Once considered too much of an extreme environment for online shopping, the boom in Indian e-commerce is proving sceptics wrong. With one in three Indians expected to shop online by 2020, homegrown companies such as Flipkart and Snapdeal capitalised on their early-bird advantage to reach out to the country’s 1.25 billion consumer base and overcome the challenges stemming from traffic-choked cities, isolated rural areas and still-improving internet infrastructure.
Their success, combined with a gradual opening of the market to foreign investment, drew attention from e-commerce powerhouses around the globe. With US giant Amazon leading the pack, and China's Alibaba following at short distance, foreign e-tailers appear ready to launch an all-out assault on local peers to gain the lion’s share of a market whose overall value is set to increase four-fold to $103bn by 2020, according to Goldman Sachs.
“Amazon.in has surpassed even our most ambitious milestones,” Amazon’s CEO, Jeff Bezos, said in June when he announced a $3bn extra investment to boost Indian operations. “But we’ve barely scratched the surface of this vast nation,” he added.
After failing to gain an edge over competitors in China, Amazon made a bold entry in India in 2013, when it first announced a $2bn investment to launch Amazon.in. Three years on, Amazon India employs 45,000 people and stands out as the group’s fastest growing region. Gross merchandise volume (GMV) grew by an annual 250% in 2015 (the fourth quarter alone was equal to the whole 2014), according to company figures. GMV continued to boom in the first quarter of 2016, when it increased by 150% on the first quarter of 2015, giving the company a market share of somewhere between 21% and 24%, against the 37% of Flipkart, according to estimates by local newspaper The Economic Times.
“For Amazon, India continues to be its highest priority investment,” says Amit Agarwal, Amazon’s country head for India. “We continue to look at India as a key growth region and we are committed to investing aggressively in building a great customer and seller experience.”
The fresh resources announced by Mr Bezos will serve Amazon India’s ambitious investment programme, which aims to widen the reach of its suite of services for sellers and clients and strengthen its delivery network and infrastructure base, with the addition of five fulfilment centres to the 22 existing ones.
Amazon's renewed commitment to India comes at a time when the government is loosening up regulations on FDI across the board, including in the historically sensitive retail sector. According to the new guidelines issued in March, 100% of foreign investment channelled through the fast-track automatic route is possible for business-to-business e-commerce as well as for the marketplace model, where the e-commerce entity only provides a platform connecting offer and demand, but does not own any inventory of goods and services. The e-commerce channel is also available for foreign single-brand retailers, as long as they source at least 31% of their products locally.
The gradual liberalisation of the Indian economy is paying off already. The country emerged as the world’s largest destination for FDI in 2015, with total announced investment into greenfield projects reaching a record level of $62.9bn, according to figures from greenfield investment monitor fDi Markets. The country also remains at the top of fDi Markets’ global FDI ranking in the first five months of 2016.
“In the e-commerce arena, I see a tremendous amount of interest from the West as well as Japan and Korea,” says Manoj Gidwani, partner at SKP Business Consulting, a member of Nexia International. “With the opening up of the market, they will be much more comfortable reaching out to consumers directly.”
Homegrown players are already feeling the chill, however. Amazon’s assertive strategy is adding pressure on Flipkart and Snapdeal, which reportedly lost market share to the American behemoth between March 2015 and March 2016, and their ability to weather the storm is now being tested. Mumbai-based equity broker Kotak Securities estimates that the combined revenues of the 22 e-commerce companies active in India, including Flipkart, Amazon and Snapdeal, increased by 191% year on year in 2015, but losses grew at an even faster pace by 264%, year on year, as price competition and investments squeezed out profit margins.
If Amazon India has got the firepower to continue to bring down fees and final costs (it has just launched its free delivery service, Amazon Prime, across 100 Indian cities), “smaller companies incurring high cash burns may shut down or be acquired, and a stronger focus on unit economics and viable business models may lead to the emergence of one or two strong companies in each category”, said a Kotak report published in March.
This would create room for other investors, including international investors, to step in. Chinese giant Alibaba has been in talks to acquire a stake in Flipkart and raise its current 4.14% participation in Snapdeal, local press reported earlier this year – Alibaba also owns a 40% stake in Indian e-commerce website Paytm.
Worth the risk
Any investment in this direction looks set to be worth the risk. Despite a still-weak infrastructure and huge challenges related to last-mile delivery in urban and rural areas, Indian e-commerce is growing beyond expectations, piggybacking on the country's economic growth, growing internet and smartphone penetration and a widening offer of e-commerce services. Goldman Sachs sees total market value increasing from $26bn in 2015 to $103bn in 2020, by which time Flipkart estimates that about 36% of the Indian population will be active e-commerce users, from only 5% today.
“Now is the time to figure out how to reach this population,” Vineet Sethi, head of international business at Flipkart, said during a webinar organised by the UK Trade & Investment department in July.
Those e-tailers who come up with the best way to connect sellers and consumers across Indian sprawling cities and remote villages, but also fend off the stifling competition in the market, will reap the benefit of the world’s second largest e-commerce market by number of potential customers. For the rest, however, a struggle to keep pace with the leading pack beckons.