India’s e-commerce market is something of an untamed frontier for all but a few big international retailers.
Change, however, is very much in the air. High levels of smartphone usage, a rapidly growing middle class and policy reforms are now helping to create the right conditions for a thriving e-commerce scene.
And this won’t just be down to growth in the select few players who have so far been enjoying a sizable market share of the e-commerce market, it will also be about new entrants.
As Suvishesh Valsan, Assistant Vice President, Research, JLL India says: “India is currently witnessing a wave of reforms as far as retailers are concerned. Whether its opening-up of foreign direct investment (FDI) for single-brand retailers, the introduction of level-playing rules in the e-commerce sector or several states contemplating a round the clock retail policy, there are a host of changes coming.”
The recent guidelines by the Modi Government, allowing for 100 percent FDI in the sector has paved the way for Indian online retail space to become the latest battle ground for international players – with the potential for significant impact on the country’s real estate.
In the big cities such as Mumbai and New Delhi as more global players seek to establish a foothold in India, they will require office space for their back end operations. In smaller cities, the demand would be more for warehousing spaces, according to Anuj Puri, Chairman and Country Head, JLL India.
“Rental values of new commercial space—both office and retail—are growing at about 12-15 percent per annum. There is a healthy demand for office space across major cities as companies are looking to expand,” said Mr. Puri.
A new market for established names
Indeed, competition is rapidly heating up in the Indian marketplace. According to Nandan Nilekani, Indian technocrat and billionaire co-founder of Infosys, “India is the last big thing in e-commerce.” U.S. firms like Amazon and Ebay have struggled against Chinese firms like Alibaba in China, while simultaneously holding the Chinese at bay back home in the U.S. “Now, both Chinese firms such as Alibaba and American players like Amazon see India’s open market as a huge opportunity,” Nilekani tells the Straits Times.
They will, however, be taking on established Indian firms. The country’s e-retail landscape is currently dominated by three major firms who share 80 percent of the total market: domestic giants Flipkart and Snapdeal, and their American rival Amazon. Flipkart has the backing from the likes of Morgan Stanley and Greenoaks Capital, while Snapdeal receives investment backing from Amazon’s long standing Chinese rival Alibaba, among others.
Smaller retailers have nevertheless been gaining ground at the expense of the big three in recent years, partly down to previous regulatory restrictions around FDI which forced foreign capital flows into Indian startups.
“A lot of them have access to big-ticket funding from financial institutions, corporate honchos and/or private equity firms,” says Valsan. “While this may be good for the overall retail sector competitiveness, it makes life of a new entrant difficult given the financial firepower and number of competition that currently exists in retail. Innovative business models and sustainable financial conditions will be the key to success.”
India’s tech revolution
Technology has been the driving force behind the Indian e-commerce revolution. Smartphone penetration is at all time high and internet connectivity is also on the rise in an economy where income levels have shown a steady, if unspectacular rise. More people are heading online to shop: the Indian e-commerce industry generated $17.5 billion sales in 2015, with an almost eight-fold growth since 2012. The overall share of e-commerce in Indian retail is expected to jump from 2 percent to 10 percent by 2019.
However, serious challenges persist. India is still a developing nation, and “has its fair share of operating complexities in the retail sector which can create significant logistical bottlenecks for online retailers,” says Valsan. “From the real estate perspective, a lack of quality warehousing, poor transport network, poor turnaround time at ports and a long list of permits for various product categories are some of the challenges that a retailer will have to overcome,” he adds.
Yet, despite fractured and inefficient delivery networks, Indian customers are more demanding than their counterparts in US, UK, Japan and China when it comes to acceptable delivery times, according to global surveys on logistics by DHL. As demand rises, all major e-commerce companies are investing heavily into their warehousing capabilities to improve connectivity between vendors and consumers. Indian online retail firms could be expected to invest $450 million to close to $1 billion by 2020 on warehousing, according to a joint study by industry body ASSOCHAM and PwC.
A piece of the e-commerce pie
As the Indian e-retail sector starts to gather pace, many new entrants are jumping into the market. In 2015, e-commerce startups received investment of $6 billion from venture capital firms and hedge funds, representing 50 percent increase over previous years, according to Morgan Stanley.
They’re also snapping up office space across the country with e-commerce increasing its market share from 0.3 percent in 2011 to 6 percent in 2015, according to JLL figures.
Indeed, despite fears of global macroeconomic slowdown in 2016, the Indian market has huge potential. Goldman Sachs expect the Indian e-commerce to generate $100 billion in online retail revenue by 2020, compared with the country’s overall retail market that is estimated to grow from $675 billion in 2016 to $850 billion by 2020.
Profits, however, remain elusive for the time being as retailers focus on aggressive pricing to attract Indian customers who have been traditionally averse to spending money online. Discount wars may have got their attention but they also led to staggering losses on the accounts of all major retailers like Flipkart, Amazon and Snapdeal.
While India’s fledgling e-commerce market is undoubtedly having teething issues, many online retailers are watching its development with interest. As it matures, in terms of sheer size and potential customer base, the Indian online retail market could be in the same league as the U.S. and China.