The Rise of E-Tailing

E-tailing in India has reached a tipping point.  STORAI investigates.

With more than 85% of the world shopping online, it’s no longer a fad, even in developing markets like India.   Worldwide retail web sales will reach nearly USD 1 trillion (Rs 60 lakh cr) by 2013, predicts Goldman Sachs. While the US and Europe is mature brick and mortar markets, they will grow their online sales at 10% and 11% respectively – till 2017.


The Internet offers unlimited shelf space, is not constrained by operational timings and geographical boundaries. Most of the first time adopters of online shopping have been in Asia – fueled by China, Japan and Australia – the Asian market accounts for almost a third of global ecommerce spends.  (See Infographic Feature:  RAI Insights on E-tailing)

India at a tipping point

India registers as a high potential market within Asia – it has a over 150 Mn active Internet users, is considered as an ‘app’ superpower and has seen the fastest adoption of smart-phones in the world.

E-commerce in India is about USD 8.6bn (Rs 51,000 cr) and is expected to grow at 18% in 2013 (source IAMAI, E&Y) .  It is expected to contribute around 4% to IGDP by 2020. Yet, with numbers like these Jeff Bezos, Founder & CEO, Amazon says “The alarm clock hasn’t gone off yet.”

China had an internet penetration of 10% of the population in 2007 – which grew exponentially to 40% by 2012.  India is expected to follow suite – current population penetration of the internet is just under 10%.  Most experts believe that this puts India at the beginning of a growth curve.


Key drivers for growth would be the wave of ‘consumption’ across the country, which so far, seems to be recession proof, as well as its young demographic. What could hold India back is the familiar refrain of poor infrastructure – research suggests that broadband speeds and dial up speeds are both a third lower than the rest of Asia on average.

Regulations around ecommerce

Currently, FDI is not permitted in e-commerce.  However companies such as Flipkart have used a “modular” design by setting up separate companies for the technology platform, distribution and retail.  While FDI is not permitted in ecommerce (i.e. B2C retail) ,  it is permitted in market place companies (i.e. B2B) – example, Amazon, EBay .  These are considered part of the wholesale, distribution and cash and carry segment.

Ecommerce market structure:

The ecommerce market in India is dominated by online travel – which accounts for about 70% of the total market (Source: IAMAI). This is followed by online retailing (i.e. e-tailing) – which, at `10% has just tipped the USD 1 bn mark and is expected to grow at 20% (Source: E&Y), making it one of the fastest growth areas within Indian Retail.


Structurally, the Indian ecommerce market differs from the rest of the world – in that it is dominated by travel.  The graphic below shows the relative %ages of online visitors to retail and travel, comparing India with the world.  In India, about 70% of online transactions are on travel (with the Indian railways site – leading in traffic) whereas, globally retail sites draw relatively more traffic than travel sites.

Both online travel and e-tail have grown faster than other ecommerce categories in India. Retail category penetration has increased to 60% reach and has grown to 37.5 million unique visitors a month, an overall growth of 43% annually (Source: ComScore).


Flipkart leads the way among the online retailers in India with 7.4 million unique visitors (“uniques”) a month, growing at 400% annually. Snapdeal has been close second with 6.9 million uniques. Jabong and Myntra have been competing closely in the lifestyle category with over 5.3 million uniques each. HomeShop18 has over 4 million uniques a month.

Online business models

Multiple business models exist in the online arena – and there is overlap between them in terms of model design.

  • Offline retailers – These are actual, physical stores which also have an online presence. For example most large retailers in India, e.g. Croma, Shoppers Stop, Westside as well as smaller retailers such as Fab India, Nallis – have both a physical and an e-presence. They have come to be known as ‘brick & click’ retailers.Cover_Story-5
  • Pure click companies – Some companies offer their products solely through their website, and maintain inventory, these are known as ‘Pure click’ companies, for e.g. or are considered as ‘pure click’ websites, they are an online retailer, selling hundreds of different products without an actual physical outlet.
  • Marketplace – Marketplaces are websites that allow third parties to list their products and services for consumers to discover and buy. The third parties use the market place to manage orders and process payments, but are responsible for their own inventory, and supply chain. Popular market places in India include,, and  These could include variants – e.g. where the market place provides support services or basic market places which provide an easy, low cost way to achieve an e-presence.
  • Vertical v/s Horizontal:  Another method to distinguish online models is to consider the range of merchandise sold. Vertical sellers specialize and sell one or two categories – e.g. Croma, Horizontal e-tailers are category agnostic – examples are Jabong, Myntra, Flipkart etc.

Three factors drive the design of the business model for ecommerce:

a.   Willingness to take inventory / supply chain risk: Inventory Model.

b. Strategic focus on Returns / Sizing

c. Payment options on offer.

Inventory Models

Inventory costs are between 6 to 10% for e-tailers. The choice of the business model and inventory model – represent two key decision points which drive profitability and eventually, valuation.  The two main inventory models are a “stock and sell model” versus a “consignment” model.  The former involves investment and inventory risk but provides better control; while the latter has lower entry barriers.


Managing Returns

Irrespective of the inventory model chosen, e-tailers have to devote significant resources to managing returns – usually between 30 and 50% of apparel transactions will generate returns, for other categories such as electronics returns are lower but post sale queries and service demands from the customer are high.   Apparel e-tailers have been investing in technology / process to manage sizing – as a way of pre-empting returns (see Insights:  Sizeable Returns).

Insight:  “Sizeable Returns”.

The “elusive” perfect Indian body size is giving many e-tailers, both domestic and international, a headache.  Apparel e-tailers face between 30 and 50% of returns. As with their brick and mortar counterparts, they have discovered that managing returns is the single determinant of customer experience and therefore repeat purchase. In a business where the cost of customer acquisition is often as high as the first cash memo spent, this is significant.

Online retailer recently launched its virtual trial room to enable its customers to check out instantly how select Zovi merchandise looked on them. ‘Zovi Eye’ will be featured on the Web site, which will help buyers view themselves in their desired apparel via an interactive Web-cam application. Technology simulates the offline buying experience of checking appearance and fit.

Paying your way

As with fulfillment and returns management – the market dynamics of payments have forced retailers to offer a range of payment options – both online and offline (i.e. cash on delivery).Cover_Story-7

At a market level, India is evolving towards  credit / debit card transactions – for example, the government is pushing its Electronic Benefit Transfer scheme – and the number of cards in circulation has increased to 300 mio in 2013 (Source: RBI) . At the same time, failure rates on payment gateways remain high – at 20%.  (In relative terms, performance has improved– failure rates used to be as high as 35% in 2010).   Most e-tailers use more than one payment gateway,  so that they can offer better overall reliability to the customer – but they do report card abandonment rates as high as 30% if the payment gateway does not work in the first instance.  High failure rates also create the need to invest in customer service – as call center capacity has to be created to deal with customer queries.

Cash on delivery (COD) in India is too big to ignore.  Most e-tailers and market places have report COD rates as high as 40 to 60% – though published surveys put the figure at between 20 and 30%.


Marketplaces such as Myntra are also offering a Card on Delivery option – where the courier brings a Mobile Point of Sale (MPOS) machine to the shopper’s door to accept card payments.  MPOS has the potential to significantly push up transaction sizes for market places and e-tailers.

Who is the customer?

The Indian online shopper is young (75% under the age of 35), and increasingly  – female.  A June 2013 report on shopping behavior published by Google and TNS Australia showed that 40% of the online base was female and that women who are online are relatively more affluent and younger. 3 in 4 women in SEC A/B are now online and 75% are in the 15-34 age group, with over 24 million women accessing the Internet daily.

Travel is the gateway to online shopping.  Most online customers started with booking tickets (usually rail tickets) online.  Also, online travel customers spend more and use their credit cards more often than other online adopters.

Most online shopping is for electronics and apparel (as measured by value). However, velocity of purchase of apparel and accessories as well as beauty and personal care is higher, making these categories more profitable.


At the same time, the industry’s focus on managing returns and investing in owned inventory models and Payment Gateways is starting to pay off in terms of customer trust.    “Fast delivery” was reported as the highest “motivator” to purchase while “delays in delivery” was reported as the third barrier to purchase.  That reveals that the e-tailer has been able to combat some of the initial negative perception about fulfillment which was in the customer’s mind iCover_Story-10n the initial (2007-2012) phase of market expansion.

An interesting trend in terms of categories is that apparels are expected to overtake electronics by value of sales – in 2013.  Apparel as a category is a high involvement and high velocity purchase versus electronics which is a high involvement, low velocity purchase.


Another trend to note:  Health and Nutrition as a category is a ‘rising star’ as the number of search queries on this category is high, and users have also purchased this category at least once in 2013.

STORAI Focus: Marketplaces

How Online marketplaces empower small retailersFor nearly 25 years, Dinesh Chopra lived with a locational handicap. Chopra sells computer parts, electronic gadgets and accessories from his outlet in Nehru Place, Delhi. Although its Asia’s largest computer market and registers thousands of footfalls every day, only a fraction brave the filth and dilapidation to climb up. And amidst this Dinesh’s shop Softek Surya is on the first floor, which was an added disadvantage. But not anymore.

“Now, they land on my shop via online marketplaces,” he smiles. Softek is a registered seller on five online marketplaces, including eBay and Flipkart. “About 35 per cent of my marketplace buyers are from South India, who have never seen my shop,” he says. His annual sales have rocketed from Rs 14 crore in 2010-11 to Rs 60 crore now; and 70 per cent of it is from online marketplaces, which are adding “muscle to business”.

Online marketplaces come with a ready customer base and provide a level-playing field for small retailers.

Source: Economic Times.

The Market Place Dynamics

We spoke to some leading marketplaces, and pure-click companies to understand what drives the business.  Three dimensions emerged:

  • Creating a critical mass of listed retailers / merchants
  • Supporting the merchant community
  • Logistics Support

Creating a Critical Mass of MerchantsCover_Story-11

Successful online market places have grown by “subsidizing” the early adopters – easing the process of listing and helping merchants to understand and justify the initial fixed investment involved in listing.

Different market places have evolved differing strategies to attract merchants:  Naaptol & Jabong use site traffic to attract new merchants, Flipkart & Myntra focus on brands and range, Amazon & EBay (formerly position using own brand and technology.  New entrants such as Plush Plaaza and vertical e-tailer Cupcake Girlswear focus on using Social media to drive traffic.

Supporting the Merchant Community

E-marketplaces can provide greater transparency in the purchasing process since availability; prices and stock levels are all accessible in an open environment.  At the same time, the number of market-places vying for a merchants business means that traffic is not enough of a crowd-puller.  While companies such as Myntra are focusing on aggregating brands which do not otherwise have a web-presence, Naaptol positions itself on its robust technology offering. EBay uses a combination of its legacy brand and the its positioning as a “pure, open marketplace”.   “eBay India doesn’t differentiate amongst sellers either big, small, micro or even individuals. We are an open pure marketplace and provide a robust technology platform to sellers to reach a huge consumer base.  We don’t own inventory and therefore don’t compete with our sellers. A brand, retailer or any other seller on our site can choose to only list items or open basic to featured and even brand stores on eBay” – says Lathif Nathani , Managing Director, eBay India.Cover_Story-12

Logistics Support

Fulfillment represents the single strategic challenge of the e-tailing business.  India has one of the highest cost of logistics – measured at 13% of GDP. This compares against 6% in countries like Singapore and much of Europe, 3% in the US and UK and 2% in Canada (Source: World Bank 2012).

In the initial phase of e-tailing (2007-2010) – there were operational challenges around fulfillment. However customer adoption (at one end of the value chain) together with the availability of capital to invest in supply chain (see feature on Funding Etail: “Show me the profit”) meant that marketplaces and e-tailers invested in supply chain.  The Logistics industry responded to the market opportunity – between 2008 and 2013 – 4500 local courier companies have come up. Companies such as Chhotu, Mudita, unicommerce and Delhivery  are area-specific in coverage and provide  local services – last mile delivery, third party and transit warehousing, reverse logistics, and offline payment collection.

Outside the top 50 cities, fulfillment requires e-tailers / marketplaces to tie up with multiple courier partners.  Most international courier companies (FedEx, DHL, and Blue Dart) and national players such as Gati have launched services targeted at the e-tailing sector and work with local delivery partners.  Cover_Story-13Shipments are sent to the nearest Package Distribution Center where a local courier will pick up the package and deliver it to the customer’s door, frequently on a bike. In rural areas, where even capturing a standard address for a consumer can be challenging, bike delivery is often the most convenient option.

Marketplaces such as Flipkart, Myntra and Jabong have invested in fulfillment.  Flipkart has launched its own delivery service – it has a fleet of vans / bikes who undertake the last mile fulfillment i.e. from the nearest package distribution center of the Courier partner to the residence of the customer.  This also represents an important branding / marketing touch point for the company – as the customer sees that the delivery boy who hands over the package and takes payment is dressed in Flipkart colors.  Branding that “moment of truth” has helped to build trust in e-tailing as a practice, especially for first time buyers who have online security concerns.

Inventory Models

Market places are evolving hybrid models of inventory. The category being sold impacts the choice of inventory model – fashion and lifestyle products usually entail greater inventory control because of the ‘perishable’ nature of the category.  So, in spite of pursuing a “market place” business model, Myntra has invested in inventory.  Similarly, a higher focus on private label automatically creates the need to hold inventory.   Pure-play market places such as eBay and Naaptol take minimal inventory risk.

Sizing Up

For market places such as Jabong and Myntra managing sizing is critical to their strategic position in the consumer’s mind. Jabong positions itself as a being “Fashion Forward”, Myntra works at aggregating brands which are not available elsewhere in the online space.

Marketing @ the MarketPlace

Most e-tailers use strong digital and social media marketing campaigns.  Some companies (e.g. Push Plaza) have also begun to use blogs.  Companies like Flipkart, Naaptol, Myntra and Jabong also use mass media including TV ads – this is a function of viewing habits of the target customer base (e.g. for Naaptol – the base is older) as well as the availability of marketing budgets.  All companies’ measure traffic spends, cost of acquisition – in addition eBay measures velocity and depth of spend and profiles the same through its annual census publications.


The Great (Indian) Online Shopping Festival

In 2013 both Flipkart and Google introduced the conceptual equivalent of “Black Monday” – a short window of time where the availability of deals online is very high and therefore customer interest and spend peaks. While Flipkart undertook this during Diwali (the Great Flipkart Diwali sale), Google’s Great Online Shopping Festival took place on 12/12/12.

Shopper Insights from marketplaces

There is little question that marketplaces are responsible for broad-basing the online shopping phenomenon.  EBay provides the most widespread example of this – the company has customers from more than 4000 towns and cities in India and of these 3200 locations are in tier 2 / tier 3 cities.  A large number of these are rural customers – this points to the depth of the consumption wave in the country.

In terms of geographical velocity of purchases – Maharashtra, Karnataka, Tamil Nadu and Rajasthan show the highest number of transactions (See Heat Map).

Another trend is the increasing number of mobile phone queries. Naaptol reported a sizeable increase in the number of purchases from mobiles – and Google search data from Jan to June 2013 substantiated this – about 25% of queries are now from smart phones.  Google expects this to translate into higher mobile / Tablet sales in 2013 / 2014 (source: Google).

Funding: “Show me the Profit”

52 E-Commerce companies raised USD 700 Mn in Venture Capital between May 2010 and May 2013.  However, most of the large companies and marketplaces are not profitable.  Some niche e-tailers (e.g. Utsav Fashion, Craftsvala) are – but these are exceptions to the rule.

Source: Re-birth of E-commerce in India – E&Y report

Of the 53 companies that raised capital, only 11 companies were able to raise further rounds of funding – a pointer to the high rate of mortality.

Fund House Total Deals Portfolio
Ace Partners 19 Flipkart, Myntra,, Babyoye, Freshdesk
Tiger Global 17 Makemytrip, Flipkart, Caratlane, Olacabs, JustDial
SAIF Partners 15 Makemytrip, JustDial, Firstcry, Homeshop18, iStream
Nexus Venture Partners 14 Snapdeal,, GENWI, Salorix, Unmetric
SeedFund 14 Redbus, Printo, Fetise, Sportskeeda, Healthizen
Helion Venture Partners 14 Makemytrip, Hoopos, Redbus, yepme, SMS Gupshup
IndoUS Venture Partners 13 Snapdeal, Indiaplaza, Zivame, Via, Hushbabbies
Sequoia Capital 13 Fashionandyou, Knowlarity, JustDial, Freecharge, Healthkart
Source: VCCEdge

The design of e-tailing in India – with the need to invest in supply chain, inventory management and returns management – is operationally intensive.  Profitability has been elusive because of:

High customer acquisition cost: Given low Internet penetration and some customer distrust around online buying, customer acquisition is expensive. Most sites spend between Rs 800-1,200 to acquire a customer. Considering that the average order size is around Rs 1,600, and that gross margins range between three to eight per cent, the customer needs to transact over 12 times for the retailer to recover the acquisition cost.

High inventory carrying costs: Most Indian e-commerce sites carry their own inventory. This causes a heavy drain on working capital due to unsold inventory and carrying costs.

Cash on delivery (COD) is expensive: COD encourages customer to buy, but it is a sub-optimal mechanism for e-commerce. COD transactions have a higher rate of product returns, and lock-up working capital.

High cost of fulfillment: Most e-tailers have had to invest heavily in their own fulfillment network. This allows them to ensure predictability of delivery and a better experience. But it requires deep pockets to invest upfront, and incurs greater operational costs that which bring down margins by another 3 to 5 percent.

While capital is still available – the funding industry has become more selective.  That trend is likely to continue either until FDI is permitted into ecommerce OR until large e-tailers / marketplaces are able to create enough supply chain efficiency to create profits.

Future Focus

Watch the “brick and click” counterparts

E-tailers and market places invest heavily in technology – to track and manage inventory, delivery, and returns.  In addition, customer acquisition related analytics (‘click analyses’) and converting abandoned carts are focus areas.

As their brick and click counterparts scale up their online presence;  pure play e-tailers will also have to find an answer to Omni-channel offerings. For example, brick and click stores can offer customers the option of in-store pick up and return and will move to integrating mobile shopping into in-store and online experiences.  These are two areas of focus for e-tailers in the future.

Converging to emerge?

While brick and mortar stores are creating online presence, the market is also witnessing instances where e-tailers are setting up physical presence. is a case in point. They e-tail contemporary gold, diamond and semi-precious jewellery.  They have set up Solitaire Experience Lounges in New Delhi and Hyderabad.  At these, customers are given information about buying solitaires and experts handhold them through the transaction. The lounges serve as an offline extension of the online store.

“Because jewellery is a high involvement purchase category, and part of the experience is ‘trying on’ – we have merged the online and offline shopping experiences.  Customers can use our “Solitaire Lounges” where they can Touch and Feel the product.” – Calvin John, VP-Offline Marketing,

As an extension of the customers need to “touch and feel” – Caratlane offers “Try at Home”.  This is aimed at mimicking the traditional purchase process, where customers will try on multiple pieces, ‘shortlist’ and then buy. Customers can choose up to five designs online and will arrange to send these, correctly sized, to the customers’ preferred address. Once the customer makes her choice, she can pay cash or go online and place an order.

Impact: The Try at Home service has resulted in cash memo sizes which are 3x the pure online transaction.

Multiple partnerships

E-tailers must be willing to work with many different partners. In India, no single player today can handle all aspects of the business  – from site design to fulfillment solutions to employee training.  Most e-tailers in India tend to build their capabilities rather than buy, that scenario is likely to change as more global players with existing vendor partners enter the market.

Nurture people

There are few ecommerce professionals in India – the domain has attracted entrepreneurs and technocrats but senior professionals who have grown with the industry are rare.  E-tailers will have to invest in this space as well – pure financial hooks such as ESOPs will not hold key talent, when the marketplace down the road offers more of the same.

Make mobile a part of the eCommerce mix from the start. While the mobile opportunity in India is nascent, it is undeniably going to be a critical part of how consumers interact online. India has seen the fastest global adoption of the smart-phone.  With the proposed national rollout of 4G in the next two years, customers will increasingly replace their laptops with smart phones and tablets.


Move beyond English in the longer term

The experience of Yahoo, MSN and Google is an early indicator – as ecommerce moves into the hinterland, English language capability will not be enough. While it’s relatively easy to convert the technology front end into other languages – service capability (e.g. call centers, e-mailers) will need investments and top management mind-share.

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