2.1
South Korea
29
103.6
97
84
USA
15.3
67.8
86
57
India has one of the highest mobile internet users. More than 50% of the internet users are mobile users. As per Akamai Q1 2016 shown in Table 74.5, the average mobile internet bandwidth is also low compared to other developed countries and China [14]. In addition of low average speed, there are congestion and connectivity issues. High speed internet in mobile and broadband has become the need of the hour for providing good customer experience and growth of digital market place ecosystem in India. Table 74.5Average mobile internet connection speed. (Source: Akamai [14])
Country
Avg. MBPS
Peak MBPS
India
3.2
20.9
China
6.5
29.3
USA
5.1
19.8
South Korea
13.0
73.8
With 462 million internet users as of July 2016, the Indian government and telecommunication companies are setting up robust digital infrastructure to promote adoption of mobile internet. Many telecom operators are investing in 3G, 4G and 5G networks. Mobile internet user base is expected to grow to 314 million with a CAGR of 28% from 2013 to 2018 [15]. India has also become the third largest smart phone market in the world. The number of Smartphone users is projected to reach 369 million by 2017 [15]. The price of smart phones is also coming down and the 3G handsets are available for prices as low as USD 40.
The key technologies that build and drive the e‐commerce platforms are mobile technologies and applications (Apps), internet infrastructure, cloud computing, search engine optimization and analytics. The market place companies are offering their interface through mobile and website. As more users are accessing internet through mobile app interface is more popular. Hence most of the companies are getting leveraged in app economy and hence have given focus to app mode, rather than website model. Many experiments and innovations are being tried out by the companies in identifying the best interface model. Myntra, India’s largest fashion portal found that 90% of the traffic and 70% of company’s business was through app [16]. And they shut down their website/portal and went to app only mode. They became app only market place and started driving app only strategy. They were the first not only in India but also globally to adopt app only mode. But they had to roll back and re‐launch their desktop version later [17]. Myntra claims that rationale behind the roll back was from women consumers who have a preference for browsing and shopping in multiple platforms. Cloud computing, Analytics and Search engine optimization are also equally important areas which are of great significance for the growth of digital marketplace companies.
74.2.2 Business Models
The e‐commerce in India operates with the established models like B2B, B2C, C2C, aggregator and hybrid. The B2C segments include online travel, online retail, online classified, online health, online entertainment, online education, financial services and digital download. In the B2C marketplace there are horizontal and vertical players. The horizontal players sell many vertical products and dominate the market. The vertical players in India operate in specific vertical such as grocery, fashion, furniture and many other specific products. Flipkart, Amazon and Snapdeal dominate the market and they adopt a managed market place model.
As the market is crowded and the competition is intense, multiple models are adopted by these companies. The business models adopted by the global leaders include inventory, pure marketplace, managed marketplace, hybrid plus and hybrid. The advantage of a managed market place model is that they are less capital intensive, do not hold any inventory, and just provide the platform. In India, due to regulatory restrictions, Amazon operates a managed market place model though Amazon in the US operates a hybrid plus model [11]. Alibaba, the world’s largest e‐commerce company and dubbed by Economist magazine as the world’s biggest bazaar, adopts a different strategy in China. They operate two market places Tmall and Taobao. Tmall is a B2C managed market place and is an open platform for merchants to run their own stores. Taobao is a C2C pure market place. They are also planning to enter in Indian online market place with managed market place model. In India Flipkart started with an inventory model moved to hybrid and today they are operating a managed market place model. Myntra, the fashion retailer, was following a hybrid model till 2014. They were selling premium brands through inventory and local brands through marketplace model. After their acquisition by Flipkart they also follow managed marketplace model. To survive in the market, all Indian companies also take advantage of revenue models like transaction fee model and advertising revenue models.
74.2.3 Hyper Competition and Customer Retention
In India the customers are highly price conscious and hence discounts, price war and promotional sales are rampant. This makes online market place a hyper competitive market place [9, 18]. Even though the customer base is increasing, retaining customers in a real challenge as customers switch platforms based on discounts or negative experiences. As there are many players doing the same business, same way and same price, there is no switching cost. Hyper competition and mega discounts results in customer acquisition and retention costly for these companies. With heavy price discounts, aggressive pricing strategy and free home delivery, the hyper competition impacts the profitability and sustainability of the companies. In developed countries customers switch between brands and in India customer switching happens based on price and discounts. This makes customer retention challenging in a hypercompetitive Indian market place.
74.2.4 Logistics
Logistics is a key enabler for the growth of digital market place. It is also emerging as a key differentiator in terms of customer delivery, customer experience and differentiation. Today most of the e‐commerce companies operate mostly in metros and Tier I cities (population 0.1 million and above). Some key challenges in logistics include shortening of delivery time, ensuring consistency and improving the predictability. Here 90% of goods ordered move through air which increases the delivery cost. The cities are traffic logged and streets are not numbered sequentially.
The marketplace companies are spreading their reach from metros to Tier 2 (population between 50,000 and 99,999) and Tier 3 (population between 20,000 and 49,999) cities and rural areas due to emergence of low cost smart phone and internet penetration. But the poor last mile connectivity is a key bottleneck for a time bound delivery. In small towns and villages there is lack of organized physical addresses. The other major challenges specific to India are Cash‐on‐Delivery as a preferred option and consumer expects returns of goods as a seamless and convenient process. This calls for a good reverse logistics. The fragmented logistics and poor physical infrastructure causes delivery delays and errors. The above logistics factors make logistics cost in India expensive as 10 per cent of the GMV of the product against 3–10% for most companies in China. In many BRIC countries, consumers have cited free delivery as one of the factors influencing digital market place.
As per KPMG the logistics sector pertaining to e‐commerce companies in India is valued in 2014 at USD 0.2 billion with a potential growth of CAGR 48% growth and expected to reach USD 2.2 billion by 2020 [19]. The leading logistic providers in India like Blue Dart, Fedex and DTDC have specifically added e‐commerce solutions to their offering. The Flipkart’s logistic company EKart handles about 85% of Flipkart’s logistics. Flipkart is in the process to monetize the logistics investments and build data for e‐commerce which can bring additional revenues and reduce the cash burn [20]. Flipkart’s logistics arm Ekart is s
tarting a customer facing courier service which will be competing with traditional logistics companies like such as Gati and Blue Dart. Ekart thus wants to be most transformative supply chain provider in India. For this Flipkart has also acquired a major stake in mapping company called MapMyIndia. The company has a mapping platform called Flip which will enable customers to mark the pickup point using pins.
India Post which is the postal department of India is also playing a leading role. India Posts have 460,000 employees across 155,000 post office and handling 6 billion mails annually to take care of goods to customers including rural areas [21]. In the past two years about 400 e‐commerce companies, including Flip kart and Amazon, have tied up with India Post for delivery of goods. Due to the e‐commerce growth, Indian Post hopes to slash its USD 800 million annual deficit and improve profitability at its rural post offices. India post, world’s largest postal system is in a process to become world’s leading e‐commerce delivery platform [22].
74.2.5 Payment
Cash on Delivery (CoD) is the most preferred and popular option of payment for Indian digital marketplace transactions and 60% of sales happens through CoD. This is in contrast of 50% in China and 69% in Russia [2]. Manual cash collection and deposit is tedious, risky and expensive. They also elongate the working capital cycle and bring higher administration and handling costs. Many logistic companies charge 3% for the service and may also hold the money for few days. Forty one percent of India’s population are unbanked and coverage is low compared to BRIC economy [2]. Due to lack of high bandwidth, poor connectivity and inefficiencies in payment gateways, high failures in online payment transactions are also common. Concerns around security of online transactions, low usage of debit and credit cards and payment gateway failures have limited the use of electronic payments which is a big challenge for digital marketplace growth.
Rising mobile and internet penetration, evolving payment technologies, entry of new players in the payment ecosystem and the initiatives of Government of India and the Central bank – Reserve Bank of India, the payment landscape is undergoing a big change in India. One of the payment modes which is getting wider acceptance is mobile wallets. These wallets are issued by mostly by leading banks in India or companies having a tie up with banks. Two such products issued by the top two banks are State Bank of India’s SBI buddy and ICICI Banks’ Pockets.
India is a cash dependent economy. The amount of cash in circulation is 12% of GDP [23]. India has the largest unbanked population of 41% compared to 36% in China and 12% in USA. Many schemes are initiated for electronic payments. One such scheme to bank the unbanked is Pradhan Mantri Jandhan Yogna (Prime Ministers people money scheme) which is India’s national mission program for financial inclusion. The scheme is to provide bank account for the unbanked. Under the program, 220 million accounts are opened as of August 2016. The second initiative is Rupay card which is a domestic card facilitating electronic payments at all banks and financial system with low cost of transaction. This is targeted for consumers in rural India who do not have access to banking and financial services. Another major initiative is the Universal Payment Interface (UPI) by the National Payment Corporation of India NPCI [24]. The UPI makes transaction through various modes such as debit cards, credit cards, digital wallets, net banking and prepaid cards. UPI is also expected to propel instant payment via mobile, web and other applications. It supports economic growth and also meets the goal of financial inclusion.
74.2.6 Regulations – Taxations and Legislations
Taxation is an important aspect for the marketplace companies. The tax rate is different for the different states in India. With Goods and Service Tax (GST) implementation there will be uniformity in the taxation. Similarly there are some caps on the FDI in investments in this sector. FDI is allowed 100% for managed market place model and is not permitted for Inventory model. But many reforms are happening to support the companies in this space.
74.2.7 Financing and Valuations
The digital marketplace companies are not only disrupting the traditional marketplaces but also setting new benchmarks in valuations. In the year 2015, the poster boy of India’s online retail, Flikart’s valuation was USD 16 billion and this exceeded the individual market capitalization of over 99% of 5500 listed companies in India’s Bombay Stock Exchange [25]. In the year 2015, six unicorns of India were valued more than USD 1 billion plus. But Flipkart continued to post losses, even after several years of continuous operation. Most of the capital was used to acquire customer through heavy discounting like cash back, discounts, bonus, rewards and free shipping. The capitals were also used for acquisitions/consolidations, improving logistics, scaling the business, technology infrastructure, advertising and recruiting talents.
Morgan Stanley has recently downgraded the valuations of the Flipkart. They have also downgraded the valuation price to USD 11 billion in February 2016 and to USD9.3 billion in May 2016 [26]. Morgan Stanley also wrote down the valuation of many unicorns of India. Investors who accepted cash burn during initial growth phase find it hard to justify now. This has made companies to focus from GMV to profitability. Making the economics right and evolving sustainable market place business model will be challenge for the future.
74.3 Key Emerging Trends
Many trends are evolving in the digital marketplace growth in India. Some of the key trends transforming the digital marketplace growth include traditional retailers going online, supplier development, online to offline model, customer loyalty programs and vernacular language implementations.
74.3.1 Traditional Retailers Going Online
As per KPMG, the retail industry in India is USD 534 billion in 2013–14 and is expected to reach USD948 billion in 2018–19 [27]. The top 5 leading retailers in the organized sector are owned by the leading business houses of India which include Future Group, Tata Group, Reliance, Godrej and ITC. Seeing the growth in the online retail in India, these traditional retailers are also venturing into the online space. There are four business models adopted by the retailers. In the first model, retailers are entering into online business through existing online players. Future group for their Shopper Stop retail has tied up with existing market place player Snapdeal for their online store. In the second model retailers are hosting an online platform themselves. Reliance Retail, one of the largest modern retailers, joined the fashion e‐commerce race by launching an online store ajio.com. This is the second initiative after reliancefreshdirect.com, a grocery delivery platform. The third model is followed by some companies who enter into the online space by acquiring online marketplace startups. Titan industries, part of Tata group and a leading company in watches, optical and branded jewelry, had a tied‐up initially with the traditional online market place companies. Recently they acquired an online market place start up Caratlane for its online jewelry business [28]. The fourth and the important trend is Omni channel model.
Retailers are adding click factor and turning their traditional stores brick and mortar into ‘bricks and clicks’ store and offering them ‘click and collect’ service [29]. The retail store becomes in store and pick up points. Reliance, one of the biggest business houses in India has launched a project called Reliance Jio which connects pan India with digital services [30]. Reliance Jio promises to usher a digital revolution in India by providing end to end digital solution including mobile, broadband for business, institution and household including rural India. Reliance also has the huge offline retail presence. They plan integration of advanced technology infrastructure built by Jio and physical retail to create a differentiated Omni channel and Omni commerce model to the retail business in India [31]. The Tata group with market cap of USD 134 billion and having 7.8% of market cap in India leading Bombay Stock Exchange also has a large
retail presence. They have entered into e‐commerce space through launch of their online market place CLiQ. This market place is first of its kind phygital (Physical + digital) an online marketplace that will blend online and in store shopping experience. Tata CliQ will follow a curated market place model. Unlike an online marketplace where sellers are free to sell any product, Tata CliQ will carefully choose the product making it exclusive [32]. They also plan to have an asset light marketplace model where a product brought through online are delivered from retail outlet which cuts down the overheads on warehousing and logistics.
Meanwhile the reverse trend is also happening. Some of the pure online market place players are also building physical stores. Myntra, one of the leading online fashion market place, is planning to open its first physical store. The leading vertical players in eye wear like Lenskart and furniture market place player Pepperfry have already opened physical stores and have started to see significant contributions to their revenue and profit from their physical stores [33]. All these trends are going to revolutionize the online retailing models in India.
74.3.2 Supplier Development
Snapdeal, one of the leading players in India says that they are a technology company connecting the dots between demand and supply in India [34]. In a managed market place model one of the biggest challenge is to bring more merchants/sellers in to the market place platform. None of the leading players formally disclose the number of suppliers. As per company’s website information sources in August 2016, Flipkart has 85,000, Snapdeal has 0.3 million and Paytm has 0.11 million suppliers. All the companies are in the process of supplier development. Amazon ran a program called Amazon Chai Cart where Amazon deployed three wheeled mobile kart to various parts of India, served tea, water, lemon juice to small business owner and taught them how to sell online. In four months Amazon’s team travelled 15,280 kilometers, 31 cities, served 37,200 cups of tea in journey to a large market and engaged 10,000 sellers [35]. Amazon also launched Amazon Tatkal which enables small business to get online in less than 60 min.
Digital Marketplaces Unleashed Page 113