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Executive Summary

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What is E-commerce?

E-commerce (electronic commerce or EC) is the buying and
selling of goods and services, or the transmitting of funds or data, over an
electronic network, primarily the internet. These business transactions occur
either as business-to-business, business-to-consumer, consumer-to-consumer or
consumer-to-business. The terms e-commerce and e-business are often used
interchangeably. The term e-tail is also sometimes used in reference to
transactional processes for online shopping.

E-commerce in India

India has an internet user base of about 452 million as of
July 2017, 40% of the population. Being the second-largest userbase in world,
only behind China (651 million, 48.1% of population), the penetration of
e-commerce is low compared to markets like the United States (268 million,
84.6%), or France (54.1 Million, 81.2%), but is growing at an unprecedented
rate, adding around 6 million new entrants every month. The industry consensus
is that growth is at an inflection point.

In India, cash on delivery is the most preferred payment
method, accumulating 75% of the e-retail activities. Demand for international
consumer products (including long-tail items) is growing much faster than
in-country supply from authorised distributors and e-commerce offerings.

E-commerce Market in India

E-commerce in India market was worth about $4.89 billion in
2010, it went up to $12.68 billion in 2013. In 2013, the e-retail segment was
worth US$2.31 billion. About 72% of India’s e-commerce market is travel
related. According to Google In India, there were 36 million online shoppers in
India in 2014 Q1 and was expected to cross 100 million mark by end of year
2016.CAGR vis-à-vis a global growth rate of 8–10.1%. Electronics and Apparel
are the biggest categories in terms of sales.

The Indian e-commerce industry has been on an upward growth
trajectory and is expected to grow at a Compound Annual Growth Rate (CAGR) of
28 per cent from 2016-20 to touch US$ 63.7 billion by 2020 and overtake the US
by 2034.1 The sector reached US$ 14.5 billion in 2016. The ongoing digital
transformation in the country is expected to increase India’s total internet
user base to 829 million by 2021 (59 per cent of total population), from 373
million (28 per cent of population) in 2016, while total number of networked devices
in the country are expected to grow to two billion by 2021, from 1.4 billion in
2016.

 

 

 

 

 

 

Major developments in the Indian e-commerce sector are as
follows:

•             Venture
Capital backed firms in India raised a record US$ 9.61 billion of fresh capital
between January-September 2017, which is more than twice the amount of capital
raised during the same period in the previous year.

•             BankBazaar,
a financial marketplace start-up in India, raised US$ 30 million in a funding
round led by Experian Plc, a credit rating agency based in UK, taking the
company’s total funding to US$ 110 million.

•             Mr Jeff
Bezos, Founder and Chief Executive Officer, Amazon Inc has announced plans to
further increase its investments in the country to develop its infrastructure
and technology. The e-commerce giant also received an approval from the Reserve
Bank of India (RBI) for launching its own digital payment wallet in India,
thereby tapping into India’s fastest-growing digital payments business.

•             In April
2017, India’s online retail giant, Flipkart, raised US$ 1.4 billion in the
biggest start-up funding round led by Tencent Holdings Ltd, eBay Inc and
Microsoft Corp. It also acquired eBay’s Indian arm as a part of the deal. The
company also raised US$ 1 billion in March 2017 in a funding round led by
Chinese internet giant, Tencent and Microsoft, thereby valuing the start-up at
US$ 11 billion.

•             Paytm’s
e-commerce unit raised US$ 200 million in a funding round led by Chinese
e-commerce giant, Alibaba and existing investor, SAIF Partners, to become the
Indian unlisted company to be valued at over a billion dollars.

•             China’s
largest e-commerce player Alibaba has planned to set up its first India office
in Mumbai, in order to be a part of India’s growing e-commerce market, which is
expected to double to US$ 34 billion by 2017.

 

 

 

 

 

 

Market Survey by Ernst and Young – Glimpse of Market Trends
and Market Structure

To better understand consumers’ online buying behaviour, EY
polled about 700 online respondents in six cities in India.

 

 

 

 

 

Consumer Trends according to EY report

•             61% will
stop buying online if there are no discounts.

•             40% said
that convenience was the most important reason for shopping online.

•             30% said
timely delivery and a good return policy are the reasons for online shopping.

 

 

 

 

 

 

 

 

Payment trends according to EY report

 

•             71% of
regular online shoppers prefer cashless transactions.

•             64% of
online shoppers have concerns about sharing credit card info.

•             51% of
consumers younger than 21 years prefer cash on delivery.

 

Most Influential mode of communication according to EY
report

•             74% of
consumers younger than 21 years said social media influences buying decision.

•             64% of
women said that family and friends influence buying decisions.

•             51% of
buyers 55 and older said email and SMS offers influence their buying decision.

India’s still-young e-commerce market has grown in part
because of marketing strategies such as heavy discounts and free home delivery.
However, this has come at the expense of profitability for many e-tailers.

•             96% of
female consumers <21 years only buy when discounts are offered. •             86% regularly look for discounts. •             55% do not want to pay for home delivery.   Market Segmentation       Porter's Five Forces Framework Analysis        ? Competition Two Major Business Models Marketplace Model •             Marketplace model adheres to the standards and directions of a zero-inventory model. For example, Naaptol, eBay and Shopclues. •             The e-commerce marketplace becomes a digital platform for consumers and merchants without warehousing the products. Marketplaces do offer shipment, delivery and payment help to merchants by tying up with some selected logistics companies and financial institutions. •             The new FDI policy rules and regulations in the e-commerce market have permitted 100 percent FDI in the e-commerce marketplace model under the automatic route.   Issues with Market Place Model •             Quality of service, shopping, delivery and overall customer satisfaction tends to be low. •             When any seller, regardless of quality, can sign up to be part of the Flipkart or Snapdeal marketplace, faulty delivery orders and fraud are likely to be common occurrences. o             Example: the famous incident of a man ordering a Samsung smartphone on Snapdeal and receiving a bar of soap. •             To deal with it, Flipkart and Amazon have done is to create a 'primary seller'; a way of getting around the weaknesses of the marketplace model. •             Flipkart and Amazon Managed to Comply with the FDI regulations on inventory-led e-commerce models while overcoming the weaknesses of a pure marketplace model.       Amazon (marketplace model) •             Amazon started practicing the market place model by launching its site in early 2013 in India. •             It started registering electronic goods sellers and ended FY 2013 offering nearly 15 million products. •             Known for its strong last mile delivery network. •             Amazon India has set up a logistics arm named Amazon Logistics and started offering same day delivery.               Inventory led Model •             Inventory led models are those shopping websites where online buyers choose from among products owned by the online shopping company or shopping website take care of the whole process end-to-end, starting with product purchase, warehousing and ending with product dispatch. •             A few examples of such are Jabong, Yepme and LatestOne.com.     Flipkart (inventory-led model) •             It started with a consignment model where goods were procured on demand. •             And turned into inventory e-retailer supported by registered suppliers. •             This provides better control on the logistics chain. •             Manages a fine balance between inventory and cost of delivering goods.     Competition in E-commerce   New products and services are introduced very constantly, and opens a lot of opportunities to create a business and take a niche. It's easy to sell your products online if you're one of the first on the market, but if you're joining a market with established and strong market leaders, you'll have to face a fierce competition. From the fall of a competitor to another investing into food retail, 2017 has seen it all in the e-commerce space. Despite spending Rs 200 crore on re-branding in September 2016, the Gurgaon-based company, Snapdeal, was unable to sustain the pressure of the e-commerce sector. Its merger plans with Flipkart also fell through and Snapdeal 2.0 was announced with an aim of being profitable. The year of 2017 saw higher investments and some major transformations with competitors scattering to close market share in rural India. E-commerce reached the nooks and crannies of India's Tier II and Tier III cities, ending the monopoly of the metro cities. Amazon said it grew 66% in sales volume owing to rapidly expanded market share in Tier II and Tier III cities.   Cash burn in the industry on account of heavy discounts by e-commerce sites was estimated to reach $370-400 million in 2017, as per RedSeer Research data. Amazon's GMV share fell from 32% in 2016 to 26% in 2017.   US-based Amazon pulling out the big guns and investing $500 million in food retail in India.   Flipkart has also toyed with the idea of buying online grocery site, Big Baskets. Latest developments in this regard include Alibaba, major Chinese e-commerce company, which is poised to buy Big Basket for an impending sum of $300 million, a report by Economic Times said.   Flipkart, which has raised $4 billion this year from Softbak, also tried its hand in the online grocery space with 'Supermart' in Bangalore.   India still has a long way to go when it comes to e-tailing with the sector amounting to only 1% of entire retail activity in India, as per Care Ratings data.   Market Share Analysis by Morgan Stanley         GMV or gross merchandise value for e-commerce companies means sale price charged to the customer multiplied by the number of items sold. Online marketplace firms Flipkart and Snapdeal have managed to keep their top spots with a combined gross merchandise value (GMV) market share of 71 per cent, according to global brokerage firm Morgan Stanley. According to the report, Flipkart bagged the top spot, with a GMV market share of 45 per cent, while Snapdeal came in second, with 26 per cent. The report puts Amazon India at number three, with a GMV share of 12 per cent. "The e-commerce market was dominated by the three large general merchandise companies in 2015, with a combined GMV market share of 83 per cent. It will be interesting to see how these market shares play out in 2016 as Snapdeal, Amazon and Paytm have all raised their competitive intensity to close the gap with Flipkart," it said in its report.           The report says combined GMV of Flipkart, Snapdeal, and Amazon, stood at $13.8 billion in 2015, while that of the top-10 offline retailers was $12.6 billion. According to Morgan Stanley, Shopclues was the most capital-efficient (GMV to total capital raised) online marketplace, followed closely by Snapdeal and Paytm. Some examples of consolidation were CarWale/CarTrade (automobile classifieds), Commonfloor/Quikr (real estate classifieds), TaxiForSure/Ola Cabs (taxi aggregators), and FreeCharge/Snapdeal (online recharges). Currently, India has the second-largest internet population in the world. We expect internet penetration to increase from 32 per cent in 2015 to 59 per cent in 2020, translating to a near-doubling of the internet user base," it said. The report expects the number of online shoppers in India to grow to 320 million by 2020 from 50 million in 2015.   Characteristics and Behavioural Traits of E-commerce Industry Competition   Flipkart was founded on 2007 by Sachin Bansal and Binny Bansal, both alumni of the Indian Institute of Technology Delhi. They worked for Amazon.com, and left to create their new company incorporated in October 2007 as Flipkart Online Services Pvt. Ltd. Flipkart started by selling books online and popularised the idea of buying books online in India. Flipkart now employs more than 33,000 people. Flipkart were operating through a complex business structure which included nine firms, some registered in Singapore and some in India. In 2012 Flipkart co-founders sold WS Retail to a consortium of investors led by Rajeev Kuchhal. Flipkart.com was honoured as the Young Turk of the Year at CNBC TV 18's 'India Business Leader Awards 2012' (IBLA).       Amazon.com, Inc., doing business as Amazon is an American electronic commerce and cloud computing company based in Seattle, Washington that was founded by Jeff Bezos on July 5, 1994. The tech giant is the largest Internet retailer in the world as measured by revenue and market capitalization, and second largest after Alibaba Group in terms of total sales. The amazon.com website started as an online bookstore and later diversified to sell video downloads/streaming, MP3 downloads/streaming, audiobook downloads/streaming, software, video games, electronics, apparel, furniture, food, toys, and jewelry. The company also produces consumer electronics—Kindle e-readers, Fire tablets, Fire TV, and Echo—and is the world's largest provider of cloud infrastructure services. Amazon also sells certain low-end products under its in-house brand AmazonBasics. We shall talk about Amazon in detail further in the analysis.               Snapdeal is an Indian e-commerce company based in New Delhi, India. The company was started by Kunal Bahl and Rohit Bansal in February 2010. As of 2014 Snapdeal had 300,000 sellers, over 30 million products across 800+ diverse categories from over 125,000 regional, national, and international brands and retailers and a reach of 6,000 towns and cities across the country. It received its first funding worth USD $12 million from Nexus Venture Partners and Indo-US Venture Partners in January 2011. This was followed by another round in July 2011 worth USD $45 million from Bessemer Venture Partners and existing investors. The third round of funding was worth USD $50 million and came from eBay and other pre-existing investors.                 Paytm is an Indian e-payments and e-commerce brand based out of Delhi NCR, India. Launched in August 2010, it is a consumer brand of parent company One97 Communications. The name is an acronym for "Payment Through Mobile". The company employs over 13,000 employees as of January 2017 and has 3 million offline merchants across India. It also operates the Paytm payment gateway and the Paytm Wallet. Among other sources of funding, in 2015, Paytm became the first Indian company to receive funding from Chinese ecommerce company Alibaba, after it raised over $1 million at a valuation of $1.5 billion. The Alibaba Group was the biggest stakeholder in Paytm parent company One97 Communications.               ShopClues is an online marketplace owned by Clues Network Pvt. Ltd. It was established in July 2011 in Silicon Valley by Sanjay Sethi, Sandeep Aggarwal and Radhika Aggarwal. The company claims to have over 6 lakh merchants and 2.8 crore products on its platform, serving over 32,000 pincodes across the country. Valued at USD 1.1 billion,ShopClues has Tiger Global, Helion Ventures, and Nexus Venture Partners as major investors.In May 2016, joined hands with GoDaddy to assist its small and medium entrepreneurs in starting their own e-commerce websites. In January 2016, ShopClues raised USD 100 million from Tiger Global Management and joined the Unicorn Club. In 2016, received the Gold Award at APAC Effie Awards for Ghar Wapsi campaign in David vs. Goliath category.             Other Key Players         eBay is a multi-billion-dollar business with operations in about 30 countries. The company manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a wide variety of goods and services worldwide. The website is free to use for buyers, but sellers are charged fees for listing items after a limited number of free listings, and again when those items are sold. However, eBay was never able to make its mark in the Indian market as it entered too early. It is said to be a player in the market just for the sake of it.                                  Jabong.com is an Indian fashion and lifestyle e-commerce portal founded by Praveen Sinha, Lakshmi Potluri, Arun Chandra Mohan and Manu Jain. The portal sells apparel, footwear, fashion accessories, beauty products, fragrances, home accessories and other fashion and lifestyle products. The companies headquarter is in Gurgaon, NCR. In July, 2016 Flipkart acquired Jabong through its unit Myntra for about $70 million. Myntra is an Indian fashion e-commerce marketplace company headquartered in Bengaluru, Karnataka, India. The company was founded in 2007 with a focus on personalisation of gift items. By 2010, Myntra shifted its focus to the online retailing of branded apparel. In May 2014, Myntra.com acquired by Flipkart to compete against Amazon. Myntra and Jabong are now Flipkart's subsidiaries and their market share is counted under it.         OLX Group is a global online marketplace (headquartered in Amsterdam, and owned by South African media and technology group Naspers), operating in 45 countries, and is the largest online classified ads company in India, Brazil, Pakistan, Bulgaria, Poland, Portugal and Ukraine. It was founded by Alec Oxenford and Fabrice Grinda in 2006. Fabrice Grinda and Alec Oxenford founded the company as a Craigslist alternative for the world outside of the United States. South African media group Naspers, acquired a majority of OLX in 2010 and 95% of the company in 2014.       Makemytrip Inc. is an Indian online travel company founded in 2000. Headquartered in Gurgaon, Haryana, the company provides online travel services including flight tickets, domestic and international holiday packages, hotel reservations, rail and bus tickets, etc. The company has been recognized as one of India's good travel portals. The company also operates through 65 retail stores across 50 cities in India, along with offices in New York City and Sydney. Makemytrip holds close to 25% market share of the OTA hotel booking segment.       Yatra.com is an Indian online travel agency and a travel search engine based in Gurgaon, Haryana, founded by Dhruv Shringi, Manish Amin and Sabina Chopra in August 2006. In April 2012, it was the second largest online travel website in India, with 30 per cent share of the ?370 billion (US$5.8 billion) market for all online travel-related transactions. It also launched a "holiday-cum-shopping card" with State Bank of India (SBI), India's largest bank. Yatra.com publicly listed on the NASDAQ under the ticker symbol YTRA in December 2016.