India’s e-commerce evolution: An ideal case study for Sri Lanka
Wednesday, 30 October 2013 00:00
Sri Lanka witnessed an early adoption of e-commerce in early-2000 with the launch of pure play platforms such as eChannelling.com and kapruka.lk. Since then, we have not witnessed any major ventures in this sphere until recently. Thanks to recent developments in internet connectivity and the expanding internet user base, the e-commerce model now seems to be gaining traction in Sri Lanka.
Many local brick and mortars, such as Odel, have already set up online platforms to complement their offline businesses. Further, we have witnessed many new pure play startups gradually gaining popularity among the local community. Some of these players have recently tied up with major local telecom operators to leverage their technological expertise and mobile reach, thus increasing their popularity.
Smartphone wave to drive internet penetration…
We have witnessed a surge in smartphone usage in Sri Lanka thanks to falling smartphone prices and the variety of products available to the average consumer. This has also been supported by 3G/4G facilities that have helped improve mobile internet connectivity and speed. Further, users are also shifting towards mobile, rather than desktop, internet access due to its convenience and low cost. Therefore, this is a primary catalyst for improving internet penetration in the country going forward.
…but the lack of mobile presence remains a concern
One major concern is that we have not yet seen active participation by local e-commerce players in the mobile space. Given the rapidly growing popularity of smartphones in the country, it is imperative that these players take advantage of the mobile space early in its lifespan. For example, they should introduce user-friendly mobile apps and customised mobile interfaces, which would provide them with first mover competitive advantage. Further, as better internet access reaches the rural population, it provides e-commerce players with an untapped market with local language preferences. Thus, they should actively explore native language content in their mobile and desktop interfaces to penetrate this potential market.
Cash on delivery, a solution to address user concerns…
While e-commerce should be a natural beneficiary of improving internet penetration, the fact remains that user conversion typically takes time in developing countries such as Sri Lanka. One reason for this is the low usage of credit cards in the country. To add to this, users’ reluctance to conduct online transactions, due to security concerns, and preference for physical verification are further impediments. To overcome these obstacles, many local players are increasingly adopting the cash on delivery (COD) method as a solution to gain customers’ trust.
…but COD entails significant costs
This method, however, requires significant investment on inventory and logistics infrastructure. Evidence from neighbouring India suggests that this method also poses issues such as high user rejection rates, stretched cash conversion cycles, and even prank orders. Thus, local players need to be mindful to weigh in the benefits against such significant costs. This is especially the case if they plan to add value propositions such as free/same-day/last-mile delivery options and “check-and-accept” policies.
Lack of scale necessitates search for new business avenues…
While there is potential to enter this market space, local players need to be aware of the lack of scale in Sri Lanka given its smaller population base. In other words, while a maximum of two to three players for a particular model could be gauged as realistic, the local e-commerce space will likely not have ample room to facilitate many me-too players in the long run. Meanwhile, existing players need to aggressively innovate and build on their USPs to protect their dominance. Kapruka.lk, for example, recently introduced the ‘Kapruka Global Shop,’ which offers an innovative value-for-money delivery service for users who buy through global platforms such as Amazon and Ebay.
…and many offline services provide such online opportunities
It is imperative that new entrants carve out untapped niche market spaces or identify altogether new avenues. To identify new avenues, they should research and explore offline services that are potential candidates for online transformation. One such potential area could be an online platform for personal tutoring and knowledge sharing, given that Sri Lanka has an active offline tutorial culture for the O/L and A/L examinations, as well as professional courses. Another area could be an online platform for local transport ticketing given the frequent usage of bus and train services by the local community. A market feasibility study, however, would be useful to ascertain and justify these avenues.
India’s case provides some interesting observations
We see a similar e-commerce revolution taking place in our neighbour India. However, compared with India, Sri Lanka’s e-commerce adoption is still at a nascent stage. Given this situation, it is interesting to analyse India’s experiences to see if we could learn any lessons that would be relevant to our local context. The following is an attempt to analyse India’s e-commerce evolution for this purpose.
India’s e-commerce is in a high-growth trajectory
India witnessed its first wave of e-commerce evolution way back in the mid-90s, but it did not really take off due to the absence of clearly-defined business models and the lack of investor enthusiasm. Further, the alien nature of this concept to the user, poor internet penetration, and poor IT infrastructure also contributed towards this slow uptake. It then rough a muted phase during the first half of 2000 with the spillover effects from the dot.com bubble in the late-90s. The mid-2000s marked the emergence of a second e-commerce wave, thanks to the country’s readiness by this time, with increasing internet awareness and adoption, coupled with improving infrastructure. Further, new ventures, having learnt from first wave failures, ensured that well-defined revenue models were in place, thus attracting investor backing.
As per the Internet and Mobile Association of India (IAMAI), India currently has 137 million internet users, behind only China (538 million) and the US (245 million), globally. This sheer volume, however, translates to a meagre 11% internet penetration compared with that in China (40%) and the US (70%). This is likely due to internet access still not having reached India’s vast rural population (approximately 70% of the population). As per IAMAI, rural internet penetration is well below 5% and accounts for only 30% of total internet users. This circumstance is expected to change thanks to the immense popularity and fast adoption of smartphones in India (Chart 1). Falling prices; rapid adoption of 3G/4G infrastructure; and user preference to access internet via mobile phones, as opposed to PCs, are driving India’s smartphone wave.
India’s e-commerce sphere witnessed significant growth in the recent past and is poised to continue the growth trajectory despite its still lower e-commerce activities among internet users (Chart 2). As per IAMAI, only 18% of internet users shop online, which is significantly low compared with that of >50% in China and the US. The majority of users use the internet for basic needs, such as email and entertainment. Further, IAMAI finds that approximately 64% and 25% of rural and urban internet users, respectively, prefer using the internet in their native language. This provides an untapped market for players who could leverage the mobile front with local language content and apps to address this language preference.
the biggest contributor
The travel segment is, by far, the biggest e-commerce contributor in India (Chart 3). India’s second wave of e-commerce evolution, in essence, took off with the emergence of low-cost budget airlines and their preference to sell tickets online. The low-cost option, coupled with the convenience factor and limited need for physical inspections of the service, led to the popularity of online ticketing. Online ticketing agencies, such as makemytrip.com and yatra.com, have become dominant players in this segment.
High volume offline services open up new market frontiers
India’s biggest online bus ticketing company, Redbus, which pioneered a novel concept to offer bus tickets online in mid-2000, has a fascinating story behind its success. As is the case with any unique venture, Redbus initially had a very slow response with only a few reluctant bus operators agreeing to join the online platform. By overcoming many challenges, it now dispenses over one million tickets per month. It has also successfully secured major venture capital backing and investment from global players such as the Ibibo Group. Further, this success story has attracted many me-too players, who are now vying for a piece of the pie in this growing market.
Yes, government institutes can leverage e-commerce too
India has one of the largest railway networks in the world and the demand to travel by rail is naturally quite high, which has lead to lengthy queues to make reservations. Capitalising on this, the government-owned Indian Railways has revolutionised rail ticketing by introducing an online reservation system via its ticketing arm, the IRCTC. This has effectively provided the user with a greater convenience factor – the much-needed value proposition for an e-commerce business. Currently, IRCTC issues, on average, half a million e-tickets per day, which accounts for nearly 50% of the total daily rail tickets dispensed. This generates a monthly average run rate of nearly INR100m, thus making it one of the best monetising e-commerce platforms in Asia. It has, since then, expanded beyond rail ticketing to online flight, hotel, and tourism-related reservations, and also generates advertisement revenue. Very recently, it has ventured into the e-tailing segment in partnership with online retailer Yebhi.com, in order to further leverage its already huge user base.
The above examples demonstrate that the convenience factor is a high-value proposition and provides opportunities for online adoption. These are ideal case studies for both private and government players in Sri Lanka to consider similar ventures with a localised approach. Services with steady demand and high daily/monthly volumes, such as local bus and rail ticketing, would provide potential avenues to be explored.
Shopping with fingers fast gaining traction
E-tailing, the second biggest e-commerce venture in India’s e-commerce space, is poised to grow significantly over the coming years (chart 3). E-tailing is a segment that, quite naturally, benefits from the growing online community in any country due to the convenience factor that is complemented by the changing life styles of the affluent middle class population. In the case of India, it has the added benefits of its sheer population base and still lower but improving internet penetration.
A survey, conducted by the Boston Consulting Group, has made the following interesting observations highlighting India’s e-tailing sector. They provide useful insights for the Sri Lankan context, too.
Gaining customers remains the top priority…
Many big e-commerce players in India, such as Flipkart and Jabong, still maintain that attaining critical mass and customer loyalty remain their utmost priority over short-term profitability. They have been aggressively marketing their USPs in mass and social media to differentiate their offerings. These marketing efforts seem to be paying off as evidenced by heavy traffic numbers accessing their websites. Due to this, investors still have faith in these players, despite most of them still not being profitable. This is evident by the fact that these companies have raised several rounds of successful funding in the recent past.
…but customer acquisition cost is exorbitant
Customer acquisition cost in India’s e-commerce space remains significantly high due to the unsustainable value propositions offered, such as deep discounts, same day/free delivery, and COD. Moreover, big players utilise mass media space, such as television, extensively for marketing purposes. An article in thehindubusinessonline.com cited that customer acquisition cost ranges, on average, INR800-1,500 per customer. Given the average order size being between INR1,500 and INR2,500, and gross margin being in the single-digit level, the e-tailer needs to generate multiple transactions with the customer to recover the acquisition cost. Further, the operating leverage increases significantly due to heavy investments on the platform, supply chain, and warehouses.
E-tail essentially a volume play with thin margins…
Thus, it is reasonable to assume that many e-tailing ventures are losing out on their transactions, and most of them are yet to show profit. Many new startups, which were cash burners and me-too players, soon went out of business due to irregular spending. On the other hand, many other unsuccessful ones were acquired by larger players. This essentially highlights the fact that e-commerce is a leverage play, with high-fixed costs and thin margins. Players need to strike a fine balance between investments in customer acquisition and profitability.
…thus, players are evolving to stay on their feet
Many e-tailers are evolving to find suitable and sustainable business models in the long run. They are constantly adjusting their business models to address such profitability issues. For example, Snapdeal, one of India’s largest shopping sites, soon realised that its daily deal model was unsustainable and transformed itself to a multi-product platform. Flipkart, another online shopping site in India, was initially an online book retailer, but transformed itself into a multi-product e-tailer. With this evolution, Flipkart ventured into the inventory model, adopted the COD method, and formed its own logistics arm. It has recently also ventured into the marketplace model to complement its costly inventory-led model.
FDI restrictions on the inventory model, a major concern…
Given the lucrative market potential, many global players, such as Amazon and Walmart, are vying for their shares in India’s e-tailing market space. However, India recently imposed restrictions on such FDIs for inventory-led e-commerce models. By contrast, FDI is relaxed for offline brick and mortars allowing up to 51% ownerships for global multi-brand retailers. Thus, many global players, including the above, are actively in talks with the government for similar relaxations in the online field as well. Many local players view FDI positively as it would bring much-needed investments for the cash starving online ventures, and also provide exit strategies for seed investors. However, some oppose such a move citing that local players still need protection till they build scale.
…however, the marketplace model is relaxed from FDI
It should be noted that there are no FDI restrictions for the marketplace model in India. Thus, this concept is fast gaining traction in India. This has provided a path for global players to foray into India’s growing e-commerce space. Ebay has already left its footprint in the Indian market, and Amazon recently launched its marketplace platform in India. Thus, many big local players, including Flipkart and Snapdeal, have already set up their own versions to face-off against impending competition from the global players.
Marketplace model mutually benefits both SMEs and platforms
India has a huge small and medium enterprises (SME) base, which contributes approximately 8% to its GDP. They often lack access to mainstream media channels and are unable to diversify physically to reach out to a wider customer base due to financial considerations. However, the e-commerce marketplace model provides an effective playground for them to reach such a wider audience. This model is akin to the Ebay model, where the e-tailer does not own inventory and merely provides the platform for merchants and buyers to interact directly. Thus, this approach is mutually beneficial to both the SMEs and the platforms by opening up potential markets for both. Sri Lanka also has quite a significant number of SMEs in the country, which have not yet been exposed to online transactions. This provides an untapped market for local marketplace models to bring them online.
Payments and logistics remain key challenges
E-tailing in India encompasses many challenges in terms of logistics management and payment gateways. The lack of efficient systems to address wider coverage and lower credit card penetration remain key impediments. There is evidence that credit card holders are not comfortable using online payments mainly due to safety concerns. Added to this are technical issues such as poor internet speed and the complexity of authentication/validation procedures.
COD has become a necessary evil...
Thus, COD has become the most preferred payment method in India, accounting for more than two-third of total online transactions. Initially, the COD method was an opportunity for players to differentiate themselves against the competition, but it has now become a necessity. Customers have become attuned to the COD method as it usually comes with free delivery, and they can physically verify and pay for the product. Thus, COD has almost become a must for the e-commerce players to remain in the market.
…and comes with many burning issues
The COD method, however, has its own share of issues. It entails greater cash flow implications due to high costs and tied up working capital. Moreover, players generally envisage high rejection rates and also have encountered prank orders. Many players are now considering imposing minimum free delivery limits to alleviate cost pressure. The Times of India recently reported that FlipKart took a decision to cap the maximum COD limit to INR10,000 to the state of Uttar Pradesh. While the company maintained it was a business decision, the paper says it has learnt that the company had encountered many prank orders and high levels of rejections in this region.
Specialised players help to mitigate COD problems…
The above issues are somewhat mitigated by the emergence of many specialised third party service providers such as cash collectors (e.g. Gharpay) and logistics providers (e.g. Delhivery, Chhotu.in). These specialists tend to provide cost effective solutions for COD, thus somewhat complementing the businesses of e-commerce players. These third-party players have a business case given the scale due to the huge population and wider coverage network.
…but some biggies resort to expensive in-house models
However, such outsourcing has its own share of problems as e-tailers then do not have full control over the entire value chain. Late deliveries and fraud at cash collection points are some of the key issues. Thus, some large players such as Flipkart have resorted to their own in-house delivery models. They can afford such in-house options thanks to the scale benefits they enjoy. Moreover, many are now introducing innovative systems such as portable points of sales card readers, mobile POS devices, and pre-paid wallet systems to mitigate cash collection issues.
E-tailing is a cost-intensive business and it will take years to attain critical mass and show profit. Amazon took many years to show its first profit and many Indian counterparts are yet to taste profit. They also need to constantly evolve until they find a suitable monetising platform. Customer relationship management should be considered as the life blood in this sphere to gain repeat customers. However, customer value propositions will invariably add to the cost, and thus need to be justified keeping profitability in focus. This is because such strategies will invariably raise the bar of breakeven levels given the wafer thin margins, which is a norm in the e-commerce industry. To sum it up, the right differentiation strategies, together with a great deal of patience, confidence, and flexibility, are essential ingredients to stay above the game in the e-commerce industry.
(The writer is Vice President, Equity Research at Amba Research Colombo. Amba is a large independent capital markets specialist outsourcing firm. Amba is ranked #1 in the investment research and analytics space, according to independent customer satisfaction surveys. A majority of the top 15 global sell-side and buy-side firms use Amba in areas such as equity research, fixed income and credit research, quantitative research, sales and marketing, corporate finance, and compliance. Asset managers, brokerages, and investment banks have not only saved over USD700m by using Amba over the past nine years, but have also built a new operating model that helps them win market share and outperform competitors while eschewing inflexible cost structures. For more information about Amba, please visit www.ambaresearch.com.)