On a related note, Nasscom's Emerge Forum has a series of posts on e-commerce in India.
One of the lesser known factors behind e-commerce growth has been the increased adoption of online buying model by smaller cities. With 30 million active Internet users in these cities, the contribution to e-commerce sales in India is estimated to be around 40%. Lack of attractive offline channels outside large metros coupled with increased brand awareness is driving these consumers online according to industry reports.
...Not surprisingly, e-commerce adoption is highest for product categories that have low ‘touch and feel’ requirements such as travel and ticketing and financial services. The apparel and fashion segment has also seen a number of initiatives, especially in niche areas such as baby clothing and premium brand websites. As the number of categories expands, average ticket values have gone south. Industry data shows that previously, buyers from high income segments such as SEC A formed the bulk of online purchasers. With greater e-commerce penetration, cheaper goods, even second hand cell-phones are being bought on-line....CLSA believes that the Indian market can sustain at most 1-2 horizontal players such as Flipkart, 2-3 garments or lifestyle players and a handful of niche players.
...While the number of e-commerce users in India is on the rise, Indian Internet companies are still battling price wars and high customer acquisition costs, competing for a share in the same pie. The average ticket size for e-tailing has gone down and there is little or no incentive for buyers to increase the average transaction value. The downside of e-tailers offering Cash on Delivery (CoD), is the return rate of goods which is as high as 20%-30% in some categories like fashion, while categories like electronics offer poor margins. Leaders in the space are using CoD as a model for successful penetration into tier 2 and 3 cities to win customer confidence, and are increasingly becoming aware that this is not suitable for scaling up as the infrastructure is not supportive in these cities.
Business Today has more on the "long journey to profitability" of e-retailers.
Flipkart's customer base increased 10 times in the past year. It ended 2011/12 with a top line of Rs 500 crore, and expects that figure to grow by four times in the current year. The company and its associates are losing money: according to three people with knowledge of its operations, losses are at least Rs 6 crore a month. Flipkart's filings with the Registrar of Companies say it lost Rs 91.27 lakh in 2009/10 and Rs 1.37 lakh in 2008/09. The increase in losses since 2009/10 is due to the cost of customer acquisition. E-retail industry executives say the cost of acquiring each new customer - expenses include advertising and search engine optimisation, which improves visibility in search results - is Rs 800 to Rs 1,500. By contrast, the average price of a book is Rs 300.
...In the last 15 months, online fashion retailer Myntra has doubled revenues every four to five months. To double them again, it must build capacity in terms of people, warehouses, and stocks. By reducing marketing expenses, it expects to become profitable by October 2013. It has cut the cost of customer acquisition from Rs 1,300 in March 2011 to Rs 400 now, says CEO Mukesh Bansal. "It's our secret sauce. We have a deep understanding of online consumers." Myntra does not discount much. Margins are higher in fashion retail than on books or mobile phones. Online fashion brand Yepme, too, expects a net profit by November 2013 - faster than a seller of books or electronics could do.
For those who discount - which means most Indian e-retailers - the path to profitability is lined with thorns. Executives connected to the e-commerce industry say most companies are not profitable at even the gross margin level, going by international accounting standards. Discounts, free shipping and cash on delivery (COD) eat into profits. Free shipping for books and apparel adds up to 10 per cent of revenues. COD, necessary because not all customers pay by credit card, can eat up as much as eight per cent of the top line. "COD adds Rs 50 to Rs 100 to costs, and 60 per cent of Indians pay this way," says Aashish Bhinde, Executive Director, Avendus. "That can be brought down to 20 per cent if things like mobile payment work out."
Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.