Industry Insight Industry

Increasingly, the elephant in the retail shop

Large domestic corporates and major foreign e-retailers are making a beeline for India’s e-commerce market, enthused by the rapid growth of e-commerce, particularly online shopping, in the country.

Among the notable ones who have already announced their plans for the sector are the doyen of the Tata Group Ratan Tata, who has made investments in, and global e-retail giant Alibaba.

Initially, growth in e-commerce in the country was largely on account of online ticketing, which was driven by the rapid penetration of the Internet and changing lifestyles. In fact, online ticketing continues to fetch the bulk (57 per cent) of revenues in the sector even today, followed by online marketplace (23 per cent), online retail (19 per cent), and online deals (one per cent).

But in the past two years or so, there has been a sea change in the market as online marketplaces and online retail have also caught the fancy of customers due to the terrific discounts that they offer, in addition to soft advantages such as ease of shopping, timely delivery and product quality that is the same as those offered at brick and mortar stores.

As a result, the domestic e-commerce market has more than doubled since 2010-11 (Rs.190 billion) to almost Rs.563 billion in 2013-14 and this growth momentum is expected to be maintained in future.

CRISIL Research forecasts the e-commerce market in India to grow at a 3-year CAGR of 40-44 per cent to reach Rs. 1.6 trillion by 2016-17.

Although online ticketing will still garner most of the revenues, its share will reduce; concomitantly online marketplace and online retail will grab a larger slice of the pie by 2016-17 — the share of online ticketing will be 40 per cent, online marketplace (41 per cent), online retail (17 per cent) and online deals (2 per cent).

To differentiate themselves and propel growth, companies in the e-retail space (e-retail includes both online retail and online marketplaces) are increasingly entering into exclusive sale arrangements for electronics, smartphones and the like where the competition is very intense. For example, Flipkart is the exclusive seller for Xiaomi’s latest range of smartphones. Snapdeal has started selling postal stamps, cars (Mahindra & Mahindra recently tied up with Snapdeal for online pre-bookings of SUV Scorpio) and residential real estate (in a tie-up with Tata Value Homes). Such innovations will continue as e-commerce firms jostle to boost their share in the fast-growing market. In the early years, growth was largely driven by large cities. That is today no longer the case.

Semi-urban and rural India is increasingly turning out to be the future battleground for e-retail. Customers in smaller towns and villages, who were inclined to buy branded products but were unable to do so as they were not available at brick and mortar retail outlets close to their homes, are expected to drive demand for e-retail in the years ahead.

E-retailers are making the shopping and buying experience much more convenient for rural and small town customers through facilities such as cash on delivery (COD).

By contrast, customers in urban areas increasingly prefer to buy online if product differentiation is minimal (segments such as grocery, books, electronics, appliances) even if prices are more or less the same.

Physical retailers have been clearly hurt by this phenomenal surge in e-retail. In terms of size, e-retail today accounts for as much as 10 per cent of organised retail revenues, up from 4 per cent in 2010-11.The impact is most evident in segments where product differentiation is low, such as books, music and electronics. It is only in categories such as clothing that a majority of the buyers still prefer the traditional retailing format to online retailing, but this too is now gradually changing.

By 2016-17, we expect e-retail to account for nearly a quarter of all organised retail revenues.

The author is Director, CRISIL Research

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Printable version | May 31, 2020 10:21:00 PM |

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