India's e-retail revolution is radically transforming the way consumers interact with brands, evaluate their offerings and purchase their products, with major implications for consumer and retail businesses. This in-depth study of the evolution of e-retail globally finds that China is the most appropriate benchmark for CEOs looking to anticipate future changes in Indian e-retail.
Forecast to grow faster than China in the coming years, India is rapidly rising up the agenda of global CEOs. However, those approaching this important market must pay close attention to the boom currently underway in Indian e-retail and its profound implications for strategy development. Our in-depth analysis has discovered that those searching for insights into the future of Indian retail should look East rather than West, due to its striking similarities with China in both supply and demand dynamics.
With India’s economic growth forecast to overtake China’s in 2016, the country is poised to become the world’s fastest growing large economy. As a result, global CEOs are re-calibrating their strategies to take advantage of potential opportunities in the emerging South Asian giant. However, when developing strategies for India, it is imperative that decision-makers understand the country’s fast-changing consumer behaviour and its evolving market structures, both of which will have major implications for their success.
Today, the most important shift occurring in India - across consumer demographics and product categories - is the rapid move to online. Since 2009, online sales in India have been growing at an annual rate of 65% as the Internet has become an increasingly popular shopping channel. With an estimated value of 3.9 billion USD in 2014, the Indian e-retail market has been driven by major players like Flipkart, Amazon and Snapdeal, who are leveraging their innovative models to scale-up at an incredible pace, already reaching the kind of size that the country’s incumbent retailers toiled for many years to achieve.
The e-retail revolution that is underway is radically transforming how Indian consumers interact with brands, evaluate their offerings and purchase their products. What is more, this process is manifesting itself in very distinct ways to what has been experienced in any developed country, adding another layer of difference to this already complex market.
In this context, CEOs looking at India are asking a number of questions about the evolution of e-retail, upon which there has been been much debate but so far few clear answers. The three key questions being asked are:
1. What stage of development has e-retail reached in India?
2. How fast will e-retail penetration increase from here on?
3. What will the resulting retail landscape look like?
To find answers to these pressing questions, we conducted an in-depth study of how e-retail has developed across the globe to draw insights about the future prospects for Indian e-retail. We examined the experiences of key developed markets like the UK and the USA, as well as China. As our findings increasingly indicated that China had the most compelling similarities with the Indian scenario, our focus gravitated to that market and the insights it offered.
What stage of development has e-retail reached in India?
The first major insight from our analysis was that India has reached an inflexion point, marking the start of a much faster phase of growth in online retail. Like most disruptive business models, wherever e-retail has emerged around the world it has developed in three successive phases:
Incubation: a period of slow growth during which players develop new capabilities, investors get comfortable in funding unusual businesses, and buyers adapt to new forms of consumption.
Inflexion: the tipping point when growth suddenly takes-off as players reach the necessary level of development to effectively match the market’s needs.
Acceleration: a longer phase during which the pace of growth increases, turning e-retail into a mainstream market space.
By analysing the evolution of e-retail in the countries of study, we were able to clearly identify these phases and measure their duration. In the USA and the UK e-retail appeared around 1995, when players like Ebay and Amazon came on the scene with what were then highly innovative business models. Subsequently, online retail witnessed rather slow development in the first five years until it reached an inflexion point between 1999 and 2000, at the height of the dot com boom. Since then, despite the bursting of the bubble, online sales kept growing at healthy rates. Today, e-retail has reached a penetration rate of 6% of total retail in the USA, and a much higher rate of 14% in the UK.
A similar growth story happened in China, albeit at a more rapid pace. There, the starting gun was fired with the launch of Alibaba’s consumer oriented platform Taobao in 2003, but online retail in China was similarly slow out of the blocks in the initial years. Then in 2007, after 4 years of incubation, the Chinese market reached its inflexion point as it started to attract an increasing number of urban shoppers which led to an unprecedented rate of growth. Since 2007, online channels have gained so much traction with suppliers and consumers in China that e-retail penetration has reached 9% in a very short time frame, surpassing the USA back in 2011, and now closing fast on the UK.
By analysing such trends in e-retail penetration in India, it becomes evident that the market there reached its inflexion point around 2012. From 2012 to 2014, after 5 years of incubation, Indian e-retail registered a phenomenal CAGR of 80%. This is a step-change compared to the relatively slower rate of 38% witnessed from 2007 to 2012. Today, e-retail in India accounts for almost 1% of total retail value, and with the huge size of the overall market, many are wondering how fast e-retail can expand in the next stage of development.
How fast will e-retail penetration increase in India?
There are compelling reasons to believe that Indian e-retail will boom with as much force as it has in China. Indeed, our analysis shows that India shares a number of fundamental characteristics with China that favour the rapid rise of e-retail.
Firstly, in both countries economic growth is creating an emerging class of consumers with increasing spending power, as well as the aspiration to buy branded goods and to shop in modern retail formats. Secondly, the organised retail landscape in both countries is insufficiently developed to provide a large part of the consumer base with easy access to their preferred products, brands and retail outlets. For example, organised retail today stands at around 8% in India and 20% in China, while countries like the USA and the UK have been organised at levels above 80% for more than a decade.
One reason for this is that China and India are vast territories with much cultural and socio-demographic diversity. As a result, organised retailers face major challenges in establishing their brand awareness and store footprint at a national scale, often limiting their expansion plans in distant regions or cities where there is a lower density of their target customers. To illustrate this, the average national US apparel retailer operates a footprint of around 1,100 outlets while a leading apparel retailer in India only operates around 200 stores, even though the US territory is only three times as big as India’s and has a much smaller population. Because of this supply and demand gap, e-retail adds a new dimension of accessibility in India and China that is simply not as critical in other international markets. For Indian and Chinese consumers, e-retail is not only a convenient way to shop anytime anywhere, but it is also a way to gain access to an offer that would be otherwise unaccessible to them through existing retail formats.
The third shared characteristic between both countries is that it is smartphone users - rather than fixed line internet subscribers - that are fuelling market growth. Indeed, as the numbers of smartphones increase, e-retail penetration follows closely. We can see this trend visually by looking at how highly both metrics correlate. This demonstrates just how strong the relationship between mobile Internet penetration and e-retail penetration really is in emerging Asia.
Interestingly, both India and China appear to be on the same regression line, indicating that they are following a very similar growth trajectory, with mobile Internet driving the development of the e-retail market. Thanks to its larger and faster growing population of mobile internet users, China has so far registered stronger growth in e-retail than India. By projecting historical data, we can estimate that India is approximately 5 years behind China in terms of mobile Internet penetration. However, the country could very likely rise faster than expected, as every day a large number of Indian consumers are getting online through acquiring smartphones. At the same time, moves from telecom companies coupled with the new government’s Digital India programme could help India make a leap in connectivity, securing reliable Internet access for yet more consumers across country.
What will India’s future retail landscape look like?
India is not only following the path of China on the demand side. Our research shows that there are also major similarities on the supply side that will shape India’s future retail landscape, with important implications for those developing strategy. Most important among these will be the continued dominance of marketplaces, the increasing role of partnerships and the move to Online to Offline integration.
Marketplaces will continue to dominate
Firstly, in both China and India the marketplace model dominates e-retail. In China, around 90% of online sales go through marketplaces; and the scenario is comparable in India, where players like Flipkart (which is increasingly moving towards a pure marketplace model), Snapdeal and Amazon are capturing the lion’s share. By contrast, the situation in the USA is completely the opposite. There, marketplaces generate only 20% to 25% of online sales; the rest being realised by inventory led online players and brick and mortar retailers who have built their own e-retail presence.
What has made marketplaces so successful in India and China is their capacity to scale-up rapidly and soak the surging demand for online retail faster than any other model. They are able to do this first of all thanks to the participation of third party vendors. These vendors enable marketplaces to reduce the time and expense of scaling up by sourcing, stocking and continually expanding their own offering on the platform. The second scale advantage of marketplaces lies in the unique capabilities they have built in logistics. India and China are challenging countries for distribution due to their size, the uneven state of infrastructure development, and the limited availability of adequate third party providers. To reliably deliver items across the country, marketplaces have made substantial investments in logistics infrastructure.
The second important similarity between India and China is the way in which the competitive landscape is evolving. Since the marketplace model is dominant in both countries, the e-retail game is played according to the rules of fast growth and market concentration. The imperative for marketplaces is to generate a positive feedback loop - often called the network effect - in which the greater number of visitors to their website attracts more vendors, and vice versa. With larger scale, marketplaces strengthen the network effect and leverage investments in logistics more efficiently.
In both countries, marketplaces started by competing through price to attract visitors, and in the process they burnt large amounts of cash to sustain their discount policies and build their logistics networks. In China, this pressure led to a shakeout phase during which smaller e-retailers started to exit the market or ended up being acquired by larger players. The wave of acquisitions in e-retail started around 2010 in China and peaked in 2012 when seven major acquisitions took place. These consolidation moves were necessary to remain competitive in an increasingly concentrated market, where two dominant players - Tmall and JD.com - are ruling over almost 80% of the B2C segment. We are starting to see a similar movement in the Indian market with players like Flipkart and Snapdeal announcing ambitious growth targets and acquiring category specific players like Myntra and Exclusively.in.
Partnerships will play a greater role
If Indian e-retail continues to follow in China’s footsteps in terms of market concentration, we can expect to see another key trend emerging. As marketplaces become increasingly dominant, other retailers and brand owners will have to see them not as a threat but as potential partners.
Today, most Indian brick and mortar retailers and consumer brands are wary of selling through marketplaces, often ignoring them or selling only a limited selection of slow moving items. In China, retailers and brands have realised that marketplaces are inescapable and have made moves to leverage their strengths through partnerships.
For example, pure online retailers like ASOS, and brick and mortar players such as Uniqlo, have been working closely with the leading marketplace Tmall to build their own flagship stores on its platform. Similarly, global FMCG brands like L’Oreal and P&G have followed suit by creating their own Tmall shops. It is likely that such developments will become common in India too, as marketplaces continue to build their customer base and develop pan India delivery capabilities.
Online to offline (O2O) integration will be key
The rise of marketplaces does not signify that other retail formats - whether online or offline - will become obsolete in India. On the contrary, the market will probably develop around the concepts of omni-channel and online-to-offline integration (020), just like it has in China. There, more than 60% of the top 100 brick and mortar retailers have built an online presence through both their own platforms and through marketplaces. Their strategy is to become ubiquitous, making their products available in multiple retail channels, to follow consumers through their entire purchasing journey.
Developing an O2O capability is fast becoming the new competitive edge in China’s retail market, where retailers have been streamlining their offer to ensure that consumers get the same brands at the same price point, no matter what channel they go through. Online and offline are not regarded as mutually exclusive, but as highly integrated channels, providing a comprehensive value proposition. For example, Chinese shoppers are encouraged to buy on their mobile while browsing in physical stores to avoid congestion at the checkout. They can also use the same loyalty cards when buying in store, through a marketplace or on a single-brand website.
O2O integration has become so central to customer satisfaction in China that even pure online players like Moonbasa and Sunning have started to open physical stores. Their objectives are threefold. First, brick and mortar stores are a way to capture the share of customers that start their journey in physical formats. Second, they provide a place where the company can differentiate itself though ambience and shopping experience. And third, they provide a network of after-sales centres where customers can get their items repaired, exchanged or refunded. We are already seeing this trend take off in India with several online players opening physical stores. For example, online kids and baby products store Firstcry and furniture store Fabfurnish have already started to roll-out brick and mortar outlets. It is likely that other players will follow suit in the near future to add a physical dimension to their brand and customer experience.
In conclusion, while India’s e-retail market may appear small today compared to China’s, the country has already passed the inflexion point and begun a period of accelerated growth. Furthermore, the compelling fundamentals India shares with its Asian neighbour point to a similarly impressive rise in the years to come. The ascent of e-retail in India will not only reshape the country’s retail landscape but, thanks to its massive size and scale, it promises to create a market opportunity comparable only to that which has been realised in China. Therefore, CEOs wanting to tap the India opportunity should pay close attention to the insights from China’s e-retail experience.