indian e-commerce industry: riding on high tides

This report is solely for the use of Zinnov Client and Zinnov Personnel. No Part of it may be quoted, circulated or reproduced for distribution outside the client organization without prior written approval from Zinnov

…Riding High Tides

Zinnov Management Consulting

Indian E-commerce

E-commerce activities in India are rapidly growing

Huge existing opportunity

E-tailing to outpace e-travel

Consolidation unavoidable

Managed logistics to prevail

Wide range of marketing channels used; mobile yet

to be leveraged

Estimated revenues of USD 125-160 bn by 2025

Mass-media advertising being deployed for brand building; social media effective in driving traffic

Expected CAGR of e-tailing 4x that of online travel

E-commerce specific logistic services emerging

VCs getting cautious of investing; expect consolidation

Focus on profitability driving new business

models

Scale to drive profitability; companies entering multi-category retailing and launching self-owned brands

1

2

3

6

5

4

E-Commerce India Trends

E-commerce presents an unparalleled USD 125-260 bn opportunity

Source: Avendus Report; Morgan Stanley Research; Pricewaterhouse Coopers; Comscore 3

• Indian e-commerce revenue projected to reach USD 125-260 Bn for the year 2024-25

• Current revenue: USD 10 Bn

• ~USD 900 Bn worth retail sector by 2014

• Current contribution of online sales: only 0.47%

• ~376 Mn unique

internet users by 2015

• Current users: 120 Mn

Number of people below

the age of 35 to reach

828 Mn by 2015

• ~450 Mn smartphone users to by 2015

• ~100 Mn 3G users by 2015

USD 125-260 Bn

Huge Retail Industry

Favored Demographics

Growing Smart Phone Adoption

Growing Internet User Base

Explosive Growth in E-commerce

“An e-commerce firm can become India’s largest retailer by 2015” Vishal Mehta, CEO, Infibeam

Huge existing opportunity (1/2)

Consumer preferences echo high growth prospects for e-commerce

Source: Zinnov Primary Survey

Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behavior towards e-commerce; the survey was conducted during June-July, 2012 4

Consumer Perception of E-Commerce (based on survey1)

Multiple times a month 23.5%

Once in 6 months or less

22%

Once in 3 months

27%

Once a month 27.5%

Frequency of Online Purchases During Last Year

Some increase

54%

No Increase

17%

Substantial increase

29%

Expected Number of Online Transactions in the Future

Currently using 25%

Would be using in the

future 36%

Not aware, but willing

to try 7%

Do not want to use

32%

Using Mobile Phone for Shopping

• Over 77% of the respondents shopped online at least once in 3 months

• Over 50% have shopped at least once in the last month

• Over 83% of the respondents forecast an increase in online purchases

• Only 3.3% respondents do not intend to shop online

• Over 68% respondents currently using or willing to use mobile for online transactions

Huge existing opportunity (2/2)

Source: Avendus Report; Morgan Stanley Research; Comscore; Zinnov Primary Survey

Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012

E-tailing growing tremendously; will account for ~50% of the e-commerce by 2015

CAGR of E-Tailing = 4x CAGR of online travel

(2012E – 2015E) 10% 13% 22%

49%

90% 87% 78% 51%

2010 2011E 2012E 2015E

E-Tailing Online Travel

E-commerce Market segmentation

E-tailing to grow 4 times as fast as online travel

More people more comfortable with buying books than travel tickets

Electronics and Local Deals comparable

43%

45%

65%

80%

0% 20% 40% 60% 80% 100%

Local Deals

Electronics

Travel Tickets

Books

Category of goods comfortable in purchasing online

Based on consumer survey1

5

E-tailing to outpace e-travel (1/2)

6

Major obstacles to e-retailing adoption have been addressed

• Product categories, such as books and electronics,

which don’t require extensive touch and feel driving growth

• Trust built by extensive marketing • Offering fraud-proof options, such as COD1

and easy returns

• Key investments in logistics/ supply chain • Well supported by 3rd party companies for

pan-India coverage

• Discounts driving adoption

• 25% - average product discount offered2

Why E-tailing will Catch Up?

Building Trust

Logistics Infrastructure

Discounts Strategic Products

Source: Sequoia Capital, Zinnov Primary Research

Note: 1Cash on Delivery; 2According to Sequoia Capital

E-tailing to outpace e-travel (2/2)

• Online travel, unlike e-tailing o required minimal infrastructure investment o had a commoditized service offering, helping it take a lead over the latter o zero lag time in order fulfillment built trust

Online Travel vs. E-tailing

VCs getting cautious after heavy investments last year – industry expects consolidation

105 111

902

2009 2010 2011

VC funding - Huge growth in Year 2011

Total Investments (USD Million)

Source: IAMAI, 2011 Report; Avendus; Press Articles

Over 800% growth in VC funding from 2009 to 2011;

market, then in its infancy, witnessed

emergence of many start-ups

Off-late, VCs have become extra-cautious while investing in the industry; have tightened money supply


in the medium term;

acquisitions already

happening

Recent Acquisitions

“VCs are investing in e-commerce companies on the high risk-return probability and are betting on finding strategic partners at a later stage to acquire these companies”, —

Srividya C G, Partner, Valuation Services

“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”, —Alok Mittal, MD of VC firm Canaan Partners

“Flipkart and Myntra expected to gain 50% market share by 2014”, —India E-Retail Market, Companies Revenue

Analysis & Forecast to 2015, Bharat Book Bureau

7


VC funding has witnessed a dip since

November 2011, compared with the

first 8 months of the year which saw heavy

investments by VCs

• High cost of customer acquisition (~INR 1,500 for online acquisition), and small basket size hinder profitability

• Repeated purchases must to compensate acquisition spending

Expensive Customer

Acquisition

• E-tailing involves heavy investments into supply-chain and warehouses

• Companies hold extensive inventory of up to 3 months in-order to get discounts from their suppliers

Capital Intensive Business

• In-house logistics require up-front investments while third-parties are operationally expensive

• Typically, delivery costs 5-10% of the product value, higher for COD shipments

High Shipment

Costs

• E-tailers burning cash to fuel growth; offering discounts deeper than their pockets and spending heavily on advertising and marketing

Focus on Growth

8

Profitability remains elusive due to multiple hindrances

Source: News Articles; primary Interviews with senior stakeholders of companies


models (1/4)

Key Challenges

9

• Average loss of INR 90 on a typical SKU with

average selling price of INR 1,200

• On increasing scale, companies can become profitable by reducing the cost of warehousing,

shipping, and packaging, per shipment

Scale is imperative for operational profitability

Source: Sequoia Capital; News Articles

Note: 1 Stock Keeping Unit, 2 Average Selling Point, 3 Cost of Goods Sold

Cost split of a typical SKU1 with ASP2 of INR 1,200

Net Loss INR 90

COGS3 INR 780

Discount or Voucher INR 300

Payment Gateway/COD INR 35

Packaging INR 25

Warehousing and Shipping INR 150

Effect of Increasing

Scale

Effect of Increasing

Scale Average Loss Per Transaction

Total expense =

INR 1,290

Indicates decrease in

cost with increasing

scale

Indicates no effect of

increasing scale

Selling Price

Cost of Item

Discount Packaging Free

Shipping COD cost Warehousing

Inventory and Write-offs

Manpower Gross

Margin

Books 100% 60% 30% 1% 10% 8% 1% 4% 10% -24%

Mobile 100% 88% 10% 1% 2% 2% 1% 4% 5% -13%

Apparel 100% 65% 15% 1% 10% 4% 1% 2% 10% -8%


models (2/4)

Turbulence in Eurozone effecting economic climate

all across the world

Global Economic

Climate Sours

USD 829 Mn invested in e-

commerce from

Jan to Oct 2011

Only USD 97 Mn in the between Nov-

Dec 2011

Money Supply Tightened by

VCs Growth no more acceptable at the

cost of profits

Companies cutting costs and moving to performance

driven advertising

Increased Focus on Profitable

Growth

Modifications in operational

strategies and tweaking of

business models on a rise

Evolving Business Models

“It has now become imperative that companies look at metrics they have till now ignored so they at least start chalking out a road to profitability”—Prashanth Prakash, Accel Partners

Focus on increasing profitable growth

Source: News articles; primary Interviews with senior stakeholders of companies 10


models (3/4)

Companies innovating their business models to attain profitable growth

Source: News articles; Zinnov Analysis 11

Multi-category Retailing

Customer acquisition cost too high to make single purchase profitable • FirstCry diversified from babycare to beauty care products with Good Life • Fashion&You diversified portfolio from women apparel to Home décor,

Electronics, Kids’ and Men’s clothing

Self-owned Brands

E-tailers venturing into lucrative space of selling self-owned brands • Myntra plans to sell its own brand of products by 2013 • Launched by founders of exclusively.in, SherSingh retails products under its own

label

From Deals to E-tailing

Deals-only websites enter pure-play retailing • SnapDeal started selling products after moving into pure-play retailing

"We have seen that after expanding our offerings, the frequency of purchase has gone up significantly.”— Sandeep Komaravelly, VP Marketing, Snapdeal

Offloading Shipment to

Suppliers

E-tailers acting as digital storefronts for suppliers who stock and ship • Aaram Shop tied with local retailers to fulfill customer orders; revenues from ads • Drop shipping: Under the model, e-tailers forward customer orders to their

suppliers for a margin and offload shipment to them, thus saving logistics & warehousing costs

Opportunity Buying

In addition to bulk buying and bypassing intermediaries, companies actively buy off-season products for availing deep discounts

• “We actively buy off-season goods, typically available at 30-50% discount compared with fresh stock” – Senior Manager Operations, Leading Indian E-tailer


models (4/4)

In-house Logistics

Third-party Managed Logistics

Parameter Key Parameters

Capital Expenditure In-house logistics require heavy upfront investment

Last mile Access Logistic networks of third-parties reach the farthest corners of the country

Expertise in Operations

Experience and expertise of specialist third-parties is hard to copy

Agility to Respond to Dynamic Market

Easy to modify logistic strategy and switch partner with third-party logistics

Operational Risk & Requirement of Management

Financial & management resources needed to run in-house teams; additional operational risk assumed

Delivery Cost Managed services are generally costlier; may change with industry growth

Upfront investment in in-house logistics is hard to justify

Source: Primary Interviews with senior stakeholders of companies 12

Managed logistics to prevail (1/3)

Telecom companies outsource

infrastructure installation and

management, and IT solutions

E-commerce logistics – a prime candidate

for outsourcing

Is e-commerce headed towards managed

Logistics?

Key functions including ATM

installation and management, and IT solutions outsourced

E-tailing headed towards outsourcing model?

Source: News articles; Zinnov Analysis

Telecom Industry (2004 to Present)

BFSI Industry (2010 to Present)

E-commerce Industry (2011 to Present)

13


Managed logistic services to prevail

Emergence of E-commerce

Specific Logistic Services

Poor Access Through

In-house Teams

In-house logistics teams catering only to a few metros1

Tier-2 onwards cities

accessible almost

exclusively by third parties2

Specialist e-commerce logistic companies, such as Delhivery, Chhotu, and Holisol,

emerging

Existing logistic providers, such as DTDC, are creating separate arms for catering to e-

commerce business

Note: 1Only exception is Flipkart which has in-house teams in about 27 cities; 2Most companies use India Post for accessing customers unreachable through private logistic players, such as DTDC, Gati and Blue Dart | Source: Primary interviews with senior stakeholders of companies; Zinnov Analysis 14


• Reduces visibility and usability Small screen

(48.7% respondents)

• Low 3G penetration of 4% Slow internet

(41% respondents)

• Most retailers don’t have mobile apps or mobile friendly websites

Unavailability of apps/mobile websites

(31% respondents)

Mobile offers much higher potential than currently leveraged

Over 68% of respondents

willing to shop online through

mobile

Only 6% of the respondents using their

mobile often to shop online H

igh

Will

ingn

ess

Limite

d P

en

etration

Deterrents to

Mobile E-commerce

Source: E-commerce consumer survey conducted by Zinnov

Notes: 1Zinnov conducted an online survey among 300 respondents to understand their behaviour towards e-commerce; the survey was conducted during June-July, 2012 15

Based on consumer survey1


to be leveraged (1/3)

Consumer Insights (Based on Survey)

16

Industry Trends

Social media is effective in directing web-traffic to e-tailers

• Heavy advertisement through social media by e-tailers such as Myntra, Valyoo Technologies and Jabong

• Ads targeted towards traffic generation as opposed to brand building

• 50% respondents of survey purchased/ visited an e-commerce site through social media

• 44% respondents of survey influenced by friends and colleagues

Source: Primary Interviews with senior stakeholders of companies; E-commerce consumer survey conducted by Zinnov


• Specialized teams to monitor customer reviews for any negative posts

• Players approach the authors and try to address their issues

• Negative SEO techniques used to suppress unfavorable reviews

• 70%+ respondents influenced by consumer reviews to a large extent

• Customer reviews most influential while purchasing electronics

Social Media

Consumer Reviews

Snapdeal’s Facebook Page



Consumer Insights (Based on Survey)

17

Industry Trends

Focus on mass-media for brand building

• Leading e-tailers, such as Myntra, Jabong and Flipkart, using TVCs, print media and out-of-home promotion

• Stakeholders believe mass media to be most effective for brand building

• Ads focused on building trust; highlight easy return policy, money back guarantee and COD

• 71% of the respondents cited ‘Reputation and Trust’ as a major factor in decision making

• 63% respondents directly explored e-commerce sites to research about an online purchase; driven completely by brand recall

• Most companies deploy SEO and SEM techniques for traffic generation

• However, online customer acquisition remains costly, with each costing ~INR 1,500

• 47% of the respondents initiate their first visit to e-commerce sites using search engines

• 52% respondents use search engines while researching about online purchases

Mass Media Advertising

Online Marketing

Source: Primary Interviews with senior stakeholders of companies; E-commerce consumer survey conducted by Zinnov


Flipkart TVC

Myntra Outdoor Ad



This report is solely for the use of Zinnov Client and Zinnov Personnel. No Part of it may be quoted, circulated or reproduced for distribution outside the client organization without prior written approval from Zinnov

Zinnov Management Consulting

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