a few hours after partnering with one of the leading online marketplaces in India. Within a span of two short years, my business has seen an astronomical growth of over 2000 per cent and it now operates on a 24X7 basis and caters to a national consumer base.“
Category: Toys and games
25 | Impact of e-commerce on SMEs in India 25 | Impact of e-commerce on SMEs in India
04 Although it has often been debated that FDI in B2C retail or e-commerce would cause Indian mom and pop stores to shut down, study of developed markets where e-commerce has been in existence for more than quarter of a decade, suggests otherwise. As per KPMG in India’s analysis, India’s e-commerce presence is miniscule when compared to the offline expanse of the kirana stores. This coupled with issues of last mile connectivity, high payment costs, diminished profits, limited skilled manpower and regulatory barriers keep the competition at bay. However, the mom and pop stores offer a value proposition which is very different from that offered by the e-commerce players. The kirana stores are hyper- local in nature and tend to focus their attention on the loose and unbranded products which can be customised as per the consumer’s requirement as opposed to online e-tailing which focuses on the sale of standardised products to an organised market. The kirana stores also depend of catchment areas of a few kilometres, the dominance of which can never be challenged by organised retail.
Women in low-income countries like India often seek additional means of income to support themselves and their family and look for opportunities for self- fulfilment and independence in decision-making. However, traditionally Indian women have faced multiple challenges such as lack of finance and education, family ties, and low risk-bearing ability, while starting their own ventures. 54 per cent of women entrepreneurs do not have enough knowledge of what the start-up life entails, 63 per cent have self-funded or bootstrapped their venture, and 42 per cent feel that starting-up a business is difficult. Low entry barriers provisioned by the e-commerce industry such as low set up costs, audience reach, work-life balance and better margins when compared to offline sales, are helping women gain financial independence, and are also attracting them from sectors like farming, textiles, and construction. Due to this, 20 per cent of the online seller base today constitutes of women entrepreneurs.
SME shuts down offline operations and moves to e-commerce
Take the case of an SME apparel retailer, who moved his business online to overcome slow growth and high operating costs. The Mumbai based company focusing mainly on sarees, started selling online in 2013. The company almost doubled its revenues from 2013 to 2014 because of online sales. By the end of 2014, the company decided to close all of their stand-alone stores and focus only on online growth. The company currently sells through multiple online websites.
Small retail stores expand their geographic reach
A Gurgaon based start-up (mobile app based services) focusing on hyperlocal delivery of groceries, ensures delivery of groceries within two hours. Instead of an inventory based model which would include high fixed costs of maintaining warehouses, high inventory and logistics cost, they work with an asset-light model, where they partner with local stores to create customer centres that are relatively organised to satisfy household needs. The partner stores that supply the company with inventory pay a commission on sales. This player is also helping small retail stores expand their catchment area by piggybacking on the company’s logistics services.
Source: : Retailers shut brick-and-mortar stores, go online to offset slow growth, Livemint, 2014
Source: : Retailers shut brick-and-mortar stores, go online to offset slow growth, Livemint, 2014
Small businesses focusing on manufacturing or export are registering as sellers with leading e-commerce marketplaces in their own respective verticals to gain a wider reach across the country and globally.
SMEs innovate to stay ahead of the curve
Small businesses across the country are experimenting with innovative business models to grow or survive in the e-commerce era. Retail businesses that face competition from e-tailers are also adopting online route.
Source: How women entrepreneurs are gaining big from the online retail revolution, Economic Times, 2015; What you don’t know about women entrepreneurs in India, YourStory, June 2014; KPMG in India analysis, 2015
Impact of e-commerce on SMEs in India | 26
1. MSMEShopping.com, Govt’s Unique e-commerce Portal For SMEs, July 2014 2. Digital India plan could boost GDP up to $1 trillion by 2025: McKinsey, The Economic Times, December 2014 3. http://blog.snapdeal.com/snapdeal-com-introduces-unique-scan-sell-feature-sellers/
The interim Budget 2014 came in with a number of announcements that were indicative of the positive intent of policymakers to promote digital and e-commerce adoption. The ‘Technology Centre Framework’ was one such initiative that was aimed at facilitating access to various transformative technologies such as cloud-based platforms for SMEs. The B2C marketplace - MSMEShopping.com was launched in 2014 and it is estimated that the platform would have over 3,000 to 5,000 suppliers on board by the end of 20151. SMEcorner.com is another initiative that offers a financing platform that will make borrowing easier for SMEs.
Various other initiatives including the ‘Digital India, have been introduced to drive internet accessibility across the country. The successful execution of this programme is expected to boost India’s GDP by 20-30 per cent by end of 20252. Internet and technology adoption are being perceived as a catalysts for growth among the country’s MSME sector and the economy as a whole. The Indian government’s announcement on expansion of scope of the ‘Make in India’ programme by adding five more sectors including SMEs shall aid the growth of the sector in 2015.
Initiatives by the Indian government are supported by efforts of leading e-commerce players in India. Innovative features like ‘scan and sell’ enable SMEs to scan and add their product to the online marketplace in less than five minutes3. Another large e-commerce player is working towards promoting weavers from various parts of India with the help of National Institute of Fashion Technology (NIFT) by providing a platform for SMEs in the textile segment.
Complementing the launch of its own e-commerce portal by the National Small Industries Corporation (NSIC), the Indian government has taken several steps in the last few years to boost SME participation in e-commerce. These include:
Digital India: The initiative is an umbrella programme launched to improve internet accessibility across India and make the growth story more inclusive. The successful implementation of this programme is expected to boost India’s GDP by 20-30 per cent by the end of 20252, providing further impetus to the digitisation of the SME sector in India.
Make in India: Realising the need to indigenise manufacturing, cut imports and boost product and services exports, the Indian government launched the ‘Make in India’ campaign which aims to support, among others, the SME community in India. The Indian SMEs, equipped already with ICT and other digital policy announcements, hope to leverage these initiatives to create an online presence for themselves, localise sourcing and cater to a larger and more global audience.
Skill India: In parallel with the ‘Make in India’ campaign, the government also announced a supplementary initiative called ‘Skill India’ to boost manpower training and skills with a special focus on the SME sector in India. The Government is expected to launch a federal programme to impart skill-based training to SMEs including the use of technology and conducting online business.
27 | Impact of e-commerce on SMEs in India
All aboard – full throttle05
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Impact of e-commerce on SMEs in India | 28
All aboard - full throttle
The way ahead for the e-commerce ecosystem: Enabling a brighter future for Indian SMEs
The future of India’s internet and e-commerce story seems encouraging. Pioneering initiatives by the government, proactive support from existing players in the market and improved awareness among SMEs is helping to increase the adoption of e-commerce by them. In a country as diverse and geographically vast as India, a collaborative effort between all ecosystem players is imperative for the successful and seamless integration of SMEs as an important component - a move that can benefit existing players, SMEs and the Indian economy.
Conclusion
With the collaborative and proactive participation of e-commerce players and sustained support and focus from the government as well as associated bodies, SMEs shall smoothly integrate into the ecosystem and realise envisaged benefits. In a country that is increasingly going online, assuaging fears of obsolescence will depend on equal opportunity creation across the board for SMEs even in the most remote locations and by enabling them to tackle the challenges of adoption.
Stakeholder involvement
Recommendation Focus area Industry associations
e-commerce players
Regulatory bodies
Bridge the information gap Value awareness
Cluster-based resource sharing Value awareness
Collaborating with NBFC’s Financing
Collaborating with technology providers Technology support
Shared infrastructure Technology support
Transparent payment structure Business practice
Think long-term Business practice
Stronger enforcement of government policies and initiatives
Regulatory environment
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29 | Impact of e-commerce on SMEs in India 29 | Impact of e-commerce on SMEs in India
The Indian economy presents a significant opportunity for SMEs to achieve double digit business growth over the next decade. The policy reforms, infrastructure and defence spends, significant higher FDI numbers, ‘Make in India’ initiative and many more catalysts shall provide growth opportunities to small and medium businesses in India. In order to seize these opportunities, India’s SME businesses have to transform and adopt the emerging trends in technology. This requires a careful understanding by SME promoters and their key management teams of what these technology trends are and how they can add value to their business model, operations and to all the stakeholders of the business, whether internal or external. With new advances in technology and various procurement and deployment options, investments in technology shall
Sanjay Aggarwal Partner Markets KPMG in India
Closing thoughts
30 Impact of e-commerce on SMEs in India | 30 Impact of e-commerce on SMEs in India | 2
further become more affordable, justifying its ROI and business case. In addition to human resources, technology shall be one of the key differentiators for successful growth, valuation and sustainability of SME businesses.
It is essential to evaluate e-commerce as a strategic channel for brand communication and for developing unique customer experiences. SMEs have to consider this and look beyond to understand that e-commerce is more than a mere retail channel. Promoters should invest time in understanding the power and potential of these platforms and the possibilities of using them as game changers. In an environment where customer needs and preferences are changing rapidly, communicating value
proposition and differentiation is becoming a critical success factor for business sustainability. Digital marketing spends for top global corporations are expected to be 30 to 40 per cent of their annual spends on advertisements over the next two to five years emphasing the need for such a distinct channel to communicate with stakeholders and deliver differentiated interactions and experiences.
It is therefore essential to overcome inhibitions and perceptions and get hands on understanding of the strategic aspects of technology and the platforms that can shape the future of your business.
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About Snapdeal Snapdeal’s vision is to create India’s most impactful digital commerce ecosystem that creates life-changing experiences for buyers and sellers. In February 2010, Kunal Bahl along with Rohit Bansal, started Snapdeal. com - India’s largest online marketplace, with the widest assortment of 15 million+ products across 500+ diverse categories from thousands of regional, national, and international brands and retailers. With millions of users and 200,000 sellers, Snapdeal is the shopping destination for internet users across the country, delivering to 5000+ cities and towns in India. With its acquisition of Freecharge in 2015, a leading mobile transactions platform, Snapdeal has become the largest m-Commerce company in the country. In its journey till now, Snapdeal has partnered with several global marquee investors and individuals such as SoftBank, BlackRock, Temasek, eBay Inc., Premji Invest, Intel Capital, Bessemer Venture Partners, Mr. Ratan Tata, among others.
For further information, visit www.snapdeal.com
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Kunal Bahl Co-founder and CEO T: +91 11 4914 6666 E: [email protected] Farheen Akhtar Head, Public Relations T: +91 11 4914 6666 E: [email protected]
Latest insights and updates are now available on the KPMG India app. Scan the QR code below to download the app on your smart device.
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MANAGEMENT CONSULTING
Impact of e-commerce on
SMEs in India
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India Internet Goldman Sachs.pdf
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
May 4, 2015
Unlocking the potential of a billion digital users
Piyush Mubayi +852-2978-1677 [email protected] Goldman Sachs (Asia) L.L.C.
Rishi Jhunjhunwala +91(22)6616-9039 [email protected] Goldman Sachs India SPL
Venkat Surapaneni +91(22)6616-9047 [email protected] Goldman Sachs India SPL
INDIA RISING
India Internet
India is poised to see more people join the Internet over the next 15 years than any other country. The prospect of 1 billion people online by 2030 sets the stage for enormous growth in e-commerce. In the latest report in our India Rising series, we examine how a nascent sector that is today dominated by private “unicorns” and international companies is likely to transform into a US$300 billion hyper local, on- demand market.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 2
Table of contents
PM Summary: Transforming into a hyper-local, on-demand market 3
India internet market: Hyper-local and on-demand 17
Indian companies that are exposed to India internet themes 20
Six key ecosystem enablers 23
Ecosystem #1: Telecom infrastructure developing at a rapid pace 24
Ecosystem #2: Capital infusion accelerating as global firms enter 31
Ecosystem #3: Payment landscape evolving across channels 35
Ecosystem #4: Logistics – Within the bottleneck lies the opportunity 38
Ecosystem #5: Government initiatives likely to pick up 40
Ecosystem #6: Talent driven start-up ecosystem fast emerging 43
Risks to our view: Execution is key 45
Addressable markets: US$300bn opportunity 47
TAM# 1: Indian e-tail market to reach US$220bn by FY30E 48
TAM# 2: Online travel market to reach US$40bn by FY30E 52
TAM# 3: Digital ad market to reach US$15bn by FY30E 54
TAM# 4: Electronic payments market to reach US$5bn by FY30E 57
India’s increasing importance for global firms 59
Google: Multi-pronged opportunities across verticals in India 62
Facebook: India set to become the largest subscriber base globally 64
Twitter: Picking up pace in India 66
Amazon: A giant with global expertise and balance sheet 67
eBay: Early entrant building a diversified portfolio 68
Samsung: Market leader facing stiff competition 69
Xiaomi: Unique marketing style, but going full throttle now 70
Apple: Growing shipments, but not significant strides in India yet 71
SoftBank/Alibaba: Strategically entering India through investments 72
Private companies dominant in the Indian market today 74
Appendix 80
Disclosure Appendix 83
The prices in the report are as of the market close of April 28, 2015, unless stated otherwise.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 3
PM Summary: Transforming into a hyper-local, on-demand market
We believe India is at an inflection point of consumption moving online at a rapid pace
as digital transformation commences. This should see the country emerge as the second-
largest digital market in the world by 2020, based on connected smartphones. In our view,
India will leapfrog traditional tech themes and embrace new disruptive technologies with
greater ease facilitated by a currently underdeveloped landscape. We expect diverse
demographics and inadequate infrastructure to catalyze the transformation of the sector
into a hyper-local, on-demand market.
Over the next 15 years, we estimate India will have more than one billion digital users. This
would be a unique global phenomenon, witnessing arguably the largest shift online in a
country’s population. We summarize 10 pulse points of the India internet sector that make it
a unique market and potentially one of the largest opportunities in the internet space globally.
We forecast the Indian e-commerce market to grow 15X to 2.5% of GDP, or US$300bn, by
2030 driven by hyper growth in affordable smartphones, improving infrastructure, and a
propensity to transact online. Further, India’s attractive demographics – the youngest
population in the world – should lead to 300mn+ new online shoppers in the next 15 years,
making e-tailing the largest online segment. We outline the four key total addressable
markets (TAMs) which we think could potentially catalyze transformation of domestic
companies into multi-billion dollar businesses:
(1) E-tailing market: US$220bn by FY30E
Opportunity: We estimate the Indian e-tail market to reach about US$220bn by FY30E in terms of gross merchandise value (vs US$7bn currently) driven by online shopping
penetration rising to 25% from 4% currently.
Catalyst: We believe lack of adequate infrastructure would potentially catalyze the adoption of online retail in India. Further, e-tail companies are looking to address issues
(such as fragmented supply chain) by aggregating merchants via marketplace model and
debottlenecking infrastructure to enhance the internet shopping experience, in our view.
Comparison with US/China: We estimate the Indian e-tail market at US$220bn in FY30E vs current US market at US$240bn and China at US$134bn.
T(2) Online travel market: US$40bn by FY30E
Opportunity: We estimate the online travel agency (OTA) market to grow to US$40bn by FY30E from US$8bn in FY14 driven by rise in online travel penetration from 41% in FY15 to
50% by FY30E.
Catalyst: We believe the underpenetrated hotels and packaging segment would be the key growth driver in the OTA space. At present, the OTA market is dominated by airlines which
contribute 55% of the total revenues. However, we expect other categories such as hotel
bookings, railways and car rentals to grow at a faster pace.
Comparison to US and China: We estimate the Indian OTA market at US$40bn in FY30E vs current US market at US$137bn and China at US$23bn.
4T(3) Digital ad market: US$15bn by FY30E
Opportunity: We forecast digital ad spend market to grow to US$15bn by FY30E from c.US$0.5bn now, driven by the shift from offline advertising (such as print) to online
with mobile (US$4.6bn) and social media (US$4.5bn) being the largest contributors.
Catalyst: With increasing online adoption and expanding e-commerce market, time spent by consumers on online media is set to rise, in our view. We believe this is likely
10 pulse points of the
Indian internet market
US$300bn addressable
market for e-commerce
by 2030E from US$20bn
currently
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 4
to shift the advertising spend to online media such as social and mobile. Further,
significantly lower digital ad rates in India are likely to rise driving the online ad market.
Comparison to global ad-spend penetration: As per our US team, the global online ad spend stands at 23% currently and is expected to go up to 36% over the next five
years. We also assume a similar online ad-spend penetration in India by FY30E.
(4) Electronic payments market: US$5bn by FY30E
Opportunity: We estimate the electronic payments market in India to grow from just US$80mn in FY15E to US$5bn by FY30E, largely driven by migration of offline retail to:
(1) electronic modes of payments and (2) e-commerce as data penetration improves.
Catalyst: We believe emergence of innovative payments mechanisms such as e-wallets and social payments, helped by the potential launch of payment banks, will boost the e-
payments market. Further, continuing shift of payments from offline to point of sale
mode (credit/debit cards) would help increase adoption of electronic payments.
Government push: Government’s initiative to extend banking facilities to its previously unbanked citizens through the ‘Jan Dhan Yojna’ scheme has added
significant number of debit cards (over 110mn in 5 months to Jan 2015), thereby
providing these customers access to electronic payments.
We look deep into the various ecosystem enablers that are likely to propel growth of online
adoption in India. We focus on six key areas:
1) Telecom infrastructure: Developing at a rapid pace: Launch of 4G services in India and availability of sub-US$200 4G handsets are likely to compress data prices in 2015.
2) Capital infusion: Accelerating as global firms enter: Inflows from private equity funds/ public listings will support aggressive expansion, M&A, and price competition.
3) Payments landscape: Evolving across channels: Reduced entry barriers through payment banks’ launch and initiatives by traditional banks to facilitate digital payments.
4) Logistics: Within the bottleneck lies the opportunity: Logistics/last mile delivery bottlenecks may be deterrents, but potential introduction of GST may lower barriers.
5) Government initiatives: Likely to pick up: Government would likely be a key enabler through its initiatives (Digital India) and reach (India Post, IRCTC, JAM trinity).
6) Talent availability: Driving the start-up ecosystem: With abundant supply of engineers from the IT sector, India has enough specialists to enable the digital shift.
We highlight how India is fast becoming one of the most important markets for global
internet and telecom giants as they look beyond China for opportunities. US giants are
targeting ad revenues (such as Google, Facebook) and the e-tailing pie (Amazon); Asian
majors such as Samsung, Xiaomi are eyeing significant smartphone shipments, while
Alibaba/Softbank look for strategic stakes in the India internet opportunity, helped by low
entry barriers compared with some of the other markets, in our view.
4TWhile the Indian internet opportunity looks compelling, we see some risks around
execution. Some of the key challenges faced by the industry are: (1) lack of investment in
telecom infrastructure, delayed rollout of 4G services and Digital India initiative, (2)
regulatory uncertainty over taxation, listing, and foreign investment restrictions, (3)
continuous cash burn by companies resulting in fragmented business models, (4) lack of
logistics and technology infrastructure that may slow the pace of online adoption, and (5)
language diversity may be a deterrent to online adoption.
Six enablers to provide
the launch pad
Increasing importance
for global internet giants
Key risks to the internet
opportunity in India
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 5
1) What is so ‘unique’ about India?
Did you know these facts about India, which make it unique: (1) India has one of the
youngest populations in the world with 68% below 35 years, and median age of 27 years vs.
37/38 for China/US, (2) India has a very diverse population, speaking 22 different languages
and the second-largest English speaking population in the world at 125mn+, (3) Only 30%
of the population have bank accounts and only 3% file their income tax returns, (4) Just 9%
is covered by digital fiber and only 20mn people own a credit card. All this, along with sub-
optimal infrastructure are key triggers for the online economy to develop, in our view.
WAREHOUSING & DISTRIBUTION COSTS
MILLION / 1.25
20%
850 68% of the population is under the age of 35 –
key target market for global internet companies is
the largest in the world. Diverse population
speaks 22 different languages and has the
second-largest English speaking population in
the world at 125mn+.
243mn internet users/57% via mobile
3rd largest internet user base in the world behind
China. We estimate 673mn Indians to be online by
2020. Since June 2012, 76% of incremental internet
users are from the mobile channel. Indian internet
usage leapfrogging PCs and tablets.
3% or 36mn people in India pay income tax vs. 45%
in the US and 20% in China. Only 42,800 people have
filed taxes with taxable income exceeding Rs10mn.
Warehousing & distribution cost
is 10%-18% of sales in India.
Multi-tax structures hampering
centralized warehousing
expansion. GST (Goods &
Services Tax) rollout, expected
in April 2016, key to bottlenecks.
YOUNGEST/MOST DIVERSE ECONOMY IN THE WORLD
INTERNET PENETRATION
SMARTPHONE SHIPMENTS
CHEAPEST SMARTPHONE
With smartphone costs coming down,
significant pickup is witnessed in their
shipments. Incremental smartphone
shipments in 2014 (38mn) is more than total
mobile phone shipments in 2013. Cheapest
3G handsets are available for as low as $40.
2.89%
25,000 There are over 150,000 post offices in India with
90% of them in rural areas. Amazon, Snapdeal &
Shopclues have all tied up with India Post to
expand their reach. India Post also planning to
launch its own e-commerce portal by CY2015 end.
PIN CODES SERVED BY INDIA POST
CREDIT CARD HOLDERS < WALLET HOLDERS
LOGISTICS BOTTLENECK
BANK ACCOUNTS
400mn people in India have bank accounts. The
Prime Minister’s flagship program “Jan Dhan
Yojana” has opened 125mn bank accounts and
issued 111mn debit cards in 5 months since its
launch in Aug 2014. We estimate that 2/3rd of this
was previously unbanked.
30% OF POPULATION 60%
CASH ON DELIVERY (COD)
FIBERIZATION
OF E-COMMERCE SALES
OF INDIANS PAY INCOME TAX
INCOME TAX PAYERS
BILLION
20mn credit cards outstanding vs.
50mn registered users for Paytm,
India’s largest mobile wallet firm.
US$2.2bn – avg. monthly value
transacted on credit cards in 2014.
$40
Only 9% of India penetrated by Fiber vs. 40% in
China. However, 3G coverage is available in 25-
30% of the country currently. We believe the
introduction of 4G services with new companies
coming in will improve 4G coverage in India.
9% OF INDIA IS CONNECTED BY FIBER
60% of Indian e-commerce transactions are COD
vs. 30% in China and 2% in US. We estimate COD
deliveries to come down to 45% by 2025 and 30%
by 2030 as mobile wallet penetration improves to
25% by 2030 from the current 2% levels.
10%-18%
Source: CIA Fact book, IAMAI, CNNIN, comScore, RBI, Holisol Logistics, Ministry of Finance, News articles (including The Economic Times, Business Standard), Goldman Sachs Global Investment Research.
M ay 4
, 2 0 1
5
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G o
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ach s G
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2) Why look at the Indian internet market?
India is on the way to becoming the country with the second-largest digital population in the world by 2020, in our view. This would
be a unique global phenomenon, witnessing arguably the largest shift in a country’s population towards the online segment (to
reach 1bn by 2030 vs. 280mn for US and 640mn for China currently). We believe India will leapfrog traditional tech adoption themes
(such as accessing internet through PC and broadband), and move towards online mobile penetration. The current e-commerce
market size in India is c.US$20bn vs. US$675bn for the US and US$200bn for China, but we expect it to reach US$300bn by 2030 .
Exhibit 1: Comparison of population of individual Indian states vs. top 20 countries in terms of the internet population in the world (excluding China) 6TIndian Census (2011), Internet statistics (July 2014)
Source: India Census, Data from respective countries, ITU, World Bank, Goldman Sachs Global Investment Research.
Millions
Internet users in Countries
Population in India States
*Madhya Pradesh grouped in 100mn group as it and Uttar Pradesh
together represent equivalent internet users in the US
United States of
America
Japan S.Korea
France
Brazil
Russia
United Kingdom
Germany
Nigeria
Italy
Mexico
Indonesia
Vietnam
Philippines
Turkey
Spain
Thailand
Argentina
Canada
Australia
0 50 100 150 200
Uttar Pradesh Madhya Pradesh*
Maharashtra Bihar
West Bengal Tamil Nadu Rajasthan Karnataka
Gujarat Andhra Pradesh
Odisha Telangana
Kerala Jharkhand
Assam Punjab
Chhattisgarh Haryana
Delhi Jammu and Kashmir
Uttarakhand Himachal Pradesh
Tripura Meghalaya Manipur Nagaland
Goa Arunachal Pradesh
Puducherry Mizoram
Chandigarh Sikkim
Andaman and Nicobar
>=100mn 50‐100mn 25‐50mn <=25mn
M ay 4
, 2 0 1
5
In d ia: T
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n o
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G o
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7
3) How does India compare with the US and China?
India may prove to be a different market from China, especially from the perspective of a new addressable market for global internet
giants. China has higher entry barriers for foreign companies, potentially helping homegrown Chinese companies to develop
successful business models in China. However, India could potentially become one of the largest markets for the foreign companies,
beyond China. While India has one of the youngest populations in the world, its online market lags that of the US and China
significantly with the largest Indian company (unlisted) valued at US$13bn (vs US$380bn/US$220bn for US/China) and total listed
market cap of only US$4bn (>US$1tn/US$550bn for US/China).
Exhibit 2: India vs. USA vs. China
320 mn
38 yrs
$54K Demographics
280m n
74 mins
1,450 mb/mth254
mn
Internet Penetration
$675 bn
> $1 trillion
$380 bn
Market size
1.25 bn 27 yrs
$2k
243 24 158 73
$15 bn
$4 bn
$13 bn
1.35 bn 37 yrs $7.5K
640 32 256
403
$200 bn
> $550 bn
$220 bn
Population
USA India China
Median Age Per‐Capita Income
Largest CoMcap
Data UsageTime spent2G/3G User
Market
Population Median Age Per‐Capita Income
Largest CoMcap
Data UsageTime spent2G/3G User
Market
Population Median Age Per‐Capita Income
Largest CoMcap
Data UsageTime spent2G/3G User
Market
Note: Data as of 2014 or latest available. For India, the largest company is unlisted and its valuation is based on the latest round of funding raised.
Source: CIA Fact book, IAMAI, CNNIN, Cisco, iResearch, Statista, comScore, News articles (including The Economic Times, Business Standard), Goldman Sachs Global Investment Research.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 8
4) Is the ecosystem available for internet to develop?
4TIndia currently has enough spectrum and telecom infrastructure to provide 3G data
coverage to 25%-30% of the population. 3G enabled smartphones are available for US$40
with more than 900 phone launches last year, helped by the China 4G regime. The potential
R-Jio launch in 2015 (with pan-India 4G services) and Digital India (government initiative to
connect 250,000 villages by broadband) may help improve fiberization from the current 9%
country coverage. The payments landscape is also evolving fast with the launch of digital
wallets and payment banks, despite 60% of e-commerce transactions currently in cash on
delivery mode. Logistics and infrastructure are bottlenecks, but also indirect drivers for
online adoption, in our view. Finally, US$6bn+ of private funding has come into India in
2014 and significant funds are still waiting, implying a potent ecosystem is in place.
Exhibit 3: Indian telecom infrastructure ecosystem is evolving fast, creating a launch pad for higher internet penetration Network of forces coming together
• Data tariffs have reduced by c.20% in the past 2 years
• Introduction of 4G by R- Jio/telcos could reduce data tariff further in the next 3 years
• 9% Fiber coverage and 25%- 30% 3G/4G coverage currently
• Capex ramp up by telcos/R-Jio and govt.’s Digital India will help ramp up capacity and coverage
• Cheapest 3G/4G handsets are available for US$40/150
• 4G ecosystem in China will provide enough supply of 4G handsets in India
• Post spectrum auction in Mar, 2015, India telcos now have spectrum to enable pan-India 3G coverage
• Government expects National optical fiber network will cover 250k villages by Dec 2016
Spectrum Devices
TariffsFiber/ Towers
Source: Company data, TRAI, DoT, Goldman Sachs Global Investment Research.
Exhibit 4: Large capital inflows accelerated in the past 6-9 months enabling start-ups to grow scale Capital flows (US$ mn) into e-commerce industry
Exhibit 5: We think the grant of payment bank licenses to wallet companies would improve trust, penetration Key bank applicants
Source: News articles (including The Economic Times dated Apr 16, 2015, Business Standard dated Jan 16, 2015), Crunchbase.
Source: RBI.
$94 $181 $115
$322 $304
$503
$1,757
$1,457
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
1Q 2013
2Q 2013
3Q 2013
4Q 2013
1Q 2014
2Q 2014
3Q 2014
4Q 2014
1Q 2015
$3.4bn
mn No Applicant JV Partner
1 Aditya Birla Nuvo Idea Cellular 2 Bharti Airtel Kotak Mahindra Bank 3 Cholamandalam
Investment and Finance
NA
4 Fino Paytech NA 5 Future group IDFC 6 GI Technology NA 7 Oxigen RBL Bank 8 Paytm NA 9 Reliance Industries State Bank of India 10 Vakrangee Ltd NA 11 Vodafone Yes Bank
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 9
5) What is the life cycle of the internet economy in India and at
which stage are we now?
4TWe believe the Indian internet landscape is evolving into a hyper local, on demand market.
In the first few phases of the life-cycle, as online adoption improves and private equity
money flows in, we see two themes playing out:
(1) “Consumer is king”: The consumer will benefit from heavy discounting and incentives
as we are currently witnessing, funded by the significant flow of private equity funds.
(2) “Survival of the richest”: Companies with better balance sheets, not necessarily better
business models, would survive in the first round of consolidation.
We are currently in between both these themes. As the market matures, firms will go
public and consolidate once profitability is established for 2-3 years. Horizontal firms will
standardize their offerings while vertical firms will specialize to personalized offerings.
Firms with better data will be able to build better brands by analyzing consumer behavior,
interests and spending patterns, in our view.
Exhibit 6: We are currently between the ‘Consumer is king’ and ‘Survival of the richest’ phases Life cycle of the India internet sector: A hyper-local and on-demand market
US$300
US$10
0 100 200 300 400 500 600 700 800 900 1,000
To Be or Not To Be Online adoption begins
Start-ups bloom as PE
money flows in Consumer is
"King" Heavy discounting
Survival of the
"Richest" M&A in private space
Going Public
Major IPOs hit markets
Firms with better data will build
better brands Horizontals will
standardize; Verticals will personalize
Flipkart vs. Myntra
Survival of the
"Fittest" M&A in public space
Online Consumers (mn)
In d
ia E
-C o
m m
e rc
e M
a rk
e t
(b n
)
Source: Goldman Sachs Global Investment Research.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 10
6) What are the opportunities for global internet giants in India?
Global technology giants have made inroads into the Indian market already and are eyeing
a larger share of the pie. For most, India is already a top-3 market in terms of users, but in
terms of revenues it has yet to materialize. For the potential revenue opportunities, we see
three major avenues:
1) Digital ad revenues: Google, Facebook/Whatsapp, and Twitter with already a large user base in India are likely to target this pie.
2) Smartphone shipments: Apple, Samsung, Xiaomi are eyeing this market.
3) E-tailing: Amazon is already the third-largest e-tailer in India.
Apart from this, we note that other major companies such as Alibaba/Softbank have made
strategic investments in several unicorns such as Snapdeal, Olacabs, and Paytm. Recently,
Mr. Ratan Tata announced buying stake in Xiaomi (source: The Economic Times, April 27,
2015) as it plans to aggressively expand operations in India with a first India-specific
handset model – Mi4i at Rs12,999 – launched in India on April 23, 2015.
Exhibit 7: India emerging as a key market for global companies TGlobal companies’ website positioning (latest rank) in India in the past 3 months
Note: Size of bubble represents unique visitors from India for global websites *For Samsung, Xiaomi and Apple: X-Axis = market positioning in India based on smartphone shipments in 4Q2014, Y-Axis = Market share of smartphones in India in 4Q2014. Size of bubble represents smartphones shipments in India in 4Q2014.
Source: Alexa, comScore, Gartner, Goldman Sachs Global Investment Research.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 11
7) What are the challenges in the country?
4TWhile the Indian internet opportunity looks compelling, we see some risks around execution.
Some of the key challenges faced by the industry are: (1) lack of investment in telecom
infrastructure, delayed rollout of 4G services and Digital India initiative, and debates around
net neutrality that may affect capex from telcos, (2) regulatory uncertainty over taxation,
listing, and foreign investment restrictions, (3) continuous cash burn by companies resulting
in fragmented business models, (4) lack of logistics and technology infrastructure that may
slow the pace of online adoption and (5) language diversity may be a deterrent to online
adoption.
Exhibit 8: No separate regulator in place for e-commerce yet, still governed by existing rules/laws 6TRegulatory landscape for e-commerce and related businesses in 2014
Source: News articles (The Economic Times, Business Standard etc.), Goldman Sachs Global Investment Research.
Exhibit 9: Most logistics companies do not have enough pan-India reach, except India Post Key logistics solutions providers in India and their reach
Exhibit 10: Challenges to ‘Fiberization’ through Digital India initiative
Source: Company data.
Source: Goldman Sachs Global Investment Research.
Category Regulation Affected Companies ‐ 2 factor authentication is mandatory for card / online
payments
All B2C ecommerce
companies
‐ Allowing payment banks licenses which will allow
acceptance of deposits upto Rs100k, issuance of debit cards,
offering financial products like MFs, Insurance.
Mobile wallets, payment
gateways, e‐commerce
companies, telcos
‐ 100% in B2B e‐commerce
‐ 100% in single brand retail (offline)
‐ 51% in multi‐brand retail (offline)
All e‐tailing companies
‐ Complete restriction on foreign online retailers to sell
products sourced by themselves ‐ should rely on marketplace
model which is 100% allowed
Foreign ecommerce
companies
Listing / IPO ‐ Distributable profits in at least 3 out of past 5 years and
positive net worth in the past 3 years
Loss making e‐commerce
companies
Value Added Tax
‐ For goods sold by online retailers like Amazon under their
own risk (fulfilment), they should be paying VAT rather than
the merchant
All e‐tailing companies
M&A ‐ Current tax regime and unclear M&A regulations for online
companies make the M&A process complicated All e‐commerce companies
Logistics
‐ Lack of GST leads to inefficient taxation of sales tax and VAT
in each state and resulting in multiple warehouses in different
locations and lack of economies of scale
All e‐tailing companies
Payments Landscape
Foreign Direct
Investment (FDI)
Dept. of Revenue
Dept. of Industrial Policy and
Promotion, Dept. of Commerce
Reserve Bank of India
Ministry of Corporate affairs
Dept. of Information Technology
Dept. of Consumer affairs
Dep. Of Information & Broadcasting
Ministry of Statistics and Programme
Implementation
Ministry of Home & Finance
Company eCommerce solution
Type CoD offered
(Pincodes)
Pre-paid reach
(Pincodes)
Shipping solutions Aramex REDe B2B and B2C 1,900 2,200 Blue Dart E-business solutions B2B and B2C 3,300 4,100
Delhivery Delhivery B2B 2,600 2,600 DTDC Dotzot B2B and B2C 7,100 8,000 FedEx FedEx B2B and B2C 2,650 5,550 India Post Express Parcel B2B and B2C 50 cities 50 cities India Post Business Parcel B2B and B2C 25,000 25,000 Logistic aggregators KartRocket ShipRocket B2B 9,000 16,000 Zepo ZePost B2B 6,100 8,220
6. Poor network coverage. BTS: population ratio in India much lower than in China
Challenges to Fiberization in India
1. Complicated Right of way procedures and high ROW charges. Different rules in different states for getting clearances
2. Lack of investments in infrastructure by private telecom operators. Copper wire network mostly owned by PSUs 3. Low smartphone and PC penetration 4. Lack of digital literacy and consumer awareness in rural areas about advantages of internet 5. Lack of data spectrum. Paucity of spectrum leading to low speeds
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 12
8) Which companies have biggest exposure to the internet story?
In this section, we highlight six Indian unicorns in the private space that are reportedly
valued at US$1bn+ and are creating a market leading franchise in their respective verticals
through differentiated business models and strong moats – Flipkart and Snapdeal (e-
tailing), Olacabs (taxi-hailing), Paytm (wallet and m-commerce), InMobi (digital ad) and
Quikr (C2C classifieds). Some of the global companies are also making a mark, such as
Amazon, Uber, and Xiaomi.
Within the listed space, we highlight sectors and stocks which are exposed to the online
adoption and India e-commerce opportunity.
Exhibit 11: Six unicorns have emerged in India, room for more 6TLast reported valuations and investors in each of the companies; Indian companies exposed to India internet themes
US$ 12.5bn US$ 5bn US$ 1.5bnUS$ 2.4bn
Tiger Global Management
Accel Partners
Naspers
DST Global
T Rowe Price
Singapore GIC
Others
US$ 700mn
SoftBank
Kalaari Capital
Nexus Venture Partners
eBay
Intel Capital
Temasek Holdings
Others
DST Global
SoftBank
Tiger Global Management
Steadview Capital
Matrix Partners
Sequoia Capital
Others
Ant Financial (Alibaba Sub)
SAIF Partners
Intel Capital
Silicon Valley Bank
Others
Sequoia Capital
Info edge
Vy Capital
Others
US$ 1bn
US$ 165mnUS$ 300mn US$ 250mn
Tiger Global
eBay
Steadview Capital
Matrix Partners
Omidyar Network
Others
Falcon Edge Capital
Sequoia Capital
Matrix Partners
Omidyar Network
Darby Overseas Investments
Others
Accel Partners
SAIF Partners
Network 18
Others
SoftBank
Nexus Venture Partners
Helion Venture Partners
Falcon Edge
Others
Tree Line Asia
Sequoia Capital
Cisco investments
American Express
Others
US$ 400mn
SoftBank
Kleiner Perkins
Sherpalo Ventures
Mumbai Angels
Others
US$ 2bn
Hillhouse Capital
Tybourne Capital
Sequoia Capital
Others
US$ 300mn
Newshunt
Indian companies exposed to internet themes in India
Info Edge
Just Dial
MakeMyTrip
Bharti Airtel
Idea Cellular
Reliance Industries (R-Jio)
Bharti Infratel
Dish TV
ICICI Bank
HDFC Bank
State Bank of India
Phoenix Mills
DLF
Titan
Shoppers Stop
Pantaloons
GATI
Snowman Logistics
Blue Dart
Internet Telecom Banks Logistics Real Estate Consumer
Source: Crunchbase, News articles (including The Economic Times, VC Circle, Forbes, Business Standard), Goldman Sachs Global Investment Research.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 13
9) What is the total addressable market opportunity in 15 years?
We estimate the total addressable market (TAM) for e-commerce in India to reach
US$300bn by 2030E, growing at 19% CAGR over 2015E-2030E, driven by increasing online
data penetration (71% ) and shopper penetration (25%). This compares with China/US at
US$200/US$675bn currently with 22%/60% online shoppers’ penetration. We forecast e-
tailing to be the biggest share of this pie at US$220bn and reach 1.8% of India’s nominal
GDP and many domestic companies may emerge as multi-billion dollar revenue business
models. In the medium term, we forecast the overall e-commerce market to grow at 30%
CAGR to reach US$80bn by 2020E, with e-tailing growing at the fastest rate of 47% CAGR
to US$47bn.
Exhibit 12: We estimate e-commerce market to reach c.US$300bn by FY30E, growing at 19% CAGR… 6Te-commerce market breakdown
Exhibit 13: …primarily driven by e-tail where we estimate GMV to reach c.US$220bn by FY30E 6TGMV= gross merchandize value
Source: Company data, PhoCusWright, RBI, IAMAI, IMRB International, Goldman Sachs Global Investment Research.
Source: Company data (Flipkart, Snapdeal, Amazon), Goldman Sachs Global Investment Research, media reports (such as The Economic Times).
Exhibit 14: We estimate OTA penetration to reach c.50% by FY30E resulting in c.US$40bn market
Exhibit 15: Digital ad market to grow at 24% CAGR to US$15bn by FY30E driven by offline to online shift 6TPenetration – online shoppers as % of population
Source: PhoCusWright, Goldman Sachs Global Investment Research.
Source: IMRB International, IAMAI, Goldman Sachs Global Investment Research.
$220
$40 $15 $8
$17
$0
$50
$100
$150
$200
$250
$300
$350
FY15E FY20E FY25E FY30E
E‐Tail OTA Adtech Mobile recharge Other financial services
30% CAGR
16% CAGR
12% CAGR
$21
$81
$169
$300
US$ bn
$3 $7 $12 $19 $27 $37 $47
$112
$220
144%
71% 57%
44% 36%
29% 19% 13%
‐10%
10%
30%
50%
70%
90%
110%
130%
150%
0
50
100
150
200
250
20 14
20 15
E
20 16
E
20 17
E
20 18
E
20 19
E
20 20
E
20 25
E
20 30
E
GMV (US$bn) Growth (%) [RHS]
CAGR 2015‐2020: 47% 2015‐2025: 32% 2015‐2030: 26%
8.1 9.4 10.7 12.3 14.1
16.2 18.4
30.5
40.0
20.4 22.8 25.5
28.5 31.9
35.8 40.0
62.5
79.5
40% 41%
42% 43%
44% 45% 46%
49% 50%
30%
35%
40%
45%
50%
55%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
FY 14
FY 15
E
FY 16
E
FY 17
E
FY 18
E
FY 19
E
FY 20
E
FY 25
E
FY 30
E
Total online travel market (US$ bn) Total travel market (US$ bn)
Online penetration (%) [RHS]
452 596 2,767
8,093
15,043
7% 8%
19%
31%
37%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY14 FY15E FY20E FY25E FY30E
Total online ad spend Online ad as % of total [RHS]
US$ mn
24% CAGR
36% CAGR
13% CAGR
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 14
10) When will they be profitable and how much funding is needed?
4TCompanies in India are currently burning cash at an average rate of 1.35X of the GMV sold,
through heavy discounting, marketing, free shipping and handling, cash incentives and
various other incentives that e-tailers give to attract consumers. We believe this is likely to
continue till the online shopper penetration reaches a steady state, in about 5 years from
now. As such, we estimate that e-tailers are likely to continue their cash burn to keep their
growth intact, while slowly working towards lowering and eventually eliminating
aggressive consumer incentives. We estimate that the e-tail industry will need at least
US$20bn of incremental cash infusion to sustain before it reaches a steady state in FY20.
Exhibit 16: Currently, companies are incurring almost 1.35X of their GMV as expenses, driven by high discounting and promotions
Source: Goldman Sachs Global Investment Research.
Exhibit 17: We estimate that US$20bn of incremental cash burn is needed to sustain GMV growth to US$47bn over FY15E-FY20E
Source: Goldman Sachs Global Investment Research.
65%
30.0% 12.0%
8.0% 7.0% 5.0%
3.0% 2.0% 3.0% 35.0%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Vendors Discounts Marketing & Promotions
Technology Logistics Warehousing Packaging Payment Gateways
Others Loss
Current e‐tailer revenue split
$2.9
$4.0
$4.7
$4.3
$2.4 $1.5 $20
$0
$5
$10
$15
$20
$25
2015E 2016E 2017E 2018E 2019E 2020E FY15E‐FY20E
E‐tailing: Incremental annual funding needed (US$ bn)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 15
India: On your marks…
M ay 4
, 2 0 1
5
In d ia: T
e ch
n o
lo g
y: In te
rn e t
G o
ld m
an S
ach s G
lo b al In
ve stm
e n
t R e
se arch
1 6
Exhibit 18: Indian companies are just beginning to develop, still several years before they resemble their peers in the US and China
Amazon US$ 174bn*
eBay US$ 83bn*
Overstock US$ 1.5bn
Trip Advisor US$ 1.2bn
Expedia US$ 5.8bn
Uber US$ 10bn #
Makemytrip US$ 139mn
Yatra US$ 60mn
Ola Cabs US$ 300mn #
Facebook US$ 12.5bn
Google US$ 52.5bn
Yahoo! US$ 4.4bn
LinkedIn US$ 2.2bn
Qunar US$ 285mn
eLong US$ 200mn
CTrip US$ 1.2bn
Flipkart US$ 3bn *
Snapdeal US$ 1.5bn *
Amazon India US$ 1bn *
Naukri US$ 72mn
Zomato US$ 10mn
Just Dial US$ 100mn
Alibaba US$ 365bn*
JD.com US$ 41.9bn*
Dangdang US$ 1.1bn*
Tencent US$ 13bn
Baidu US$ 7.4bn
SouFun Holdings
US$ 688mn
Facebook Google LinkedIn Yahoo!
Amazon eBay Overstock
Trip advisor
Expedia UBER
Alibaba JD.com Dang dang
Qunar eLong CTrip
Baidu SouFunTencent
USA INDIA CHINA
Note: Numbers represent revenue in US$ for 2014. For India, revenue for FY15 (ending Mar 2015) * Gross merchandize value (GMV), # Gross transaction value (GTV) Data as of 2014 or latest available
Source: Company data, News articles (including The Economic Times, Forbes, Business Standard), Goldman Sachs Global Investment Research
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 17
India internet market: Hyper-local and on-demand
The India internet landscape is evolving into a hyper-local and on-demand market. Key
reasons for this are the lack of infrastructure, significantly diverse demographics –
culturally, geographically, and economically – and relatively lower per capita incomes. As a
result, not only will the Indian internet market leapfrog many secular tech adoption trends,
but also adapt to new disruptive ideas as it is easier to change an underdeveloped tech
landscape, in our view. We analyze the life cycle of the Indian internet sector in various
stages below, which are somewhat different from how it played out in China.
We also point out that the Indian internet opportunity is a unique phenomenon which will
arguably see the largest shift in population towards the online community anywhere in the
globe, potentially the last shift of this scale for the next few generations as no other
country has a similar underpenetrated market.
To be or not to be online4T: This is the initial phase of the internet journey when most of the data access was through broadband and resulted in limited penetration. With 3G
auctions happening in India in 2010 and telcos rolling out 3G on mobile, it led to a
significant adoption of data services. Internet penetration has now reached 20% of the
population vs. 13% a year ago. Cheaper handsets and data tariffs have resulted in a big
shift towards being online.
Start-ups bloom on PE seed capital: This phase saw the initial success of some of the online business models such as Flipkart selling books, and Bookmyshow/ Makemytrip
selling movie/air tickets. This was followed by PE funds flowing into India as investors
started looking for opportunities beyond China. As a result, start-ups started emerging
at a rapid pace and funding became more accessible.
Exhibit 19: We are currently between the ‘Consumer is king’ and ‘Survival of the richest’ phases Life cycle of the India internet sector: A hyper-local and on-demand market
US$300
US$10
0 100 200 300 400 500 600 700 800 900 1,000
To Be or Not To Be Online adoption begins
Start-ups bloom as PE
money flows in Consumer is
"King" Heavy discounting
Survival of the
"Richest" M&A in private space
Going Public
Major IPOs hit markets
Firms with better data will build
better brands Horizontals will
standardize; Verticals will personalize
Flipkart vs. Myntra
Survival of the
"Fittest" M&A in public space
Online Consumers (mn)
In d
ia E
-C o
m m
e rc
e M
a rk
e t
(b n
)
Source: Goldman Sachs Global Investment Research.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 18
4TConsumer is King4T: With significant amount of private equity money flowing into India, it has created an environment where significant pricing and discounting competition
has begun among companies to acquire a customer’s time and wallet share. With
companies burning cash, the consumer has become the biggest beneficiary of the
trend and is enjoying heavy discounting and incentives.
4TSurvival of the Richest4T: This phase marked the beginning of the first round of consolidation in the internet space and is underway. The transactions are mostly in the
private space with the companies acquiring peers of somewhat similar size in order to
gain scale or technical know-how, and to fend off competition. This phase is not
necessarily driven by firms with better business models acquiring other companies,
but by firms with more cash. Hence, this phase will see the survival of the richest, not
necessarily the fittest. We have recently witnessed the Flipkart-Myntra, Olacabs-
Taxiforsure, Snapdeal-Freecharge deals.
4THorizontals will standardize, verticals will personalize 4T: As every company tries to capture the limited time of an online consumer, we believe there will be space for both
horizontals and vertical specific companies. It will not be a market for just one business
model. Horizontal companies (e.g. Flipkart) would need to standardize their offerings
so that volumes will drive profits, while vertical companies (e.g. Myntra) would need
to personalize the user experience and get premium pricing despite lower volumes.
4TGoing public4T: This is the phase when companies, looking to become profitable in the next 18-36 months, would consider going public through the IPO route in India or the
US, depending on investor appetite, access, regulatory ease and addressable market.
4TData will build brands4T: As consumers spend more and more time on internet for social networking, shopping, entertainment, and services, consumer behavior and
usage patterns are likely to become increasingly important to gauge. Hence,
companies with proprietary access to data would be able to build much better brands
and prove to be a key differentiator.
4TSurvival of the Fittest4T: We believe this would be last phase of the internet life cycle before the market matures and peaks out. In this phase, companies would consolidate
as the business models with more powerful competitive advantage will survive,
whereas the weaker business models will suffer lack of capital and profitability. This
would end up in the weaker companies getting acquired and it becoming a “winner
takes all” market.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 19
Several Unicorns have already emerged, more on the way
4TThe six unicorns: 4TBased on recent media articles quoting private equity investments into
some of the largest names in the Indian internet market, India is now home to at least 6
unicorns (US$1bn+ companies) including the largest e-tailers: Flipkart and Snapdeal; taxi
hailing app: Ola cabs; mobile classifieds company: Inmobi; wallet/mobile commerce
company: Paytm and online/mobile classifieds company: Quikr.
Potential billion dollar babies? 4TSeveral other companies like restaurant finder Zomato,
mobile wallet company Mobikwik, real estate classifieds company Housing.com, local
news aggregator NewsHunt and ticketing platform Bookmyshow have raised funds at
valuations of more than US$100mn.
4THome for start-ups: 4TWe believe that besides these companies, there are several others
that may emerge to potentially become billion dollar companies in the near to medium
term. India is fast becoming a home for start-ups in the e-commerce space and private
equity funds are fuelling the hyper-growth of new ideas and technologies.
4TThe ancillary technology unicorns: 4T Apart from the regular internet firms, we are also
witnessing the emergence of multi-billion dollar ancillary firms which are disrupting the
technology landscape such as IPSoft in automation and Mu-Sigma in data analytics.
Exhibit 20: Six unicorns have emerged in India, room for more 6TLast reported valuations and investors in each of the companies
US$ 12.5bn US$ 5bn US$ 1.5bnUS$ 2.4bn
Tiger Global Management
Accel Partners
Naspers
DST Global
T Rowe Price
Singapore GIC
Others
US$ 700mn
SoftBank
Kalaari Capital
Nexus Venture Partners
eBay
Intel Capital
Temasek Holdings
Others
DST Global
SoftBank
Tiger Global Management
Steadview Capital
Matrix Partners
Sequoia Capital
Others
Ant Financial (Alibaba Sub)
SAIF Partners
Intel Capital
Silicon Valley Bank
Others
Sequoia Capital
Info edge
Vy Capital
Others
US$ 1bn
US$ 165mnUS$ 300mn US$ 250mn
Tiger Global
eBay
Steadview Capital
Matrix Partners
Omidyar Network
Others
Falcon Edge Capital
Sequoia Capital
Matrix Partners
Omidyar Network
Darby Overseas Investments
Others
Accel Partners
SAIF Partners
Network 18
Others
SoftBank
Nexus Venture Partners
Helion Venture Partners
Falcon Edge
Others
Tree Line Asia
Sequoia Capital
Cisco investments
American Express
Others
US$ 400mn
SoftBank
Kleiner Perkins
Sherpalo Ventures
Mumbai Angels
Others
US$ 2bn
Hillhouse Capital
Tybourne Capital
Sequoia Capital
Others
US$ 300mn
Newshunt
Source: Crunchbase, News articles (including The Economic Times, VC Circle, Forbes, Business Standard)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 20
Indian companies that are exposed to India internet themes
We highlight companies that are impacted by the various themes of the India internet
opportunity and are leveraging the online penetration in India.
1) Info Edge: Info Edge is India’s largest online classifieds company with top 3 positions
in the recruitment listing (Naukri), real estate listing (99Acres) and restaurant listing
(Zomato) portals. It also has investments in matrimony, education, financial services,
deals and gifts portals. Hence, among the listed companies in Indian internet, Info
Edge has the most diverse and balanced mix of companies with steady state market
leadership businesses such as Naukri and hyper-growth global expansion business
such as Zomato (also refer to our report, Blend of steady-state and hyper-growth
business models; Buy, dated May 4, 2015).
2) Just Dial: Just Dial is India’s largest online and voice search classifieds company with
more than 30% of India’s small enterprises listed on its portal (2014). Just Dial has a
dominant share in online local search classifieds and is now expanding its footprint to
23 other categories such as e-tailing, travel, tickets, foods through its search and
transact platform called Search Plus (to be launched in FY16) (also refer to our report,
Leveraging the competitive edge in Search Plus; maintain Buy, dated May 4, 2015).
3) Makemytrip: MMYT is India’s largest online travel services provider with more than
40% share of gross bookings in the online travel market (2014). On one hand, it has the
air ticketing business which is a mature market with moderate growth, and on the
other it is expanding its footprint in the underpenetrated hotels and packages segment
(also refer to our report, Profitable growth key to re-rating in a maturing OTA market;
Neutral, dated May 4, 2015).
4) Bharti Airtel (covered by Aditya Soman): It is India’s largest mobile operator with
market leadership in 12 of 22 regions and revenue market share over 30% (2014).
Bharti Airtel is a pan-India operator with the largest spectrum holding and offers
2G/3G/4G services. The Indian internet opportunity may have an impact on growth in
data demand, revenue mix, EBITDA margins and capital expenditure. In addition,
consolidation and some new entrants could potentially alter the competitive landscape.
5) Idea Cellular (covered by Aditya Soman): It is India’s 3rd largest mobile operator
with a revenue market share of almost 18% (2014). Idea offers 2G and 3G services on a
pan-India basis. The Indian internet opportunity may have an impact on growth in data
demand, revenue mix, EBITDA margins and capital expenditure. In addition,
consolidation and some new entrants could potentially alter competitive landscape.
6) Reliance Industries (covered by Nilesh Banerjee): One of India’s largest companies
Reliance Industries, through its telecom arm Reliance Jio, is gearing up for a 4G-LTE
launch over the next few months. Reliance Jio has the largest inventory of 4G-LTE
spectrum. The Indian internet opportunity may have an impact on growth in data
demand, revenue mix, EBITDA margins and capital expenditure. In addition,
consolidation and some new entrants could potentially alter competitive landscape.
7) Bharti Infratel (covered by Aditya Soman): It is a tower company with a consolidated
portfolio of over 85,000 towers and over 175,000 tenancies. Bharti Infratel and its
associate company Indus towers (Infratel owns 42% in Indus along with Vodafone
which owns 42% and Idea which owns 16%) may potentially be impacted by the
growth in data demand which may lead to greater demand for infrastructure to
support the data bandwidth.
8) Dish TV (covered by Aditya Soman): It is India’s largest satellite TV provider with a
market share over 27% and over 18.5 mn gross subscribers (as of Dec 2014). It may
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 21
potentially see a significant impact due to increased convergence and change in
content distribution platforms.
9) ICICI Bank (covered by Tabassum Inamdar): ICICI Bank has been at the forefront of
innovation in particular in the retail digital space. Some of its product introductions
are: 1) first bank to launch Facebook banking, banking on Twitter and goal based
savings product iWish in a tieup with SmartyPig, 2) Launched India’s first ‘contactless’
debit and credit cards, 3) Recently launched Pockets (their e-wallet) – the first Indian
bank to do so. The e-wallet allows users to instantly send/request money to/from any
e-mail id, mobile number, friends on Facebook and bank account and make payments
at e-commerce websites.
10) HDFC Bank (covered by Tabassum Inamdar): HDFC Bank seems to be ahead in
converting customers to the digital platform. It is one of the largest processors of online
banking transactions, and has now managed to notch up a 32% market share (9MFY15)
in mobile banking and c. 40% share in e-commerce transactions (as per the company).
Recently, it has focused on creating Hindi language apps and will be soon launching
mobile wallet. Management believes that its success is in the high usage of the channels
rather than launching too many products. Having said that, they too plan to launch on
social media, but would do so with more comprehensive banking products and services.
11) Blue Dart (Not Covered): It is one of the largest courier companies in the organized
air express segment in India. The company is looking to open multiple warehousing
centres (called e-fulfilment centers) across the country where sellers on e-commerce
portals can store goods and value added services are provided. Each time an order
comes in, the product is packed and shipped to the consumer, saving time as the
couriers do not have to go to the seller's location to pick up the item.
12) GATI (Not Covered): Prominent logistics companies in the Indian surface logistics
industry such as GATI are looking to capitalize on the e-commerce opportunity. In
1QFY15, Gati stated that it expected to sustain the trend of growing its ecommerce
volumes at 100%+ yoy for the next two years. It earmarked capex to invest in cold
chain warehouses to benefit from the online distribution of perishable goods. From
delivering over 5.5mn packages in a month currently, the company is targeting to
deliver 1mn packages per day by 2020.
13) Snowman Logistics (Not Covered): It is one of the largest temperature controlled
logistics service providers in India. Management wanted to use the IPO proceeds
(listed in Sept 2014) for expanding capacity from 25 depots currently to 37 depots in
the medium term as it expects strong growth in the segment. The company has
reported 40%-50% CAGR sales growth over the past 4 years.
14) Phoenix Mills (covered by Puneet Jain): It is currently one of India’s largest retail mall
companies having the largest mall in four key metros. 80% of its value accrues from retail
malls. As per our India consumer team, rental growth of malls are typically impacted due
to lower SSSG of tenants due to potential shift from offline to online retail, but this can be
partly mitigated if some area is occupied by restaurants and multiplexes.
15) Titan (covered by Puneet Jain): It is India’s largest specialty retailer selling jewelry
(80% revenues as of 2014), watches (15% revenues) and eye-ware/accessories. As per
our India consumer team, the watches segment is susceptible to large discounting on
Swiss watches by online retailers, although the Swiss Franc depreciation helps them.
16) Home and personal care (HPC) firms and offline retail (Shoppers Stop, Pantaloon – Not Covered): Over the medium term, emergence of large online grocery retailers
tends to alter working capital cycle of large FMCG firms, as per our India consumer
team. Currently HPC companies in India enjoy negative working capital due to the
unorganized distribution chain.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 22
Entry barriers (moats) for different e-commerce categories
4TFramework for screening stronger business models: 4TWe are witnessing quite a few
companies emerging with new ideas that are spending significant amount of cash currently.
It is difficult to pick which companies would survive over the long term. We believe the five
factors that will decide which companies survive over the long term are: (1) management
quality, (2) business model, (3) moats or entry barriers, (4) potential addressable markets,
and (5) cash costs in the form of fixed vs. variable.
4TScale, technology and capital are the most common moats: 4TWhile moats may differ for
different verticals, there are three moats which are common for most:
1) 4TScale:4T In most of the verticals, it's a winner-takes-all market with room for at the most
one or two more competitors apart from the leader. Hence, gaining scale quickly is
becoming quite critical even if it is coming at the expense of significant cash burns.
2) 4TTechnology:4T While a lot of the business models are replicable, especially when there
is no underlying physical entry barrier to it (such as exclusive supplier tie-ups for an e-
tailer), technology can potentially be a big differentiator. Companies that invest in
building franchise technology platforms and data mines will be able to maintain a
competitive edge.
3) 4TCapital:4T In the first half of the life cycle of the industry, availability of capital is a very
strong moat. Companies with strong investor backing and free capital available would
be able to buy out competition early if it proves to be disruptive and a challenge to
their own model, or they can use it to gain scale through burning significant cash on
customer acquisitions.
Exhibit 21: Entry barriers for different e-commerce categories
Source: Goldman Sachs Global Investment Research.
E-tailing Digital Advertisements Payments/Wallets Online Travel
Merchant ecosystem Higher the number of merchants, higher the customers (Virtuous cycle)
Distribution network Faster delivery times, better customer service, fewer product returns
Capital infusion Ability to discount and spend on customer acquisition and retention
Technology / Data Superior analytics, better pricing algorithms, better customization
Trust/Customer loyalty Reward points, better service, better return handling
Navigation/Interface Clean navigation and display is critical (customer can’t touch product)
Traffic Higher the consumer traffic, higher the listings and vice versa
Data quality Better the quality of listings higher the customer retention
Navigation/Interface Ability to find listings/services easily
Integration w/ payment systems Seamless integration with different payment methods
Grievance redressal Consumer ability to report grievances and procedures to address them
User base Bigger the user base, higher the acceptability from merchants
Universal acceptability Payment method should be merchant agnostic
Low charges Lower the costs, higher the acceptability by merchants
Capital Ability to discount to lure customers to sign up
Ease of use Pay in as many fewer steps as possible
Security Safety and security policies, grievance redressal
Footprint Large footprint (airlines/hotels) implies more choices for consumer; more choice implies more consumers
Partnerships Travel agents, complementary service providers, global access
Market share Higher the market share, better the ability to sign up new merchants and negotiate favorable terms
Ratings Higher the number of ratings, more comfortable customer feels to book
Navigation/Interface Easy navigation and smooth transacting capability are vital
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 23
Six key ecosystem enablers
Six key ecosystem enablers
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 24
Ecosystem #1: Telecom infrastructure developing at a rapid pace
Exhibit 22: Indian telecom infrastructure ecosystem is evolving fast, creating a launch pad for higher internet penetration in India Network of forces coming together
Source: Company data, DoT, Goldman Sachs Global Investment Research.
#1 Data tariffs: New entrants could accelerate the declining trend
Data tariffs already low: 4TIndia’s data tariffs as of Dec 2014, measured as charge per unit
MB of usage, is already among the lowest globally at 0.5 cents (US$) per MB, similar to the
trend in voice ARPU which is at US$2/month. Data rates in India are 2X cheaper than in
China and nearly 3X cheaper than in the US. Despite the low tariffs, data consumption,
measured as per capita consumption across all mobile phone subscribers in India, has
been significantly lower than in China/US (Exhibit 10) due to slow adoption and lack of
proper ecosystem in the past 5 years.
Exhibit 23: Data tariffs in India are declining over the past four quarters (yoy)…
Exhibit 24: …and are already among the lowest in the world (2014)
Source: Company data from Bharti Airtel and Idea Cellular.
Source: Company data (Bharti Airtel, Idea Cellular, RCom, China Mobile, China Unicom and China Telecom, Verizon, AT&T and T-Mobile used as proxy for respective markets), Cisco, Goldman Sachs Global Investment Research.
• Data tariffs have reduced by c.20% in the past 2 years
• Introduction of 4G by R- Jio/telcos could reduce data tariff further in the next 3 years
• 9% Fiber coverage and 25%- 30% 3G/4G coverage currently
• Capex ramp up by telcos/R-Jio and govt.’s Digital India will help ramp up capacity and coverage
• Cheapest 3G/4G handsets are available for US$40/150
• 4G ecosystem in China will provide enough supply of 4G handsets in India
• Post spectrum auction in Mar, 2015, India now has spectrum to enable pan-India 3G coverage
• Government expects National optical fiber network will cover 250k villages by Dec 2016
Spectrum Devices
TariffsFiber/ Towers
0.25
0.27
0.29
0.31
0.33
0.35
1Q 13
2Q 13
3Q 13
4Q 13
1Q 14
2Q 14
3Q 14
4Q 14
1Q 15
2Q 15
3Q 15
Data tariff (Rs/MB)
158 256
1,450
0.4
1.0
1.1
‐
0.2
0.4
0.6
0.8
1.0
1.2
0
200
400
600
800
1,000
1,200
1,400
1,600
India China US
Data per sub per month (MB) Cost per MB (US cents) [RHS]
This section includes the view of our India telecom team of Aditya Soman and Manish Adukia
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 25
4TTelcos focusing on data revenues: 4TAs data adoption picks up, it is becoming a key
revenue growth driver for Indian telecom companies. Our telecom research team expects
data revenues to drive 43% of incremental revenues by FY25E for the Indian telecom sector.
Widespread adoption of data plans has resulted in data prices coming down by almost 20%
in the past 2 years. Further, economies of scale are also driving these prices lower. The
team expects data consumption by 3G/4G data subscribers to increase to c.1GB/month by
FY25E from c.395MB/month in FY14 driven by (1) better smartphone penetration, (2)
convergence to IP and (3) more localized content.
4TNew entrants may act as another catalyst: 4T Launches by new entrants such as Reliance
Jio (the only private operator to have a pan India 4G/LTE spectrum) would impact: a) price
of data plans, b) per capita data consumption, and c) coverage area of high speed internet
(4G network/ FTTH). Moreover, R-Jio has already launched its chat app called Jio-Chat
which is offering free audio/video calls and messages.
4TFree internet for consumers: We note another trend with internet companies tying up
with telecom companies to offer free internet applications or website access and the cost is
borne by the telco/internet firm rather than the consumer, e.g. Internet.org by Reliance
Communications and Facebook, and Airtel Zero by Bharti Airtel, Flipkart and others,
(although Flipkart has recently pulled out of the scheme).
Exhibit 25: New entrants to impact penetration and tariffs… Different technology platforms to offer data services
Exhibit 26: …boosting data consumption significantly, in our view
Note: 3 ticks indicate strong focus, 2 ticks indicate moderate focus and 1 indicates limited focus
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
#2 Devices: Smartphone penetration rising exponentially
4TAvailability of cheaper smartphones is key: 4T Another key cog in the wheel to boost data
usage is the availability of affordable devices/ handsets that are suitable to 3G/4G bands.
Over the past 2 years, India has seen a significant jump in smartphone launches with a
majority of them in the affordable band of Rs5,000 to Rs15,000 (US$80 to US$250).
Moreover, there have been 200+ new smartphone launches in both 2013 and 2014 that cost
below Rs5,000 (or US$80). As affordability improved with these launches, the number of
smartphone shipments also improved significantly with nearly 38mn units shipped in 2014,
which is higher than the total shipments (smartphones + feature phones) in 2013.
Operator 3G data (phone)
3G/4G (dongle)
4G data on phone
Wired Internet
FTTH
Bharti Airtel
Vodafone India
Idea Cellular
RCOM
Reliance Jio
Aircel
MTS India
Tata Docomo
BSNL
MTNL 0
200
400
600
800
1,000
1,200
50
100
150
200
250
300
350
FY 14
FY 15 E
FY 16 E
FY 17 E
FY 18 E
FY 19 E
FY 20 E
FY 21 E
FY 22 E
FY 23 E
FY 24 E
FY 25 E
Data price (Rs/GB) [LHS]
Data use (MBs/month) [RHS]
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 26
Exhibit 27: Smartphone prices in India are declining and are already at c.US$40 levels 6TPrice trends for smartphones and feature phones in India
Exhibit 28: Bulk of the new smartphone launches in India are in the US$80-US$250 range (Rs5,000-Rs15,000) 6TSmartphone launches in India
Source: Retail websites (such as Flipkart, Amazon, Snapdeal), Goldman Sachs Global Investment Research.
Source: 91mobiles.
4TShift from feature phone to smartphone underway: 4T India’s current penetration of
smartphones stands at just 16% of mobile phone users compared with 78% for China and
82% for the US. The rapid rise in affordable smartphones combined with replacement
demand from feature phone users (who bought their phones in 2009-2010) will lead to a
significant jump in smartphone penetration, reaching 54% by 2020, according to Ericsson.
Consequently, as is witnessed in other countries such as China, we expect the rising
smartphone penetration to directly correlate with higher 3G/4G subscription. As such, our
telecom team estimates 3G/4G penetration to reach 49% by 2020.
Exhibit 29: India’s smartphone penetration currently at 16% vs. China/US at 78%/82% 6TSmartphone and high speed mobile data penetration
Exhibit 30: Smartphone shipments into India in 2014 more than the total shipments in 2013 6TSmartphone shipments (in mn)
Source: Company data (Bharti Airtel, Idea Cellular, RCom, China Mobile, Verizon, AT&T used as proxy for respective markets), Gartner, Goldman Sachs Global Investment Research.
Source: Gartner.
3,022 2,712 2,611 2,575 2,565
740 698 687 689 712
500
1,000
1,500
2,000
2,500
3,000
3,500
Oct‐14 Nov‐14 Dec‐14 Jan‐15 Feb‐15
Smartphone Feature phone
Rs
202
299
46 18 18
215
368
63 18 27
0 50
100 150 200 250 300 350 400
Below Rs 5K
Rs 5K ‐ 15K
Rs 15K ‐ 25K
Rs 25K ‐ 35K
Above Rs 35K
New Smartphone launches in India
2013 2014
16%
78% 82%
9%
46%
80%
India China USA
Smartphone penetration 3G/4G subs penetration
16.5
37.0
75.1
20.6
38.1
2012 2013 2014
Incremental smartphone shipments in 2014 more than total shipments in
2013
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 27
Exhibit 31: Smartphone penetration in India expected by Ericsson to improve to 50%+ by 2020…
Exhibit 32: …driving similar penetration levels in data subscription
Note: Data as of CY2014
Source: Gartner, Ericsson, Goldman Sachs Global Investment Research.
Source: Company data (Bharti Airtel, Telkomsel, China Mobile, Vodafone, MTN, Verizon, AT&T, MTS are used as proxy for respective markets), Gartner, Goldman Sachs Global Investment Research.
4TChinese 4G ecosystem to help India too: 4TChina has seen a rapid development in the 3G/4G
ecosystem as 4G subscribers crossed 100mn in 2014 and are rising rapidly. As a result,
availability of 4G handsets has also become greater. 4G-LTE spectrum band auctioned in
India is same as that of China – 2300 TD LTE and potentially 2600 TD LTE – which implies
compatibility of 4G handsets from China (available at a reasonable price). The cheapest
3G/4G handsets in India are now available for US$40/US$150, respectively. The trend is likely
to continue with the entry of multiple Chinese handset makers such as Xiaomi, Oppo, and
OnePlus. Xiaomi has already claimed 4% market share of smartphones in the first 3 months
of its launch in India as of Dec 2014, as per Gartner.
#3 Spectrum auction has improved 3G/4G coverage across India
Data from TRAI suggests that various telecom circles in India have 40%-45% of the
spectrum available in Western Europe on a per population basis. However, current data
usage per subscriber is 20%-25% of those in Western Europe. Further, we note that if the
Indian government were to vacate more spectrum in the 700 MHz band in future, it could
potentially cover all the needs for 100% coverage in all forms, i.e., 2G/3G/4G technologies.
Recent auction of spectrum has ensured Bharti, BSNL, and Jio will have entire 100% of
3G/4G coverage, whereas Vodafone and Idea would have c.75% of coverage in India. Some
of the spectrum licenses of the top four mobile operators in India are coming up for
renewal in the next two years. At present, only Airtel and Aircel offer 4G services in India,
albeit on a very small scale. But with R-Jio launching its 4G services shortly, we believe
other operators will start investing and promoting data usage a lot more going forward.
81 1515.1%
5.9% 7.2% 10.7% 16.0%
54.2%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
700
2008 2009 2010 2011 2012 2013 2014 2020
Smartphone users (mn)
Smartphone penetration (RHS)
650 mn smartphone users by 2020 according
to Ericsson
R² = 0.8089
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0% 50% 100%
3G /4 G su bs p en
et ra tio
n
Smartphone penetration
Indonesia
China
India
USA
Russia
S.Africa
Europe
India 2020
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 28
Exhibit 33: We believe the recent spectrum purchases would provide pan-India 3G coverage
Exhibit 34: India currently has spectrum to enable pan- India 3G coverage
Source: Department of Telecom, Goldman Sachs Global Investment Research.
Source: Department of Telecom.
Exhibit 35: Government has been active in auctioning spectrum in the past 4 years 6TSpectrum auctions in India including re-auctions (MHz)
Exhibit 36: Both spectrum and non-spectrum capex to rise, as per our India telecom research team 6TGS India telecom coverage capex (Rs bn)
Source: Department of Telecom.
Source: Company data, Goldman Sachs Global Investment Research.
#4 Towers: 3G/4G uptake to drive BTS growth of 6X in 10 years
4T3G/4G BTS penetration at 25%-30%, much lower than US/China: 4T Over the past several
years, we note that telecom companies in India have held back on investing in building
mobile networks as they have been burdened with relatively high spectrum prices and low
average revenue per user (ARPU) in India. As a result, India has had only 25%-30% of the
area covered by 3G/4G enabled towers. However, we believe that: 4Ta) 4T the impending pan
India launch of TD-LTE based 4G services across 800 cities by R-Jio, and 4Tb)4T the rising data
demand on the back of improving smartphone penetration are likely to drive incumbents to
step up investments to remain competitive. Our telecom research team forecasts over 6X
increase in 3G/4G enabled towers by 2025E.
Spectrum band Comments 2G
3G
4G
Recently concluded spectrum auction will ensure Indian telecom companies have enough spectrum to cover 100% of the population if other infrastructure exists
Current available spectrum can ensure 4G coverage for 30%-40% of India. If Indian Defence department vacates 700MHz spectrum in future, that will ensure 100% coverage as well
Enough 2G spectrum to cover 100% of the population. India already has c.80% voice penetration
421
992
520
1,160
306
0
200
400
600
800
1,000
1,200
1,400
900 1800 2100 2300 800
Spectrum Inventory in India (MHz)
355
880
95
295
46
385
104 178
99 85
0
200
400
600
800
1000
2100 2300 800 1800 900 1800 800 900 1800 2100
2010 2012 2014 2015
Spectrum Auctions in India (MHz)
5%
7%
9%
11%
13%
15%
17%
19%
0
50
100
150
200
250
300
350
400
Non‐spectrum capex Spectrum capex
Capex as % of sales (RHS)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 29
Exhibit 37: Telcos ramping up their tower coverage in anticipation of 3G ramp up 6TBase transceiver stations (‘000)
Exhibit 38: India still lags China in 3G/4G tower coverage 6TBTS of China Mobile (4G only), Indonesia and India (Idea +
Bharti) (‘000)
Note: 2013 corresponds to FY14 for Indian and CY13 for China/Indonesia
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
4TNon-spectrum capex way behind China: 4TChina Mobile has spent US$34.4bn of non-
spectrum capex in 2014 as it ramps up its 4G footprint in China. For the past five years, its
average has been US$25bn vs. Indian companies spending US$4-5bn. However, we expect
industry capex to rise 55% over the next 3 years to US$8.3bn from US$5.3bn in FY12-FY14.
The incremental spend is likely to be on towers, better in-building solutions, and new
network equipment.
Exhibit 39: Per capita BTS penetration too low at present in India, in our view 6TBTS per thousand subscribers
Exhibit 40: Non-spectrum capex of Indian telcos in the past 5 years is less than 20% of China Mobile’s 6TCapex (US$ bn)
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data.
170
431
126
387
31
283
21
268
0 50
100 150 200 250 300 350 400 450 500
2014 2025E 2014 2025E
Bharti Idea
Total BTS ('000) 3G/4G BTS ('000)
0
200
400
600
800
1,000
1,200
2013 2014E 2015E
China Mobile 4G India 2G India 3G India 4G Indonesia total
2.29
0.90 0.83 0.83
0.93
1.15
0.68
0.25 0.17 0.16
0.00
0.50
1.00
1.50
2.00
2.50
China (China Mobile)
US (average)
Indonesia (Telkomsel)
Bharti Idea
BTS per thousand subs
3G/4G BTS per thousand subs
3.7 3.6 6.0 6.1 6.7
20.3 21.0 20.8
30.2
34.4
0
5
10
15
20
25
30
35
40
FY11 FY12 FY13 FY14 FY15
Bharti Idea Vodafone RCOM
R‐Jio Tower co's China Mobile
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 30
#5 Fiber: R-Jio launch and NOFN to act as catalysts for ‘fiberization’
4TNOFN to ensure pan India fiber network: 4TThe national optical fiber network rollout plan
(NOFN) by the Government of India plans to connect 250,000 village councils and deliver
bandwidth of 100Mbps by Dec 2016. While the progress was slow until FY14, the
government has now put this plan on priority and advanced the rollout targets. It could
accelerate internet penetration and significantly boost data consumption especially in the
sub-urban and rural demographics, in our view.
4TR-Jio to reportedly launch coverage in 800 cities:4T Recent media articles (such as
Business Standard, Dec 17, 2014) have stated that R-Jio is set to launch its TD-LTE based
4G services across 800 cities over the next 12 months and that it may augment its 4G
launch with FTTH (Fiber to the home) broadband and Wi-fi based devices. We think this
coupled with the national rollout of fiber optic network by the Indian government could be
a game changer. Coverage of fiber to carry data in India is currently at 9% penetration but a
combination of Jio and NOFN may expand it at least to a 40%+ over the long term.
Exhibit 41: R-Jio has tied up with various tower operators for c.300k towers – sufficient to provide
network in 800 cities, in our view
Exhibit 42: Indian government’s National Optical Fiber Network (NOFN) likely to be a key enabler
Source: Company data.
Source: Dept. of Electronics and Information Technology
Exhibit 43: Roadmap to ‘Fiberization’
Source: Goldman Sachs Global Investment Research.
113
45 42 36
28
11 8 5 4 0
20
40
60
80
100
120
Tower sharing agreement of R‐Jio with different operators ('000)
Roadmap of National Optical Fibre Network (NOFN)
Connectivity
Bandwidth
Open access
Additional capacity
In addition 400,000 - 500,000 Km of existing fibre to be leased
Deliver 100 Mbps bandwidth at every Gram Panchayat
Connect 250,000 Gram Panchayats (Village Councils) by Dec 2016
Non-discriminatory access to all service providers
500,000 Km of incremental fibre to be laid
Current Status Challenges The government plans to connect 250k gram panchayats with broadband by Dec 2016. Speed of laying fiber at 500km per month against target of 30km per month
Internet penetration of c.25% of which broadband penetration only at 6%. More than 90% of the 260mn internet users access it from wireless devices
For 3G, only about one third of the available spectrum in the 2100 MHz band assigned to telcos. Spectrum in the highly efficient 700 MHz is unused
Average broadband speeds of around 1 Mbps in India vs. 3 Mbps in China and 10 Mbps in the US
Complicated Right of way procedures and high ROW charges. Different rules in different states for getting clearances
Lack of investments in infrastructure by private telecom operators. Copper wire network mostly owned by PSUs
Low smartphone and PC penetration
Lack of digital literacy and consumer awareness in rural areas about advantages of internet
Lack of data spectrum. Paucity of spectrum leading to low speeds
Poor network coverage. BTS: population ratio in India much lower than in China
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 31
Ecosystem #2: Capital infusion accelerating as global firms enter
Global venture capital (VC) and private equity (PE) firms have been active in India over the
past few years. In 2013, nearly US$700mn of capital has come into e-commerce companies
in India, and the trend continued in the first half of CY2014. However, we note that a pick
up in global internet companies’ valuations in 2013-2014 led by China provided the first
trigger for increasing capital inflows in India. Big ticket investment announcements like
those into Flipkart (US$1bn investment in July 2014 by investors including Tiger Global,
GIC and Naspers) and Amazon India (US$2bn commitment by Amazon Inc. CEO Jeff Bezos
in the medium term) kickstarted the first major leg of capital inflows into the e-commerce
industry. These were followed by some major announcements with large amounts of
capital commitment from Softbank ($10bn) and Alibaba (through Ant financials), besides
other global companies such as Google Capital deciding to set up shop in India.
Exhibit 44: Venture capital (VC) firms continue to invest in India 6TTop 10 VC investors in India (as of April 2015)
Exhibit 45: Large capital inflows accelerated in the past 6- 9 months 6TCapital flows (US$ mn) into e-commerce industry
Source: Crunchbase.
Source: News articles (including The Economic Times dated Apr 16, 2015, Business Standard dated Jan 16, 2015), Crunchbase
Exhibit 46: Global majors have begun committing capital to Indian start-ups
Exhibit 47: E-tail attracted the most capital followed by classifieds
Note: This is not an exhaustive compilation of capital raising activity in India
Source: News articles (including Business Standard dated Jul 31, 2014, The Economic Times dated Oct 28, 2014)
Source: News articles (including The Economic Times, Business Standard), Crunchbase
S.No Investor # VC Investments made in India
1 Sequoia Capital 74 2 IDG Ventures India 58 3 Tiger Global Management 43 4 Helion Venture Partners 41 5 Accel Partners 40 6 Nexus Venture Partners 38 7 Blume Ventures 37 8 Kalaari Capital 32 9 Intel Capital 32 10 Norwest Venture Partners 30
$94 $181 $115
$322 $304
$503
$1,757
$1,457
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
1Q 2013
2Q 2013
3Q 2013
4Q 2013
1Q 2014
2Q 2014
3Q 2014
4Q 2014
1Q 2015
$3.4bn
mn
Jul, 2014
Oct, 2014
US$ 10bn SoftBank announces
plans to invest US$10bn in India in
coming years Feb, 2015
Alibaba Alibaba backed Ant Financial
takes 25% stake in Paytm
US$2bn Amazon announces an additional US$2bn investment in India
Jun, 2014
Google Capital Google's first investment in India ‐ Freshdesk ‐ infuses $31mn along with existing
investors
Jan, 2015
Twitter Twitter buys Indian marketing services provider ZipDial for
$30‐$40mn
Google Capital Google provides fresh funding to CommonFloor ‐ India's online real estate company
$6.71
$1.20
$0.96
$0.36
$0.33
$0.22
$4.24
$0.63
$0.58
$0.18
$0.24
$0.15
$0.0 $2.0 $4.0 $6.0 $8.0
e‐commerce
Classifieds
Travel & logistics
Restaurants & Food
Social/ Entertainment etc.
Financial services/ Others
Capital raised by internet firms in India (US$ bn)
Latest round (US$ bn)
Total raised (US$ bn)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 32
In 2014, the capital commitment towards e-commerce companies in India has been about
US$6bn, with about 85% of it coming in the second half of CY14. Within e-commerce, e-tail
has captured a major share of capital flows followed by classifieds and travel/logistics. We
expect the capital infusion to continue into 2015 as internet penetration picks up pace
backed by economic reforms on the horizon such as potential rollout of GST reforms. We
believe that investment opportunities in the e-commerce derivate sectors such as
warehousing, distribution and logistics, education, financial and other business services
are likely to take center-stage.
Exhibit 48: E-tail dominated capital raising in the past 2 years 6TKey investments made in India over the past two years
Note: This is not an exhaustive compilation of capital raising activity in India
Source: News articles (including VC circle, Crunchbase, The Economic Times).
Company Industry Total raised Investors Amount
(US$ mn) US$ mn
e-commerce $4,241 $6,712 Flipkart Marketplace/Retail Qatar Invesment, T Rowe, Steadview Capital $700 $2,500 Amazon India Marketplace Amazon $2,000 $2,000 Snapdeal Marketplace SoftBank $627 $1,100 Paytm Mobile Marketplace Ant Financials (Alibaba Group) $525 $525 Shopclues Marketplace Tiger Global Management $100 $116 Urban Ladder Lifestyle Shopping (Furniture) Sequoia Capital, TR Capital, Steadview Capital $50 $77 CaratLane Lifestyle Shopping (Jewellery) Tiger Global Management $31 $52 Others Lifestyle Shopping (Furniture,
Fashion, baby products etc) SAIF Partners, Temasek, IDG Ventures, Norwest, Kalaari Capital, Steadview Capital, Intel Capital, Smile Group, Sequoia Capital, Nokia etc
$208 $342
Classifieds $628 $1,198 InMobi Mobile ads SoftBank $200 $216 Quikr Community (C2C) Tiger Global Management, Matrix, Nokia, Omidyar Network $150 $346 Housing.com Real estate SoftBank $100 $140 CarDekho Automobile aggregator Hillhouse Capital, Tybourne Capital, Sequoia Capital $50 $50 Komli Media Advertising Nexus, Helion, Peepul Capital, Norwest $30 $97 Others Automobile, Community, Real
estate, deals Tiger Global Management, Canaan Partners, Nexus, DN Capital, Bessemer Venture Partners, Info Edge
$98 $350
Travel & logistics $585 $960 OLA Transport DST Global, Tiger Global, Steadview Capital, Accel Partners $400 $677 Delhivery Logistics Multiples Alternate Asset Management, Nexus, Times Internet $35 $43 Yatra Transport Norwest Venture Partners $23 $45 TaxiForSure Transport Helion, Bessemer, Accel $30 $44 OYO Rooms Travel/Accommodation Greenoaks Capital, Lightspeed Ventures, Sequoia Capital $25 $26 Others Transport, logistics Intel Capital, Inventus Capital Partners, Peepul Capital,
Blumberg, Helion, Sudeep Bhandari (Datavision) $72 $126
Latest round of investment
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 33
Exhibit 49: Global pioneers in the internet sector are now eyeing investments in India. Nearly all global majors have established a presence in India in recent months 6TKey investments in Indian internet companies by leading private equity/venture capital firms in the past 3 years
Other Investors
Intel Capital
Google Capital
Tencent Holdings
Investee Companies
SoftBank Sequoia Tiger Global Accel Naspers Capital Management Partners
Newshunt
Source: Company data.
Capital raising = Discounting, advertising, consolidation
As capital flowed into e-commerce companies, most of them used it to acquire customers
through heavy discounting including incentives such as cash backs, discounts, bonus
reward points, free shipping. As is typical in e-commerce industries across the globe, the
“winner takes all” phenomenon is taking hold in India as well. This has led to large e-tailers
like Flipkart, Snapdeal and Amazon India offering heavy discounts to gain market share.
With this discounting strategy, we note that these 3 e-tailers now account for nearly 80%
market share in the e-tail space, led by Flipkart at 45%.
In addition to utilizing cash to offer discounts and acquire customers, companies have also
spent money on consolidation, e.g., Flipkart acquiring Myntra (fashion/apparel e-tailer) for
approx US$300mn in May 2014. We expect the trend to continue going forward with a high
possibility of horizontal e-tailers acquiring niche vertical e-tailers.
Impact of capital across spectrum of industries
We believe the rise of e-commerce in India is likely to have a significant derivative impact
on complementary industries like online and print media and advertising, warehousing and
distribution, recruiting etc. Further, it could adversely affect traditional vendors besides the
IT services industry (higher attrition) as both the industries recruit from a similar talent pool.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 34
4TAdvertising: 4T Heavy advertising spends to attract new customers is becoming a trend which could not only impact print media companies but will also be quite important for
online advertisers.
4TLogistics: 4T Logistics and distribution are the key enablers of e-commerce in India, more so due to the bottlenecks in Indian infrastructure. Increasing capital inflows are
ensuring investments in logistics and last mile delivery infrastructure. Further, logistics
firms as well as real estate firms providing warehousing facilities are likely to be
impacted, in our view.
4TRecruitment:4T A surge in the internet sector and significant capital inflows has resulted in significant demand in workforce across technology, management, finance and
administration levels which would impact recruitment consultants and classified
companies such as Info Edge (Naukri.com), in our view.
4TConsolidation: 4T In order to gain scale, combat competition and acquire niche offerings such as personalized deals, companies may look to acquisitions with the help of capital
raised. We are already in the middle of the first phase of consolidation where
companies with better funding are acquiring peers in the space. Start ups and
companies which have gained a reasonable scale are being impacted by this trend.
4TConsumption: The side-effects of heavy discounting and investments are impacting offline channels of economies such as offline retail stores, traditional vendors and
capital providers.
Exhibit 50: Key sectors and companies impacted by capital flows into e-commerce
Advertising
Most Internet companies’ business models are either B2C or C2C. Consequently, there is a need to advertise
“Winner takes all” phenomenon accelerating advertising spends
Companies
Media companies
Search providers
Social media advertisers
E.g.: Times Group, Just Dial, Google, Facebook, InMobi etc.
Logistics
Current logistics infrastructure covers less than 10% of the country’s postal codes
Multiple tax structure leading to decentralized warehouse networks
Companies
Warehousing and distribution solution providers
Real estate firms
E.g.: Blue dart, India Post, Aramex, GATI, Delhivery, DLF etc.
Recruitment
Rapid growth leading to talent hunt
IT/ITES industry suffering high attrition rates leading to higher retention/ recruiting costs
Companies
Talent search firms
Colleges/ Universities
Students/Job seekers
E.g.: Naukri, LinkedIn, Times Jobs, Randstad, Team Lease etc.
Consolidation As industry grows,
consolidation bound to happen
Several acquisitions happened in last few months.
E.g.: Flipkart acquired Myntra, Goibibo acquired Redbus
Companies
Niche/vertical companies
E.g.: Zovi, Pepperfry, Urban Ladder, Zomato, Hike, Policybazaar etc.
Consumers
Internet companies incentivizing consumers through heavy discounts
Higher competition leading to better customer service quality
Sectors
Consumers
Traditional vendors
Capital providers
Source: Goldman Sachs Global Investment Research.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 35
Ecosystem #3: Payment landscape evolving across channels
4TLow card penetration makes case for evolving payment landscape: Credit card
penetration in India is quite low, with only 20mn cardholders as of Sep 2014, implying 1.7%
penetration. Further, while there are 431mn debit cards as of Sep 2014, a lot of these may
be used only for cash withdrawals and not for commercial transactions at all, in our view.
Hence, we believe the online payment landscape in India needs to evolve to propel the
growth of e-commerce. We believe the rise of the internet economy in India would not be
possible without a commensurate improvement in the ease of payments for consumers.
Hence, multiple niche companies, besides banks, have emerged across the payment
landscape offering several inexpensive and innovative transacting solutions.
Cash on Delivery (COD) is the most preferred mode:4T Our interactions with multiple e-
commerce firms suggest the most preferred way for Indian consumer to transact still
remains cash as about 60% transactions in e-commerce as of 2014 are being done on cash
on delivery (COD) mode, vs. 2%/30% in the US/China. It is so successful in India because it
is convenient and enhances customer trust initially, in addition to enabling consumers who
do not have access to credit card/debit cards/net banking etc. to buy goods/services online.
This has helped push online commerce to the Indian consumers and propelled it to attain
critical mass. However, cash on delivery is an expensive option owing to a variety of
reasons:
Higher return rates for goods (customer refusal to take deliveries due to lack of cash, non-serious buyers etc.)
Higher costs of handling cash (theft, loss of cash due to mishandling etc.)
Elongated working capital cycles (time for cash to reach the merchant from consumer increases)
Higher delivery costs as third party logistic providers charge extra for such deliveries
Exhibit 51: Cash on delivery is most preferred mode for Indian online shoppers, unlike in China or the US 6TMix of online transactions by mode of payment (2014)
Exhibit 52: Credit card penetration barely changed since 2006, but debit cards’ rose as banks offer them for free 6TCredit and debit cards outstanding and growth
Note: China wallet mix assumes Alipay’s wallet users as the total wallet users in China
Source: Central Banks, Goldman Sachs Global Investment Research.
Source: RBI.
60%
16%
12%
12%
1%
2%
40%
30%
18%
10%
30%
0%
26%
34%
9%
0% 20% 40% 60% 80%
Cash on delivery
Credit Cards
Debit Cards
Net Banking
EMI/3rd party wallets China US India
17 23 28 25 18 18 18 20 19 20 50
75 102
137 182
228
278
331
394 431
33%
19%
‐10%
‐26%
‐2% ‐2%
11%
‐2%
7%
51%
37% 34% 32% 25% 22% 19% 19% 17%
‐30%
‐20%
‐10%
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
450
500
Credit cards (CC) Debit cards (DC)
CC yoy (%) [RHS] DC yoy (%) [RHS] mn
This section includes the views of our India financials team of Tabassum Inamdar and Shyam Srinivasan
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 36
Expensive COD acting as a catalyst for innovative payment mechanisms: As the
merchants have to typically bear most of the overhead expenses arising out of COD, it is
increasingly denting profitability. Hence, merchants/service providers are opening up for
tie-ups with mobile wallet providers, banks and credit/debit card providers. Sometimes, it
was also due to regulatory requirements such as in the case of Uber/Paytm where the RBI
regulations resulted in Uber using a mobile wallet. Indian banks and start-ups space are
looking to present consumers and merchants with numerous transacting choices including
mobile/electronic wallets, payment gateways, mobile POS (point of sale), cash cards,
credit/debit cards, net banking, electronic fund transfers etc.
Exhibit 53: Mobile based payments fast evolving; could eventually help reduce high cost/high risk cash on delivery (COD) transactions
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 54: Digital payment landscape evolving rapidly in India with banks, telecom companies and specialized firms focusing on disrupting the payments landscape 6TPayment system landscape and key companies
Note: Payment banks are not set up yet. Companies listed have applied for Payment bank licenses with the RBI; NACH = National Automated Clearing House
Source: Company data, RBI, Goldman Sachs Global Investment Research.
Payment approach Providers Cost structure Comments Cash on delivery (COD) Aramex, FedEx, Blue Dart, JAVAS,
Delhivery etc.
Rs25‐80 per 0.5kg packet or
2%‐4% of invoice value
‐ Expensive solution for sellers
‐ Improves customer reach
Credit/debit card/net
banking
Visa, MasterCard, American
express, Diners club, RuPay etc.
0.75% to 3% ‐ Low penetration
‐ Less convenient
Payment gateways ‐ card
linked
CCAvenue, Billdesk, PayU, Citrus,
SBIePay, zaakpay etc.
0.75% to 5% ‐ Limited customer base
‐ Merchant tie‐ups necessary
IMPS (Immediate payment
system)
IMPS live member banks (~59
banks currently)
Only 4 banks charge. Rest
offer for free
‐ Low merchant adoption
‐ Long drawn sign‐up process
Mobile only based payments Mobile pre‐paid wallets Airtel money, m‐pesa, Citrus,
Paytm, Itzcash, Oxigen etc.
0.7% to 3% + convenience
fee to users
‐ Scale is an issue
‐ Customer skepticism
Direct operator billing/
Direct‐to‐bill
Airtel, Vodafone as high as 60% ‐ High cost structure
‐ open up paid‐app download market
Indirect operator billing
(charge to mobile bill)
Boku, Zong (owned by PayPal) as high as 30% ‐ High cost/fee structure
‐ Low merchant adoption in digital
Banks
C o
n s u
m e rs
M e
rc h
a n
ts
Technology Telcos Retail
Government/Regulator
Networks
Visa Mastercard
RuPay American Express
Point of Sale Terminals
Mswipe Ezetap
Ingenico SBI MAB
Acquirers
ICICI Merchant Services
Merchant Solutions (Axis Bank)
ACH based systems
NACH remit2India
Telco wallets
Airtel Money Vodafone M-Pesa
Banks/ Card issuers
State Bank of India Axis Bank ICICI Bank HDFC Bank
Payment aggregators
CCAvenue BillDesk SBIePay direcpay
PayU Zaakpay
Citrus
eWallets
ngpay PayUMoney
Google wallet
Wallets
ITZ cash Paytm cash Citrus cash
Gift cards
Shoppers Stop Lifestyle
Payment Banks
Paytm Vodafone Mobikwik
Bank e-wallets
HDFC Bank Chillr ICICI Bank Pockets
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 37
Exhibit 55: Mobile banking transactions have picked up in recent months 6TMobile banking transactions
Exhibit 56: Wallets are as yet a new phenomenon in India, we expect it to rapidly scale up 6TElectronic (mobile) wallet users (2014)
Source: RBI
Source: Company data, respective Central banks.
Reserve Bank of India – the facilitator and regulator moving in the right direction:4T
Over the years, the Indian banking regulator has also been taking incremental steps to
increase cashless transactions not only in the internet space but also offline. More recently
it has released guidelines for a universal bill payment system called Bharat Bill Payment
System (BBPS). It has also released guidelines and invited applications for payment bank
licenses, following which a large number of companies have applied.
We believe that payment bank licenses, once issued, could act as a catalyst in pushing the
Indian consumer towards a cashless economy for the following reasons:
1) Enhanced customer trust -- will let more people sign up for electronic wallets,
2) Allows for withdrawal of cash from wallets,
3) Allows wallet companies to pay interest to customers on money stored in the wallet,
4) Lower cash balance, regulatory control and ease of payments for small ticket items.
Exhibit 57: Reserve Bank of India actively taking steps to increase cashless transactions 6TTimeline of regulations on cashless payments
Exhibit 58: We think the grant of payment bank licenses to wallet companies would improve trust, penetration 6TKey payment bank applicants
Source: RBI
Source: Reserve Bank of India.
1 2 10 10 12 11 13 14
16 20 20 23 26 26
34 33 39 40
44 47
77 84
102 113
129 141
169
‐
5
10
15
20
25
‐
20
40
60
80
100
120
140
160
180
M ar ‐1 1
M ar ‐1 2
M ar ‐1 3
A pr ‐1 3
M ay ‐1 3
Ju n‐ 13
Ju l‐1
3 A ug
‐1 3
Se p‐ 13
O ct ‐1 3
N ov
‐1 3
D ec ‐1 3
Ja n‐ 14
Fe b‐ 14
M ar ‐1 4
A pr ‐1 4
M ay ‐1 4
Ju n‐ 14
Ju l‐1
4 A ug
‐1 4
Se p‐ 14
O ct ‐1 4
N ov
‐1 4
D ec ‐1 4
Ja n‐ 15
Fe b‐ 15
M ar ‐1 5
Value (Rs bn) Volume of transactions (mn)
300
162 152
50 10 6
0
50
100
150
200
250
300
350
Al ip ay
Pa yp al
Ka ka o ta lk
Pa yt m
Ci tr us
Pa yp al
Au st ra lia
Wallet users (mn)
Date Payment related milestone 1986 Introduction of MICR based cheque clearing 1994 Electronic Funds transfer system (EFT) launched 1998 Introduction of debit card Jun‐01 RBI allowed banks to offer internet banking facilities Nov‐05 National electronic funds transfer (NEFT) launched Dec‐07 Parliament clears the Payment and settlement systems act Jun‐08 Operating guidelines for mobile payments released by the RBI Apr‐09 Operating guidelines for prepaid instruments put out by RBI Mar‐12 Launch of Rupay ‐ domestic card payment network Oct‐14 2‐factor authentication mandated for all credit card
transactions Nov‐14 RBI releases final guidelines for licensing of Payment banks Nov‐14 Guidelines for bharat bill payment system Dec‐14 EMV Chip and Pin mandated domestically
No Applicant JV Partner
1 Aditya Birla Nuvo Idea Cellular 2 Bharti Airtel Kotak Mahindra Bank 3 Cholamandalam
Investment and Finance
NA
4 Fino Paytech NA 5 Future group IDFC 6 GI Technology NA 7 Oxigen RBL Bank 8 Paytm NA 9 Reliance Industries State Bank of India 10 Vakrangee Ltd NA 11 Vodafone Yes Bank
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 38
Ecosystem #4: Logistics – Within the bottleneck lies the opportunity
4TLack of infrastructure is a blessing in disguise: 4TLack of retail outlet infrastructure, high
rentals and poor connectivity have limited the presence of organized retail (less than 10%
according to EY in 2013) in India. We believe the same reasons could act as a catalyst for
heightened adoption of e-commerce in India – a counter trend to that in developed
countries. However, we believe logistics and last mile delivery are key bottlenecks that
need to be addressed for faster adoption of e-commerce in India.
4TTraditional vendors evolving, so are new entrants: 4T While incumbent logistic providers
like India Post, Aramex, Blue dart, DTDC, Fedex have specially added ecommerce solutions
to their offerings, the e-commerce industry still faced challenges in terms of handling cash
on delivery orders, return orders and customer service. This led to the emergence of
specialized e-commerce logistics companies like Delhivery, E-Com express, e-kart etc. As
most of these specialized providers suffered from limited reach across India (Exhibit 48), it
saw the emergence of logistics aggregators such as Kart Rocket and Zepo. These
aggregators do not have their own distribution network, but instead rely on the
incumbent’s network. They assist merchants in choosing cost/time effective way of
shipping merchandize to their customers.
Exhibit 59: E-comm. related logistics market grew at a 105% CAGR in 3 years, while organized air/ground
express industry grew 14%/19% 6TMarket size and growth
Exhibit 60: Lack of retail outlet infrastructure in India (hypermarkets) is a big catalyst for faster adoption of
online commerce, in our view 6TData as of 2014
Source: Holisol Logistics, Avenues Capital, Blue Dart. Source: Euromonitor.
4T
Clarity on tax and regulations needed; GST may be a potential trigger: 4TEven with the
emergence of multiple competitors, key issues such as lack of enough warehousing and
distribution space and sub optimal (or lack of) last mile connectivity still hinders the e-
commerce industry. Moreover, uncertainty around tax regulations for marketplace
providers (such as Amazon, WS retail) who handle warehousing and distribution for SMEs
that sell merchandize on their platforms is causing further roadblocks. With our forecast for
e-tailing market to grow to US$220bn in size by 2030, we estimate that a significant
opportunity awaits the logistics industry.
We believe the passage and potential implementation of GST starting April 2016 (goods
and services tax) could result in seamless working of the hub and spoke model in the
Indian logistics industry. This could lead to third party logistics companies (3PL) emerging
in the market place resulting in much lower logistics cost and lesser bottlenecks. Also,
modes of transportation like the railways which are currently underutilized for logistics,
would assume significance for long distance travel.
690
500
680
105%
14% 19%
0%
20%
40%
60%
80%
100%
120%
e‐comm. logistics Organized Air Express
Organized Ground Express
300 350 400 450 500 550 600 650 700 750
Market size (US$ mn) FY11‐FY14 CAGR
43 74 233
425
2,974
0
500
1,000
1,500
2,000
2,500
3,000
3,500
UK USA China Brazil India
# people per Hyper market ('000)
This section includes the views of our India infrastructure team of Pulkit Patni and Mohit Soni
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 39
Exhibit 61: COD is more than twice as expensive as regular delivery, but remains the preferred option for consumers
Note: Delivery of 500g
Source: Zepo, Kart Rocket, Goldman Sachs Global Investment Research.
Exhibit 62: Most logistics companies do not have enough Pan-India reach, except India Post 6TKey logistic solutions providers in India and their current reach
Source: Company data.
Exhibit 63: Potential GST implementation could ease logistics bottlenecks for companies with large scale warehousing facilities and multi-modal logistics firms How GST will change things
Source: Goldman Sachs Global Investment Research
58 62
68
130
0
20
40
60
80
100
120
140
Non‐COD total charge
COD shipment charge
COD cash collection charge
COD total charge
Rs Cash on delivery (COD)
Company eCommerce solution Type Description CoD offered (Pincodes)
Pre-paid reach
(Pincodes)
Shipping solutions
Blue Dart E-business solutions B2B and B2C Provides shipping tools that businesses can incorporate in their e-tail stores 3,300 4,100
Delhivery Delhivery B2B Fulfilment and logistics network for non-contact retail. Own and operate fulfilment centers 2,600 2,600
DTDC Dotzot B2B and B2C Third party logistics service provider focused exclusively on e-retail delivery fulfillment 7,100 8,000
FedEx FedEx B2B and B2C Provides shipping tools that businesses can incorporate in their e-tail stores 2,650 5,550
India Post Express Parcel B2B and B2C Door-to-door service available to both retail as well as business (corporate) customers in major cities using air mail service
50 cities 50 cities
India Post Business Parcel B2B and B2C Offers total mailing solutions to businesses from mail preparation to mail delivery using surface transport system
25,000 25,000
Logistic aggregators
KartRocket ShipRocket B2B Enables e-tailers to dispatch a shipment, pick a courier company, assign an airway bill number, and print a shipping label, among other facilities
9,000 16,000
Zepo ZePost B2B Offers complete logistic assistance to small businesses looking to sell online 6,100 8,220
Central taxes Excise Customs duty CST
Current tax structure
State taxes VAT Octroi State Cess
To avoid duplication of taxes
Proposed GST
Manufacturers do stock transfer between inventory stocking points
Hence, they have multiple small warehouses in each state
Target - saving taxes rather than operational efficiency
Large scale / 3rd party warehousing will get a big boost
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 40
Ecosystem #5: Government initiatives likely to pick up
Lack of clarity around the regulatory environment
The regulatory environment in India has not been very clear around e-commerce till now.
In the past few years, there have been concerns around lack of clarity on various regulatory
/legal issues such as taxation, logistics, foreign investment, payments landscape and
vertical specific concerns. Although India does not have a separate regulator for the e-
commerce industry yet, the government has identified nine different agencies which would
monitor the development of this sector going forward. We believe that while regulation is
necessary, businesses should be able to focus more on expanding their business.
Exhibit 64: No separate regulator in place for e-commerce yet, still governed by existing rules/laws 6TRegulatory landscape for e-commerce and related businesses in 2014
Source: News Articles (The Economic Times, Business Standard etc.), Goldman Sachs Global Investment Research.
Digital India – a key cog in the wheel to increasing penetration
By pursuing its ‘Digital India’ initiative which entails a capital expenditure of c.US$19bn, we
believe the Indian government could accelerate the spread of internet connectivity in India
by improving infrastructure (broadband connectivity to 250k village councils, 400k internet
access points, Wi-Fi in 250k schools and all universities) and easing bottlenecks as enabling
private investments in technology. While the NOFN and Digital India rollout has been
gradual to date, the central government seems to be focusing on the same and have
advanced the timeline to execute the Digital India initiative by almost a year.
Category Regulation Affected Companies ‐ 2 factor authentication is mandatory for card / online
payments
All B2C ecommerce
companies
‐ Allowing payment banks licenses which will allow
acceptance of deposits upto Rs100k, issuance of debit cards,
offering financial products like MFs, Insurance.
Mobile wallets, payment
gateways, e‐commerce
companies, telcos
‐ 100% in B2B e‐commerce
‐ 100% in single brand retail (offline)
‐ 51% in multi‐brand retail (offline)
All e‐tailing companies
‐ Complete restriction on foreign online retailers to sell
products sourced by themselves ‐ should rely on marketplace
model which is 100% allowed
Foreign ecommerce
companies
Listing / IPO ‐ Distributable profits in at least 3 out of past 5 years and
positive net worth in the past 3 years
Loss making e‐commerce
companies
Value Added Tax
‐ For goods sold by online retailers like Amazon under their
own risk (fulfilment), they should be paying VAT rather than
the merchant
All e‐tailing companies
M&A ‐ Current tax regime and unclear M&A regulations for online
companies make the M&A process complicated All e‐commerce companies
Logistics
‐ Lack of GST leads to inefficient taxation of sales tax and VAT
in each state and resulting in multiple warehouses in different
locations and lack of economies of scale
All e‐tailing companies
Payments Landscape
Foreign Direct
Investment (FDI)
Dept. of Revenue
Dept. of Industrial Policy and
Promotion, Dept. of Commerce
Reserve Bank of India
Ministry of Corporate affairs
Dept. of Information Technology
Dept. of Consumer affairs
Dep. Of Information & Broadcasting
Ministry of Statistics and Programme
Implementation
Ministry of Home & Finance
This section includes the views of our India economics team of Tushar Poddar and Vishal Vaibhaw
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 41
Exhibit 65: Digital India initiative proposes to connect 250k village councils to broadband via National optical fiber network 6TDigital India highlights
Source: Dept. of Electronics and Information Technology.
Government channels may contribute in a big way
Besides helping build network connectivity across the country, we believe the Indian
government has several other channels through which it can accelerate the penetration of
internet and e-commerce. We list below a few of those avenues, in some of which the
government already has a major head-start.
4TIndian Railways – IRCTC portal is the largest online portal in India
The Indian government runs one of the largest e-commerce portal in the country — IRCTC
(Indian Railway Catering and Tourism Corporation) — measured in terms of number of
transactions (463,000 per day in FY14). It is the online railway ticketing platform used by
the Indian Railways. It provides the first touch point of e-commerce for the vast rural and
suburban population, which is otherwise untouched by the current e-commerce industry in
India. The government could leverage this reach and look to provide e-governance and e-
services across various departments, in our view.
Exhibit 66: Indian govt. owned IRCTC runs one of the largest online ticketing agencies in the world
Exhibit 67: India Post is looking to launch an e-commerce portal in marketplace model in 2015. Its infrastructure
reach could help deepen the e-comm. market, in our view
Note: Data as per latest available
Source: IRCTC.
Source: India Post.
Ongoing Schemes
Rs1 tn (US$ 17bn)
New Schemes
Rs130 bn (US$ 2bn)
Costs
Impact of Digital India by 2019 Broadband in 250,000 villages
Universal mobile phone connectivity Net zero electronics imports by 2020 400,000 public internet access points
Wi-Fi in 250,000 schools, all universities Public Wi-Fi hotspots for citizens
17mn trained for IT, Telecom & Electronic jobs 17mn direct employment; 85mn indirect employment
e-governance & e-services across government Leader in IT use across health, education, banking
IRCTC # of tickets (mn) # of Passengers
(mn)
Avg. tickets per day ('000)
Avg. passengers
per day ('000)
FY12 116.1 209.9 318.1 575.1 FY13 140.6 254.4 385.2 697.0 FY14 169.0 345.7 463.0 947.0
# of Post Offices (PO) 155,015 # in rural areas 139,144 % in rural areas 89.8%
People served per PO 7,175 Avg. area served by each PO 21.2Km
2
Employees 460,000 COD orders (Rs bn - FY14) 2.8
India Post
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 42
4TIndia Post – The widest distribution reach in the country
The Indian government possesses a massive logistics network through India Post - its
postal service arm. It is the only logistics service provider in India currently that can deliver
parcels and goods to nearly 25,000 postal codes in India (nearly a 4PthP of total pin codes).
Several large e-tail companies in India, like Amazon and Flipkart among others, have
partnered with India Post to take advantage of its deep reach. As such, India Post is already
aiding as a catalyst in the penetration of e-commerce.
Further, India Post plans to launch an e-commerce marketplace of its own that could
significantly aid in improving internet and e-commerce penetration into the hinterlands of
the country. Moreover, we note that if they were to get a payments bank license from the
RBI, it could enable safer and easier way of payments for its customers.
Jan Dhan Yojna – The biggest drive for financial inclusion in India
The PMJDY (Pradhan Mantri Jan Dhan Yojna) scheme intends to bring banking to every
doorstep in the country. As part of this initiative, the government has opened nearly 125mn
bank accounts as of Jan 2015 since the program started on Aug 28, 2014. Of 125mn
accounts, 110mn account holders were also issued debit cards potentially arming them
with the necessary tools to be able to transact online. We believe this increases the target
market for online commerce in India as well as helps propel India towards a cashless
economy.
JAM Number trinity: The Indian government envisages the JAM Number trinity – Jan
Dhan Yojna (Bank account number), Aadhaar ID card number (UIDAI), and Mobile number
– to help effectively target public resources (such as direct cash transfer of subsidies to the
poor) and deliver other governance services. As highlighted in our “India’s Digital
Dividend” report dated Sep 24, 2014, the delivery of governance services through the use
of technology could eliminate wastage of resources as well as drive productivity growth in
the country. We believe this could potentially bridge the per capita income gap that India
has with China/US at a faster pace fuelling consumerism, a key catalyst for e-commerce
growth, in our view.
Exhibit 68: Unique Identification Authority of India (UIDAI) issued identification cards to nearly 2/3PrdP of
Indian population (Feb, 2015)
Exhibit 69: ‘Jan Dhan Yojna’ launched in late August, 2014 has added c.110mn debit card holders in 5 months
Source: UIDAI.
Source: UIDAI, Ministry of Finance
4T
Aadhaar cards issued 773mn 63%
Rest of population 463mn 37%
India
Total 125.5 Rupay debit card
110.8
Aadhaar seeded 45.0
‐
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Jan Dhan bank accounts (Jan 31, 2015)
mn
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 43
Ecosystem #6: Talent driven start-up ecosystem fast emerging
4TIndian IT services sector has a pool of tech talent: 4TOver the past couple of decades, the
Indian IT-BPM sector has been the key driver of employment in India. This has led to an
increasing number of graduates looking to equip themselves for recruitment by this
industry. As a result, talent supply to the industry has grown significantly, more or less
matching demand. Apart from more than 1mn engineers that graduate in India every year,
there are more than 150,000 digitally skilled high end employees that can cater to the
supply side dynamics for the industry.
Exhibit 70: 5.8mn are estimated to graduate in FY15 (vs. 3.7mn in FY10) 6TGraduate output in India
Exhibit 71: 150K+ digitally skilled employees are readily available (FY15) 6TDigitally skilled professionals
75000+ Post graduates
1mn engineers
1.5mn industry
ready professionals
0.8mn science
graduates
30,000 mobility
specialists
> 50,000 cloud, social media, and
collaboration skilled talent
50,000 analytics
professionals
Source: NASSCOM, McKinsey.
Source: NASSCOM, McKinsey.
4TTougher immigration norms in the US, bridging parity help: 4TAvailability of talent is
improving driven by: (1) increasingly tougher immigration norms in the US, (2) reducing
purchasing power parity in India as salaries for good talent are at global levels, and (3)
potential upside in compensation from stock options in Indian start ups after they get listed
or acquired.
4TStart-ups boom as funds become freely available: 4T Of late, the abundance of talent has
driven a start-up boom, catapulting India to be among the top start-up nations across the
globe. Since 2010, industry participants such as NASSCOM estimate that nearly 3,100 start-
ups focused on technology have emerged in India. Of these, it is estimated that nearly
2,200 are digitally focused, while c.500 in the e-commerce space. As capital from around
the globe begins to flow into Indian entrepreneurial ventures, we see a virtuous cycle of
entrepreneurship and employment generation taking shape in India. Within e-commerce,
most of the interest has been in the e-tail category – probably a reflection of the vast
opportunity in the space. Travel/ticketing and classifieds have closely followed while
financial services start-ups have been relatively fewer.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 44
Exhibit 72: Abundance of talent driving start-up boom in India
Exhibit 73: India is now the 4 PthP biggest start-up hub in the world (as of 2014)
Source: NASSCOM, Zinnov.
Source: NASSCOM, Zinnov.
Exhibit 74: 2/3PrdP of start-ups focused on digital, of which nearly 500 are in the e-commerce space Indian Start-ups breakdown as of 2014
Exhibit 75: E-tail and ticketing dominate e-commerce start-ups in India 6TStart-ups by category as of 2014
Source: NASSCOM, Zinnov.
Source: NASSCOM, Zinnov.
Exhibit 76: Most start-up businesses in India are consumer centric as of 2014
Exhibit 77: Indian IT industry investing significantly in augmenting workforce (data below as of 2014)
$2.2bn spent annually on training and re-skilling
50% of the spend is on new employees
~5% of man hours spent on average in training
$4K spent on training a new recruit
Training focused on emerging technologies like cloud, analytics, social, mobility, robotics, artificial intelligence etc.
Global firms increasingly shifting product/engineering development to India
Source: NASSCOM, Zinnov.
Source: NASSCOM, McKinsey
480 525
590 680
805
0 100 200 300 400 500 600 700 800 900
2010 2011 2012 2013 2014
Technology product/start‐ups by inception year
3,500 3,300 3,100 2,700
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
US UK Israel India Canada
Tech product/digital start‐ups by key countries
41,500
~3,100 Start-ups ~2,200 Digital
focused
~500
e-comm. 50+
20+
60+
70+
200+
0 50 100 150 200 250
Other online services
Financial services
Classifieds
Travel/ticketing
etail
B2B 1,140 37%
B2C/B2B 120 4%
B2C 1,820 59%
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 45
Risks to our view: Execution is key
We believe the India internet opportunity is predicated on the successful execution of some
of the key ecosystem enablers. We note that growth rates of some of the listed internet
companies such as MMYT, Just Dial, and Info Edge have not been very high, despite being
first movers in their space, due to slow pace of online adoption, relatively mature segments
(such as OTA) and smaller addressable markets in some cases (such as online recruitment
classifieds). This may not necessarily hold true for the larger verticals such as e-tailing
where growth rates have been high. However, we highlight some of the risks/challenges
that the sector may face going forward:
Lower investment in telecom infrastructure: In addition to the high spectrum capex
incurred recently, telecom companies would need to spend significant capex for laying out
backhaul/fiber network. Non-spectrum capex in India is significantly lower than that being
spent in China for 4G rollouts (e.g., China Mobile (Exhibit 40)). In the absence of adequate
capex investment, there is a risk of demand outstripping capacity.
Delayed execution of 4G services and Digital India: Some of the key risks that can delay
the successful execution of 4G services and Digital India initiative are clarifying right of way
for laying fibre, providing more backhaul spectrum, incentivizing operators to share
infrastructure, promoting capital expenditure and incentivizing local manufacturing of
network equipment.
Lack of logistics infrastructure:4T Lack of retail outlet infrastructure, high rentals and poor
connectivity have limited the presence of organized retail (less than 10% according to EY in
2013) in India. Further, we believe logistics and last mile delivery are key bottlenecks that
need to be addressed for faster adoption of e-commerce.
Language is an entry barrier – SMS adoption is a case in point: SMS adoption could not
take off in a big way in India during 2001-2010 (despite rising wireless penetration rates)
due to the low percentage of English speaking population (only 10% in 2001). If the e-
commerce firms are unable to adapt to the language diversity in India, we believe the pace
of growth may not be as strong. However, we think the English speaking population may
have increased over the past decade.
Clarity around regulatory environment: The regulatory environment in India has not
been very clear around e-commerce till now. In the past few years, there have been
concerns around lack of clarity on various regulatory/legal issues such as taxation, logistics,
foreign investment, payments landscape and vertical specific concerns. Any adverse
regulatory change could be a risk for the sector.
Oversupply of start-ups funded by private equity: The recent rise in private equity fund
flow has resulted in a significant increase in startups/new entrepreneurs. Hence, there is a
risk of oversupply of ideas in the medium term which may make the market extremely
competitive and potentially alter the profitable trajectory for some of the better business
models.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 46
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May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 47
Addressable markets: US$300bn opportunity
Addressable markets: US$300bn opportunity
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 48
TAM# 1: Indian e-tail market to reach US$220bn by FY30E
US$220bn e-tailing market by FY30E: We estimate the Indian e-tail market to be US$7bn
of GMV (gross merchandise value) in FY15E, more than double the US$3bn market in FY14.
With the necessary ecosystem rapidly evolving as outlined earlier and internet penetration
achieving critical mass, we expect the e-tail market to continue its robust growth path. We
estimate the Indian e-tail market to reach c. US$47bn/US$220bn by FY20E/FY30E, at 47%/
26% CAGR, driven by online shopping penetration rising to 12%/25%, respectively, from
4% currently.
E-tail companies creating the ecosystem: Paucity of infrastructure, high rental expenses,
fragmented supply chain are some of the primary reasons for the low penetration of
organized retail. E-tail companies are looking to address these issues by organizing the
supply chain (aggregating merchants via marketplace model) and debottlenecking
infrastructure (such as establishing logistics solutions, warehousing and distribution centers)
to enhance the internet shopping experience, a key driver of the market, in our view.
Key assumptions for our long-term estimates for e-tailing market are:
1) Data penetration and online shopper penetration: We forecast the overall data
penetration to reach 71% by FY30E (13% in FY14) vs. wireless penetration at 78%,
assuming the developing ecosystem will help converge data and wireless penetration
over time. Further, we estimate online shopper penetration to reach 25% levels, from
4% currently.
2) Average transaction value and transactions per shopper: We forecast every
shopper to increase the frequency of purchases from just about 4 transactions per year
to about 8 transactions per year as the ecosystem evolves and more merchants come
online. Further, we forecast average transaction value to grow from Rs1,800 currently
to almost Rs4,300 by FY30E, growing largely in line with inflation at about 6%.
Comparison to US and China: At US$220bn, the Indian e-tail market in FY30E would be
smaller than the current US$240bn e-tail market in the US, but larger than the current
US$134bn market in China. The significant differential in per capita income between India
and US/China partly explains the relatively small size of the Indian market. Nevertheless,
the e-tail market is likely to become nearly 1.8% of India’s GDP or 11% of the Indian retail
market by FY30E, according to our estimates.
Exhibit 78: We estimate e-tail GMV to reach c.US$220bn by FY30E, growing at a 26% CAGR… 6TGMV= gross merchandize value
Exhibit 79: …driven by online shopping penetration increasing to 25% (from 4% in FY15E) 6TPenetration – online shoppers as % of population
Source: Company data (Flipkart, Snapdeal, Amazon), Goldman Sachs Global Investment Research, media reports (such as The Economic Times).
Source: Company data (Flipkart, Snapdeal, Amazon), Goldman Sachs Global Investment Research, media reports (such as The Economic Times).
$3 $7 $12 $19 $27 $37 $47
$112
$220
144%
71% 57%
44% 36%
29% 19% 13%
‐10%
10%
30%
50%
70%
90%
110%
130%
150%
0
50
100
150
200
250
20 14
20 15
E
20 16
E
20 17
E
20 18
E
20 19
E
20 20
E
20 25
E
20 30
E
GMV (US$bn) Growth (%) [RHS]
CAGR 2015‐2020: 47% 2015‐2025: 32% 2015‐2030: 26%
24 49 72 98 122
147 168
258
380
2% 4%
6% 8%
9% 11%
12%
18%
25%
0%
5%
10%
15%
20%
25%
30%
0
50
100
150
200
250
300
350
400
20 14
20 15
E
20 16
E
20 17
E
20 18
E
20 19
E
20 20
E
20 25
E
20 30
E
Online shoppers (mn) Penetration (%) [RHS]
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 49
Exhibit 80: We estimate the Indian e-tail market in FY30E to be larger than the size of the China market today but
smaller than the US
Exhibit 81: We estimate the Indian e-tail market to grow to 1.8% of GDP by FY30E
Note: GDP forecasts are from our Global Macro Research team
Source: CNNIN, Euromonitor, Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Indian retail market at US$415bn in FY14: The Indian retail industry which is estimated
at c.US$415bn in size (FY14), is likely to grow at 12% CAGR till FY18, as per Euromonitor.
However, the retail industry is highly fragmented in India with organized retail accounting
for less than 10% of the market as of 2014. Lack of adequate infrastructure, high rental
expenses, fragmented supply chain are some of the primary reasons for the low
penetration of organized retail, as per the India consumer and retail team.
Exhibit 82: Indian retail market is likely to grow at 12% CAGR to c. US$640bn by FY18, as per Euromonitor
Exhibit 83: Indian retail market is dominated by food & groceries, followed by apparel
Source: Euromonitor.
Source: ASSOCHAM, India Brand Equity Foundation (IBEF).
India India China US FY15 2030E 2014 2014
Population (mn) 1,268 1,527 1,350 320
Wireless subscribers (mn) 932 1,196 1,227 328
Penetration (%) 73% 78% 91% 103%
Data subscribers (mn) 244 1,086 604 254
Penetration (%) 19% 71% 45% 79%
Online shoppers (mn) 49 380 302 191
As % of online users 20% 35% 50% 75%
Penetration (%) 4% 25% 22% 60%
Average transaction value (Rs) 1,812 4,341
GMV per transaction (Rs mn) 230 3,047
No of transactions per annum 4.7 8.0
Annual GMV (Rs bn) 416 13,228
Annual GMV (US$ bn) $7 $220 $135 $240
GDP $11,950
Offline retail $1,813 15%
e‐tail $220 2%
Retail $2,033 17%
Indian Retail and e‐tail in 2030
370
415
463
519
578
642
250
300
350
400
450
500
550
600
650
700
2013 2014 2015 2016 2017 2018
India Retail sales (US$ bn)
12% CAGR
Food & grocery 69%
Apparel 8%
Jewellery 6%
Consumer durables and IT
6%
Pharmacy 2%
Furniture and furnishing
2% Footware
1%
Others 6%
2013 Retail market split
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 50
Exhibit 84: Organized retail market in India is less than 10% of the total
Exhibit 85: Organized retail is more focused and is evenly spread across categories
Source: ASSOCHAM, IBEF.
Source: ASSOCHAM, IBEF.
E-tail industry needs US$20bn of incremental capital in next 5 years
At present, the Indian e-tailer on average incurs 1.35X of the GMV sold as expenses
suggesting gross losses of 35%. This is due to the heavy discounting, marketing, free
shipping and handling, cash incentives and various other incentives that e-tailers give to
attract consumers. We believe this is likely to continue till the online shopping penetration
reaches a steady state in about 5 years from now. As such, we estimate that e-tailers are
likely to continue their cash burn to keep their growth intact while slowly working towards
lowering and eventually eliminating aggressive consumer incentives. Based on our e-
tailing market forecasts and assumptions of the e-tailing transactions becoming profitable
only after the next five years (FY20E onwards) vs. a loss of 35% currently, we estimate that
the e-tail industry will need at least US$20bn of incremental cash infusion to deliver
sustainable growth before it reaches steady state in FY20E.
Exhibit 86: Currently, companies are incurring almost 1.35X of their GMV as expenses, driven by high discounting and promotions
Source: Goldman Sachs Global Investment Research.
Organized 8%
Unorganized 92%
2013 Retail market split
Food & grocery 3%
Apparel 19%
Jewellery 10%
Consumer durables and IT
20% Pharmacy
4%
Furniture and furnishing
8%
Footwear 27%
Others 9%
2013 Organized Retail market split
65%
30.0% 12.0%
8.0% 7.0% 5.0%
3.0% 2.0% 3.0% 35.0%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Vendors Discounts Marketing & Promotions
Technology Logistics Warehousing Packaging Payment Gateways
Others Loss
Current e‐tailer revenue split
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 51
Exhibit 87: We estimate that US$20bn of incremental cash burn is needed to sustain GMV growth to US$47bn by FY20E
Source: Company data (Flipkart, Snapdeal, Amazon), Goldman Sachs Global Investment Research.
Exhibit 88: E-tailers’ steady state margins will be reached in 5-6 years’ time provided execution is reasonable
Source: Goldman Sachs Global Investment Research.
$2.9
$4.0
$4.7
$4.3
$2.4 $1.5 $20
$0
$5
$10
$15
$20
$25
2015E 2016E 2017E 2018E 2019E 2020E FY15E‐FY20E
E‐tailing: Incremental annual funding needed (US$ bn)
65%
10.0%
7.0% 6.0%
3.0% 2.0% 2.0% 2.0%
3.0%
40%
50%
60%
70%
80%
90%
100%
Vendors Marketing & Promotions
Technology Logistics Warehousing Payment Gateways
Packaging Others Margin
Steady state e‐tailer revenue split
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 52
TAM# 2: Online travel market to reach US$40bn by FY30E
4TOnline travel market to reach US$40bn by 2030E: 4TWe estimate the online travel agency
(OTA) market to grow nearly 5X to US$40bn by FY30 from US$8bn in FY14 implying 11%
CAGR. The growth is likely to be driven by: 1) the shift of travel ticketing from offline to
online with online travel penetration growing from 41% in FY15 to 50% by FY30E, and 2)
9% CAGR in the travel market from US$22.8bn in FY15 to US$80bn by FY30E, largely linked
to GDP growth in India.
Exhibit 89: We estimate OTA penetration to reach c.50% by FY30E
Exhibit 90: India’s OTA penetration in FY30E to be higher than where China/US are today
Source: PhoCusWright, Goldman Sachs Global Investment Research.
Source: PhoCusWright, Goldman Sachs Global Investment Research.
4T
Online air ticketing business to reach US$16bn by 2030E:4T At present, the Indian OTA
market is dominated by airlines which contribute 55% of the total revenues. This is despite
relatively low airline passenger traffic growth in India and can be attributed to: 1) higher
average ticket size, 2) higher online penetration among the target passenger segment, and
3) relatively low fragmentation of the airline industry in India. However, as online
penetration improves in other travel categories, we expect the airline contribution to OTA
market to decline to 40% by FY30E. As such, we estimate the online air travel market to
increase from US$5.1bn in FY15 to US$16bn by FY30E, a CAGR of 8% over 15 years.
Online railway bookings to reach US$18.6bn by 2030E: 4TAlthough railways is under state
control and is the dominant source of transportation for the masses in India, the online
market is not as big due to the low level of internet penetration compounded by the limited
access to online payment options for the average Indian traveler. However, we believe that
the Indian government’s ‘Digital India’ initiative to provide broadband access to 250,000
village councils by 2016 combined with the permeation of digital wallets to the masses in
India is likely to drive growth in online rail travel penetration, in our view. As such, we
estimate the online rail market to increase from US$3.2bn in FY15 to US$18.6bn by FY30E,
a CAGR of 12% over 15 years.
4TOnline hotel market to reach US$4.6bn by 2030E: 4TThe other big piece of the travel
market pie, the hotel market, is highly fragmented in India. Further, most hotel operators in
India do not have the necessary systems in place to take an online reservation. As a result,
it is one of the least online penetrated markets among the travel categories with 17%
penetration in FY14. With Indian OTAs like Makemytrip, Yatra etc. beginning to aggregate
hotels and roll out real-time online hotel reservation systems, we believe online
penetration for the hotel market is likely to pick up in the medium term. By FY30E, we
8.1 9.4 10.7 12.3 14.1
16.2 18.4
30.5
40.0
20.4 22.8 25.5
28.5 31.9
35.8 40.0
62.5
79.5
40% 41%
42% 43%
44% 45% 46%
49% 50%
30%
35%
40%
45%
50%
55%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
FY 14
FY 15
E
FY 16
E
FY 17
E
FY 18
E
FY 19
E
FY 20
E
FY 25
E
FY 30
E
Total online travel market (US$ bn) Total travel market (US$ bn)
Online penetration (%) [RHS]
US$ bn India India China US
FY15E FY30E 2014 2014
Airline market 10.1 29.1 56.9 132.2
OTA airline market 5.1 16.0 16.0 71.1
Online penetration (%) 51% 55% 28% 54%
Hotel market 4.5 13.0 34.3 132.1
OTA hotel market 0.9 4.6 6.7 45.2
Online penetration (%) 20% 35% 20% 34%
Total travel market 22.8 79.5 116.2 318.5
OTA market 9.4 40.0 23.2 136.7
Online penetration (%) 41% 50% 20% 43%
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 53
estimate the online penetration in hotels to reach 35% with online hotel market reaching
US$4.6bn.
Online car rental market to reach US$1.4bn by 2030E: 4TThe car rental market is highly
fragmented in India. Further, most car operators in India do not have the necessary
systems in place to take an online reservation or payment. However, multiple car rentals or
taxi hailing companies have emerged such as Olacabs, Uber, Carzonrent, Orix, Meru which
are rolling out real-time online car hailing or reservation systems. Hence, by FY30E, we
estimate the online car rental market to reach US$1.4bn growing at a CAGR of 18%.
Comparison to US and China: At US$40bn, the Indian OTA market in FY30E would still be
much smaller than the current US$137bn OTA market in the US but higher than the current
US$23bn market in China. The significant differential in per capita income between India
and US/China partly explains the relatively small size of the Indian market.
Exhibit 91: Online air travel penetration is already at 50% in India. We expect this to improve to 55% by FY30E
Exhibit 92: We expect 25% hotel market penetration by FY20E and 35% by FY30E
Source: PhoCusWright, Goldman Sachs Global Investment Research.
Source: PhoCusWright, Goldman Sachs Global Investment Research.
4
Exhibit 93: Airlines currently dominate the OTA market in India primarily due to the higher ticket size 6TOTA market mix
Exhibit 94: Rail is likely to overtake airlines as the largest market in OTA 6TOTA market mix in FY30E
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
4.6 5.1 5.8 6.5
7.3 8.1 8.9
13.1 16.0
9.2 10.1 11.1 12.2
13.5 14.8
16.3
23.9
29.1
50% 51%
52% 53%
54% 55% 55% 55% 55%
40%
45%
50%
55%
60%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
FY 14
FY 15 E
FY 16 E
FY 17 E
FY 18 E
FY 19 E
FY 20 E
FY 25 E
FY 30 E
Online air travel (US$ bn) Air travel market (US$ bn)
Online penetration (%) [RHS]
0.7 0.9 1.0 1.2 1.4 1.6
1.8
3.2
4.64.1 4.5 5.0
5.5 6.0
6.6 7.3
10.7
13.0
17% 20% 21%
22% 23% 24% 25%
30%
35%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
FY 14
FY 15 E
FY 16 E
FY 17 E
FY 18 E
FY 19 E
FY 20 E
FY 25 E
FY 30 E
Online Hotels (US$ bn) Hotel market (US$ bn)
Online penetration (%) [RHS]
Airline 55%
Rail 34%
Hotels 10%
Car rental 1%
FY15E
Airline 40%
Rail 46%
Hotels 11%
Car rental 3%
FY30E
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 54
TAM# 3: Digital ad market to reach US$15bn by FY30E
Social networks are likely to drive online ad-revenues in India
According to comScore, social networking activity accounts for the greatest share of time
(25% of total time) spent online by Indians, with messaging platforms among the most
popular means of communication. Indian consumer companies (including banks) are
increasingly looking to take advantage of this phenomenon and beginning to engage
consumers by building communities and platforms on social media to highlight their
brands.
Currently, social media engagement by Indian firms is not too focused on generating leads
for sales as much as it is used for highlighting brands and/or building communities, as per
EY Social Media Marketing: India Trends study 2014. However, we believe this is likely to
change as online consumerism evolves and digital payments become seamless. Hence, we
believe social media advertising is likely to emerge as a strong growth engine for digital
advertising in India.
Exhibit 95: Social networking dominates share of minutes spent online in India (2013)
Exhibit 96: Messaging services are among the most popular services in India (2014)
Source: comScore.
Source: Statista.
Exhibit 97: Indian companies are currently looking to build brands than generate leads (2014)
Exhibit 98: Even social media-savvy firms are not spending much on social advertising yet (2014)
Source: EY Social Media Marketing India trends study 2014
Source: EY Social Media Marketing India trends study 2014
Services 23%
Social networking
25%
Entertainment 11%
Retail 3%
News 3%
Other 35%
Share of minutes spent online
11%
9%
8%
8%
7%
6%
5%
5%
4%
4%
0% 2% 4% 6% 8% 10% 12%
FB messenger
FB
Skype
Google+
Viber
Penetration in India
38.1%
95.2%
42.9%
42.9%
76.2%
0.0% 50.0% 100.0%
Research
Platform to highlight brand
Customer services
Generate leads
Build community/advocates
Social media engagement by Indian companies
43%
48%
5%
5%
0%
0% 10% 20% 30% 40% 50%
1%‐5% marketing on social media
6%‐10% marketing on social media
11%‐15% marketing on social media
16%‐20% marketing on social media
20%+ marketing on social media
Social media budgets of social media‐savvy organizations
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 55
Exhibit 99: Social network in India dominated by US based companies like Facebook, LinkedIn, Twitter. Hike is the only Indian social network with decent scale 6TCompetitive landscape for social networking sites, as of 2014
Source: The Wall Street Journal, GigaOm, EY, TechCrunch, Company data, Goldman Sachs Global Investment Research.
Significant shift to online advertising to drive US$15bn spend
Although social networking dominates the Indian online activity landscape, there are very
few Indian origin social networks of scale. Currently, the Indian social scene is dominated
by the likes of Facebook, Twitter etc. We believe these companies are likely to benefit as
more Indians gain access to internet and adopt internet commerce.
As in markets across the globe, India is also witnessing the trend of internet battling with
print and television media for eyeball share. However, the trend in India is not as profound
as in other markets with digital ads accounting for only 7%-8% of total advertising spend vs.
26% in the US (as per Magna Global) in 2014. However, with rising internet penetration and
changing patterns of content consumption (news, movies, plays, music etc.) internet is fast
turning into the medium of choice for consumers. As such, the demand for advertising in
the digital channel keeps rising at a solid pace resulting in 25% CAGR in digital ad spend to
Rs28bn in FY14 from Rs17bn in FY12.
Exhibit 100: Digital ad market in India is currently at c.US$450mn, led by search (30%) and display (23%)
Exhibit 101: Digital ad market to grow at 26% CAGR till FY30E driven by offline to online shift
Source: IMRB International, IAMAI.
Source: IMRB International, IAMAI, Goldman Sachs Global Investment Research.
Facebook LinkedIn Twitter Tumblr Instagram Pinterest RenRen Weibo Kakao* Pengyou WeChat Hike VK WhatsApp* Usage Founded 2001 2003 2004 2007 2010 2010 2006 2009 2010 2010 2011 2012 2006 2009
Registered users (mn) ‐ 347 ‐ 420 ‐ 70 219 600 150 260 ‐ 35 280 ‐
Monthly active users (mn) 1,189 ‐ 284 ‐ 300 ‐ 44 ‐ ‐ ‐ 438 ‐ ‐ 700
Monetization 2014 Revenue ($mn) $12,467 $2,219 $1,403 ‐ ‐ ‐ $83 $334 $203 ‐ ‐ ‐ $10
Use cases Public
Private message
Photo
Video
News
Predominant Available Not available
* denotes 2013 revenue ($ mn)
US Asia Europe/Russia
Search $136 30%
Display $104 23%
Mobile $63 14%
Social Media $81 18%
Email $14 3% Video
$54 12%
FY14 US$ mn
452 596 2,767
8,093
15,043
7% 8%
19%
31%
37%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY14 FY15E FY20E FY25E FY30E
Total online ad spend Online ad as % of total [RHS]
US$ mn
24% CAGR
36% CAGR
13% CAGR
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 56
Within the digital ad market, search currently dominates with 30% of revenue followed by
display at 23% in FY14. However, the growing relevance of mobile internet, social media
and improvement in internet speeds are resulting in ad spend shift towards these media.
We forecast digital ad spend market to grow to US$15bn by FY30E from c.US$0.5bn now.
We believe this will be driven by mobile advertising (US$4.6bn by FY30E) and social media
advertising (US$4.5bn) and the shift from offline to online advertising.
Key assumptions for our long-term estimates for ad-tech market are:
(1) Overall and online ad spend market in India: We forecast the overall ad-spend market
in India to reach US$40bn by FY30E assuming a CAGR of 12%, in line with the nominal
GDP growth as per our Global Macro Research team. Further, by FY30E, we estimate 37%
of advertising spend to be directed towards digital channels from 7% currently.
(2) Mobile and social media to garner highest share: We forecast mobile and social
media to garner almost 61% of the overall online ad-spend in India as of FY30E as we
believe that these media are going to be a lot more relevant and effective against the
backdrop of increasing data penetration in India.
Comparison to global ad-spend penetration: As per our US team, the global online ad
spend stands at 23% currently and is expected to go up to 36% over the next five years. We
also assume a similar online ad-spend penetration in India by FY30E.
Exhibit 102: Indian digital ad market to reach US$20bn or 50% of total market by FY30E 6TIndia digital advertisement market (US$ mn)
Exhibit 103: Mobile to be the largest segment in digital ad world by FY30E 6TSplit of digital ad market by revenue
Source: IMRB International, IAMAI, Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
US$ mn FY14 FY15E FY20E FY25E FY30E Search $136 $161 $415 $1,214 $2,256
Display $104 $110 $208 $607 $1,128
Mobile $63 $107 $858 $2,509 $4,663
Social Media $81 $125 $830 $2,428 $4,513
Email $14 $15 $42 $121 $226
Video $54 $77 $415 $1,214 $2,256
Total online ad spend 452 596 2,767 8,093 15,043 Growth rate (%) 9% 32% 36% 24% 13%
Total ad spend 6,317 7,350 14,753 26,468 40,177 2% 16% 14% 11% 8%
Online ad as % of total 7% 8% 19% 31% 37%
Search $2,256 15%
Display $1,128 8%
Mobile $4,663 31%
Social Media $4,513 30%
Email $226 1%
Video $2,256 15%
FY30E
US$ mn
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 57
TAM# 4: Electronic payments market to reach US$5bn by FY30E
Confluence of banking and technology evolving payments
landscape
With multiple companies emerging in the payments landscape bringing in disruptive
changes, the electronic payments market is set for rapid expansion in India, in our view.
Further, Indian government’s initiative to extend banking facilities to its previously
unbanked citizens through the ‘Jan Dhan Yojna’ scheme has added significant number of
debit cards (over 110mn) thereby providing these customers access to electronic payments.
Also, the launch of electronic wallets (such as Paytm, Mobiqwik, Freecharge, HDFC), mobile
POS (point of sales) machines (such as ezetap, mswipe), social network banking (such as
ICICI Bank, Kotak Mahindra Bank) and peer to peer money transfers (such as ICICI Pockets,
HDFC Chillr) are all aiding in enhancing electronic access to funds.
US$5bn market from payments processing by 2030E
We estimate the overall payments market in India to grow from just US$80mn in FY15E to
US$5bn by FY30E at a CAGR of 23% largely driven by migration of offline retail to: (1) e-
commerce as data penetration improves in India and (2) electronic modes of payments
such as credit/debit cards, mobile wallets and net banking. As per RBI, as of Dec 2014, only
US$50bn of annualized transactions go through the point of sale mode (credit/debit cards)
but it has been growing rapidly at 28% CAGR in the past five years, suggesting increasing
adoption of electronic mode of payments in India.
Key assumptions for our long-term estimates for payments market are:
(1) Overall point of sales: We forecast the overall point of sales to grow from US$51bn in
FY15E to US$153bn by FY20E (25% CAGR) and US$510bn by FY30E (16% CAGR) largely
driven by increased adoption of electronic payment mechanisms and increasing
penetration of e-commerce transactions.
(2) Online point of sales: We forecast e-commerce transaction through online POS to
become 12%/17% of overall POS transactions in FY20E/FY30E vs. 1.5% in FY15E as the e-
commerce market in India grows at 23% CAGR over FY15E-FY30E to US$282bn. We believe
this will be driven by: 1) shift of offline commerce to online, 2) shift of online transactions
from cash-on-delivery to an electronic payment system (wallets), and 3) increased velocity
of transactions due to ease of payments via electronic channels.
(3) Share of modes of payments: We assume share of CoD in e-commerce transactions
will go down from 60% in FY15E to 45%/35% by FY20E/FY30E and will be taken up by
credit/debit cards and emergence of mobile wallets and/or payment banks which will
garner 25% of e-commerce transactions by FY30E vs. just 8% in FY15E.
(4) Blended commissions on e-payments: We believe that the overall commissions in the
e-payments will continue to shrink from a blended 1.5% currently to 0.82% by FY30E, in
line with global trends.
This section includes the views of our India financials team of Tabassum Inamdar and Shyam Srinivasan
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 58
Exhibit 104: India has disproportionately large number of e-commerce transactions settled in cash 6Te-commerce transactions payment distribution (2013)
Exhibit 105: High incidence of cash usage in India is a possible reason for higher proportion of cash on delivery Cash as % of GDP (2013)
Source: Respective Central Banks.
Source: Respective Central Banks.
Exhibit 106: Interchange fee in India relatively higher than in China Interchange fees on card transactions (2014)
Exhibit 107: Electronic payments set to pick up, revenue for payments industry to reach US$3.4bn by FY30E Break up of offline vs. online payments revenues
Source: Respective Central Banks, Goldman Sachs Global Investment Research.
Source: Company data (Flipkart, Snapdeal, Amazon), Goldman Sachs Global Investment Research.
Exhibit 108: E-commerce driven payment revenue to grow at 23% CAGR till FY30E to US$1.6bn… 6TOnline payment revenues in US$bn
Exhibit 109: …driven primarily by shift of e-commerce payments from COD to wallets 6Te-commerce transactions payment distribution
Source: RBI, Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
60%
16%
12%
12%
1%
2%
40%
30%
18%
10%
8%
0%
26%
66%
1%
0% 20% 40% 60% 80%
Cash on delivery
Credit Cards
Debit Cards
Net Banking
EMI/3rd party wallets China US India 17.8%
13.8%
11.4% 11.2% 11.0%
8.7% 7.7% 7.4%
6.4%
3.8% 3.7% 3.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0% Cash as % of GDP
0.3%
0.9% 1.0%
1.5% 1.5%
1.9% 2.0%
2.3%
2.5%
3.0%
0.3%
0.9%
0.2%
0.7% 0.7%
0.9%
1.5%
2.3% 2.5%
3.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Interchange fees (%) Credit card Debit card
0.08 0.12 0.18 0.25 0.33 0.42 0.50
0.92 1.62
0.58 0.70 0.86 1.06
1.24 1.39 1.52
1.90
3.45
0.66 0.83 1.04
1.30 1.57
1.80 2.02
2.81
5.07
0.0
1.0
2.0
3.0
4.0
5.0
6.0
20 14
20 15
E
20 16
E
20 17
E
20 18
E
20 19
E
20 20
E
20 25
E
20 30
E
Offline electronic Payments revenue (US$ bn)
Online Payments revenue (US$ bn)
Revenue CAGR (2015‐2030) Total payment: 13% Online payment: 23%
Offline electronic payment:11%
0.08 0.12
0.18 0.25
0.33 0.42
0.50
0.92
1.62
49%
62%
43% 40%
33% 26%
19% 13% 12%
0%
20%
40%
60%
80%
100%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
20 14
20 15
E
20 16
E
20 17
E
20 18
E
20 19
E
20 20
E
20 25
E
20 30
E
Online Payments revenue (US$ bn) Growth (%) [RHS]
57%
11% 15%
10%
1%
8%
45%
13% 17%
10%
1%
15%
35%
13% 17%
10%
1%
25%
0%
10%
20%
30%
40%
50%
60%
COD Credit Cards
Debit Cards Net Banking
EMI / Others
Wallets
2015E 2020E 2030E
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 59
India’s increasing importance for global firms
India’s increasing importance for global firms
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 60
Evolution of unique business models and internet giants in China
The rapid and substantial internet infrastructure build out in China led by telecom giants
such as China Mobile led to a significant rise in internet penetration, a key driver of the
internet market seen in recent years. Further, lack of a significant presence of global
internet giants in China, such as Google, has led to the rise of local internet giants which
look to fill this gap.
Rise and rise of Alibaba: Alibaba, which originally began as a search engine in the e-
commerce space, grew to displace eBay in China by starting a free C2C proposition that
appealed to small merchants. Alibaba then realized that the only way to get more
customers to transact on its platform was to have escrow accounts for payments until the
customer was happy with the products. And that’s the genesis of Alipay, which has now
become an extremely prominent and critical part of Alibaba’s ecosystem. To monetize the
vast SME customer base, Alibaba has resorted to advertising, creating a differentiated
model vs US e-commerce companies such as Amazon which has not tried to monetize
search. Alibaba now has a widespread presence today: e-commerce, internet finance,
social network, mobile browser, maps and logistics.
Birth of the “Freemium” model: China has been extremely innovative in the gaming
industry aided in part by the Chinese government due to its ban on gaming consoles. The
ban on consoles pushed gaming online and the need to monetize online gaming led to
what is now called the “freemium” model. This is the model adopted by King.com and
Candy Crush wherein players pay for virtual items to improve their standing in a game.
This idea originated and evolved in China for a long time and then spread to the rest of the
world. Virtual identity or status is very important for the Chinese consumer and Chinese
online gaming companies capitalized on this trait, a pattern now being adopted around the
world.
Tencent - Messaging its way to success: Tencent started as a communications company
with a messaging service for PCs. Its free QQ messaging platform was quite early to move
from the consumer market to the enterprise space, and came at a time when younger
internet users preferred the less formal messaging tool to the relatively more formal email.
When the QQ customer base assumed significant mass, Tencent leveraged the platform to
enter the online games segment and has eventually become the pre-eminent gaming
platform in the world. Further, Tencent messaging dominance went mobile leading to
social and messaging products years before the likes of Facebook added messaging to
their platforms. Being the single most prominent messaging app in China allows Tencent
to always stay in touch with its users. We think this sticky user base and the ability to
control the user experience is what made Tencent so dominant on the mobile platform in
China.
Deeper monetization through vertical focus: Many Chinese internet companies have
been innovative in adapting their business models and coming up with alternative
monetization techniques by moving into more verticals rather than focusing on horizontal
expansion making them quite different from US internet companies. This has resulted in
Chinese internet companies developing much deeper monetization models and far richer
content. As a result, the competitive advantage of the Chinese companies has evolved such
that in the event that they have to compete with US firms, they would be able to maintain
their dominance on their customer base.
This section is sourced
from GS Fortnightly
thoughts Issue 87
dated April 6, 2015
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 61
India coming to the fore for global majors
The impending rise of internet penetration in India and the rapid strides made by the e-
commerce industry has caught the attention of most of the major global internet
companies including Google, Facebook, Amazon, Twitter, and Alibaba, along with handset
makers such as Samsung, Apple and Xiaomi. With higher entry barriers in China for
foreign companies and several domestic internet firms emerging in the past decade such
as Alibaba, Tencent, India is set to become the target for these global majors with its
potentially large internet population, dominated by users under the age of 35 years. While
US giants such as Google, Facebook, Apple, and Amazon are already making inroads and
count India as their second largest market by user base, the Asian companies such as
Samsung, Xiaomi, Alibaba, and Softbank are finding ways to grab a slice of the pie.
While Google, Facebook and Twitter may want to tap the ad revenue market as well as
online payments market, handset makers such as Samsung, Apple, Xiaomi and other
Chinese companies would be looking for the bigger pie of smartphone market in India.
Exhibit 110: India emerging as a key market for global companies TGlobal companies’ website positioning (latest rank) in India in the past 3 months
Note: Size of bubble represents unique visitors from India for global websites * For Samsung, Xiaomi and Apple: X-Axis = market positioning in India based on smartphone shipments in 4Q2014, Y-Axis = Market share of smartphones in India in 4Q2014. Size of bubble represents smartphones shipments in India in 4Q2014.
Source: Alexa, comScore, Gartner, Goldman Sachs Global Investment Research.
This section includes the views of our global analysts – Heather Bellini, Heath Terry, Bill Shope, Marcus Shin, and Ikuo Matsuhashi
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 62
Google: Multi-pronged opportunities across verticals in India
Digital ad revenue opportunity to rise in coming years
Google, the global market leader in the US$142bn digital advertising market (2014) gets
over 10% of visitors from India, second only to the US (source: Alexa). At present, Google
charges for ad words in India are a fraction of those charged in the US (Exhibit 68). In most
of the popular keywords, Google cost per click (CPC) rates in India are on average 75%
lesser than that in US. As India’s online penetration and e-commerce rise significantly in
the next few years, the need for digital advertising is going to rise as well, in our view.
Hence, online traffic and CPC rates for ad words may rise in India as currently about 35%-
40% of traffic for some of the large internet portals in India is driven by Google.
Exhibit 111: About 10% of Google’s global visitors are from India 6TSize of bubble represents internet users in the country (2014)
Exhibit 112: Prices for adwords in India are a fraction of those in the US (2014)
Source: Alexa.
Source: Company data.
Exhibit 113: Google’s market share gains in global online advertising are likely to be affected with competition and
advertising shift towards mobile and social
Exhibit 114: Paid clicks growth decelerated in 2014, while CPC continues its decline from 2013
Source: Company data, MAGNA Global, Goldman Sachs Global Investment Research.
Source: Company data.
35.9%
9.6%
3.0% 2.9% 2.8%
‐5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0 1 2 3 4 5 6
% o f G
lo ba
l V is it or s
Rank in the Country
Google Visitors
USA
IranBrazilJapan
India
‐78%
18%
‐77%
‐71%
‐68%
‐65%
‐95%
‐98%
‐90%
‐55%
‐120% ‐100% ‐80% ‐60% ‐40% ‐20% 0% 20% 40%
Airline tickets
Apartments
Cars
Furniture
Games
Hotels
Insurance
Mobile
Movies
Restaurants
Discount on CPC rates for keywords in India vs. US
11.8%
18.6%
24.9%
29.5%
34.3% 36.3% 37.0%
38.1%
42.4% 43.0% 42.0% 42.1% 41.7% 41.1%
0.3% 0.5% 1.2% 2.5% 3.7%
4.2% 5.8%
8.1% 10.1%
11.9%
0.3% 0.5% 0.9% 1.3% 2.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Global advertising revenues market share
Google Facebook Twitter
20%
23% 26%
31% 26% 25%
17% 14% 13%
‐4%
‐6% ‐8%
‐11% ‐9%
‐6%
‐2% ‐3%
‐7%
‐12%
‐8%
‐4%
0%
4%
8%
12%
‐12%
‐6%
0%
6%
12%
18%
24%
30%
36%
1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15
Google (yoy growth)
Paid clicks Cost per click [RHS]
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 63
Google Play and Android One are other opportunities
With digital advertising shifting away from desktop towards mobile, our US technology
research team expects Google’s market share gains of the past decade to marginally
reverse as competition from the likes of Facebook and Twitter intensifies. To counter this
trend, Google may look to improve monetization from the mobile ecosystem. We believe
that Google is well positioned in the Indian context given that: 1) majority of Indian
smartphones run Google’s Android operating system, and 2) India is already the 3PrdP largest
market for apps download via Google Play (source: AppAnnie). Further, Google’s Android
One project has started well in the country in the past one year and may pose a challenge
to the cheap and crowded smartphone market in India due to its value proposition of low
price, android OS, local content and tie up with local handset distributors such as Spice
and Karbonn.
Exhibit 115: India is the 3 PrdP largest in terms of app downloads via Google Play, but revenue lags
Exhibit 116: Android One phones launched in India with some of the top Indian smartphone distributors
Note: Market share of companies based on smartphone shipments into India in 4Q2014
Source: AppAnnie.
Source: Company data, Gartner, Android One.
Exhibit 117: Revenue from mobile apps is likely to grow 8.7X by 2017 from 2013
Exhibit 118: Google India’s revenue crosses US$0.5bn in FY14 6TGoogle India revenues
Source: IDC, AppAnnie.
Source: Registrar of Companies, Ministry of Corporate Affairs.
Rank Downloads Revenue 1 US Japan
2 Brazil US
3 India S. Korea
4 Russia Germany
5 S. Korea Taiwan
6 Mexico UK
7 Turkey France
8 Indonesia Hong Kong
9 Germany Australia
10 Thailand Russia
Google Play top 10 countries in 2014 Company Company smartphone market share
Model Price (Rs)
Micromax 13% Canvas A1 7,999 Karbonn 11% Sparkle V 6,990 Spice 5% Dream UNO 7,499
3.5x
1.8x
3.2x 3.5x 1.5x 3x 2.2x 8.7x 2.7x 3.2x 0
50
100
150
200
250
300
350
400
U S
Ja pa
n
U K
G er m an
y
S. K or ea
Fr an
ce
Ca na
da
In di a
Ru ss ia
Br az il
In de
xe d m ob
ile a pp
r ev en
ue
Mobile app revenue by country
8 9 12
21
31
9%
36%
79%
47%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
5
10
15
20
25
30
35
FY10 FY11 FY12 FY13 FY14
Google India
Revenue (Rs bn) YoY (%) [RHS]Rs bn
CAGR: 41%
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 64
Facebook: India set to become the largest subscriber base globally
Largest subscriber base offers a big revenue opportunity
Facebook (along with its subsidiary WhatsApp) has been the social network of choice in
India as evidenced by the number of users and web traffic ranking by Alexa. According to
eMarketer, India is set to overtake US as the largest mobile user base for Facebook by 2017
suggesting robust penetration of the FB platform into the Indian internet user community.
Further, the trend of digital advertising shift towards mobile is only likely to gain traction.
All these factors put together suggest that India is likely to become a sizable market for
Facebook in the medium to long term.
Exhibit 119: Facebook is the 3PrdP ranked website in India, which contributes 9% of its user traffic (2014) 6TSize of bubble represents internet users in the country
Exhibit 120: India set to overtake US as the largest mobile user base for Facebook by 2017, according to
eMarketer 6TFacebook (FB) users
Source: Alexa, Goldman Sachs Global Investment Research.
Source: eMarketer.
Exhibit 121: Global online advertising shift towards mobile is favorable to FB, as per our US tech research
team
Exhibit 122: FB demonstrated that its open to acquisitions in India with its purchase of Little Eye Labs
in 2014
Source: MAGNA Global, Goldman Sachs Global Investment Research.
Source: Company data, News articles (including The Economic Times dated Jan 8, 2014).
24.7%
8.5%
4.3%
3.6%
3.5%
‐5%
0%
5%
10%
15%
20%
25%
30%
35%
0 1 2 3 4
% o f G
lo ba
l V is it or s
Rank in the Country
Facebook visitors
USA
UK
Germany
Brazil
India
58
81
102
124
146
168
78
109
136
162
185
211
8%
9% 10%
11% 12%
13%
5.0%
7.0%
9.0%
11.0%
13.0%
50
75
100
125
150
175
200
225
2013 2014 2015 2016 2017 2018
India FB mobile users (mn)
India FB users (mn)
Indians as % of mobile FB users [RHS]
$60 $72 $82 $93
$104 $112 $117 $123 $128 $132$2
$3 $4
$9 $17
$30 $46
$65 $85
$105
$0
$50
$100
$150
$200
$250
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Global advertising market (US$ bn)
Desktop MobileUS$ bn Who? When? What?
Acquisition # How much? approx. $15mn
43rd by Facebook; 1st in India
Facebook's India acquisition
Little Eye Labs
Feb, 2014
Tool to measure, analyze and
optimize an app's performance
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 65
India is a key geography in the underpenetrated Asian market
Asia Pacific region contributed only 15% of Facebook’s 2014 global revenues even though
its user base is as big as 28% of global users as of 4Q2014. Keeping that metric in mind,
India’s contribution to the revenues may be disproportionately lower despite the large
number of users in the country as the ad rates in India are much lower than developed
markets. As India’s online penetration and e-commerce rise significantly in the next few
years, the need for digital advertising is going to rise as well, in our view. As such,
Facebook may benefit form this trend in line with our US team’s views on increasing
market share of FB in global digital advertising market.
Exhibit 123: More than 1/3PrdP of FB users in Asia-Pac region are from India
Exhibit 124: Asia-Pac showed the most growth in revenue for Facebook in 2014
Source: Company data, eMarketer.
Source: Company data.
Exhibit 125: Revenue growth was driven primarily by ads
Exhibit 126: However, Asia-Pac ARPU still among the lowest worldwide
Source: Company data.
Source: Company data.
35.3%
19.5%
8.6%
4.0% 3.5%
29.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0
20
40
60
80
100
120
140
160
180
India Indonesia Japan S.Korea Australia Others
Facebook users in Asia Pacific region (2014)
Users (mn) % of total mn
921 1,063
2,193
3,695
1,374 1,831
3,396
5,865
49%
72%
55% 59%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
ROW Asia‐Pac Europe US & Canada
Total Revenue 2013 2014 YoY (%) [RHS]
US$ mn
881 974
1,958
3,173
1,335 1,741
3,131
5,285
52%
79%
60% 67%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
1,000
2,000
3,000
4,000
5,000
6,000
ROW Asia‐Pac Europe US & Canada
Ad revenue 2013 2014 YoY (%) [RHS]
US$ mn
0.8 1.1
2.9
7.2
2.4
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
ROW Asia‐Pac Europe US & Canada Worldwide
ARPU (2014) US$
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 66
Twitter: Picking up pace in India
Twitter, although not at the scale of Facebook, is the other popular social networking
platform in India, with eMarketer expecting Twitter users to grow to 19% of social network
users in India by 2018 from 16% now. Twitter is fast becoming a key news disseminating
network in India with the government also actively using Twitter to disseminate
information.
Twitter began to actively monetize its healthy user base in India with its recent purchase of
ZipDial. ZipDial is an innovative pull-based marketing tool that sends marketing
information to users who give a ‘missed call’ to a pre-disclosed number through SMS.
Twitter has also set up a system “Twitter Samvad” (meaning Twitter dialogue) for Indian
politicians and government agencies to send tweets to followers using SMS. By sending
tweets through SMS, Twitter expects to expand its reach to consumers who do not even
have a data plan.
Exhibit 127: India is the 3 PrdP largest source of traffic for Twitter globally 6TSize of bubble represents internet users in the country (2014)
Exhibit 128: Twitter expected to reach 19% penetration of social network users in India by 2018 6TTwitter users in India
Source: Alexa, Goldman Sachs Global investment Research.
Source: eMarkerter.
Exhibit 129: Our US tech research team estimates Twitter to capture 2% of ad market share globally by 2016E 6TGlobal advertising revenue market share
Exhibit 130: Twitter made its first acquisition in India in Jan 2015 6TTwitter acquired ZipDial of India in Jan 2015
Source: MAGNA global, Goldman Sachs Global Investment Research.
Source: Company data, News articles (including LiveMint dated Jan 20, 2015).
30.1%
10.9%
8.0%
4.2%3.4%
‐5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0 5 10 15
% o f G
lo ba
l V is it or s
Rank in the Country
Twitter visitors
USA
Japan
UK Spain
India
12 17
22 28
34 40
14%
16%
17%
18% 19% 19%
12%
13%
14%
15%
16%
17%
18%
19%
20%
5
10
15
20
25
30
35
40
45
2013 2014 2015 2016 2017 2018
India Twitter users (mn) as % of social network users
0.3% 0.5%
0.9%
1.3%
2.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2012 2013 2014E 2015E 2016E
Twitter advertising market share (%)
Who? When? What?
Clients
How much? approx. $30mn
Twitter's India acquisition
ZipDial
Jan, 2015
'Missed call' marketing ‐ Customer
calls and hangs up before he is
charged. Company sends info to the
'caller'.
Unilever, Disney, Gillette, Amazon,
Facebook, Twitter etc.
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 67
Amazon: A giant with global expertise and balance sheet
Amazon Seller Services Private Limited, a 100% subsidiary of Amazon, launched its
operations in India in June 2013 through the marketplace model. Indian regulations
prohibit foreign companies to sell multi-brand products directly to consumers in India.
However, under the marketplace model, Amazon also does fulfillment for merchants
selling on its platform, if needed. Within a year of operations, Amazon in India has grown
to be among the top 3 e-tail companies (in terms of GMV) along with Flipkart and Snapdeal.
The rapid rise for Amazon could be attributed to its investments in establishing a merchant
ecosystem, setting up warehouses, building out distribution and fulfillment network
(through partnerships with India Post etc.). Further, Amazon CEO Jeff Bezos’
announcement in July 2014 that Amazon is looking to invest US$2bn in its India operations
is an indication of the opportunity for growth that it sees in India.
Exhibit 131: Amazon is ranked among the Top 20 websites in India 6TSize of bubble represents internet users in the country(2014)
Exhibit 132: Nearly 25mn unique users visit Amazon’s online store in India in a month 6TUnique visitors
Source: Alexa, Goldman Sachs Global investment Research.
Source: comScore.
Exhibit 133: Amazon is the 2PndP largest e-tailer in India by net revenues 6TNet revenue and loss (Rs bn)
Exhibit 134: However, its customer acquisition costs are the highest in India 6TLoss to net revenue ratio (FY14)
Source: Registrar of Companies, Ministry of Corporate Affairs.
Source: Registrar of Companies, Ministry of Corporate Affairs.
56.3%
5.3%5.2% 3.6%1.7%
‐10%
0%
10%
20%
30%
40%
50%
60%
70%
0 10 20 30 40
% o f G
lo ba
l V is ito
rs
Rank in the Country
Amazon visitors
USA
ChinaCanadaS.Korea India
24.2
22.4
21.0
12.7
11.1
7.3
6.0
6.0
4.9
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Amazon
Flipkart
Snapdeal
eBay
Myntra
Shopclues
Zovi
Homeshop 18
Bookmyshow
Unique visitors in India (Oct 14) in mn
1.8 1.7 1.5
1.1
3.2 3.2
2.6
0.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Flipkart Amazon Snapdeal eBay India
Large e‐tailers in India (FY14)
Revenue (Rs bn) Loss (Rs bn) 1.90x 1.76x 1.72x
0.77x
0.00x
0.20x
0.40x
0.60x
0.80x
1.00x
1.20x
1.40x
1.60x
1.80x
2.00x
Amazon Flipkart Snapdeal eBay India
Loss to revenue ratio (FY14)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 68
eBay: Early entrant building a diversified portfolio
eBay India, a 100% subsidiary of eBay Inc., was one of the first global majors to start
operations in India with the acquisition of Bazee.com in 2004 for about US$55mn (source:
Business Standard). As is the case with Amazon, eBay also operates a marketplace only
platform in India due to regulatory reasons.
eBay India currently lags market leaders Flipkart, Snapdeal and Amazon in terms of gross
merchandize value (GMV) sold on its marketplace platform as well as revenue. This
appears to be due to its less aggressive discounting stance as evidenced from its low loss
ratio (loss/net revenue - See Exhibit 105). Further, eBay’s exposure to the Indian e-
commerce opportunity extends beyond its own marketplace through its investments in
Snapdeal (2nd largest e-tailing company in India) and Quikr (one of the biggest online
classifieds company in India). eBay’s participation in multiple rounds of fund raising by the
companies suggests that it is looking to play a significant role in the rapidly evolving e-
commerce landscape in India.
Exhibit 135: eBay is ranked among the Top 100 websites in India 6TSize of bubble represents internet users in the country(2014)
Exhibit 136: eBay diversifying its portfolio in India through investments in Snapdeal and Quikr 6TeBay investments in India
Source: Alexa, Goldman Sachs Global investment Research.
Source: Crunchbase, News articles (including Business Standard, The Economic Times).
Exhibit 137: eBay India’s revenue growth healthy but on a declining trajectory as competition is rising 6TNet revenue (Rs bn)
Exhibit 138: However, its loss ratio is lowest among large e-tailing companies in India 6TLoss to net revenue ratio (FY14)
Source: Registrar of Companies, Ministry of Corporate Affairs.
Source: Registrar of Companies, Ministry of Corporate Affairs.
54.8%
5.1% 3.3% 2.6% 2.6%
‐10%
0%
10%
20%
30%
40%
50%
60%
70%
0 20 40 60 80 100 120 140
% o f G
lo ba
l V is it or s
Rank in the Country
eBay visitors
USA
ChinaRussia S.Korea
India
Investee Company Investment Date
Bazee 2004
May, 2011
May, 2012
Mar, 2014
Sep, 2014
Apr, 2013
Feb, 2014
Quikr India
Snapdeal
Comments
Invested in US$75mn Series D funding
round
Acquired for US$55mn
Reportedly invested US$50mn in
US$134mn Series F funding round
Invested in US$8mn Series D funding
round
Invested in US$32mn Series E funding
round
Invested in US$90mn Series F funding
round
Invested in US$60mn Series G funding
round
0.5
0.8
1.1
69%
59%
33%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
FY12 FY13 FY14
eBay India
Revenue (Rs bn) YoY (%)
0.77x
1.72x
1.90x 1.76x
0.00x
0.20x
0.40x
0.60x
0.80x
1.00x
1.20x
1.40x
1.60x
1.80x
2.00x
eBay India Snapdeal Amazon Flipkart
Loss to revenue ratio (FY14)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 69
Samsung: Market leader facing stiff competition
Samsung India Electronics, a subsidiary of the global electronics major Samsung, has been
a leading competitor in the Indian mobile phone space with a dominant presence in
smartphone shipments for the past several years. Samsung’s ability to offer mobile phones
to Indian consumers at multiple price points has been a key contributor to its success in
India. Although Samsung has a range of products that it sells in India across various
consumer appliance categories, its growth in recent years has been driven by the mobile
devices segment with revenues growing at 60% CAGR between FY10-FY14 vs. 39% CAGR
for its whole India business. However, the entry of domestic companies like Spice, Karbonn
etc. and global firms such as Apple and Xiaomi, has resulted in Samsung yielding market
share in the mobile devices segment. Nevertheless, Samsung’s focus on the Indian market
continues as is evidenced by the launch of its Tizen powered mobile device ‘Samsung Z1’
first in India.
Exhibit 139: Samsung shipments strong, but dipping…
Exhibit 140: …as new entrants impact market share
Source: Gartner.
Source: Gartner.
Exhibit 141: Revenue growth in India for Samsung driven primarily by mobile
Exhibit 142: Overall market share in phone shipments is slipping in India, not just on smartphone shipments
Source: Registrar of Companies, Ministry of Corporate Affairs.
Source: Gartner.
276%
238%
203%
58% 84%
59% 57% 89%
61% 42%
23% ‐3%
‐50%
0%
50%
100%
150%
200%
250%
300%
0
1,000
2,000
3,000
4,000
5,000
6,000
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
Samsung Smartphone Shipments ('000) YoY (%) [RHS]
000's
48.2%49.8% 54.4%
50.8%49.2%
39.2% 35.7%35.9%35.6%
28.1%
21.9% 17.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
Samsung Smartphone market share in India
42 66
110
180
279
107 141
198
278
404
0
50
100
150
200
250
300
350
400
450
FY10 FY11 FY12 FY13 FY14
Samsung India
Mobile phone rev. (Rs bn) Revenue (Rs bn)
Rs bn
Revenue: 39% CAGR
Mobile rev.: 60%
21% 21% 21% 22%
20% 18% 18% 17% 17%
14% 13%
11%
5.0%
8.0%
11.0%
14.0%
17.0%
20.0%
23.0%
7,000
8,500
10,000
11,500
13,000
Samsung Mobile phone shipments ('000s) Market share (%)
000's
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 70
Xiaomi: Unique marketing style, but going full throttle now
Xiaomi, the Chinese smartphone and electronics manufacturer, is targeting India as its next
growth frontier. It followed a distinct strategy of entering India by exclusively selling
through online store Flipkart via flash sales which required users to pre-register. Despite
the online only strategy, Xiaomi managed to capture c.3% market share in smartphone
shipments within six months of its entry into India. It has launched more than 4 models in
the past 4 months. After the initial buzz through its exclusive online flash sales, Xiaomi has
now tied up with other e-tailers Amazon and Snapdeal and also with offline mobile retailer
Mobile Store. Recently, Mr. Ratan Tata announced buying a stake in Xiaomi (source: The
Economic Times, April 27, 2015) as it plans to aggressively expand operations in India with
a first India-specific handset model – Mi4i at Rs12,999 – launched in India on April 23, 2015.
Exhibit 143: China based Xiaomi grabbed 3%+ smartphone market share in India with 6 months of its
launch
Exhibit 144: Xiaomi initially sold through online store Flipkart via flash sales which required users to pre-
register
Source: Gartner.
Source: Company data.
Exhibit 145: Xiaomi phone features comparison with other similarly configured phones
Source: GSM Arena, Company data.
164
779
0.8%
3.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0
100
200
300
400
500
600
700
800
900
2014 Q3 2014 Q4
Xiaomi in India Smartphone Shipments ('000)
000's Model Price (Rs) Initial Sales strategy
Redmi 1S 5,999 Online sales via Flipkart Redmi Note 4G 9,999 Sold through Bharti Airtel stores Mi 3 13,999 Online sales via Flipkart Mi 4 16 GB 19,999 Online sales via Flipkart Mi 4 64 GB 23,999 Online sales via Flipkart
Mi 4i 16 GB 12,999 Online sales via Flipkart
Model Z1 Redmi Note 4G Canvas A1 One Mi 4 iPhone 6 Manufacturer Samsung Xiaomi Micromax OnePlus Xiaomi Apple
Launch Jan-15 Aug-14 Sep-14 Jun-14 Jul-14 Sep-14
OS Tizen Android Adroid One Oxygen OS Android iOS
Price (Rs) 5,999 9,999 9,999 17,999 19,999 53,500
SIM Dual Single Dual Single Single Single
2G N/W GSM 850 / 900 / 1800 / 1900
GSM 900 / 1800 / 1900 GSM 850 / 900 / 1800 / 1900
GSM 850 / 900 / 1800 / 1900
GSM 850 / 900 / 1800 / 1900
GSM 850 / 900 / 1800 / 1900
3G N/W HSDPA 900 / 2100 TD-SCDMA 1900 / 2000
HSDPA 2100 HSDPA 850 / 900 / 1700 / 1900 / 2100
HSDPA 850 / 900 / 1900 / 2100
HSDPA 850 / 900 / 1700 / 1900 / 2100
4G N/W na TD-LTE 1900 / 2300 / 2600
na LTE 700 / 2600 / 2300 / 2100 / 1800
LTE LTE
Display - Resolution 480 x 800 pixels (233 ppi)
720 x 1280 pixels (267 ppi)
480 x 854 pixels (218 ppi)
1080 x 1920 pixels (401 ppi)
1080 x 1920 pixels (441 ppi)
720 x 1334 pixels (326 ppi)
Camera 3.15 MP, 2048 x 1536 pixels
13 MP, 4128 x 3096 pixels
5 MP, 2592x1944 pixels
13 MP, 4128 x 3096 pixels
13 MP, 4128 x 3096 pixels
8 MP, 3264 x 2448 pixels
Video Yes 1080p@30fps Yes, 1080p Yes, 2160p@30fps, 1080p@60fps
1080p@30fps, HDR 1080p@60fps, 720p@240fps
Secondary Camera VGA 5 MP Yes, 2 MP, 720p Yes, 5 MP, 1080 @30f
8 MP, 1080p@30fps 1.2 MP, 720p@30fps
Memory (Internal) 4 GB, 768 MB RAM 8 GB, 2 GB RAM 4 GB, 1 GB RAM 16/64 GB, 3 GB RAM 16 GB, 3 GB RAM 16 GB, 1 GB RAM
NFC No No No Yes Yes Yes
Battery Capacity 1500 mAh 3200 mAh 1700 mAh 3100 mAh 3080 mAh 1810 mAh
Talktime Up to 8 hours (3G) Up to 14 h (3G) Up to 6 hours na na Up to 14 h (3G)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 71
Apple: Growing shipments, but not significant strides in India yet
While Apple has been selling its iPhones in India for several years, it has not been able to
make inroads in terms of market share even as the shipments have increased in absolute
terms. Apple’s market share in the Indian smartphone market over the years has remained
within the 1%-2% range which may be attributed to its restricted distribution structure,
besides India not being a huge market for premium phones currently. However, share
improvements were seen whenever it introduced new models. We believe this could be
due to: (1) discounted pricing for the prior models targeting the emerging markets, and (2)
offering several financing models in emerging markets including India. Both these factors
have likely captured new iPhone users, and while it’s relatively small as a market for Apple,
new users far outnumber replacements in India at this early stage.
However, media reports (including The Times of India dated Jan 27, 2015) suggest that
Apple is looking to grow its market share in India by partnering with global retail major
Brightstar to sell its devices in India. Besides, it has also begun to tie up with network
operators such as Vodafone and Bharti and offer EMI payment option to grow sales.
Exhibit 146: Apple shipments into India have seen a steady rise
Exhibit 147: Share improvements seen around new model launches
Source: Gartner.
Source: Company data, Gartner.
Exhibit 148: However, market share remains at around the 2% level
Exhibit 149: Apple India revenues grew 10X in a period of 5 years
Source: Gartner.
Source: Registrar of Companies, Ministry of Corporate Affairs.
75 71 33
180 136
225 205
231
295 288 237
459
‐200%
‐100%
0%
100%
200%
300%
400%
500%
600%
0 50 100 150 200 250 300 350 400 450 500
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
Apple Smartphone Shipments ('000) YoY (%) [RHS]
000's
0 50 100 150 200 250 300 350 400 450 500
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
Apple India Smartphone Shipments ('000)
000's
iPhone 5 launched
iPhone 5C, 5S models launched
iPhone 6, 6 Plus launched
2.2%
1.7%
0.8%
3.9%
2.2%
2.7%
2.0% 1.9%
2.1% 1.7%
1.2%
1.9%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
Apple Smartphone market share in India
4.5 6.2
20.0 30.6
45.0
0%
50%
100%
150%
200%
250%
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
FY10 FY11 FY12 FY13 FY14
Apple India
Revenue (Rs bn) YoY (%) [RHS]
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 72
SoftBank/Alibaba: Strategically entering India through investments
SoftBank is one of the largest investors in the Indian e-commerce space with the company
directly or through its subsidiaries investing approximately US$1bn in 2014 alone. Further,
SoftBank’s CEO Masayoshi Son has announced that it is looking to invest nearly US$10bn in
India over the next 10 years. We note that Softbank’s investments in India and other South-East
Asian countries accelerated over the past 9 months since the appointment of the new Vice
Chairman. Alibaba, in which SoftBank owns 32% stake, has bought a significant share in One97
Communications in India, the company that owns Paytm –a mobile only commerce platform
and e-wallet company. In addition to this investment, Alibaba’s international arm Aliexpress
also has a decent presence in India with c. 7% of its traffic coming from India as of Dec 2014.
Alibaba/Softbank and their major shareholders may increase their presence in India
through strategic investments in various horizontal and vertical plays as per media reports
(The Times of India, Oct 28 and Nov 27, 2014). Jack Ma has already made a few visits to
India with big contingents, meeting the government and companies across the board,
indicating his interest in the country’s internet opportunity.
Exhibit 150: With its investments in 2014, SoftBank has become the largest investor in the Indian internet space SoftBank’s investments in India (direct and indirect)
Source: Crunchbase, News articles (including The Economic Times, Business Standard, VC Circle).
Exhibit 151: India is the 2 PndP highest source of traffic for Aliexpress (international arm of Alibaba selling merchandise 6TSize of bubble represents internet users in the country (2014)
Source: Alexa, Goldman Sachs Global Investment Research.
13.7%
6.9% 6.5%
6.3%
6.1% 0%
5%
10%
15%
20%
25%
30%
35%
‐50 0 50 100 150 200
% o f G
lo ba
l V is it or s
Rank in the Country
Aliexpress visitors
USA
S.Korea
Russia
Brazil
India
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 73
Private companies dominant in the Indian market
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 74
Private companies dominant in the Indian market today
We give an overview of a few large private companies dominant in their respective categories in the India internet space.
Flipkart
4TCompany description: 4T Flipkart started operations in October 2007 selling books via internet. It is now India’s leading
e-commerce marketplace with over 20mn products across 70+ categories including electronics, apparels, baby care
products, home & kitchen appliances, books & media, fitness equipment, auto accessories etc. It also plans to enter
the hyper local grocery business in 2H2015 per media reports (The Economic Times, dated Apr 8 2015). We note that
grocery business constitutes nearly 65% of total retail sales in India, according to IBEF.
Flipkart has the unique distinction of being the first billion dollar Indian e-commerce company and is the first to offer
an annual subscription service called Flipkart First. The company operates exclusively in India.
4TFounders: 4T Sachin Bansal, Binny Bansal
4TKey executives:4T Sachin Bansal (CEO), Binny Bansal (COO), Mukesh Bansal (CMO), Sanjay Baweja (CFO)
4THeadquarters: 4T Bengaluru, India
4TBusiness Model: 4T Hybrid of Inventory-based e-tailing and marketplace model. The company is currently focused on
expanding number of merchants on its marketplace platform, aiming to reach 50,000 sellers by 2HCY15.
Flipkart also does exclusive product launches, and branded stores. For example, when a Chinese smartphone
manufacturer entered India recently, it did so through an exclusive partnership with Flipkart.
4TGross merchandize value (GMV) T: Estimated by management to reach US$3bn in FY15 and US$8bn in FY16. At
present, 45% of units and 20% of the GMV is contributed by the marketplace channel.
Fulfilment: E-kart, owned by WS Retail, currently accounts for about 80% of Flipkart shipments. However, the
company is looking to partner with more 3rd party logistics companies to expand reach and scale.
4TKey metrics:4T Flipkart has about 60mn registered users and gets nearly 8mn page visits daily. It has 13 warehouses
and over 25,000 employees including contract employees mostly used for delivery.
4TAcquisitions: 4T WeRead.com (2010), Mime360.com (2011), Chakpak.com (2011), Letsbuy.com (2012), Myntra.com
(2014)
KKey investors: 4T Accel Partners, Baillie Gifford, Dragoneer Investment Group, DST Global, Green oaks Capital
Management, Iconiq Capital, Morgan Stanley, Naspers, Qatar Investment Authority, Singapore GIC, Sofina,
Steadview Capital, Tiger Global Management, Vulcan Inc.
4TFunds raised to date: 4T US$2.5bn in 11 funding rounds
4TFunds raised in latest round: 4T US$700mn in Dec 2014
4TEstimated market value: 4T US$12.5bn, as per media reports such as The Economic Times (March 31, 2015)
Note: The above information has been sourced from various media reports and company websites, and may not be exhaustive.
Source: Company data, Crunchbase, Media reports (including The Economic Times, Business Standard)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 75
Snapdeal
4TCompany description: 4T Snapdeal started operations in February 2010 as a daily deals platform inspired by US-based
Groupon. In September 2011, the company expanded to become an e-commerce company via the marketplace
model. The company has over 5mn unique products listed on its website across various categories like Mobiles &
Tablets, Home & Living, Apparel, Jewelry etc. The company also sells apartments, automobiles and yachts on its site.
Snapdeal has also recently helped over 150 sellers on its platform, raise over Rs500mn in loans through its capital
assist initiative (per company press release dated Mar 26, 2015).
4TFounders: 4T Kunal Bahl, Rohit Bansal
4TKey executives:4T Kunal Bahl (CEO), Rohit Bansal (COO), Abhishek Passi (CSO), Vivek Patnakar (Sr. VP Finance)
4THeadquarters: 4T New Delhi, India
4TBusiness Model: 4T Snapdeal follows a marketplace only model and the company claims it is the largest online
marketplace in India.
4TGross merchandize value (GMV) 4T: Estimated to be US$2bn in FY15 (as per Business Standard report dated Feb 18,
2015)
4TKey metrics:4T Snapdeal has over 40mn registered users, over 100,000 merchants on its platform selling goods and
products across 500+ categories. According to the company, over 65% of its orders come from outside of the top 10
Indian cities currently. The company has about 15-20 fulfilment centers across the country.
4TAcquisitions: 4T Grabbon.com (2010), esportsbuy.com (2012), Shopo.in (2013), Doozton.com (2014), Wishpicker.com
(2014), Smartprix (2015), Exclusively.in (2015), Freecharge (2015).
The acquisition of Freecharge for a reported valuation of c.US$400mn (Source: The Hindu dated April 8, 2015) in cash
and stock, is the largest in the Indian e-commerce space to date. Freecharge is a mobile commerce platform that
allows users to recharge their mobile connection and pay utility bills across major operators.
4TKey investors: 4T Bessemer Venture Partners, Blackrock, eBay, IndoUS Venture Partners, Intel Capital, Kalaari Capital,
Nexus Venture Partners, PremjiInvest, Ratan Tata, Ru-net, Saama Capital, Softbank Capital, Softbank Internet and
Media, Temasek Holdings, Tybourne Capital Management.
4TFunds raised to date: 4T US$1.1bn in 8 funding rounds
4TFunds raised in latest round: 4T US$627mn in Oct 2014
4TEstimated market value: 4T US$5bn as per media reports (The Economic Times dated Feb 14, 2015)
Note: The above information has been sourced from various media reports and company websites, and may not be exhaustive.
Source: Company data, Crunchbase, Media reports (including The Economic Times, Business Standard)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 76
OLA Cabs
4TCompany description: 4T Ola cabs (ANI Technologies Pvt Ltd) started operations in January 2011. It brings taxi/cab
services online by partnering with private taxi owners. It is India’s first aggregator of car rentals and point-to-point
cab services. Ola Cabs does not own or operate its own fleet, but aggregates small fleet operators and single vehicle
owners. Customers can access Ola services through the web, mobile app or through a customer service center. Cab
owners benefit from Ola Cabs’ network and technology platform which helps them procure customers.
The company recently launched Ola Café, a mobile-only food delivery service where customers can order food
through their mobile app from restaurants in the near vicinity. However, this service is only available in 4 cities and
limited areas within those cities currently.
4TFounders: 4T Bhavish Aggarwal, Ankit Bhati
4TKey executives:4T Bhavish Aggarwal (CEO), Ankit Bhati (CTO), Mitesh Shah (CFO)
4THeadquarters: 4T Mumbai, India
4TBusiness Model: 4T Ola provides an online marketplace for valid permit holding drivers of rental cars and auto
rickshaws (a three-wheeler vehicle)
4TGross Transaction value (GTV) 4T: Estimated to be US$350mn in FY15 (VC Circle article dated Nov 19, 2014)
4TKey metrics:4T Ola operates in 67 cities across India and has over 60,000 cabs on its platform (as of Feb 2015). It has
about 3,000 employees. In addition it has 30,000 auto rickshaws on its platform.
4TAcquisitions: 4T TaxiForSure (2015). Ola reportedly acquired TaxiForSure for US$200mn in a cash and stock (Source:
Livemint dated Mar 2, 2015). The deal reportedly adds c.15,000 cabs to its fleet. TaxiForSure is present in 47 cities
across India.
4TKey investors: 4T DST Global, SoftBank Capital, Accel Partners, Matrix Partners India, Sequoia Capital, Steadview
Capital, Tiger Global Management, Falcon Edge Capital.
4TFunds raised to date: 4T US$677mn in 6 funding rounds
4TFunds raised in latest round: 4T US$400mn in Apr, 2015
4TEstimated market value: 4T US$2.4bn as per media reports (VC Circle dated Apr 16, 2015)
Note: The above information has been sourced from various media reports and company websites, and may not be exhaustive.
Source: Company data, SoftBank, Crunchbase, Media reports (including The Economic Times, Business Standard, VC Circle, Livemint)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 77
InMobi
4TCompany description: 4T InMobi began operations in 2007 as an SMS-based search platform and was then known as
mKhoj. Later it changed into a performance based mobile ad-network. It builds mobile-first customer engagement
platforms and operates from 17 offices across the globe with a nearly 1,000 strong employee base. It provides
advertising solutions, mobile app analytics, consumer insights to advertisers and other related services. It ties up
with web publishers to enable brands and app developers to seamlessly integrate their products into mobile content.
4TFounders: 4T Naveen Tewari, Amit Gupta, Mohit Saxena, Abhay Singhal
4TKey executives:4T Naveen Tewari (CEO), Manish Dugar (VP of Finance & Legal), Anne Frisbie (VP, Global Alliances)
4THeadquarters: 4T Bengaluru, India
4TBusiness Model: 4T Proprietary cloud based technology enables remote deployment of mobile ads with the click of a
button on sites and apps of the customer’s choice
4TKey metrics:4T Inmobi has grown into the world’s largest independent ad network reaching 1bn unique mobile
devices, 30,000+ publishers across 200 countries and serves c.6bn daily ad impressions (as of Dec 2014). 43% of
unique mobile devices on InMobi’s network come from advanced markets in North America and Western Europe
while 38% come from Asia-Pac. InMobi employs over 800 people.
Competition: In the global mobile advertising market, InMobi competes directly against Google’s AdMob and
Apple’s iAd.
4TAcquisitions: 4T Sprout (2011), MMTG Labs (2012), Metaflow Solutions (2012), and Overlay Media (2013)
4TKey investors: 4T Mumbai Angels, Kleiner Perkins Caufield Byers (KPCB), Sherpalo and Softbank
4TFunds raised to date: 4T US$220mn in 5 funding rounds
4TFunds raised in latest round: 4T US$5mn in Dec 2014
4TEstimated market value: 4T US$2bn as per media reports (Economic Times dated Mar 11,2015)
Note: The above information has been sourced from various media reports and company websites, and may not be exhaustive.
Source: Company data, Softbank, Crunchbase, Media reports (including The Economic Times, Business Standard)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 78
Paytm
4TCompany description: 4T Paytm started by offering mobile recharge and utility bill payments. It has now transformed
itself into a digital goods and mobile commerce platform. It is run by One97 Communications, a firm that delivers
mobile content and commerce services to mobile consumers through its cloud platforms. Paytm also offers mobile
wallet solutions and has an exclusive tie up with the taxi hailing app ‘Uber’ in India. It has over 1,200 employees and
has offices in Mumbai, Pune, Chennai, Bangalore and Kolkata with global presence in Africa, Europe, Middle East and
Southeast Asia. Paytm has recently (Apr, 2015) entered the typically hyper local grocery segment and plans to launch
in 10 cities in 2015.
In February, Alibaba Group through its affiliate Ant Financial bought a 25% stake in One97 Communications.
4TFounders: 4T Vijay Shekhar Sharma
4TKey executives:4T Vijay Shekhar Sharma (CEO)
4THeadquarters: 4T New Delhi, India
4TBusiness Model: 4T Paytm offers a mobile marketplace for digital goods and an electronic wallet offering payment
services. In April 2015, Paytm has tied up with Axis Bank and Yes Bank enabling its customers to load their Paytm
wallets by depositing cash. However, customers are limited to depositing a minimum of Rs2,000 and a maximum of
Rs10,000 in cash at a bank’s cash counter.
4TKey metrics:4T Paytm has about 50mn Paytm wallets and about a 1/3rd of them transact on Paytm in a month on
average. Paytm expects to increase the number of wallet users to 100mn by the end of 2015. The company clocks
over 60mn transactions every month with an average user transacting four times in a month on its platform. (Source:
Livemint dated Apr 13, 2015).
Paytm mobile marketplace has about 33,000 merchants on its platform and it reportedly expects to increase it to
100,000 merchants by the end of 2015. Similarly, it expects to increase the number of units sold on its commerce
platform to 100mn a day by the end of 2015 from 8.5mn currently. (Source: Business Insider dated Apr 24, 2015)
4TAnnualized GMV: 4T Estimated by management to cross US$4bn by Dec 2015 (Livemint dated Apr 25, 2015)
4TKey investors: 4T Alibaba Group, Intel Capital, Reliance Capital, SAIF Partners, Sapphire Ventures, Silicon Valley Bank
4TFunds raised to date: 4T Unknown
4TFunds raised in latest round: 4T US$575mn for 25% stake
4TEstimated market value: 4T US$1.5bn as per media reports (Business Standard dated Jan 16, 2015)
Note: The above information has been sourced from various media reports and company websites, and may not be exhaustive.
Source: Company data, Softbank, Crunchbase, Media reports (including VC Circle, The Economic Times, Business Standard, Livemint, Business Line)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 79
Housing.com
4TCompany description: 4T Housing.com is an online real estate platform started in June 2012. It was launched as a
rental service finder in Mumbai. Since then it has expanded presence to 60 major cities in India and offers an online
real estate platform which allows customers to search for housing based on geography, number of rooms and
various other filters.
In November 2014, Housing launched an interactive home booking platform called “Slice View” and partnered with
Tata Value Homes (TVH) to launch an exclusively online-only inventory across four of TVH’s projects. Slice View
enables users to take a virtual walk through houses, by providing 3-D renderings of apartments. Further, it allows
customers to book their homes online.
4TFounders: 4T Rahul Yadav, Advitiya Sharma, Abhishek Anand, Snehil Buxy, Ravish Naresh, Sanat Ghosh, Abhimanyu
Dhamija, Jaspreet Saluja, Rishabh Agarwal, Neeraj Bhunwal, Amrit Raj, Vaibhav Tolia
4TKey executives:4T Rahul Yadav (CEO), Azeem Adil Zainulbhai (CFO)
4THeadquarters: 4T Mumbai, India
4TUSP:4T The company states that its site contains 100% verified listings. It is looking to provide respite to home-seekers
and home-owners from endless site visits to explore properties by providing genuine pictures of properties. It also
provides several additional features such as CFI (Child friendly index) heat maps, demand flux maps.
Acquisition: Indian real estate forum (2015). Housing acquired Indian real estate forum, an online discussion site for
a reported US$1.2mn (Source: VC Circle, March 26, 2015).
4TKey metrics:4T Housing.com does nearly 4,000 listings in a day.
4TKey investors: 4T Helion Venture Partners, Nexus Venture Partners, Softbank
4TFunds raised to date: 4T US$140mn in 4 rounds
4TFunds raised in latest round: 4T US$100mn from Softbank Capital in Nov 2014
4TEstimated market value: 4T US$250mn as per media reports (Times of India dated Dec 17, 2014)
Note: The above information has been sourced from various media reports and company websites, and may not be exhaustive.
Source: Company data, Softbank, Crunchbase, Media reports (including VCCircle, The Economic Times, Business Standard)
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 80
Appendix
Exhibit 152: Transaction map for an airline ticket issuance via an OTA
Note: This is for illustration purpose only assuming a gross booking value of Rs100; all numbers are indicative.
Source: Goldman Sachs Global Investment Research.
Online Travel Agent (OTA)
Source of revenue for OTA 1. Convenience or service Fee Rs 98.5 2. Fee from GDS partner 3. Airline commission + volume incentives Listing fee
Rs 6 Rs 98.5
Rs 5 GDS Fee (depends on volume)
Rs 100 + C.Fee Rs 98.5 Direct route
Gross booking amount Rs 100 + convenience fee (C.Fee)
Rs 1.5 1% commission + volume incentives
Rs 5
* Convenience Fee ‐ independent of gross booking amount
Customer confirms a purchase
Global distribution system (GDS) like Amadeus/Sabre
Payment Gateway
Airline
C.Fee + Commissions + volume incentive + GDS
Marketing
SG&A
Personnel
D&A
Rs 3
Rs 2
Rs 2
Rs 0.25
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 81
Exhibit 153: Transaction map for hotel booking via the agency/ merchant model through an OTA
Note: This is for illustration purpose only assuming a gross booking value of Rs100; all numbers are indicative.
Source: Goldman Sachs Global Investment Research.
Exhibit 154: Transaction flow of a standard debit/credit card transaction
Note: This is for illustration purpose only assuming a gross booking value of Rs100; all numbers are indicative.
Source: Goldman Sachs Global Investment Research.
Source of revenue for OTA Agency model via Travel aggregator: Aggregator takes inventory from hotels;
OTA takes commission for bookings made Inventory Agency model via GDS: Hotel lists with GDS and pays listing fee; Hotel sets its own price;
OTA gets paid in GDS fee (volume dependent) Merchant model: OTA gets preferred rate and rooms; OTA sets price and makes the margin
1) Agency model Rs 85
Rs 100 + C.Fee Rs 100
Listing fee Booking amount Rs 15 Rs 100 2) GDS Fee (volume dependent) + convenience fee (C.Fee) Rs 10
3) Merchant model Rs 80
Rs 1.5
* Convenience Fee ‐ independent of gross booking amount
Customer confirms a purchase
Online Travel Agent (OTA)
Payment Gateway
Global distribution system (GDS)
Offline Travel agents/
aggregators
Hotel 1
Hotel n
Hotel
Hotel Chains
Hotel 1
Hotel n
CC = Credit Card
DC = Debit Card
Consumer Merchant
Issuing banks Payment network Acquiring banks
Goods and services
Capture & Authorisation
Transaction amount (minus
interchange fees)
Merchant Receives
Rs98(CC)/
Rs99(DC)
Authorization & Fraud
Clearing & Settlement Clearing & Settlement
Transaction amount
(minus interchange fees)
Card payment
Customer pays
Rs100
Merchant
service charge
Interchange fee
Rs1.50 (CC)
Rs0.65 (DC)
Acquiring fee
Rs0.25 (CC)
Rs0.15 (DC)
Payment aggregator
Network fee
Rs0.10
Transaction
processing fee
Rs0.15 (CC)
Rs0.10 (DC)
HDBK, ICBK,
SBI, BOB
Visa, Mastercard,
Rupay Billdesk,
CCavenue, Citrus
HDBK, ICBK, SBI,
BOB
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 82
Exhibit 155: Most Indian e-tailers are running the marketplace model, with some like Flipkart preferring a hybrid model
Note: This is for illustration purpose only assuming a gross booking value of Rs100; all numbers are indicative.
Source: Goldman Sachs Global Investment Research.
Customer orders Rs 100
Inventory model Online store delivers Rs 90
Customer orders Rs 100
Order confirmation Marketplace model to ship to customer Rs 95
Product information Offline seller delivers to customer Rs 90
Customer orders Rs 100
1. Online store delivers Rs 90
Hybrid model Order confirmation to ship to customer Rs 95
Product information 2. Offline seller delivers to customer Rs 90
Online store Customer
Offline seller 1
Online store Customer
Offline seller 2 Offline seller n
Offline seller 1
Online store Customer
Offline seller 2 Offline seller n
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 83
Disclosure Appendix
Reg AC
We, Rishi Jhunjhunwala, Piyush Mubayi and Venkat Surapaneni, hereby certify that all of the views expressed in this report accurately reflect our
personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be,
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
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market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
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Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
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GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Rishi Jhunjhunwala: Asia Pacific Media, Indian IT Services. Piyush Mubayi: Asia Pacific Media, Asia Pacific Telecoms.
Asia Pacific Media: 58.com Inc., Alibaba Group Holding, Astro Malaysia Holdings, Autohome Inc., Baidu.com Inc., Changyou.com, Ctrip.com
International, Info Edge India Ltd., Jumei International Holding, Just Dial Ltd., Makemytrip Ltd., New Oriental Education & Technology, Qihoo 360
Technology Co., Qunar.com, SINA Corp., Sohu.com, SouFun Holdings, TAL Education Group, Tarena International Inc., Television Broadcasts,
Tencent Holdings, Vipshop Holdings, Weibo Corp., Youku Tudou Inc..
Asia Pacific Telecoms: Axiata Group, Bharti Airtel, Bharti Infratel Ltd., Chunghwa Telecom, Digi.com, Dish TV India, Far EasTone, HKT Trust, Hong
Kong Broadband Network Ltd., Hutchison Telecommunications HK, Idea Cellular, Indosat, KT Corp., KT Corp. (ADR), LG UPlus, M1 Ltd., Maxis Bhd,
PCCW Ltd., PT Link Net Tbk, PT XL Axiata, Reliance Communications, Singapore Telecommunications, SK Telecom, SK Telecom (ADR), SmarTone,
StarHub, Taiwan Mobile, Telekom Malaysia, Telekomunikasi Indonesia.
Indian IT Services: HCL Technologies Ltd., Infosys Ltd., Infosys Ltd. (ADR), Mindtree Ltd., Mphasis, Tata Consultancy Services Ltd., Tech Mahindra
Ltd., Wipro Ltd., Wipro Ltd. (ADR).
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies
covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be
aggregated under US securities law) as of the second most recent month end: Just Dial Ltd. (Rs1,070.30)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Just Dial Ltd. (Rs1,070.30)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Just Dial Ltd. (Rs1,070.30)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Info Edge India Ltd. (Rs769.85), Just Dial Ltd.
(Rs1,070.30) and Makemytrip Ltd. ($21.30)
Goldman Sachs makes a market in the securities or derivatives thereof: Makemytrip Ltd. ($21.30)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 46% 37% 32%
As of April 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,356 equity securities. Goldman Sachs assigns stocks as
Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
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May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 84
Price target and rating history chart(s)
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Info Edge India Ltd. (INED.BO)
900 835
785
200
300
400
500
600
700
800
900
1,000
15,000
17,000
19,000
21,000
23,000
25,000
27,000
29,000
Goldman Sachs rating and stock price target history
Stock Price Currency : Indian Rupee
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2015.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.
Rating
Price target
Price target at removal
Covered by Rishi Jhunjhunw ala, as of Sep 15, 2014
Not covered by current analyst
India BSE30 Sensex
In d e x P
ri c e
S to
c k P
ri c e Apr 14
M B
J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M 2012 2013 2014 2015
Jus t Dial Ltd. (JUST.BO)
1630
500
700
900
1,100
1,300
1,500
1,700
1,900
15,000
17,000
19,000
21,000
23,000
25,000
27,000
29,000
Goldman Sachs rating and stock price target history
Stock Price Currency : Indian Rupee
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2015.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.
Rating
Price target
Price target at removal
Covered by Rishi Jhunjhunw ala, as of Sep 15, 2014
Not covered by current analyst
Apr 14, 2014 N
India BSE30 Sensex
In d e x P
ri c e
S to
c k P
ri c e May 23
M B
J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M 2012 2013 2014 2015
M ak e m ytrip Ltd. (MMYT)
28
27
10
15
20
25
30
35
40
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
Goldman Sachs rating and stock price target history
Stock Price Currency : U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2015.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.
Rating
Price target
Price target at removal
Covered by Rishi Jhunjhunw ala, as of Sep 15, 2014
Not covered by current analyst
NASDAQ Composite
In d e x P
ri c e
S to
c k P
ri c e Apr 14
M N
J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M 2012 2013 2014 2015
May 4, 2015 India: Technology: Internet
Goldman Sachs Global Investment Research 85
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Goldman Sachs Global Investment Research 86
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India is the fastest growing e-commerce market.pdf
India is the fastest growing e-commerce market: Study TNN | May 8, 2016, 06.24 PM IST
Printed from
MANGALURU: Being driven by a young demographic profile, increasing
internet penetration and relative better economic performance, India's e-
Commerce revenue is expected to jump from $30 billion in 2016 to $120
billion in 2020, growing at an annual rate of 51%, the highest in the world,
according to a joint ASSOCHAM-Forrester study paper.
While in terms of base, India may be lower than China and other giants like
Japan, the Indian rate of growth is way ahead of others. Against India's
annual expansion of 51%, China's e-commerce is growing at 18%, Japan
11% and South Korea 10%, according to a joint study.
With annual additions of 25 million internet users, India is ahead of countries like Brazil and Russia even within the BRICS
nations. India has an Internet user base of 400 million in 2016 whereas Brazil has 210 million internet users and Russia has 130
million of internet user.
Interestingly, about 75% of online users are in the age group of 15-34 years since India is one of the youngest demography
globally. "This is expected to be a continuing trend in coming years, given the age distribution in India", said D S Rawat,
Myntra to relaunch desktop site a year after going mobile-only ALSO READ
ASSOCHAM Secretary General. It is not surprising to see the growth among categories focused on younger audiences in the last
12 months, added the paper. The maximum online shoppers are from the 15-24 years of age group, comprising both of males
and females.
Online travel has seen growth across all subcategories including car rentals, airlines, hotels and travel review and information
sites. The top 10 sites among the travel category show a good mix of travel options as well as information. Users are seeking
information on travel options on a regular basis, with the railways being the largest target. One out of every 5 online users in
India visits the Indian Railways site.
Retail category penetration has increased to 65 million unique visitors a month registering an annual growth of 55%. The growth
has come across all retail categories and most of them show promising transactions and conversion rates along with growth in
visitors. Apparel has been the fastest growing subcategory in retail and reaches 24% online users
Increasing internet and mobile penetration, growing acceptability of online payments and favourable demographics has
provided the e-commerce sector in India the unique opportunity to companies connect with their customers, it said. Branded
apparel, accessories, jewelry, gifts, footwear among the major hits on the e-commerce shopping, which is moving up fast on the
mobile phones applications.
In India roughly 60-65 per cent of the total e-commerce sales are being generated by mobile devices and tablets shopping online
Top B-school graduates pick ecommerce as most preferred sector ALSO READ
E-Commerce industry likely to generate 2.5-lakh jobs in online retail this year ALSO READ
through smart phones is proving to be a game changer, and industry leaders believe that m-commerce could contribute up to 70
per cent of their e-commerce revenues.
India shopping with the family(2).pdf
India: Shopping with the family The Indian apparel market has some distinctive features that massmarket
retailers must accommodate. Kartik N. Sheth and Ireena Vittal
Indians devote roughly the same share of their income to apparel as do Chinese and Brazilians. But the country’s lower per capita income levels mean overall spending on apparel is significantly lower, and the habits of Indian shoppers present intriguing challenges for multinationals eyeing the market.1 For starters, nearly 40 percent of the mass-market Indian shoppers2 we surveyed said that their most important shopping occasions revolved around special events, such as weddings and annual religious festivals—a figure dramatically higher than the one for shoppers in the other emerging markets we studied. Furthermore, to a greater extent than elsewhere, shopping is a family activity in India: nearly 70 percent of its shoppers always go to stores with family, and 74 percent— more than twice the average of Brazil, China, and Russia—view shopping as the best way to spend time with family. The preference for family-oriented shopping is consistent across age groups, income segments, regions, and city sizes. As in many markets, in India women are the primary decision makers in apparel purchases for the entire family. But India’s men also have an important role: indeed, half of our survey respondents said that their husbands had a major influence on which stores they frequented—a proportion far higher than the one for Brazil (3 percent), China (8 percent), and Russia (18 percent). What’s more, India is unusual in that the market for men’s apparel is larger than the women’s market, where traditional Indian apparel still dominates. Mass- market apparel retailers must therefore find formats and merchandising approaches that will attract shoppers seeking apparel not only for special occasions but also appealing to the entire family. McKinsey Quarterly: The Online Journal of McKinsey & Company Page 6 of 11 https://www.mckinseyquarterly.com/article_print.aspx?L2=20&L3=73&ar=2075 7/4/2011 About the Authors Kartik Sheth is a consultant and Ireena Vittal is a principal in McKinsey’s Mumbai office.
Notes 1 In India, laws governing foreign investment by retailers are slowly evolving. Currently, single-brand foreign retailers may hold controlling stakes (up to 51 percent), but multibrand foreign companies are able toinvest only in the “cash-ncarry” segment (up to 100 percent) or buy a stake in a publicly listed retailer (up to 26 percent). In a cash-n-carry operation, a wholesaler sells to offices, hotels, and retailers that become its members. 2 In India, rather than using only income bands to define categories of consumers, we used the socioeconomic class codes established by the Market Research Society of India. High-end or “global” consumers are those in socioeconomic class (SEC) A, mass-market consumers are those in SECs B and C, and struggling consumers are represented by SECs D and E. In addition to household income, the class codes incorporate levels of education and occupation.
India's consumer story to be most compelling.pdf
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Goldman Sachs expects fastest job addition in the Educated Urban Mass (10 million new jobs by 2020) and the Urban Blue Collar segments (27 million new jobs), with fastest income growth also likely in the same categories due to a shortage of trained labor.
India's consumer story to be most compelling: Goldman Sachs
NEW DELHI: India's consumer story is likely to be one of the world's "most compelling" over the next 20 years, but the challenge before the country is to create jobs to "unleash productivity" of its youth, says a report.
Thanks to 440 million millennials and 390 million Gen Z (teens and children), "the sheer size of India's youth combined with improved education pave the way for sustained growth in purchasing power and makes India's consumer story one of the world's most compelling for the next 20 years," Goldman Sachs said in a research note today.
"However, creating enough jobs for the rising number of young people is one of India's biggest challenges and opportunities. It is the most fundamental underpinning of India's consumption story," it added.
According to the report, the 'Educated Urban Mass' and 'Urban Blue Collar' segment are expected to grow fastest over the next five years largely owing to a slew of service sector jobs in retail, food and logistics.
Goldman Sachs expects fastest job addition in the Educated Urban Mass (10 million new jobs by 2020) and the Urban Blue Collar segments (27 million new jobs), with fastest income growth also likely in the same categories due to a shortage of trained labor.
As per the report, two sectors that are likely to "leapfrog" the most are Mobile connectivity and Ecommerce.
"Improved mobile connectivity will also challenge the domination of TV as a primary source of household entertainment over time, creating a bigger profit pool for content providers and mobile gaming," the report said.
However, growth of luxury and highend products will be limited as culturally India's affluent consumers tend to shy away from ostentatious display of wealth.
The number of weddings and household formations will increase over the next 5 years, given India's demographics where the peak birth reached 2223 yrs ago, the report said.
Best categories positioned for profit pool expansion are: packaged snacks, baby products, premium personal care, scooters, SUVs and jewelry. But one profit pool that may grow faster than them all is restaurants, it added.
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Indian e-commerce industry's growth comes to a halt.pdf
Indian e-commerce industry's growth comes to a halt, Snapdeal worst hit TNN | Jun 27, 2016, 09.56 AM IST
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Behind numerous headlines of a cash crunch hitting major Indian e-
commerce companies, and their valuations being questioned, is a
revelation not too many people are talking about. Indian e-commerce was
emblematic of frenetic growth until very recently, but the last six to eight
months have seen the industry come to a grinding halt, making it an
inflection point for all the players involved.
TOI accessed and analysed data for top e-tailers, which revealed that the
online retail market stagnated between May 2015 and 2016 in terms of the
value of goods sold. While in May last year, the e-commerce biggies
clocked a gross merchandise value, or GMV, run rate of $9 billion, that
number has only inched up to about $10 billion at the end of May this year,
translating into an 11% annual growth. In December last year, the total GMV run rate had reached $10.5 billion on the back of the
festive season, which typically sees a rush of discounting from all e-tailers.
GMV is overall sales on an online marketplace, excluding discounts and returns which are an integral part of the e-commerce
market.
The data gleaned from primary research and vetted by multiple stakeholders in the industry indicated that Flipkart , the country's
largest online retail player, has seen its GMV run rate stall at about $4 billion for almost a year, while an aggressive Amazon has
gone from clocking $1 billion to $2.7 billion in gross sales. However, Amazon's operations in India only began three years ago
and it's been gaining ground on a smaller base. What's worth noting is that Flipkart notched up a 400% growth the year before,
when it's GMV zoomed from $1 billion to $4 billion, post which the numbers have gone flat.
Gurgaon-based Snapdeal, on the other hand, has registered an almost 50% knock-down in sales numbers after similar highs it
touched exactly a year ago. The company said as of June, its GMV run rate was more than $2.5 billion.
An email sent to Flipkart's spokesperson did not elicit a response till the time of going to press. In an earlier interaction with TOI,
Amit Agarwal, Amazon's India head, had said the online retailer hadn't witnessed any signs of a slowdown and, instead, had
grown shipments impressively at 150% in the first quarter of the calendar year.
E-commerce companies earn anywhere between 5% and 15% in commission from sellers, which makes up their revenue. GMV
had been the key metric for all e-tailers in India to show rapid growth and ratchet up their valuations in multi-billion dollar fund-
raises over the past two years. But with sales staying flat or declining, most e-commerce players are now starting to focus on
returning customers, which their founders keep stressing in media interactions.GMV run rate varies from month to month and is
pretty jagged, depending on promotions and discounts that are available at the time. But the data collated by TOI points to a
palpable slowdown for the first time after a heady period of growth.
Reduced discounting slowing growth?
Post March this year, most e-tailers have reduced promotional campaigns after the Indian government introduced new policy
guidelines for online marketplaces. The fresh rules prohibit online retailers from offering discounts directly. Cash burn for
Amazon, for instance, had risen up to almost $80-90 million per month in the early part of the year -more than double of
Flipkart's -but has since stabilized, people privy to the matter said. Amazon's Agarwal, when asked about it recently, did not give
details on the mounting cash burn involved in weaning away Indian consumers from rivals.
An investor who has been tracking e-commerce says if the market has momentarily stopped growing, it's because online players
have reduced investments into market development. A slug of risk capital came into India's online commerce industry, with
Flipkart leading the pack. Founded in 2007 as an online bookstore, the Bengaluru-based poster boy of India's thriving startup
ecosystem scooped up $3.2 billion, a majority of the funding coming over the past two years, while Snapdeal collected $1.3
billion. The Jeff Bezos-led Amazon, too, has been pumping billions into India, the latest being a $3-billion investment
announcement -taking its overall commitment for the country to $5 billion in three years of launching here.
Has Online Consumer Base Capped Out?
Amazon is the most preferred e-commerce website for sellers: Study ALSO READ
India's online shopping market, according to rough estimates, is 60-70 million strong, and is expected to go up to 100 million in
the next few years. A notable spike happened in the past three years, but the divide between tier I and tier II cities is still very
wide. The top 6-8 cities contribute 90% of sales for all the consumer internet players, including app-based cab aggregators like
Ola and Uber.
In an earlier interaction with TOI, Binny Bansal, cofounder & CEO, Flipkart , said the e-commerce major was keenly looking at
ways to tap into its existing base of users. "There are 50-60 million consumers buying online today. Given the large base, it
makes sense to ensure you are selling more to the same customers as that opportunity is big enough compared to three years
back," he had said. Snapdeal's co-founder & CEO Kunal Bahl, too, has reiterated his focus on the e-tailer's high-value consumers,
suggesting GMV was not the metric his company was chasing anymore. "Our GMV run rate continues to be healthy and above
$2.5 billion. We are significantly focused on delivering the best experience, growing our net revenue which has increased three
times in the last 12 months," a Snapdeal spokesperson said in an emailed response to TOI. GMV was described by many as a
vanity metric during the past few years when e-commerce registered exponential growth.
"The moment of reckoning is coming or may have come already for Indian e-commerce companies. The ease with which these
companies have been able to raise money from VCs may have made them all sloppy , and the test then will be which ones can
now work on the `building-a-business' channel. As for whether the fault lies with Indian consumers for not jumping fast enough
onto the online wagon, it is a chicken-and-the-egg problem that we have to deal with," says Aswath Damodaran, professor of
finance at the Stern School of Business at New York University.
What all of this will mean for online retailers is that from here on, raising new capital at present valuations will be a very tough
proposition. Flipkart has been conserving cash and has substantially brought down its burn rate to wade through this phase of
slow growth.Besides Amazon, there's Alibaba stitching up plans for a direct entry into e-commerce, making it a contest between
the two global powerhouses and the Indian incumbents. The next one year will be extremely significant for the local online
retailers as they go back to the basics and try to make their businesses self-sustaining while moving towards a tough path to
profitability.
New Business Models in Emerging Markets.pdf
DISRUPTIVE INNOVATION
New Business Models in Emerging Markets b y Matthew Eyring, Mark W. Johnson, and Hari Nair
FROM THE JANUARY–FEBRUARY 2011 ISSUE
R
ARTWORK: DAMIÁN ORTE GA, STONE—CONSTRUCTIVE FAILURES II, 2005, WOODE N STRU CTU RE , 158 X 8 0 X 162 CM
ight now more than 20,000
multinationals are operating in
emerging economies. According to the
Economist, Western multinationals expect to find
70% of their future growth there—40% of it in
China and India alone. But if the opportunity is
huge, so are the obstacles to seizing it. On its
2010 Ease of Doing Business Index, the World
Bank ranked China 89th, Brazil 129th, and India
133rd out of 183 countries. Summarizing the
bank’s conclusions, the Economist wrote, “The
only way that companies can prosper in these
markets is to cut costs relentlessly and accept
profit margins close to zero.”
Yes, the challenges are significant. But we couldn’t disagree more with that opinion. We have seen
the opportunities of the future on a street corner in Bangalore, in a small city in central India, in a
village in Kenya—and they don’t require companies to forgo profits. On the surface, nothing could be
more prosaic: a laundry, a compact fridge, a money-transfer service. But look closely at the
businesses behind these offerings and you will find the frontiers of business model innovation.
These novel ventures reveal a way to help companies escape stagnant demand at home, create new
and profitable revenue streams, and find competitive advantage.
That may sound overly optimistic, given the difficulty Western companies have had entering
emerging markets to date. But we believe they’ve struggled not because they can’t create viable
offerings but because they get their business models wrong. Many multinationals simply import
their domestic models into emerging markets. They may tinker at the edges, lowering prices—
perhaps by selling smaller sizes or by using lower-cost labor, materials, or other resources.
Sometimes they even design and manufacture their products locally and hire local country
managers. But their fundamental profit formulas and operating models remain unchanged,
consigning these companies to selling largely in the highest income tiers, which in most emerging
markets aren’t big enough to generate sufficient returns.
What’s often missing from even the savviest of these efforts is a systematic process for reconceiving
the business model. For more than a decade, through research and our work in both mature and
emerging markets, we have been developing our business model innovation and implementation
process (see “Reinventing Your Business Model,” HBR December 2008, and “Beating the Odds
When You Launch a New Venture,” HBR May 2010). At its most basic level, the process consists of
three steps: Identify an important unmet job a target customer needs done; blueprint a model that
can accomplish that job profitably for a price the customer is willing to pay; and carefully implement
and evolve the model by testing essential assumptions and adjusting as you learn.
Start in the Middle
Established companies entering emerging markets should take a page from the strategy of start-ups,
for which all markets are new: Instead of looking for additional outlets for existing offerings, they
should identify unmet needs—“the jobs to be done” in our terminology—that can be fulfilled at a
profit. Emerging markets teem with such jobs. Even the basic needs of their large populations may
not yet have been met. In fact, the challenge lies less in finding jobs than in settling on the ones
most appropriate for your company to tackle.
Emerging markets teem with “jobs to be done.” Even the basic needs of their large populations may still be unmet.
Many companies have already been lured by the promise of profits from selling low-end products
and services in high volume to the very poor in emerging markets. And high-end products and
services are widely available in these markets for the very few who can afford them: You can buy a
Mercedes or a washing machine, or stay at a nice hotel, almost anywhere in the world. Our
experience suggests a far more promising place to begin: between these two extremes, in the vast
middle market. Consumers there are defined not so much by any particular income band as by a
common circumstance: Their needs are being met very poorly by existing low-end solutions,
because they cannot afford even the cheapest of the high-end alternatives. Companies that devise
new business models and offerings to better meet those consumers’ needs affordably will discover
enormous opportunities for growth.
Take, for example, the Indian consumer durables company Godrej & Boyce. Founded in 1897 to sell
locks, Godrej is today a diversified manufacturer of everything from safes to hair dye to refrigerators
and washing machines. In workshops we conducted with key managers in the appliances division,
refrigerators emerged as a high-potential area: Because of the cost both to buy and to operate them,
traditional compressor-driven refrigerators had penetrated only 18% of the market.
The first thing these managers wanted to know, naturally enough, was “Could Godrej provide a
cheaper, stripped-down version of our higher-end refrigerator?” We asked them to consider instead
the key needs of those with poor or no refrigeration. Did they know what those consumers really
wanted? In a word, no. A small team was assigned to conduct detailed observations, open-ended
interviews, and video ethnography to illuminate the job to be done for that untapped market.
The semiurban and rural people the team observed typically earned 5,000 to 8,000 rupees (about
$125 to $200) a month, lived in single-room dwellings with four or five family members, and
changed residences frequently. Unable to afford conventional refrigerators in their own homes, they
were making do with communal, usually secondhand ones.
The shared fridges weren’t meeting these people’s needs very well, but not for the reasons one
might expect. The observers found that they almost invariably contained only a few items. Their
users tended to shop daily and buy small quantities of vegetables and milk. Electricity was
unreliable, putting even the little food they did want to preserve at risk. What’s more, although they
wanted to cool their drinking water, making ice wasn’t a job for which these people would “hire” a
refrigerator.
The team concluded that what this group needed to do was to stretch one meal into two by
preserving leftovers and to keep drinks cooler than room temperature—a job markedly different from
the one higher-end refrigerators do, which is to keep a large supply of perishables on hand, cold or
frozen. Clearly, there was no reason to spend a month’s salary on a conventional refrigerator and pay
steep electricity prices to get the simpler job done. And just as clearly, the solution wasn’t a cheaper
conventional fridge. Here was an opportunity to create a fundamentally new product for the
underserved middle market.
Targeting this market has two great advantages. First, it’s easier to upgrade the solution to a job
people are already trying to do than to create sufficient customer demand where none yet exists—as
would-be vendors of purified water and other seemingly essential offerings have found to their
dismay. Second, it’s easier to reach people who are already spending money to get their jobs done.
That’s essentially what Ratan Tata did with the $2,500 Nano. He didn’t ask, “How can I get people
who’ve never bought any form of transportation to buy a car?” He asked, “How can I produce a
better alternative for people who hire motor scooters to transport their families?” The goal is to
redirect existing demand by offering a clear path from an unsatisfactory solution to a better one.
Offer Unique Benefits for Less
To redirect demand, your customer value proposition (CVP) must solve a problem more effectively,
simply, accessibly, or affordably than the alternatives. In developing markets, we have found, the
components of a CVP that matter most are affordability and access. Let’s look at each in turn.
Affordability.
Western companies know that they need to come up with lower-cost offerings in emerging markets,
but they too often limit themselves to providing less for less. In 2001, for instance, a 300 ml bottle of
Coke cost 10 rupees—a day’s wages, on average, and a luxury the company estimated only 4% of the
It’s easier to reach people who are already spending money to get jobs done.
population could afford. To reach the other 96%, it introduced a 200 ml bottle and cut the price in
half, shaving margins to make Coke more competitive with common alternatives such as lemonade
and tea.
In our experience, though, a far more robust approach to creating an affordable emerging market
offering is to trade off expensive features and functions that people don’t need for less-expensive
ones they do need. To get that right requires a clear understanding of the context in which the
offering will be sold—which calls for further fieldwork, preferably of a collaborative rather than a
merely observational kind. This is good product-development advice in any market. In fact, it
applies to indigenous players operating close to home, like Godrej, as well as to Western companies
confronting the unfamiliar.
Godrej’s team designed and built a prototype cooling unit from the ground up and tested it in the
field with consumers. Then, in February 2008, more than 600 women in Osmanabad, a city in
India’s Marathwada region, gathered to participate in a cocreation event. Working with the original
prototypes and several others that had followed, they collaborated with Godrej on every aspect of
the product’s design. They helped plan the interior arrangements, made suggestions for the lid, and
provided insights on color (eventually settling on candy red).
The result was the ChotuKool (“little cool”), a top-opening unit that, at 1.5 x 2 feet and with a
capacity of 43 liters, has enough room for the few items users want to keep fresh for a day or two.
With only 20 (rather than the usual 200) parts, it has no compressor, cooling tubes, or refrigerant.
Instead it uses a chip that cools when a current is applied and a fan like those that prevent desktop
computers from overheating. Its top-opening design keeps most of the cold air inside when the lid is
opened. It uses less than half the energy of a conventional refrigerator and can run on a battery
during the power outages that are common in rural villages. At just 7.8 kilograms, it’s highly
portable, and at $69, it costs half what the most basic refrigerator does. Because it’s the right size for
the job, easier to move, and more reliable in a power outage than a conventional fridge, it surpasses
the higher-end offering on the performance measures that matter most to these consumers.
Access.
It’s not surprising that portability is important to potential ChotuKool customers, given that they
move frequently. And because populations in emerging markets tend to be dispersed, obtaining
goods and services can be more difficult than in the West. This creates opportunities for companies
that solve challenges of access.
In Kenya, for example, banking services are scarce and transferring money is complicated and
expensive. Without access to traditional services, many people must use unsafe alternatives such as
hawala—an unregulated network of brokers operating on the honor system—or transport cash by bus.
The UK-based Vodafone solved this problem by developing a secure, low-cost mobile money-transfer
service. Called M-PESA (M for “mobile” and PESA from the Swahili word for “money”), the system
is operated by Safaricom, Kenya’s leading mobile network.
Customers register free with an authorized M-PESA agent—typically a Safaricom dealer, but
sometimes a gas station, food market, or other local shop. Once registered, they can deposit or
withdraw cash at the agent or transfer money electronically to any mobile phone user, even if the
recipient is not a Safaricom subscriber. They can also buy Safaricom airtime for themselves or other
subscribers. Customers pay a flat fee of about US 40 cents for person-to-person transfers, 33 cents for
withdrawals under $33, and 1.3 cents for balance inquiries. Vodafone (which owns a significant
stake in Safaricom) manages individual customer accounts on its server, and Safaricom deposits its
customers’ balances in pooled accounts in two regulated banks, so their full value is backed by
highly liquid assets.
Since its launch, in March 2007, the service has acquired more than 9 million customers—40% of
Kenya’s adult population. As of June 2010, the Economist reported, M-PESA customers could
conduct transactions at some 17,900 retail outlets, more than half of them in rural areas. That figure
dwarfs the total number of bank branches, post offices, and Post Banks—which is only about 840
nationwide.
Spurred by the success of its original offerings, the service has expanded to include bill payment,
business-to-customer payments such as paychecks and microfinance loan disbursements, delivery of
humanitarian aid, and international money transfers. After just three years M-PESA accounted for
9% of Safaricom’s total revenue. More important, it has become the engine driving the company’s
Building a New Model Business models must integrate four elements: the customer value proposition (CVP), the profit formula, key processes, and key resources. Developing new b usiness models always b egins with devising a new CVP. Models designed to compete on differentiation next estab lish the resources and processes needed to deliver the CVP, the cost of which determines the price req uired in the profit formula. Models designed to compete on price proceed in the opposite way,
profits, which have shifted dramatically from voice to data traffic. Vodafone has launched similar
services in Tanzania, Afghanistan, and South Africa and plans to introduce them in Egypt, Fiji, and
Qatar as well.
Failure to address the access challenge is an important reason that so many companies have little
success adapting their current models to emerging markets. Time and again, the increased volume
they hope will offset slimmer profit margins doesn’t in fact result in profits, because the costs of
serving far-flung customers in infrastructure-poor developing countries are just too high. But
companies that, like Vodafone, devise novel approaches may find them to be widely applicable in
many markets.
Integrate the Elements
Business models can be conceived in a variety of ways. Our approach focuses on the basics and also
on factors that make it difficult to move from an existing model to a new one—margin requirements,
overhead, and “resource velocity” (the capacity to generate a given volume of business within a
specific time frame). It has four parts: the customer value proposition, a profit formula, key
processes, and key resources the company must use to deliver the CVP repeatedly and at scale.
Creating competitive advantage lies in integrating these elements to produce value for both the
customer and the company. That’s easy to say but devilishly hard to do. Mapping the traditional
functions of your company to these broad categories will show you how much you’d have to change
to integrate those functions into a new business model (see the exhibit “Building a New Model”).
Once you’ve devised a CVP for your proposed
offering, consider the basis on which you compete
—differentiation or price. Offerings that compete
on differentiation require that you ask, “What do I
have to do to produce this?” which leads you
counterclockwise around the model, looking first
at what resources and processes are needed, the
cost of which (both fixed and variable) will
determine what price can deliver the desired
estab lishing first the offering’s price, then the cost structure, and finally the processes and resources req uired.
Find this and other HBR graphics in our VI S U A L
L I BRA RY
profit margin. That’s what Whole Foods did when
it created a new market for organic foods. Costs
drove prices.
For offerings that compete on the basis of price,
you move clockwise around the model, again
starting with the CVP, but next setting the price,
devising a rough cost structure, and then
determining what processes and resources (often
radically different from those in your current
model) are needed to meet your price
requirements. Because affordability is so critical
in emerging markets, the decision journey is
almost invariably clockwise. Innovators start with
a revenue model—“We think we can sell this
offering to X number of people at price Y”—and
then devise the cost structure required to deliver
a certain unit margin. Becoming profitable at that
margin means operating at a certain resource velocity, which in turn drives decisions about how to
organize operations, what materials to use, and other questions.
More often than not, this exercise reveals that a company can’t meet its profit goals in emerging
markets merely by reducing variable costs in its current profit formula and that a viable model will
require changes to fixed costs or overhead as well. That’s what Ratan Tata discovered when he set
out to produce his $2,500 car. He couldn’t just send the car down the production line and somehow
spend less to make it. He needed to reduce fixed costs by designing a car with far fewer parts and
changing assembly methods and other key processes. Implementing models that require changes in
overhead, margins, or resource velocity tends to be problematic for incumbent companies, which is
why it’s not surprising that start-ups so often have the edge in bringing to market offerings that
require new ways to turn a profit. An open mind is perhaps the most important asset anyone can
bring to emerging markets. We learned that lesson when we set out to solve a basic but knotty
cleaning problem for a vast group of frustrated consumers.
Village Laundry Service—which was founded by our company and uses the Chamak brand—was
aimed squarely at the emerging middle market. In India people who can’t afford a washing machine
but want an alternative to laborious washing by hand after a long day’s work have unappealing
choices: They can patronize a dhobi (a traditional washing person), or they can take their clothes to
a neighborhood laundry or dry-cleaning establishment. The dhobis are cheap, but they use any
available water, which can be unhygienic. They slap the clothes against rocks to clean them, which
wears down the fabrics, and they don’t compensate customers for damage. Turnaround time is five
to seven days. A laundry or dry cleaner can do the job in four or five days, generally returns the
clothes in good shape, and makes amends if something goes wrong. A laundry may or may not use
clean water, however, and both are far more expensive than a dhobi.
In early 2009 we ventured into several parts of India, from urban slums to rural villages, conducting
interviews and immersing ourselves in the lives of the people who faced this frustrating choice.
What, exactly, was the job to be done? What sort of laundry service would these customers hire? We
discovered several things: The job wasn’t to make it affordable for them to clean their clothes the
way rich people did; it was to replicate the advantage of a home washer and dryer at a price they
could afford. It wouldn’t be sufficient to get the clothes back in four days—they’d have to be ready
within 24 hours, and at a price well below the laundry’s or dry cleaner’s. And they’d have to be easy
to pick up at a nearby location.
With those requirements clearly in mind, we examined all parts of the business model to come up
with an inventive way of extending access while keeping costs low. We immediately realized that it
would be hard to create a profitable business that placed many traditional self-service laundries
across a town, because demand was unpredictable and up-front capital investment and rental
deposits would be high. Our solution: Portable seven-foot-square kiosks, each holding an efficient
front-loading washer and a dryer, which can be placed wherever there is heavy foot traffic.
Customers drop off their clothes to be washed, dried, and ironed, all within 24 hours. The kiosk’s
small footprint minimizes rents, and its independent water supply, delivered through a fixed
contract, is both less expensive and more reliable than the public utility connection. Covered with
ads for the Chamak brand, the kiosks also serve as billboards, reducing the need for paid advertising.
An open mind is perhaps the most important asset anyone can bring to emerging markets.
Four Ways to Uncover Unmet Needs 1. Study what your customers are doing with your product. Be aware that, as Peter Drucker famously said, “The
We keep transaction costs low through an innovative point-of-sale system, made up of a cell phone
linked to a Bluetooth printer and report server, which prints receipts, tracks orders, and captures
data on business volume.
After much experimentation, we developed standard procedures for staffing and running the kiosks,
including tests to gauge potential operators’ aptitude and commitment; simple picture-based
operating instructions (much like those used in fast-food restaurants) to ensure consistent service;
and a scorecard for traffic level, customer satisfaction, marketing effectiveness, and other variables,
allowing us to predict the chances of success at each location and to make operations replicable and
scalable.
It is this innovative marriage of a novel solution with all the other elements of the business model
that makes Chamak’s services affordable and profitable. The model allows the company to charge
40 rupees (about $1) per kilogram of clothing—little more than what dhobis charge and significantly
less than what professional laundries and dry cleaners do (sometimes 90 rupees per garment).
Village Laundry Service currently has 5,000 customers patronizing some 20 booths in Mumbai,
Bangalore, and Mysore. The company expects to reach breakeven in late 2011. Of course, as with
any new business, how Village Laundry Service performs over the long term will depend on a
number of hard-to-predict factors.
From Blueprint to Operating Business
Testing and implementing the business model blueprint in emerging markets is as much an art as a
science. Having a cadre of global “experts” study the market for months and create a plan that is
then handed over to the local team for execution simply doesn’t work. Quick adjustments based on
early lessons learned on the ground trump the best and most detailed strategic plan developed
before the fact.
M-PESA succeeded in part because Kenya’s
banking regulator permitted Safaricom to test
various business models from the very beginning.
Safaricom made the most of the opportunity. It
started in 2004 by experimenting with 500
customers and a system designed to allow them
customer rarely b uys what the b usiness thinks it sells him.”
2. Look at the alternatives to your offerings that consumers buy. Investigate a wide range of sub stitutes for your products, not just what your competitors make.
3. Watch for compensating behaviors. Discover what job s people are satisfying poorly.
4. Search for explanations. Uncover the root causes of consumers’ b ehavior b y asking what people are trying to accomplish with the goods and services they use.
Find this and other HBR graphics in our VI S U A L
L I BRA RY
to repay microloans. As the company market-
tested this concept, it discovered a more-
compelling value proposition—namely, a way for
urban workers to transfer funds to friends and
family members in rural areas. That fundamental
insight was the basis on which subsequent
services were built, and since M-PESA’s
commercial launch, its simple but powerful
branding message has been “Send money home.”
This doesn’t mean that expertise is unimportant
when launching a new business in an emerging
market. But we’ve found that agile functional
expertise is the most critical kind, because the
uncertainties in emerging markets are so great. A
broad network of resources—including responsive
advertising agencies, companies that can produce
prototypes on demand, financial service advisers who understand local regulatory guidelines, and a
healthy bench of local entrepreneurs to execute the plan—is essential.
The ability to conduct rapid experiments inexpensively and use what you learn from them to hone
the business model is essential to success. It allows you to make course corrections before you
commit to major operational or strategic investments. Recently a company we incubated was
looking to launch a men’s grooming business but was uncertain about demand. Rather than
commission an expensive 10-city quantitative research study, we rented a small air-conditioned
truck and created a mini hair salon on wheels, outfitted with a barber’s chair, scissors and other
implements, and a mirror. For two weeks we drove the truck around the streets of Bangalore to
gauge demand and test various pricing scenarios at various locations. The experiment, which cost
all of $3,000, provided essential answers that no survey could have and demonstrated the business
potential for an affordable and convenient Supercuts-like business for men. The company changed
from a roving barbershop model to a kiosk-based model and is considering offering additional
services, such as facials and skin lightening, that many customers desire.
Ultimately, the potential for such business model innovations, as for many other disruptive
innovations, may extend far beyond the markets for which they were created. G. Sunderraman, the
vice president of corporate development at Godrej, sees the ChotuKool as a new growth platform.
Unit sales are projected to reach 10,000 in the first year and 100,000 by the end of the second. If
Godrej considered the ChotuKool to be simply a no-frills refrigerator for the middle market, it might
be content with a moderate penetration rate. But the company’s managers regard it as a new
product category, based on new technology, that has the potential to perform jobs for people at
many income levels. In areas with frequent power outages, the owners of conventional refrigerators
might want an inexpensive and reliable backup. Small shops, offices, and manufacturing sites might
use it to maintain a supply of cool drinks. Higher-income customers—perhaps in developed
economies as well—might use it in their bedrooms, their cars, or their boats. When the technology
improves, Godrej believes, it can enter mainstream markets as ChotuKool changes consumers’
expectations about refrigerator prices and performance and addresses a need that previously went
unmet.
Many companies view emerging markets as one large foothold market, and in this they are right.
Classic disruptive innovation theory holds that, ideally, innovations should first be introduced in
markets where the alternatives fall short on some dimension (typically price) or are utterly
unavailable. Emerging markets fit that bill in spades. They are excellent arenas for trying out
product innovations far from competitors’ prying eyes. But we are convinced that a much greater
opportunity lies in viewing these markets not as one vast lab for product R&D but as unique
environments filled with poorly done jobs that could be creatively addressed with business model
R&D. Creating new business models will give your company a more enduring competitive
advantage.
A version of this article appeared in the January–February 2 011 issue of Harvard Business Review.
Matthew Eyring is the managing partner of the strategy and innovation consulting firm Innosight.
Mark W. Johnson
Mark W. Johnson is a senior partner and a cofounder of the innovation and strategy consulting firm Innosight.
Hari Nair ([email protected]) is a venture partner in India at Innosight’s business-building arm, Innosight Labs.
R elated Topics:
EX P ERIMENTAT IO N | INT ERNAT IO NAL B U SINESS | EMERG ING MARK ET S | B U SINESS MO D EL S | G RO W T H ST RAT EGY
This article is about DISRUPTIVE INNOVATION
F O L L O W T HIS T O P IC
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The Carnage of Indian eCommerce.pdf
The Ugly Truth Coming soon to a website near you: The carnage of Indian e-commerce Will it explode? WRITTEN BY Suneera TandonItika June 02, 2016 Quartz India
At 148 years old, India’s salt-to-steel conglomerate Tata Group wants to get hip and cool.
So, for its first big gamble on India’s booming e-commerce space, thegroup says it will only sell Camels—that’s short for
“certified authentic merchandise everybody loves”—on its online shopping platform, Tata CLiQ. It may be a contrived
marketing ploy aimed at eventually drawing 100 million customers, but that doesn’t matter. The battle for a share of India’s
burgeoning urban, young internet shoppers, is getting bloody. And the Tatas may just have opened a new front.
The group’s move comes four months after Reliance Industries (RIL) launched an online fashion portal Ajio.com to sell
branded clothing and accessories to women. Owned by India’s richest man, Mukesh Ambani, RIL runs a large network
of fashion, grocery, and electronic stores in the country.
There’s also the Aditya Birla Group, led by 48-year-old billionaire Kumar Mangalam Birla, which runs one of
India’s largest fashion retail businesses with departmental stores such as Pantaloons and brands such as Allen Solly. It
launched a multi-brand online fashion store, abof.com, in Oct. 2015. Birla, who views online retail as a “sunrise sector from
an investment point of view”, plans to “build anotherbillion-dollar business of the group in this space.” In all, over half-a-
dozen large, one-time brick-and-mortar-only retailers are going up against the big guns of India’s e-commerce
ecosystem—who, incidentally, are themselves struggling.
Flipkart, India’s largest online retailer, for instance, is hamstrung by everything from devaluation and top-level exits to
massive organisational restructuring due to a dearth of funding options. Other players, too, are suffering due to subdued
investor sentiment. India’s three largest e-commerce players—Flipkart, Amazon and Snapdeal—are bleeding money to
woo customers, reporting combined losses of over Rs5,052 crore in fiscal 2016.Yet, everyone seems to be betting on one
thing: the potential of Asia’s third-largest economy, home to 1.2 billion people. But that’s in the distant future. For now,
expect more carnage. Traditional retailers had little choice but to
follow the wallets online. “It is true that the online retail market is big and it can absorb multiple players, but it’s not infinite. It’s not like 10 players
can succeed at the same time,” said Sanchit Vir Gogia, chief analyst and CEO of Greyhound Research, a research and
advisory firm. “Large offline brands becoming bullish on the online space will have a massive impact on e-commerce in
India,” he added.
A long time coming
For years, India’s $600 billion brick-and-mortar retail industry mostly kept itself at an arm’s length from online commerce.
Even the handful who saw the light moved reluctantly and invested little. But, as consumers ditched the high streets and
malls to log onto shopping websites, traditional retailers had little choice but to follow the wallets online. Between 2009
and 2014, the Indian e-commerce industry’s sales (pdf) registered compounded annual growth rate of 34% to reach $16.4
billion.
There’s more coming. By 2020, e-commerce will contribute 25% of all sales in India’s organised retail sector, according to
a May 31 report by Google and consulting firm AT Kearney. That means, in four years, the segment will generate $60
billion in gross merchandising value (GMV) or total value of goods sold online. The internet, said AT Kearney partner Ajay
Gupta, “will influence 50% of all purchase decisions, be it in discovery or comparison.” By now, the old retail warhorses
have a sense of the inevitable.
“The way things are growing, with more smartphones and mobile devices in hands of consumers, digital is the future
mode of engagement with shoppers,” said Kulin Lalbhai, executive director at Arvind Limited, a large textile manufacturer
and retailer.
In 2012, the 80-year-old family-run company began selling its brands through online retailers such as Amazon, Jabong,
and Myntra. These labels include international heavyweights like Tommy Hilfiger, Arrow, Nautica, and now Aeropostale.
On May 12, Arvind spent $10 million to launch NNNow.com, an omni-channel venture where it plans to blend sales
through a website, mobile app, and physical stores. The company will sell over 30 of its fashion labels—besides selling
exclusive online collections and third-party brands—and hook its in-store inventory across 1,200 stores to NNNow.com.
May the force…
These transitions from offline to online won’t be easy.
“It will be a formidable task for new companies to build businesses,” said Sanjeev Mohanty, chief executive at online
fashion retailer Jabong.com. Owned by Global Fashion Group, Jabong is among the leading online fashion retailers in India with a
GMV of over $61 million. In the time that brick-and-mortar players procrastinated before getting on the internet, the
dynamics of the online business have changed.
Simply consider the cost of reaching potential consumers. “If you had to spend X three years ago to reach Y, at today’s cost
of investment and hyper-competition—with clear established players—you will have to spend 3X,” Mohanty explained.
That’s perhaps why the former Benetton Group managing director remains confident that incumbents such as Jabong and
Myntra will continue to dominate the online fashion market. It’s unlikely to be much different in other segments.
“Amazon, Flipkart, Snapdeal have had enough of a head start. It will take the new retailers another 6-12 months to make
any dent in their market shares,” said Arvind Singhal, chairman and managing director at consulting firm, Technopak
Advisors.
However, it will add pressure on the Amazons, Flipkarts, and Snapdeals, who have struggled to attain a semblance of
profitability, even as they emptied their coffers to retain market share through deep discounting. These debilitating
discounts, though, are unlikely to stop.
“The companies that have entered the online retail market now are very big and some of them will definitely take the deep-
discounting route, which will hurt incumbents immediately,” said Greyhound Research’s Gogia. Others such as Arvind’s
NNNow.com and Aditya Birla’s abof.com have vowed not to get into the discounts game. That may well mean a longer,
unprofitable wait for online market share even as they leverage their offline presence.
A silver lining
The impending chaos notwithstanding, there does seem to be some consensus on what the future of Indian retail might
look like.
“The future of retail is probably in the multi-channel retail model where companies will need to have a presence in both
online and offline space,” reckoned Gogia. Jabong’s Mohanty foresees a similar situation. “It will be like it is in the United
States, where more large retailers see a big part of their sales coming from online,” he said, “…so it will be the same sort of
evolution in the Indian market, but more gradually.”
In the US, even now big-box retailers, including Walmart and Target, are investing millions of dollars to build e-commerce channels to take on the likes of Amazon.
Whatever happens, it isn’t going to be a quick and bloodless affair. Only close to 8% of all US retail sales are made online, with apparel companies having gained the most number of shoppers online. In some cases, though, the figure is upwards of 15%, suggests a May 2015 article by Bloomberg. If indeed that’s the direction India’s retail sector takes in the long term, the brick-and-mortar players eventually may have
an advantage.
“Now if that happens, the offline guys are positioned far better than the online ones because they already have stores,
which is the more capital-intensive part of this model,” explained Gogia, “It will be extremely hard for the online guys to
compete in that space.”
Whatever happens, it isn’t going to be a quick and bloodless affair. Maybe Camels isn’t such a bad choice by the Tatas for a
name. After all, it’s going to be a long and difficult journey ahead for India’s e-commerce sector.
What Indian Niche Ecommerce Companyies Plan To Do.pdf
What Indian Niche E-Commerce
Companies Plan To Do in 2015 By Vikas SN ( @tsuvik , +VikasSN ) on January 14, 2015
http://www.medianama.com/2015/01/223-outlook15-niche-e-commerce/
As a part of our #Outlook15 series, we asked heads of niche e-commerce companies – Myntra,
Jabong, FashionAndYou, Urban Ladder and FabFurnish about their focus areas for 2015, and the
challenges that the online e-commerce ecosystem needs to address. Answers have been shortened for
brevity.
Which according to you were the top developments and roadblocks in the e-commerce
segment in 2014? Why?
Ganesh Subramanian, Myntra
Mobile is increasingly driving the e-commerce revolution in India. We have witnessed phenomenal
activity on the mCommerce front, with smartphones gaining prominence as the preferred mode to
access and shop for fashion brands in the country. Significant increase in online purchases from Tier-
2 and Tier-3 cities and now they also contribute a large majority of the e-retail pie.
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Roadblocks: The market is still small due to low internet penetration, lack of understanding of e-
commerce and addressing the consumer tendency to touch & feel the product before purchase.
Praveen Sinha, Jabong
The e-commerce industry entered an era of smart phones and we saw mobile apps for all the e-
commerce websites across all operating systems.
Dynamic changes like next door delivery, open delivery and same day delivery for a whole range of
products led to myriad of customer acquisition for the industry and garnered significant customer
loyalty towards the brand. Due to such developments, we can now comfortably predict over 3-fold
growth in the M-wallet segment in the next 5 years.
Online shopping is rising tremendously not only in the metros but also becoming a trend in the small
cities, where people have aspiration and purchasing power to buy but do not have accessibility to the
brands/products.
Aasheesh Mediratta, FashionAndYou
– Disruption in mobile space; almost 30%-50% of the transactions from mobile now
– Next leg of growth coming from tier 2/3 cities; more than 40% of the sales as compared to 60%
from tier 1
– Customer spoilt for choice, especially in fashion and lifestyle space with almost all of the players
offering huge number of brands/product lines at great price
– No customer loyalty still; overall customer experience besides product/pricing will be the deciding
factor
– Offline players recognizing the need and announcing their arrival in e-space.
Challenges
– Last mile connectivity (less than 10000 serviceable pin codes ) – for players who don’t have fleet
on the ground
– High dependence on COD as a payment option; majority of returns attributed to the same.
Rajiv Srivatsa, Urban Ladder
The year saw a lot of investments in the sector which is helping the industry scale up and attract
talent from other industries. This year also saw e-commerce becoming way more mainstream and
attracted a lot of talent on campuses as well. The media has been instrumental in making e-commerce
a lot more mainstream with continuous coverage and interest in this sector. A lot of awareness has
been spread about the medium because of the media.
Another major development has been the speed at which the e-commerce industry is operating and
fulfilling customer demands. Be it instant deliveries, resolution of customer grievances etc. The e-
commerce industry is establishing new benchmarks of putting customers first.
There has been a massive shift to the mobile web and the year saw a lot of new mobile apps and app
only deals.
On the roadblocks – there has been no major movement on the regulations of operating in the e-
commerce space. Also, the industry still needs a lot of investments on the logistics front.
Vikram Chopra, FabFurnish
Top developments in the e-commerce sector for this year are:
– Sales of most niche e-commerce players have gone up by 3 times and that’s largely because of the
increased number of customers.
– Social media has finally gained momentum in this sector in the last one year. It has not only helped
us increase our website traffic and generate more revenue but also helped us build our brand image.
– Consumers from tier 2 & 3 cities have responded really well to the experience of online shopping
this year.
– We have already created a widespread warehouse network to smoothen the surface transportation
in India that is filled with bottlenecks.
Major roadblocks of this year were:
a) Touch & feel factor: Consumers are still conscious about the touch & feel factor and that is
something hard to overlook. Whether it is home & furniture or fashion & technology, it is difficult to
overcome the age-old trend of product display and buying products offline. To counter this, we have
physical centres showcasing selected assortments.
b) Unorganized vendor base: There is a lack of structured process or manufacturing standards for
most vendors and non-standardized products in the country. Termite, borer, expansion / contraction
of wood, etc. are other common problems plaguing the e-commerce industry. Our approach is to
ensure quality accuracy for our entire assortment.
What are the consumption patterns (online & mobile) that you observed in 2014?
Ganesh Subramanian, Myntra
– Today, close to 75% of internet traffic originates from a mobile device. 50% of all internet users
access data only on mobile. Therefore we see mobile as a key driver to engage users.
– India is a cash driven economy and therefore cash transactions continue to rule with over 60% of
shoppers who still prefer to transact using cash as their primary mode of payment.
– We also observed a healthy mix of traffic from metros and non-metros. Currently Tier 2 & 3 cities
account for upto 60% of our traffic. This has largely to do with inaccessibility to brands in these
cities in the offline world and growing penetration of mobile internet.
– We have also witnessed an increase in women shopping online, a trend that will continue to grow
faster than the overall market growth rate. This is primarily attributed to the growing confidence of e-
commerce as a trusted platform which offers unlimited styles from across brands at the convenience
of their home or office.
Praveen Sinha, Jabong
– We have witnessed an increase in the sales from tier II and tier III cities by 50-60%. 45% of the
sales of the designer collection of Jabong Online Fashion Week are coming from smaller cities apart
from the usual responses that we received from the major metros.
– International brands exclusive to Jabong like Dorothy Perkins, Miss Selfridge are doing
exceptionally well. During GOSF, we observed an extraordinary leap with our revenue rising 4-5
times compared to our sales on any regular day. Brands that sold the most on Jabong this year were
Dorothy Perkins, Sangria, Alia Bhatt for Jabong, UCB and Vero Moda.
– Mobile and site contributed to 33% revenues with our sale figure mounting up by 4-5 times every
year. With such figures in the year gone by, we are hopeful for a brighter future in the year 2015.
Aasheesh Mediratta, FashionAndYou
– Increase in internet penetration; even higher in case of number of smartphone users.
– Majority of Indian population still impulse driven when it comes to buying online.
– Greater traction in fashion & lifestyle space.
Rajiv Srivatsa, Urban Ladder
There has been a massive shift to the mobile web and the year saw a lot of new mobile apps and app
only deals. Today, almost 50-60% of all transactions happen on mobile.
Vikram Chopra, FabFurnish
– 30% of our sales come from tier 2 & 3 cities and the number is only increasing.
– There has been an increase in percentage of furniture sold which gets reflected in the increase in
average order value. Consumers in metro cities are now moving towards mobile. Desktop still
contributes a huge chunk of the revenue in e-commerce.
– The number of users present on mobile has rapidly increased in 2014. 3G connectivity, m-websites,
apps and mobile wallets are some of the factors why the focus has shifted to mobile. The average
transaction amount is low on mobile by about 30% than in the desktop. Mobile wallets have made it
convenient for users to make mobile payments. Apps, as well, seem to be a good bet to reach
consumers due to greater time spent by them on the mobile.
How has the sector changed from 2013 to 2014?
Ganesh Subramanian, Myntra
E-commerce has seen a remarkable transformation in the way India shops with consumer mentality
and shopping patterns changing by the day. Shoppers are opting online channels over brick and
mortar retail not only for daily consumption but for special occasions such as festivals and weddings.
Over the year, mobile consumption has skyrocketed as users carry this device at all times and are
looking to consume content even when on the go.
The number of online shoppers has almost doubled to 35 million in 2014 and is expected to grow
over 100 million by 2016. Therefore there is no denying the fact that the online shopping
phenomenon is here to stay.
Aasheesh Mediratta, FashionAndYou
– A lot more capital raised in 2014; almost 5 Bn Dollars committed to the sector. Equal to the size of
the current market.
– Consolidation which started in 2014, to continue in 2015.
– Leaders started emerging in / across various business models (marketplace, catalogue players and
Flash sales) just like its global counterparts in US & China.
– More players to enter e-commerce but in differentiated space.
– Mobile to continue to play the key role in growth of the sector; will lead the same.
Rajiv Srivatsa, Urban Ladder
– While 2013 mostly belonged to horizontal players, 2014 saw the rise of vertical e-commerce
players. Through the year, vertical players attracted investments and customers.
Vikram Chopra, FabFurnish
2013 seemed to mostly be about acquiring customers. 2014 was a year where more emphasis was
placed on selling products to repeat customers to increase profitability.
Now we’re looking at targeting tier 2 & 3 cities for expansion as a huge chunk of population in metro
cities is already an e-commerce consumer. More furniture vendors are selling their inventory to
FabFurnish due to our superior logistics, reach, marketing and affordable pricing.
While consumers are still driven by discounts during festive seasons, more and more consumers are
looking at the brand of the company and the quality of goods sold. This is necessary as only running
on discounts is not a sustainable business model.
What sort of transition have consumers made from offline to online in 2014? Why? What
are your observations?
Ganesh Subramanian, Myntra
We have observed that a lot of people buy from physical stores after researching for a product online
while the reverse trend of buying online after gathering information from the store is also on the rise
known as Showrooming. With the rise in Internet penetration and smartphone usage, we believe that
both behaviors will merge increasingly as the customer will be empowered with information at his
fingertips.
Praveen Sinha, Jabong
We have seen a dip in the offline customers after Diwali. Online purchasing is becoming more
acceptable which is clear from the number of consumers increasing every day.
Offers like easy return policy, lucrative discounts have led to an increase in the average transaction
value. Also, the COD % has gone down comparatively. Increasing broadband industry; rising
standard per-capita income of the Indian audience; dearth of time for offline shopping ventures and a
lifestyle swamped under the chase for superiority, today the only motive a regular working person
has is crunching time for every possible activity he/she is involved in.
Aasheesh Mediratta, FashionAndYou
– Offline and online channels complement each other, with latter contributing ~3% of total retail
sales.
– While online channel offers “convenience” as a key differentiator in tier 1 cities; its the“access” to
wider offering which is the key in tier 2/3 cities.
Rajiv Srivatsa, Urban Ladder
Almost every category is shifting is now shifting online, even the ones with high ticket prices, thanks
to good word being spread by early adopters of that category.
Vikram Chopra, FabFurnish
Even though Indian consumers are still hesitant to make an online purchase, they are definitely
coming out of their cocoons. Consumers are more fashion-conscious than they were ten years ago
and want to frequently keep on upgrading the look of their homes in innovative ways.
To make the process of selecting furniture easy, we have offered a thorough product display where a
consumer can get a complete 360 degree view of any product that he or she is looking to buy. Apart
from this, payment options such as cash on delivery, EMIs and part payments have instilled
confidence in consumers about e-commerce industry.
How has your relationship with brands changed in 2014? What are your observations?
Ganesh Subramanian, Myntra
At Myntra, we have always had a deep relationship with our brand partners and we have taken this a
notch higher in 2014. We were the first in the industry to organize our annual Brand Meet back in
2012 where all our brand partners were invited to exchange their thoughts and ideas on a common
platform. Today, our partners eagerly look forward to this annual get together and are constantly
involved while planning for the next season.
Praveen Sinha, Jabong
Jabong shared a very healthy relationship with brands in the year 2014 as we were fortunate to add to
our brand count with more than 1500 on-trend international high-street brands, sports labels to Indian
ethnic and designer labels. Jabong as a brand always strives to apprise its audience with global
fashion and this year proved no different in bringing international brands on the table for our
customers.
– International fashion giants like Dorothy Perkins, River Island, Mango, Miss Selfridge and G Star
Rawcame on-board in 2014 and became the hot sellers. Such associations allow Jabong to have a
very strong market position in the e-commerce sector.
– Jabong also appended ace designer labels like RohitBal, Gaurav Gupta and Krsna Mehta under its
brand name, thus catering to the needs of an audience who otherwise have limited access to such
international and designer brand names.
– Under sports e-commerce retail, Jabong added interactive sport components like Reebok, Nike,
Adidas Puma Store etc. The year proved a year of great camaraderie between brands and Jabbing.
We also introduced brands like Dorothy Perkins, Miss Selfridge and River Island in Lakme Fashion
Week and forayed into ventures like Jabong Online Fashion Week where the strict line between
online and offline was blurred.
Today every brand has started trusting e-commerce and wants to go online given the prodigious
growth they foresee for the industry. We are seeing bigger investments from brands in the upcoming
year.
Aasheesh Mediratta, FashionAndYou
– As a flash player we offer a great platform to our trade partners to sell their surplus stocks at great
discounts to the customer; even launch new ranges on inaugural discounts.
– The alliance also offers increase in visibility and access to newer markets.
How have the exclusive tie-ups with brands helped your company in 2014?
Ganesh Subramanian, Myntra
Exclusive tie-ups with brands like Harvard Lifestyle, Desigual, WROGN from Virat Kohli, Scotch &
Soda, Rajesh Pratap Singh’s Mario de Miranda has helped Myntra not only by offering variety to
customers but also create a strong connect and inspirational value for shoppers. Our ability to
understand and cater to consumer demands ahead of time differentiates us from rest of the players.
Praveen Sinha, Jabong
Exclusivity was the flavor of 2014 when it came to online retail in India. Jabong is constantly adding
brands under its banner; international fashion giants like Dorothy Perkins, River Island, Mango, Blue
Saint and Miss Selfridge came on-board in 2014. Such associations allowed Jabong to further
strengthen its market position in the e-commerce sector.
– Alia Bhatt for Jabong, where the starlet curated a line exclusively for the brand witnessed a lot of
takers for the line since its launch. Ace designers like RohitBal and Gaurav Gupta came on-board and
created exclusive collections for the brand. The response so far has been quite fruitful for Jabong.
– Jabong also managed to bring local flavors into the online space through Jabong Boutiques. The
idea was born out of the desire to quench the needs of fashion discerning shoppers searching for
fashion forward and trendy designer wear on a single platform, and at the same time, to provide a
platform to the best boutiques to reach out to millions of customers at zero additional fixed costs.
Jabong Boutique put the crème de la crème boutique labels on the national and global map and bring
under one roof, up market and trendy boutiques which supply haute couture or ethnic and western
fashion.
The responses so far for these exclusive tie-ups have been quite favorable and we have witnessed
great sales for these brands during the diwali as well as the GOSF sale period.
What are the likely trends that you expect to see in 2015? Why?
Ganesh Subramanian, Myntra
We will witness exponential growth in the Indian e-commerce business in 2015. Some of the major
drivers that we believe will make a big impact in the coming year are:
– Mobile will emerge as the preferred medium for all online transactions. Retailers will increasingly
focus on investing in mobile technology and explore innovative ways to drive engagement and
deliver a superior experience for customers.
– Global exposure and a stable economy, coupled with a young population with high disposable
incomes, spell ‘good news’ for premium and international brands entering India in 2015.
– Online purchases from Tier-2 and Tier-3 cities are expected to significantly increase, thanks to the
emergence of low cost smartphones. E-commerce will serve as a conduit to the growing aspirational
needs in these locations.
– Exclusive brands to increasingly drive demand in 2015 as they offer differentiated products with
great quality at fair prices.
– Bollywood will be one of the key drivers in the growth of online fashion shopping as celebrities
and production houses are jumping on the e-commerce bandwagon.
Praveen Sinha, Jabong
In terms of fashion, we are likely to see a lot of prints and patterns, military and camouflage, 70’s
inspired clothing, cut-outs and stripes trending over the year. Colors which might dominate this year
are marsala and indigo.
– We further foresee innovation in delivery and payment methods. Customers today expect a hassle
free and fastest delivery of their products and for the same purpose every brand needs to constantly
diversify their offerings.
– In 2015, there will be an array of developments in the e-commerce sector. We have already seen
how offline is aggressively taking the online route and this trend is only going to further elevate in
the upcoming years. We strongly predict activation of people in rural areas, though we have already
started receiving significant response from tier II and III cities but we also plan to create a brand
name in every nook and cranny of the country. In order to embrace the rural population into the e-
commerce realm, simplification of payment process will be seen in the near future.
– Mobile to play a very important role in the buying and selling. Mobile is driving a huge portion of
the revenues and it is only expected to increase.
– As a part of on-ground marketing, e-commerce players are going to reach out to the customers to
show that they physically exist and companies will more robust against their return policies for the
people who misuse them.
– We definitely see an increase in CSR involvement of the e-commerce players. Also, a lot of these
e-commerce companies might go for public funding in the upcoming years with global players
entering the Indian market giving the existent firms a stiff competition.
Aasheesh Mediratta, FashionAndYou
In 2015, the leaders in their space will stay focussed on high growth, while the smaller
players/verticals will find their own niche.
Rajiv Srivatsa, Urban Ladder
Mobile will continue to hold strong and grow further and mobile apps will get into augmented reality
and visualization realms.
Also, instant delivery will expand to more categories including home decor.
Vikram Chopra, FabFurnish
– Mobile penetration: A substantial portion of consumers have now started using their mobile phones
to shop online. Even today, phones account for a considerable percentage in the entire website traffic.
The number hopes to radically increase by next year.
– Consumers are experimenting more: Customer preferences are constantly evolving because an
average customer is exposed to so much nowadays. E-commerce firms need to keep a tab on their
customers’ tastes & demands to deliver better.
– Social media commerce: Social media, particularly Facebook, is critical for many e-commerce
players to scale. Despite increasing ad rates on social media, it is still a cheaper and an effective
channel than content and display media options. Facebook has over 100 million active users in India
which makes it a very effective platform to reach out to consumers who are primarily young and
more prone to adapt to e-commerce. The focused audience targeting of Facebook is also very helpful
in driving higher ROIs. Overall, Facebook is a powerful tool and will continue to play an important
role in the coming year.
What are the challenges in the e-commerce segment that needs to be addressed in 2015?
How do you think these challenges can be addressed for the growth of the sector?
Ganesh Subramanian, Myntra
Logistics is a key element in providing essential customer service, but remains a major challenge for
all e-commerce players especially during peak seasons. Retailers will have to innovate and work
closely with logistics service providers to constantly upgrade the logistics and distribution systems in
order to provide flawless quality of service (prompt delivery, at the right place, and in the right state)
to gain customer loyalty. Technology will be a key enabler in streamlining fulfillment processes and
improving logistics to maximize efficiencies in inventory, service time and delivery.
Another challenge is the lack of data connectivity across smaller towns and cities which is hindering
the growth of the sector. Improvements in network connectivity and data speeds will enable first time
shoppers to experience the benefits of ecommerce sitting in remote locations.
Praveen Sinha, Jabong
– Learning from the roadblocks in logistics during the festive season, a stringent focus needs to be
put in delivery of products within the promised time. We recently saw air cargo getting clogged
which is a big challenge for e-commerce industry.
– We noticed a small set of fraudulent users because of which many of the user policies cou ld not be
sustained. Strict action needs to curb the misuse of our products; hence a definite change in our
policies is imperative.
– Ensure aggressive growth to improve customer experience.
– Tap the growing market with increasing competition.
Rajiv Srivatsa, Urban Ladder
We need to create infrastructure for better logistics and timely and trusted deliveries. Also, the
industry will grow stronger with better internet penetration across the country.
Clearer cross-border (inter-state) regulations will also help in scaling up pan India.
Vikram Chopra, FabFurnish
There are several issues related to sales tax laws that have caused uncertainty in the e-commerce
ecosystem. Since this sector is so huge, it is important to have clear-cut laws on the same to avoid
any sort of ambiguity.
Secondly, developments on the FDI front are also predicted. This will certainly open more doors for
this sector and enhance the pace of growth. So that’s a space that needs to be followed closely.
Thirdly, there might be a change on the basis of funding – from chasing growth to targeting
profitability as this is the best time in this sector to drive organic growth. The coming years hold a lot
of promise!
Youth will drive Indian consumer growth.pdf
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By IANS | 7 Jun, 2016, 06.06PM IST Post a Comment
As the affluent consumers tend to shy away from ostentatious display of wealth, growth of luxury and highend goods will be limited.
Youth will drive Indian consumer growth, says Goldman Sachs
BENGALURU: Indian youth, dominating the county's 130million strong urban mass, will drive the consumer market growth over the next 510 years, multinational banking firm Goldman Sachs said in a report on Tuesday.
"We believe India's youth who dominate its 130million strong urban mass, earning $3,200 (Rs.21,361) on average per month, will be the key driver of the country's consumption story in the next 510 years," the report titled 'India Consumer CloseUp)' said.
The report is part of Goldman Sachs' 'Asian Consumer' series.
"With a young, techsavvy population, improved education and rapid growth, India is creating a consumer market deeply tied into mobility and connectivity," it pointed out.
With the world's second biggest population (1.3 billion), including 440million millennials (adults) and 390million Generation Z (teens and children born after 2000), India is set to witness a consumer boom over the next two decades, it said.
"Unlike in China, where consumer spending is driven by its 150million urban middle class and 1.4million wealth movers and shakers, the consumer growth in India is underpinned by its urban mass, though its urban middle (class) accounts for just 27million working force or two percent of its population," the report noted.
Noting that consumer spending in India would shift as its urban mass segment grows, the report said the consumer growth would be driven by life's essential needs (food, clothing and house) and growing consumption trends spanning eating better, looking better, mobility, connectivity, having more fun, wellbeing and luxury.
"Though these consumption patterns are common, with profound effects on consumer behaviour, half of India's population is vegetarian, whisky sales dwarf beer and families save for years to spend on their child's wedding," the report observed.
Indian firms engaged in packaged snacks and dairy products, restaurants, premium personal care products, baby products, smartphones, scooters and branded jewelry are well positioned to benefit from the rise of the consumer class.
"Mobile connectivity and ecommerce stand to leapfrog traditional retail as channels for reaching young and techsavvy consumers," it said.
As the sheer size of India's youth combined with improved education paves the way for sustained growth in purchasing power, the challenge is to create enough jobs to unleash productivity of its demographic dividend.
"Hence, brand investing will be a big theme, as the urban mass will trade up into brands that offer incremental value and quality. In purchasing a car, for example, for an Indian consumer, an important input is the brand's reputation for fuel efficiency," the report averred.
"Improved mobile connectivity will also challenge the domination of television as a primary source of household entertainment over time, creating a bigger profit pool for content providers and mobile gaming," the report said.
As the affluent consumers tend to shy away from ostentatious display of wealth, growth of luxury and highend goods will be limited.
"Since Indians splurge on weddings, their numbers will increase over the next five years along with household formations in view of the
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demographics," the report added.
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