In conversation with Nivedita Jayaram Pawar, Ashish Jhalani, Founder, eTailing India and Indian School of eBusiness (ISeB), (ventures that help companies who want to make the transition from ‘brick-and-mortar’ retailing to ‘e-commerce’, or want to improve their online activity) underlines the untapped opportunity in e-commerce for Indian entrepreneurs looking to gain insight on how to run a successful e-commerce business.
According to a recent TechnoPak report, e-tailing has the potential to grow more than hundredfold in the next 9 years, to reach a value of US$ 76 billion by 2021. Factors that will motor this growth include the country’s growing Internet-habituated consumer base, which will comprise 180 million broadband users by 2020, and a burgeoning class of mobile Internet users. However, here’s the ugly truth – many e-retail players in India continue to bleed. In the US$ 500 billion retail sector, e-retail contributes by just 0.50 percent, whereas it has a promise to deliver a lot more.
India is one of the top retailing markets in the world and among the fastest growing with an online penetration of nearly 60 percent, according to a research report by Comscore for Assocham – State of e-commerce in India. Is online really the future of Indian retailing?
An emphatic yes. However, it is not easy to replace the already existing traditional channel of retailing. The challenge is to get traditional retailers embrace the Internet medium as a channel that would expand the market and reach a set of consumers who would not buy otherwise.
After 18 years of the Internet’s existence in India, the true penetration of this global medium is less than 10 percent. And yet, the way we talk about the Internet in our daily newspapers, television and radio, it gives a feeling we already have Internet as a mass media. However, that is not the case. We have a long way to go.
People need a very strong incentive to get a broadband connection and shop online; e-commerce is the future, but it will have to be embraced correctly.
Travel is the biggest e-commerce category because airlines started offering heavy discounts; and the value offered by the airlines got people online. Reasons like low broadband speed and less number of people on this medium are all myths, and true only away from the metros. It is also a myth that Indians hesitate to swipe their credit cards online as many urban Indians are getting good deals and buying things from Amazon.com. People need to have a reason to subscribe to broadband and get a computer at home.
India’s Internet base, already the third highest in the world after China and the US, is growing by nearly 40 percent every year. Yet, despite the potential and the platform, the sector continues to underperform with all the major companies bleeding. What are the reasons?
The reason is very simple. The larger set of Indian consumers is not yet ready to trust and buy online, and the e-commerce industry is yet to build that trust or need. There is a huge trust gap, which needs to be recognised and bridged by the e-commerce industry. Until this gap is bridged, the number of buyers versus the number of Internet users will be a huge disparity. In the US, 85 percent plus online users transact online versus 8–10 percent in India.
Other factors contributing to the bleed of the e-commerce companies are acquiring customers at very high cost and servicing them at similar costs too. Customer acquisition for the longest time has been considered the most important and the cost of acquiring a customer has been ignored. Servicing customers with free delivery and cash on delivery (COD) is the other major factor, as this erodes already a very thin margin that exists for most e-commerce companies. Both these services have a huge impact on each transaction’s profitability.
The Indian government is considering a move to allow FDI in online retail. How will it change the game?
FDI in online retail will temporarily enhance the issues the industry is facing. As funds become available for investing and there is shortage of sound business models, ventures that lack sound business models may get funded. In order to survive and prove their business models, once again customer acquisition costs will be ignored in order to gain a customer base.
Over the long term, it will settle down and the FDI in online retail will allow foreign players to enter the market and force survival of the fittest. Consumers as well as the eco-system will benefit from this change.
It is often debated if online retail is going to make traditional physical store buying irrelevant. What are your views on this?
Online retail cannot make traditional physical store buying irrelevant. Even in established online markets such as the US, this has not occurred. Traditionally, the growth of the retail sector is shared with e-commerce but rarely has e-commerce been able to produce a negative growth for physical stores. In most cases, it is recognised that online and physical complement each other.
The important thing here is that traditional retailers, who are online because they know that the youngsters in India are not watching TV and reading newspapers, will have to relook the fundamentals of their business models. Just a fancy website, with no concern for execution, will not help. By doing that, they are not only devaluing e-commerce but also driving people away from the net.
What is the size of e-retail market in India and at what rate has it been growing?
e-Retail in India is approximately US$ 1.6 to US$ 1.8 billion without travel. It is slated to grow to almost US$ 6 billion in the next 3 years.
How different is the Indian e-retail sector today as compared to the global market?
Indian e-retail is significantly different from other global markets. The closest market that is somewhat parallel is Brazil. This is surprising given that India’s Internet population is larger than Brazil while its overall population is substantially greater. But it is not surprising given that only about 60 percent of the Internet population in India has retail reach versus 77 percent or more in Brazil.
If we compare India to the US, in the latter, 85 percent plus online users transaction online versus 8–10 percent in India.
What are the lessons in e-retail that India can learn from mature markets like China, Europe and America?
The biggest lesson is that the basics need to be strong. Acquiring a customer is not enough; re-engaging with that customer is where profitability exists. Customer loyalty, trust and education are very important factors that all mature markets have adopted and need to be seriously evaluated and adopted in India.
On another note, India is a country where the right to information (RTI) is a law. However, sadly, our country cannot become informed rightly and equitably until we have the Internet in every household.
What are the challenges in the e-commerce growth story of India? What are some of the ways to tackle those?
The challenges are broadly:
- Enablers of growth: Technology, infrastructure, payment solutions, etc.
- New business models for retailers
- Shift from web to mobile
- Back-end systems
- The challenges will lead us to the solutions and hence this is a critical piece in the evolution of the e-commerce industry in India.
Usage of credit and debit cards is still not very high in India. How can small retailers deal with such challenges while going online?
To tackle the problem in the short term, e-tailers have adopted COD as a reliable and safe way to pay for purchases. While this has resulted in building some trust with the consumers, it comes at a heavy cost to the industry. Not only do the e-tailers suffer higher costs of implementation and delays, it also leads to greater returns, which eat away into net margins. Currently, COD accounts for approximately 50–55 percent of all online transactions in India.
Indian customers are hooked to the COD, which is bleeding the e-commerce ventures. What’s the solution?
COD service costs vary from 3.5 percent of transaction amount to as high as 7–8 percent. In an already thin margin environment, this erodes the retailer margins heavily, thus causing the economics of COD transactions to turn negative. A bigger problem remains as much with the delivering companies, which hold the payments for more than 15 days, thus affecting the churn cycles. India is a decently carded country with more than 20+ million credit cards and 300+ million debit cards. Instead of cash, the e-tailer could move towards accepting card on delivery.
We need to figure out a way to offer value and build trust with the consumers. This is a challenge that will require the government, the consumer associations and the retailers to work at forming trust seals and other mechanisms by which a consumer can evaluate each retailer.
At what scale of the business should small retailers take the business online?
There is no scale for this. If a small retailer has the infrastructure to support an online business, they should opt for it. What will be different is the strategy they adopt. They may not want to invest fully in an independent venture and may want to sell on marketplaces to start with. Over time, they can they invest and operate individual ventures; some may choose never to do this and remain on only a marketplace model. In other words, going online does not mean running our own standalone venture but it can also be selling through marketplaces.
It is very important though for all brick and mortar retailers to look at online as the future and start working towards adding online as a sales channel. We are professing this through all our conferences, seminars, training and workshops to each and every retailer, brand, wholesaler and manufacturer.
What should be the pricing strategy for a retailer who has presence on both formats – physical as well as online?
The prices should be consistent across formats. If you are trying to build customer loyalty and trust, you would not like any customer to find pricing differences. Retailers though could offer special one-time discounts to shop online in order to promote the online store.
Lastly, where do you see the e-retail industry 5 years from now?
There is no doubt this industry is poised for huge growth and is slated to reach a US$ 10 billion plus industry in the next five years. As the market matures, we will see many new names leading the pack, some old names still part of the pack, some old names drop out of the pack, and some consolidated businesses (Flipkart and Myntra being the latest consolidation example). Overall, a huge opportunity awaits the current and new entrants in e-commerce.