Internet purchases are worth $10 billion (Rs 50,000 crore) at present, but are growing fast, prompting online retailers like Flipkart and Myntra to burn cash to attract customers, a new study by consultancy firm Zinnov has found.
On a positive note, it noted that online retail accounts for only 0.5% of the total retail industry in India. This will rise rapidly in the coming years as e-commerce increases from $10 billion to $125-260 billion in the next 12 years.
However, in a desperate attempt to get the early mover advantage, online retailers are spending more money than they can strictly afford and raking up losses in the hope of getting back their investment in the future.
“E-tailers are burning cash to fuel growth; offering discounts deeper than their pockets and spending heavily on advertising and marketing,” Zinnov said in its study on the Indian e-retail sector.
The sector has seen a boom in the last two years with the launch of a number of portals such as myntra.com, jabong.com, snapdeal.com, infibeam.com etc.., besides the biggest, Flipkart.com.
Most of the new e-retailers have been aggressively advertising on TV and other websites — flush with cash from venture capitalists who want to make sure that they have an investment in the sector.
VCs invested $900 million (Rs 4,500 crore) in the sector in the last financial year.
“There has been an over 800% growth in VC funding from 2009 to 2011,” Zinnov says.
In turn, the boom is fueled by the rapidly expanding availability of high-speed broadband through 3G and 4G networks in India. India’s Internet users are estimated to be grow to 376 million (bigger than the entire U.S. population) by 2015 from the current 120 million (bigger than the population of most European countries.)
“Fear of missing the bus in a potentially huge market opportunity is causing a herd mentality among VCs. Around 3-4 players will emerge winners over the next few years”, the report quotes Alok Mittal, MD of VC firm Canaan Partners, as saying.
Nearly all of the big names — Flipkart, Jabong etc. — have got VC funding in them.
Despite the enthusiasm, Zinnov points out that online retailers offer an average discount of 25% and snap on offers such as free shipping, cash on delivery etc.. Because of all this, they lose an average of Rs 90 for an order size of 1,200.
Smaller order sizes, lack of trust (leading to consumers preferring the expensive cash on delivery), high delivery charges, warehousing charges and high marketing costs have made the sector unprofitable, it pointed out. (see chart below)
Zinnov estimates that the average cost of acquiring a customer through online ads is Rs 1,500. “Repeated purchases are a must to compensate acquisition spending,” it points out.
In an online survey, Zinnov found that Internet users are split nearly evenly between people who buy more than once a month, once a month, once in 3 months and once in 6 months or less.
E-tailing is growing tremendously and will account for ~50% of the e-commerce by 2015 as compared to the current 22%. In FY 2011, books and consumer electronics were the most favored categories outside of online travel, it said.
Over 100 million mobile users will have access to 3G/ 4G connectivity by 2015. Over 200 million people will be active on social media from the current 51 million, the study found.
“E-commerce has experienced stupendous growth in recent times in India and we do not see this growth slowing down anytime in the near future. Scale is certainly necessary to survive in this business and India presents that scale to anyone who is serious about this business. While online travel grew rapidly in the last 5 years, the next 5 years will see e-tailing to outpace online travel market in India,” said Praveen Bhadada, Director-Market Expansion, Zinnov.
Zinnov believes that third party managed logistics services will prevail in the industry as most companies struggle to invest into in-house logistics upfront. While existing logistic providers, such as DTDC, are creating separate arms for catering to e-commerce business, specialist e-commerce logistic companies, such as Delhivery, Chhotu, and Holisol, are fast emerging, it noted.
The survey also noted that mobile and social media platforms will play a key role in driving the growth of the Indian e-commerce industry. The findings reveal that brand recall is a major factor for decision making and therefore, e-commerce companies are aggressively investing into mass media for brand building. Major e-commerce companies like FlipKart, Jabong and Myntra use TV, print and out of home media to win customer mindshare.