Jun, 2018      |     By Anil Kumar, Ujjwal Chaudhry, Mrigank Gutgutia, Krishna Choudhury, Saurabh Joshi, Eshan Tyagi, & Abhinav Sharma

The Rise of US $50 Billion e-Baazar

480Mn people in India have access to internet out of which 90Mn are online shoppers


Anil Kumar

Anil Kumar

Founder & CEO

Ujjwal Chaudhry

Ujjwal Chaudhry

Engagement Manager

Mrigank Gutgutia

Mrigank Gutgutia

Engagement Manager

Krishna Choudhury

Krishna Choudhury

Senior Business Analyst

Saurabh Joshi

Saurabh Joshi

Business Analyst

Eshan Tyagi

Eshan Tyagi

Business Analyst

Abhinav Sharma

Abhinav Sharma

Junior Business Analyst

India still going strong on macroeconomics

India macroeconomics

Market Insights

GDP growth is intact

Funds are getting cheaper

Repo Rate(%)

The Stock Market is bullish

Sensex CY closing value('000)

World has confidence in india

FDI (USD Mn)

India continues to shine as one of the beacons of growth in the world economy. Performance on key fundamentals remains robust, with strong GDP growth and sustained FDI inflows driving the economy and driving up the optimism in the stock markets.

Lifted by the this strong macroeconomic performance, India continues to generate growing private wealth for its citizens, which enables a sustained consumption boom amongst them- which will further lead to a virtuous cycle of GDP and consumption growth.

Solid GDP growth is being driven by growing private consumption

Private Consumption

As a % of Total GDP

Note:
            Y-o-Y trends are considered for calendar year

Key driver of India's GDP growth is the growing share of private consumption. Share of consumption in GDP remains significantly higher than in China, where government spending is a strong driver of GDP growth.  

While in China the government has for years been trying to rebalance the GDP

away from investment and focused more on a sustainable, consumption driven growth, India already finds itself in midst of a consumption driven boom that is likely to further accelerate in coming years. This means a number of opportunities lies in store for consumer focused industries including retail. 

Demographic dividend will continue to drive consumption spending in future

Working age population (15-59 Yrs)

As a % of total population

India's working age population is expected to register a strong increase over the next decade, spurred by robust macro performance and growing job opportunities across sectors. This will drive the creation of a new consumer class that is expected to further push consumption performance.

This newly minted consumer class is likely to consume in a way fundamentally different to prior generations. Being the most digitally savvy consumer generation 

ever, for this consumer class, digital channels are expected to account for a higher-than-ever share of the buying journey, right from discovery to purchase. 

Together these two trends of 1) increasing consumption and 2) growing comfort with digital channels are likely to have a very strong growth impact on India's digital economy in general and on e-tailing sector in specific and drive high double digit growth for foreseeable future in these sectors. 

leading to increased data consumption Reducing costs for data and hardware are and creating a digitally savvy population

Cost of data and data Consumption

Cost of Data (In USD); 2014-2017

Note:
 

  1. Industry average calculated using average cost of 1 GB of data from Bharti Airtel, Idea Cellular and exclude the impact of Reliance Jio(in terms of data cost & consumption)
  2. Alliance for affordable Internet data suggests that 2% of monthly income for 1 GB of data is within affordable range

Over the last few years, India has seen two mega trends that has radically altered the nature of consumption. Firstly, data costs have seen a sharp fall, driven by aggressive pricing of Reliance Jio, which also led competitors to cut down the pricing drastically. As a result of these events, almost overnight a hitherto unaffordable service had become very much affordable for a large mass of India's population. Secondly, growing availability of affordable and high quality smartphones, 

often made even more affordable with no-cost EMIs and buyback schemes, has seen smartphone adoption soaring in the country. Together, these two trends have led to a sharp spike in data consumption levels in the country and driven India's total data consumption to the highest in the world. This is creating a population of digitally savvy users who are as comfortable streaming video online as they are with online purchase of high end furniture. 

Key takeaway

Data Consumption has increased with the onset of 4G in the market and competitive pricing due to the arrival of Reliance Jio has led to reduction in cost of data which has been the major growth driver for internet usage in India.

Rapid growth in digitally savvy users online shoppers in India

Digital Impact and Retail vs E-tailing

No. of Shoppers, In Mn

Note:

  1. Conversion rate 1$ = ₹60
  2. Y-o-Y trends are considered for calendar year

Growing digital savviness made possible by the spurt in smartphone usage and internet access would drive India's digital economy rapidly going forward. We expect India's online shopping population to more than double over the next 3 years to reach 185 Mn by 2020. Driven largely by this user base growth and increased online spending of existing users, we expect the online retail market to reach USD 50 Bn by 2020 (from USD 19 Bn in 2017), accounting for ~4.5% of 

all retail purchases in India. This is a near doubling of the penetration from the 2.4% figure currently observed. This development is likely to have profound implications and throw up massive opportunities for both e-tailers as well as offline players. However, reaching the above milestones will not be easy for e-tailers and will require solving multiple adoption challenges on the consumer side. 

480Mn people in India have access to internet out of which 90Mn are online shoppers

Internet Usage Evolution Funnel- India

Numbers of users, in Mn; CY 2017

Note:

E-tailing industry's monthly consumer base is ~25 million

A major obstacle to rapid e-tailing growth in India is the fact that online shoppers are a mere 20% of the total internet user base in India, which is a considerably lower number compared to counterpart countries at a similar stage. Historical reasons for a slow adoption of online shopping have been many-

  • Low internet speeds or lack of good
    quality smartphones to enable online
    purchase
  • Lack of trust on online payment systems
  • Lack of trust on online bought products/
    platforms
  • Long delivery times
  • Value proposition of online shopping
    being not strong enough
 While growing comfort with online transactions is likely to follow the smartphone and cheap data boom, e-tailers would need to rethink their strategy and value proposition to appeal better to the non-online users. Only then can 90+Mn new users be successfully onboarded online by 2020 and the market can be on the right track to hit USD 50 Bn GMV by 2020

Tier-II+ cities will drive the growth of e-tailing in the next few years

Annual Unique Online Shoppers

No. of Online Shoppers, in Mn

Note:

Y-o-Y trends are considered for calendar year

The major growth engine for online purchases going forward is likely to be the Tier 2+ city consumer. This is the population that was least digitally savvy till date, measured in terms of % total population which was shopping online. In comparison, the metro consumer is the most digitally savvy, with ~70% of eligible population already shopping online.

 However, e-tailers have made concentrated efforts to drive Tier2+ online shopper growth recently. Their strategy has revolved primarily along the below levers

  • Growing selection of relevant products including private labels and affordability schemes targeted at value conscious customers (which dominate these cities
  • Stronger supply chain networks catering
    to Tier 2+ cities
  • Increased cashbacks to remove barriers
    to digital payments adoption
  • Targeted
    and
    localized/relevant
    advertising campaigns
  • Use of assisted shopping to reduce
    barriers to first time usage

This approach has seen some success, with Tier 2+ shoppers likely to grow 50% y-o-y to reach 56 Mn by 2018. We expect that e-tailers will continue to leverage further innovations (e.g. O2O channel expansion) to bring onboard further Tier2+ shoppers and increase the Tier 2+ shoppers count to 106 Mn by 2020.

Starting from humble beginnings in the year 2000, the Indian e-tailing market has entered the 'acceleration phase'

Evolution of the Indian E-tailing Market

Overview, market sizes in USD Bn

Note:

Conversion rate 1$ = 60 ₹

E-tailing had humble beginnings in early 2000s when shopping on the internet was virtually unthinkable. Since it was presmartphone era, the access to internet was a major barrier even for middle and upper class. Early players had to innovate a lot in logistics and payments space to overcome initial challenges. 

Post-2009, while the barrier for 'access to internet' was falling, it also coincided with smartphones getting popular. This was the era of fastest growth. A lot of e-commerce 

companies started and got initial funding in the time period but while some of them flourished, others were shut down in the same period. 

Post 2014, the industry has entered the 'acceleration phase' where top-4 players are battling for the leadership position. Some consolidation has also happened in the industry. GMV quality has significantly improved from the early years and players are committed to move towards profitability.

E-tailing industry has a lot of headroom to grow

Online Buying Frequency

Online Penetration (In %) and Online Spend (In USD)

Less People Buying

Online shopper penetration (As a % of Total Internet User)

People Buying Less

Annual online spend per online shopper (In $)

E-tailing has evolved differently in different countries. While in US, consumers started shopping online through desktop and then graduated to mobile; in China and India, the consumers have 'leapfrogged' directly to mobile. Due to this, a large population shopping online in China and India is mobile-native. 

The penetration in US has reached 79% while in China, it has grown to 55% in a relatively shorter period of time. Indian e-tailing, which has gained momentum in the last 10 years, has reached a penetration

of 20%. A large part of this is driven by metro population, where penetration has reached 32%. 

Comparison with developed countries clearly demonstrates that Indian e-tailing has a lot of room to grow in the coming years as the middle income expands and online penetration increases. The growth will be driven by not just increasing number of shoppers but also per capita online spend which is ~10% of US in the current scenario.

 

Key takeaway

  • Annual spend per shopper on online shopping is still very low and constitutes of ~15% of the private consumption per capita which is ~55% in China.
  • Online shopper penetration is the lowest in comparison to other countries which signifies that a small share of internet users is buying online, however the penetration in metro and tier-1 cities is growing at a faster pace than tier-II cities.

As a large number of mobile-native online shoppers continue to be added, the share of mobile, compared to desktop, will continue to grow

Mobile vs Desktop Usage

As a % of Total visits

Increasing smartphone penetration has led to Indian Internet story unfolding on mobile instead of desktop; first-time internet users are largely smartphone only.

Note:

Y-o-Y trends are considered for calendar year

In the last 10 years, consumers are increasingly adopting smart phones over feature phones. In 2017, there were 295 million smartphone users and expected to reach 500 mn by 2020.  

Majority of the users who will be added in the next 3 years are mobile-native. They will access internet for the first time 

directly on smartphone, bypassing the desktop altogether. 

While desktop will still remain 20% by 2020, it is largely driven by people who access e-tailing websites in their office, whereas a large part of online shopping is now happening on-the-go.

 

Each $15 burnt results in $72 of GMV with players differing in efficiency

E-tailing Unit Economics

Cash Burn vs GMV earned, In USD

Considering the total Gross GMV to be 100 USD it is seen around the industry that around 10% cancellation take place before the order is shipped and around 17% is the total returns that are happening on the shipped order. 

12% is the gross revenue which is generated from the sale of products while 

the net revenue is around 5-6 USD. 

Supply chain is 13% off the shipped gmv while advertisement, admin expenses contribute 12% of the total fulfilled GMV Average cashburn is 15% of the total value which is largely due to the competitive environment among the players.

COD is expected to remain stagnant at ~50% as the focus of the industry shifts to Tier-II+ cities

Share of COD as payment mode

As a % of Total Sales

Note:

Card on delivery is included in COD payments

Cash On Delivery (COD) is an Indian phenomenon where customers pay through cash/ card at the time of delivery of goods from the e-tailer instead of paying at the time of purchase. COD has been arguably an important driver of e-commerce growth due to the cashheavy nature of Indian economy and low penetration of digital and plastic substitutes.

During the demonetisation, COD fell sharply as households faced shortage of cash due to lack of availability of high value notes. While it was predicted that the COD share will continue falling down

as people were adopting digital means, yet post demonetisation period, the COD share rose back to previous levels.

 While many believe that due to continued increasing adoption of digital payment substitutes, COD share will fall down, we have to be cognizant of the fact that adoption of digital payment systems is still a phenomenon more common in metros and tier-1 cities. As the new e-tailing customers are added from tier2+ cities, they will continue to prefer the COD medium as the 'trust' on e-tailers continue to be low in tier-2+ cities.

20%+ returns is a constant feature of e-tailing in India

Industry GMV – CY17

Total Industry GMV, in USD Bn

Note:

  1. Conversion of 1$ = ₹60
  2. Post shipments cancellations and customer returns are included in returns

Based on extensive consumer research conducted by RedSeer, 'trust' on e-tailers remains a key issue among the consumers. The ability to return the products, especially the 'no questions asked' policy adopted by some e-tailers has been able to convert some of the non-shoppers into e-tailing shoppers. 

Out of Gross GMV, orders contributing to 10% of GMV is canceled before shipping. These are typically impulse purchases or 

the consumer finds a better option on other e-tailer or offline.

Orders contributing to 22% of shipped GMV are returned; these are either RTO, where delivery is attempted but either the consumer refuses to accept the delivery or is unavailable, or RVP (Reverse Pickups) where product is accepted by the customer on delivery and then returned due to quality or fitting issues.

While purchasing experience is satisfactory, delivery and post delivery experience (esp. customer support) needs improvement

Customer Experience – CY17

Rating on a scale of 1-10

Note:

A total of 36,000 customer were surveyed over a course of one year

As the offerings on various e-tailing platforms have standardized, e-tailers are differentiating themselves from competition by improving the purchase and post-purchase experience. 

Purchasing experience on e-tailing platforms has significantly improved in the last few years owing to average industry NPS of 22% especially through better app experience (more intuitive interface, better search, accurate description etc.), 

product assortment (more brands coming online etc.) and reviews. 

But, the e-tailers have been unable to match the customer expectations on postdelivery front even though significant investments have been made by e-tailers to control and improve the experience. For example: Returns processes have continuously improved over the last few years and refunds are processed much quicker.

Key Takeaway:

  • As delivery and post delivery experience is infrastructure driven, e-tailers are continuously investing in expanding their supply chain capabilities and reach.

The market will be $ 50 Billion by 2020

Indian E-tailing Industry – Gross GMV

Gross GMV, In USD Bn

Note:

  1. Paytm O2O and Automotive GMV are included; Grocery is also included
  2. Conversion of $1= ₹60

The Indian e-tailing industry has seen good momentum from 2014. Though there was a slump in 2016 with the growth being just 12%, the industry recovered well in 2017. The growth of H1-2017 was around 15-20% but the industry picked up well in H2-2017, primarily due to multiple sale events.

A key reason for this recovery is the shift in the focus of the e-tailers to Tier2+ cities. We saw good amount of new users being added from the Tier2+ cities in 2017 which was a very positive sign for the industry. And thus we feel this growth would continue and the industry would touch $50 bn mark by 2020.

Flipkart has been gaining market share year on year

Market Share- Key Players

Gross GMV, In USD Bn

Note:

  1. Paytm O2O and Automotive GMV are included; Grocery is also included
  2. Conversion of $1= ₹60

The industry has seen two major players acquiring the market share over the years, In 2015 the industry was scattered with many players like Snapdeal & Shopclues which constituted the larger 

share in the market while amazon's onset in to the market left other players to lose their market share, Flipkart on the other hand continued to grow while acquiring Myntra & its subsidiaries.

The industry has seen two major players acquiring the market share over the years, In 2015 the industry was scattered with many players like Snapdeal & Shopclues which constituted the larger 

share in the market while amazon's onset in to the market left other players to lose their market share, Flipkart on the other hand continued to grow while acquiring Myntra & its subsidiaries.

Increase in frequency of buying along with online shoppers across the categories will drive the industry growth

Industry Growth Driver in CY17-20

Growth rates, In %

Note:

Conversion of $1= ₹60

The industry focused towards adding new shoppers from Tier2+ cities in 2017 and thus we saw an increase of 27% in the number of shoppers in the year. Telecom operators like Jio did a great job in bringing more and more people online which was the key reason for the addition of these new shoppers. 

The increased online penetration and the good experience provided by the e-tailers 

made people more comfortable with shopping online and hence we saw an increase in the frequency of buying. 

The average order value remained stagnant primarily due to the increase in the first time buyers who shopped for majorly low value items. We feel going forward the average order value would continue to be stable as we expect more and more new users to join the platforms.

Mobile will remain the key GMV contributor for next 3 years…

Indian E-tailing Industry – Category Share (Y-o-Y)

As a % of Gross GMV

Note:

  1. Automotive share is included in others category
  2. Conversion of $1 = ₹60
  3. Grocery share is included in the overall figure

The industry witnessed growth across all the categories but mobiles continued to dominate. Mobiles, majorly due to the effect of exclusives, contributed nearly 50% to the overall GMV of the industry followed by fashion and electronics. Smaller categories like FMCG and Home have witnessed good growth primarily 

due to the base effect.

 We feel that there would not be much change in the category mix of the industry going forward as mobiles would continue to dominate and drive the growth for the industry.

Key Takeaway:

  • Market share for mobile category has continuously seen an increase, half of the E-tailing business is being driven by the category as of 2017.
  •  Among smaller categories- share of Home and FMCG category increased in 2017.

Mobiles is expected to remain the biggest category with online penetration reaching 50% in 2020

Mobiles Category – GMV Growth

Gross GMV (In USD Bn), Online penetration (In %)

Mobile market Y-O-Y GMV (USD-Bn)

Online penetration of Mobile Category (By Value)

Note:

Conversion of $1= ₹60

The Indian consumers are getting more and more accustomed to buying mobiles online. Mobiles worth $9 bn were sold online in 2017, which is one-third of the total value of mobile sold in India. We feel that consumers would continue to adopt online as a medium of buying mobiles going forward and the share of online mobiles would touch 50% by 2020.

Brands like Xiomi, Motorola and Lenovo which were very small a couple of years back have become giants in the last two years primarily with exclusive tie-up with their e-tailers. The power of online sales has become such that players like Oppo, Vivo which were focussing only on offline have now started adopting online channels.

Growth in average selling price along with quicker replacement cycles are the major factors in the growth of the category

Share of Price bracket – Overall Mobile Market, CY 17

As a % of total units

~86% of the market is concentrated in the price bracket of < $250

Note:

  1. Conversion of $1= ₹60
  2. Replacement cycle is calculated from survey conducted of 300 consumers

Replacement Cycle

The Indian consumers today have high disposable income and mobile phones is one of the key things they chose to spend their money on. We thus see a tendency of the users to upgrade the price brackets when changing phones. Not only has the price bracket moved up, the replacement cycles have come down indicating that a user today always wants a new and good phone with them. 

The brands have thus started to rapidly 

upgrade the phone by adding news features improving the quality of the camera etc. to attract the high disposable consumers. 

The combination of these two trends; increasing price brackets and falling of replacement cycles, will continue to drive the growth of mobile category for the e-tailers.

Key Takeaway:

Replacement cycles are decreasing because of the following

  • Supply-side effect: Upgradation of smartphones by manufacturers regularly & availability of cheap smartphone
  •  Demand-side effect: Increase in disposable income of people

New vertical players have not created major impact in the growth of fashion category

Fashion Category – GMV Growth

Gross GMV, In USD Bn

Fashion Market Y-o-Y GMV (USD Bn)

Note:

Conversion of $1= ₹60

Horizontals vs Verticals (In %)

Fashion e-tailing has always been looked upon as the next big thing for e-tailersowing to a combination of its easy to ship nature, high sales margins vs electronics and low ticket sizes vs electronics that promotes user trials. 

Till date, fashion failed to live up to its lofty potential, with the category growing in slower than expected to reach USD 3.7 Bn by 2017. Slow adoption of new shoppers, high return rates etc have together led to this category only realizing a small part of its large potential. However, fashion e-tailers are well placed to accelerate growth in this category over thFashion e-tailing has always been looked upon as the next big thing for e-tailersowing to a combination of its easy to ship nature, high sales margins vs electronics and low ticket sizes vs electronics that promotes user trials. Till date, fashion failed to live up to its lofty potential, with the category growing in slower than expected to reach USD 3.7 Bn by 2017. Slow adoption of new shoppers, high return rates etc have together led to this category only realizing a small part of its large potential.

 However, fashion e-tailers are well placed to accelerate growth in this category over the next few years, owing to the 

 

e next few years, owing to the 

below factors-below factors-

  • Growing number of internet savvy Tier 2+ customers- who could try out fashion purchase as their first online shopping transaction
  • Growing trend towards using
    omnichannel models as a way to reduce
    barriers to online shopping
  • Wider range of categories being
    included in online fashion- for e.g.
    cosmetics/beauty is a key category of
    focus for e-tailers, which should further
    drive up adoption

We expect that above trends in conjunction with continued iovation by We expect that above trends in conjunction with continued innovation by fashion e-tailers should see a steady growth in fashion category (33% CAGR) to fashion e-tailers should see a steady growth in fashion category (33% CAGR) to reach ~USD 9 Bn by 2020.

Online fashion has stronger penetration in Metros, however contribution from smaller cities is also significant

Fashion Category – Tier-wise split

Tier-wise Split, in %, 2017

Online Fashion- Tier wise split (USD Bn)

Note:

Conversion of $1= ₹60

Key Trends: 

Replacement cycles are decreasing because of the following

  • All the leading horizontal players receive more than 25% of their sales from tier-2+ cities leading to higher share of online fashion from tier-2+ as compared to overall online retail
  •  Online fashion shopping has significantly increased the brand awareness among NonMetro cities where, earlier many brands had limited presence through offline channels
  • Fueled by an increase in disposable income and increased awareness, online fashion shopping has grown and more Non-Metro youth are shifting to online shopping

Fashion is one of the most important online categories sold in Tier 2+ cities- as is clear from the fact that 25% of online fashion is sold in Tier 2+ cities, a higher % than any other category sold online. 

Strong demand for online fashion in these cities is spurred by a high aspirations for branded and quality products which is not matched by enough penetration of organized retail and branded products in these cities- a clear market gap for online retailers to close. Thus as Tier 2+ city shoppers increase to 185 Mn by 2020, we expect fashion category to grow in tandem. 

However, this rapid growth is not a given. E-tailers need to solve a plethora of bottlenecks to rapid fashion growth including solving for size issues, fake products, need for touch and feel etc. While innovations like omnichannel, easy returns etc are solving some of these issues, e-tailers would need to further innovate from bottom-up, taking into account the peculiarities of shopping behaviour in these Tier cities (e.g. high level of value consciousness), to drive growth. 

Apparels are top contributing category followed by footwear; Accessories with watches as the prime contributor account for 20-25% of the market

Fashion Category – Sub category split

Sub category split, in %

Online Fashion – Category wise split, USD Bn

Note:

Conversion of $1= ₹60

Key Insights:

Replacement cycles are decreasing because of the following

  • Footwear has higher adoption online where it represents 30-35% of the category compared to 5-6% offline
  • Ethnic wear is expected to show good growth with next phase of customer growth expected to come in primarily from tier-2+ cities
  • Share of private labels has been increasing especially in apparels due to- 
  •  – Increased push by players by brand building and promotion
  •  – Higher customer adoption due to better value for money offerings

Apparel is driving the Fashion category with almost half of the share. Rest of the GMV in this category is contributed by Footwear and categories. Footwear has a higher online penetration compared to apparel due to higher standardization. The fit issues and returns are also lower.

In the accessories, cosmetics is seeing a large growth especially with vertical players like Nykaa in this space. They are educating the customer about the brands and products, and giving access to premium brands to aspirational customers in tier-2+ cities

FMCG is a USD ~1 Bn market (2017) is going to be the next battleground for growth and is expected to reach USD 4-5 Bn by 2020

FMCG category – Growth Phase

Gross GMV, USD Bn

Note:

Conversion of $1= ₹60

FMCG products are the most bought product category in India- accounting for more than 80% of all retail purchases and 60% of all retail consumption. Considering the huge size of this pie and the potential for high repeat purchases, e-tailers have now turned attention to FMCG as the new battleground to drive e-tailing growth. 

While this category has existed online in some form since 2011 onwards, the category has really come into focus the last couple of years. This phase from 2014- 2017 can be called the 'experimentation phase' for this categories- as e-tailers tried expanding into various business models and geographies to see what works. In 

this period, the difficult financials of this category led to many closures inspire of heavy investments, as e-tailers struggled to discover what works and what doesn't. 

What we see 2017 onwards is a relative stabilization of a few business models as e-tailers gradually have found the balance between growth and unit economics. Few business models have turned out to be more popular than others for e.g. warehouse fulfilled models and e-tailers are now expanding across city tiers with these models. Horizontals are also now deepening their interest in their category to find a competitive edge away from low margin electronics categories. 

FMCG is expected to be one of the fastest growing category reaching 4-5 Bn in 2020

FMCG Market Y-o-Y GMV $ Bn

Going forward, we expect high investments in grocery category from both horizontals and verticals on key areas- including supply chain network build-up , offering a wide selection including private labels and aggressive marketing to bring onboard customers.

Additionally, further business model innovation, e.g. expansion of express delivery offerings, is likely to continue to bring more wallet share online.

Subscription based models and omnichannel based delivery models that offer fresh produce from kirana stores would also be further explored as e-tailers seek to target various customers across city tiers. 

We expect that these investments and continued product innovation should drive growth of this category to USD 4 Bn by 2020. 

BPC, while a smaller opportunity, is seing high traction from horizontals and verticals and is poised to grow rapidly in the coming years

Cosmetics Category - Trends

Gross GMV, In USD Bn

Note:

  1. Conversion of $1= ₹60
  2. BPC – Body & Personal Care

Cosmetics is, in many ways, an ideal category for e-tailers- it is a brand heavy category with limited long tail and marketing pressure, sells at high prices and margins and need to manage returns is much lesser compared to other categories. 

However, this category has been underrepresented till date in the online market- owing to weak selection, limited 

marketing efforts, challenges with product genuineness, inability to compete with the shopping experience of offline channels. Bigger fashion players have focused more on apparel and footwear thus far rather and pushing cosmetics while grocery players have focused on low ticket size personal care segments. Together, this has limited the online scope of this category till date.

Cosmetics is expected to tap into the online retail market and grow rapidly to cross USD 1 Bn mark by 2020

Cosmetics Category – GMV Trends

Growth Phase, In USD Bn

Note:

  1. Conversion of $1= ₹60
  2. BPC – Body & Personal Care

After being underrepresented in the online retail landscape till very recently, cosmetics category stands at a tipping point. We are bullish on the growth of this category and expect this to be one of the fastest growing segments in e-tailing over next few years. 

A combination of supply and demand side factors are likely to drive growth for this category going forward. On the supply side, smaller cosmetics verticals are gaining greater adoption using a combination of wide and exclusive selection, innovation in product/channel including having strong content and offline stores and savvy use of influencers etc. Larger verticals are also about to expand heavily in this category after focusing on consolidating apparel and footwear till date. They are likely to invest in supply chains and product 

side innovation along with aggressive marketing to further propel online cosmetics adoption in India. 

On the demand side, the Indian shopper is turning increasingly aspirational and often finds desired products unavailable in nearby offline stores. These are shoppers who are already comfortable with shopping online for other categories, and are increasing likely to buy cosmetics online as well as the online shopping experience improves and wider selection is available. 

Together, these trends are leading to rapid growth in cosmetics market and we expect it to reach USD 1 Bn in size by 2020, growing at 60% CAGR over next three years. 

Sellers are optimistic on future outlook of e-tailing

Seller Optimism on Business Growth in %

Q. How likely do you expect that the business will grow from the following e-tailers?

Note:

  1. Optimistic Sellers – Sellers who expect the business to grow 'likely' ,'most likely' in future in the respective platform
  2. Data captured from survey of 2600 sellers on E-tailing platforms

Sellers are important stakeholders as the growth of marketplace affects their growth. RedSeer conducts quarterly surveys to assess the sentiment of sellers on various parameters. 

Sellers, according to 2600 surveys conducted in 2017, are most bullish on 

the growth of large horizontals, Flipkart and Amazon. While the e-tailing has seen slow growth in 2016, 2017 has been a year of growth for the e-tailers. Also, post DIPP regulations governing e-commerce companies, there is a feeling among sellers that marketplace models will see growth.

Inventory model will retain 60-70% of the market share

Inventory vs Marketplace

As a % of Gross GMV

The E-tailing industry continues to be largely inventory led and as the industry moves towards consolidation and new categories like FMCG and cosmetics emerge as the new front for growth, players are focusing more on improving their inventory capabilities to provide better services.

Note:

Inventory Model includes both platform owned goods as well as seller's product stored at platforms warehouse

Despite sellers being bullish on e-commerce, the inventory-led model is continuously contributing a higher percentage of overall e-tailing. The trend is towards increased share of inventoryled model as e-commerce companies look towards controlling the customer experience in a better way.

As DIPP regulations do not allow more than 25% of sales through one seller, the inventory-led model is driven by companies who are wholly or partially owned by e-tailers. Categories like FMCG have seen limited success through marketplace model and hence driven largely through inventory model.

...and the thrust on increasing the seller base has slowed down

Total Seller Base for a top e-tailer

No.of Seller on an Online Platform

Key Takeaway:

Leading industry players have stopped the push towards increasing the seller. base in the past few years and are more focused on growing business from the existing seller base.

Between 2014 and 2016, there was a big thrust on acquiring sellers for the marketplace model by e-commerce companies. However, the thrust to add more sellers is increasingly coming down with e-tailers adding new sellers only when they can provide specialised products.

There is also a churn in sellers who 

opt out of selling online due to limited success. E-tailers are also trying to better the customer experience by fulfilling a higher share of orders through their own fulfilment centers. Seller policies, in this context, play a major role for seller to decide whether they want to use their own warehouse or e-tailers' warehouse.

Sellers are constantly worried about the returns

Seller Experience

Insights

Note:

  1. Total Surveys N = 1041
  2. The data collected is from the study conducted for OND '17 period

Increasingly, sellers are demanding better services from the e-tailers as majority of sellers operate only through online platforms. E-tailers typically create seller tiers where services like account manager are provided to sellers in the top tier due to which they also have a better experience compared to long tail. 

One of the biggest issues for e-tailers is returns which also hampers their 

profitability. E-tailers have introduced services like 'seller-buyer chat' where a buyer can get in touch directly with seller to help him understand his specific needs so that multiple returns do not happen. 

Seller are fairly satisfied with the logistics support provided by the e-tailers as well as engagement forums which are conducted by e-tailers to educate sellers.

Offline retailers go online to realise both direct and indirect benefits

Omnichannel benefits for Offline retailers

Insights

Increased touch points with customer

Leading to more conversions/orders

As e-commerce continues to grow, there is a push by offline players to come online. Large Indian corporates like Tata Group, Reliance and Aditya Birla are building their online strategy so they can gain market share in this fast growing industry. For an offline player, the benefits of an omnichannel strategy are not limited to increased revenue from online channel but also gain advantages in their offline channel like: 

Increased touchpoints with customers: With a large number of consumers

researching products online, an omnichannel strategy provides the brand with a chance to interact with customer both online and offline in an integrated manner.

Customer insights and intelligence: Due to transactional nature of offline business, the insights into customer buying behaviour can be limited but online sales provides a large amount of valuable data into customer buying behaviour which can be leveraged for offline sales.

Increase order share from tier2+ cities will be the key factor owing to higher overall shipment

Indian Etailing Industry – Shipment

No. of shipments(Mn), cost per shipment(USD)

Cost per shipment (USD)

Note:

Conversion rate 1$ = 60 INR

Key Insights

Industry shipment are expected to grow at a CAGR of 40% from 2017-2020 owing to similar growth in e-tailing industry. Captive shipments will be on the rise as the players look to increase their control over the customer experience with minimum risks.

Cost per shipment is expected to remain on similar lines as the order share from tier2+ cities is expected to increase resulting in higher variable costs & volumes, hence the overall impact would result in similar cost per shipment. 

E-tailing infrastructure has improved significantly in last 3 years with increasing number of warehouses and delivery centres

Infrastructure Details

Number of centres, % share of fulfilled shipments

Number of Centres

% share of fulfilled shipments

Note:

Only captive Infrastructure for E tailing players has been considered, Fulfillment centres – Captive warehouses used to exclusively store platform's inventory (Products from sellers and private labels on the platform).

Processing of orders, at the back-end, plays a significant role in the success of an e-tailer. Efficient supply chain can significantly improve delivery times for products to reach the customers. 

Fulfilment Centers are large warehouses where orders are processed for shipping. Delivery Centers are sorting stations where orders are sorted by pin code for final delivery. The growth of FCs and 

DCs indicates the significant investments e-tailers are making in fortifying their back-end processes. 

Broadly, there are 2 modes of fulfilment for an order- one where seller fulfils their order through their own warehouse, and other where the fulfilment is done by e-tailer. E-tailers increasingly prefer to fulfil the orders themselves as they are able to control the experience better.

Key Takeaway:

Both Flipkart and Amazon have focused on developing self capability for managing the shipments, establishing control over the quality and speed of delivery which is reflected in the increase in number of warehouses and share of fulfilled shipments in the industry.

Reach of logistics players are increasing with more and more deliverable pin codes added

Player wise Pin code reach

No. of Pin codes served across India('000)

Players wise pin code reach

Note:

Data comparison has been done for Q2'16 and Q2'17

There are broadly 3 kinds of logistics players:

  • Traditional 3PL companies: These are 3rd party logistics services providers who have an extensive B2B logistics network eg: Gati, BlueDart.
  • New-age 3PL companies: These are 3rd party logistics services providers who focus mainly on e-commerce companies for logistics eg: E-com express, Delhivery.

  • Captive logistics- These are fully or partly owned by an e-tailing parent company eg- Ekart, ATS.
As customers from tier-2+ cities are increasing, reach is becoming an important factor for the success of e-tailers. Delivery companies, both 3PL and captive, have to make significant investments for increasing their reach in areas where they are not currently present.

Delivery speeds have improved continuously in the last 2 years

Delivery Performance, O2D Days

No. of Days taken from order to delivery

Delivery speed is an important lever for e-tailing companies to keep the customer happy and NPS higher. High delivery times often dis-incentivizes customer to order from an e-tailing platform and instead buy offline, for faster gratification. 

E-tailing companies have been investing in logistics and infrastructure capabilities to reduce the delivery times. O2D (Order to

Delivery) is typically broken down into O2S (Order to Shipment) and S2D (Shipment to Delivery). 

Bringing down O2S entails investment and innovations in first mile logistics infrastructure like availability of inventory in warehouses close to customer, ability to ship products as soon as order flows in and multiple pick up times from warehouse.

E-tailing players are increasing the share of captive logistics; Traditional 3PL will continue to lose share in e-commerce

Dependency on 3PL's

Share of 3PL shipments as a % of overall shipments

Note:

  • Captive includes ATS, Ekart, Myntra Logistics & others
  • New age 3PL share includes major players like Delhivery, Ecom express, Xpressbees,
  • Traditional 3PL includes Gati, Bluedart and Others

Large e-tailers have developed captive logistics arms for delivery so that they are able to better control the customer experience. They have also developed sophisticated algorithms which assign a particular shipment to in-house or a particular 3PL partner.

There are largely two different types of 3PL partners- New Age companies(likeDelhivery),and traditional 3PL companies

(like Gati and Bluedart). While New Age companies typically have a lower cost structure, traditional companies have a wider reach due to established routes in far flung areas. 

E-commerce companies have been reducing their dependence on 3PL by increasing the reach of their captive arms and creating logistics capabilities in-house.

Key Takeaway:

  • The dependency on 3PL partners is reducing since major platforms like Flipkart and Amazon have infused significant sum of money on their respective logistics arm Ekart and ATS
  • Majority of shipments(>75%) on both Flipkart and Amazon are managed by their own logistics arm

Large horizontals are developing capabilities for end-to-end supply chain for large appliances and furniture

There are 3 key pieces in the large appliance and furniture supply value chain:

  • Warehousing and fulfilment centers: The biggest sourcing hub for furniture is Jodhpur for all e-tailers. Warehouse requirements for large appliances and furniture are different from that of other products due to larger size. First mile logistics also needs to be optimized as the delivery trucks can carry less no of SKUs.
  • Delivery centers: Vertical furniture e-tailers like Peppersfry have delivery distribution centers which are close to the customer while horizontal e-tailers deliver do not have separate delivery centers for furniture and large appliances.

  • Installation: Vertical players in furniture are building in-house capabilities for installation as it forms a large part of consumer experience. While Flipkart has acquired Jeeves for installation of large appliances, Amazon passes on the installation request to respective brands.
 

Subscription model, Private labels are likely to be the major drivers in improving customer loyalty and increasing margins for the online platforms

Key Trends – E-tailing

Insights

Subscriptions will have moderate success over a large base

Subscription Model – Amazon Prime

Insights

Note:

Data captured from survey conducted of 300 Prime users

Based on extensive consumer research conducted by RedSeer on Amazon Prime members, we have identified 3 large cohorts:

Natural selection: Customers who subscribe to Prime because they shop frequently.
Value-seeker: Customers who buy Amazon Prime membership as it is valuefor-money.

Deal-tied: Customers who buy Amazon Prime membership due to deals offered The effect of Amazon Prime on customer loyalty has been a mixed bag so far. While Prime members spend almost double of Amazon in a year compared to non-Prime, 78% of customers still shop on other platforms after subscribing to Amazon Prime.

Private label will become 10% of the E-tailing GMV

Private Label – Future Outlook

Key Growth Rates

Share of private labels (As a % of Gross GMV)

Note:

*Category penetration is defined as the % of sales contributed by private label in the overall GMV of the category

Category Private label penetration* and future outlook

As e-tailers commit themselves to a path of profitability, they are looking at ways to increase their gross margins. Globally, Private labels have proved as a dependable model to improve gross margins significantly. 

While all the large players are looking to introduce (or have already introduced) 

private labels, the success will depend on various factors including the customer's behaviour while shopping for a particular category.

 Private label is expected to grow the maximum to fashion and FMCG category followed by 'Furniture and Home.'

Paytm has been moderately successful in bringing O2O model to India similar to China

Paytm O2O (Online to Offline)

Business Model

Indian retail market was estimated to be ~670 mn$ in 2017 growing with a CAGR of 17-18%. E-tailing accounts for <3% of the total retail market. Despite the growth in e-tailing, industry stalwarts are convinced that even in a mature stage, at-least 70% of entire retail market will remain offline. 

Since offline retail is expected to remain a sizeable portion of retail market, e-tailers are coming up with business models to grab market share in the organized 

offline retail. 

One such example is O2O model launched by PayTM where a customer can browse a shop' catalog on their smartphone using QR code, and pay online. This model has been fairly successful in China where customers purchase even offline through T-mall, which in turn provides retailers with customer insights as well as help them personalize customer's shopping experience and promotions/ offers.

Indian e-tailing market is sale driven like China as ~30% of Industry GMV was contributed by 10% of the days (Sale Days) in 2017

Sale vs Non-Sale GMV Performance

Key Insights; 2017

Note:

  1. Jan, May, Jun, Aug, Sept, Oct, Dec are considered sale months
  2. Total number of sale days considered are 35

The trend of festive sales started with Black Friday in US, which starts from Friday following Thanksgiving and continues till Sunday. The sales in this period typically cross 50Bn$ across US. E-tailers in US follow this trend and provide deals and discounts during this period; Black Friday sales has crossed 5Bn$ sales for e-tailers in the past few years. 

Festive sales in India contribute to 30% of GMV. While the largest festive sale is in September end/ October beginning 

before Diwali, there are many small sales which happen during the year. These sales provide the e-tailers with an opportunity to acquire new customers through deals and promotions.

 Sale periods typically have higher AOVs as new customers tend to buy mobiles which have a higher average value. Festive month sales in 2017 was 3.3 Bn$ which is expected to increase with a 50% CAGR till 2020.

Key Takeaway:

Flipkart witnessed higher jump in sales (3-4X) compared to Amazon(2-3X) during all sale events in 2017 owing to its efficient marketing and attractive prices during sale events

APPENDIX

Methodology & Glossary

Most Comprehensive E-tailing Industry Report

Customer insights such as customer perception about the platform, buying behaviour, experience etc have been established from extensive surveys conducted on quarter on quarter basis while with more than 5000+ seller interaction gave in depth analysis of 

the seller preference of platforms, view point on gaining accurate and deep understanding from more than 3000+ experts throughout the industry and assessing the individual platforms through the mystery shopping exercise with more than 20,000+ orders.

Glossary​

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