What's plaguing the e-tailing sector in India?

by Sohini Bagchi    Sep 04, 2013

online retailers

Online retailing or e-tailing is emerging as a vibrant channel in India with local and global online retailers such as Flipkart, Snapdeal and Homeshop18 as well as E-bay and Amazon.com are seeing a huge potential in this space. Ironically, the e-tailing market is also going through troubled times. So what’s plaguing the e-tailing market and what lies ahead for the e-tailers who are growing in large numbers?

Poor conversion rates

Rakshit Agarwal, an e-tailing analyst writes in his blog while companies continue to spend aggressively on online marketing, the conversion rates (that is percentage of users who transact after clicking the ad) are in the range 0%-1%. He believes that in order to turn profitable, e-commerce firms have to find a way to improve the conversion possibly through alternative ways of free advertising such as search, bulk-mail and blogs to name a few. Improving the conversion rates will help the cash-strapped e-commerce firms, he believes.

Cash-on-Delivery crunch

Very few Indian consumers use credit cards. As a result, around 60-70% of the transactions happen on Cash-on-delivery (COD) basis. This is becoming a challenge for e-tailers. Logistics partners charge an additional Rs 40-50 per shipment for handling cash, which affects the operating margins. Gaurav Issar, Co-Founder of JewelsNext believes COD, however, is a double-edged sword. “It has also made it more convenient for shoppers reluctant to pay online and overcomes a major challenge of e-commerce regarding lack of trust and touch and feel and hence will continue to account for a majority of transactions in near future,” he states.

Problem with third-party logistics

Agarwal points out poor customer-service including delays in shipments, damaged products, handling of reverse logistics and lack of good courier partners is posing a threat to online retailing. To counter this, several players such as Flipkart, Jabong etc. are building their own end-to-end supply chains. This not only solves above problems to a large extent, but also ensures customer experience while generating enough visibility for the brand on roads. Myntra.com, for instance announced delivery of product its customers in select locations in one hour. “This is obviously a sensible option for consumers who go through the tiring process of commuting to their respective shopping destination – which takes almost the entire day,” says Ganesh Subramanian, COO, Myntra. Subramanian believes Myntra’s operation was a success owing to the company’s real-time, state-of-the-art IT infrastructure, warehouse management system and streamlined processes which has helped them in building a solid framework for effective logistics and deliveries.

A vibrant market…

Despite challenges, the e-tailing market in India is vibrant with ample opportunities. It is estimated to grow to $56 billion from the current $1 billion by 2023, according to a recent Technopak forecast. Retail in itself has become one of the most vibrant sector which is projected to grow at a CAGR of 6% to reach $865 billion by 2023 from the estimated at $490 billion. At the same time, with lack of internet penetration, card-usage and logistics creating challenges, it would be wrong to assume the share of corporatized brick-and-mortar retail will diminish, which is estimated to grow from the current 7% to 17% by 2023, says Technopak analysts.

Gaurav Issar, Co-Founder of JewelsNext however believes the future of retail is online. “Any trend requires a certain time to mature. The e-tailing sector too will see consolidation in the coming months and players that are having a strong IT backbone and can keep an eye on the bottomline can expect a much higher profit margin,” he says. He also believes that the introduction of 4G services is expected to boost e-commerce services and the cutthroat competition that is expected to increase will lead to an e-tailing revolution in the country.