By Patricia Ieong
While the traditional brick-and-mortar retail sector in India remains bogged down by FDI restrictions, the online retail sector has experienced incredible growth in recent years.
With consumers increasingly turning to online retail, also known as electronic retailing or e-tailing, global behemoths eBay and Amazon are now vying to capture a larger share of India’s growing e-commerce market.
Just a few years ago, in 2009, the Indian e-commerce market was worth a mere US$2.5 billion. By 2012 this number had expanded to US$8.5 billion and further grew by an astounding 88 percent last year to reach US$16 billion according to a survey from the Associated Chambers of Commerce and Industry of India (ASSOCHAM).
A joint report by the Internet and Mobile Association of India (IAMAI) and audit firm KPMG estimate that India’s e-commerce market has grown at an average annual rate of 34 percent since 2009, and placed the 2013 value of the Indian e-commerce market slightly lower than ASSOCHAM’s at US$13 billion.
According to ASSOCHAM projections, e-commerce in India will reach a value of US$56 million in just 10 years’ time.
India’s Growing Consumer Base
The staggering 88 percent overall growth rate of India’s online retail sector is indicative of its relatively nascent stage of development. E-commerce in India accounts for less than 1 percent of the country’s mostly unorganized retail market, and continues to lag far behind that of China and the United States.
In comparison to India’s US$13-16 billion e-commerce industry, e-commerce in the U.S. and China is now valued at US$224 billion and US$220 billion, respectively. After years of relatively slow growth in China, the country’s e-commerce sector experienced an explosion of activity last year as internet giants Alibaba and Tencent battled for dominance of the domestic market.
India’s population size and demographics will likely be the driving force behind e-commerce’s expansion in the near future. According to the IAMAI, India had 213 million internet users at the end of 2013 – a number expected to rise to 243 million by June of this year. With this projected increase, India will cement its status as the second-largest internet base in the world after China’s more than 600 million reported internet users, and ahead of the United States’ estimated 207 million internet users.
While statistics indicate many of India’s internet users do not log on very frequently, there is good cause to believe this will change as the usage of smartphones and tablets increases, and 3G and 4G broadband coverage expands. Last year, smartphone sales in India grew by between 170 and 180 percent year-on-year, with over 40 million units shipped to the country according to tracking agencies International Data Corporation (IDC) India and Cyber-Media Research.
India is also demographically well-placed as it continues to enjoy a “demographic dividend” – a term used to describe a point where the proportion of a country’s productive working age group is high, and the proportion of its dependents (children and elderly) is low. A report by the IRIS Knowledge Foundation and UN-HABITAT estimates that around 430 million people in the 15 to 34 age group lived in India in 2011, and projects this will steadily increase to 464 million by 2021.
By 2020, these increases will make India the world’s youngest country with 64 percent of its population in the working age group.
These findings are especially significant as young people in that age range make up a large percentage of India’s online shoppers. Last year, AMOCHAM reported that 90 percent of India’s online shoppers were aged 35 or younger, and over half were between the ages of 26 and 35.
Survey data additionally indicates that young people in India are generally more open to the idea of purchasing products online – spending around 16 percent of their disposable income on online purchases.
Key Players and Subsectors
India’s US$13-16 billion retail e-commerce industry is currently dominated by the travel sector, which accounts for 70 percent of e-commerce in India, and is comprised of transportation, accommodation and holiday packages.
Within the travel sector, transportation currently has the largest presence online. Travel research firm PhoCusWright estimates that over half of India’s air market will move online and reach a value of US$6.6 billion by 2015, while hotel bookings for now remain grounded in the real world with fewer than 10 percent of bookings currently made online.
The sale of consumer goods (particularly within electronics and fashion) also make up a significant portion of India’s e-commerce industry.
In recent months, e-commerce in consumer goods has attracted significant media attention as well-known international firms such as eBay and Amazon seek to establish a more robust presence in the country.
While both companies have launched operations in India, neither has gained a strong foothold in the local market partly due to the dominance of FlipKart and Snapdeal – the two leading online retail sites in India. FlipKart and Snapdeal are each projected to reach annual sales exceeding US$1 billion in the next few months, well ahead of their 2015 target date.
In response, both Amazon and eBay have begun experimenting with local partnerships and acquisitions to expedite their expansion in the marketplace.
In 2012, Amazon entered the market after acquiring the Indian price comparison site Junglee.com, and the consumer-to-consumer firm eBay invested in Indian competitor Snapdeal.
While neither Snapdeal nor eBay have revealed the details of eBay’s stake, some analysts estimate it could be as high as 40 percent and Devin Wenig, president of eBay Marketplaces, has hinted that an outright acquisition may be on the horizon.
FDI Pours In Despite Legal Restrictions
In recent months, FDI has been pouring into India’s e-commerce sector despite legal restrictions and FDI caps.
Just last month, Snapdeal raised US$133.7 million in an investment round led by eBay, and last October FlipKart raised US$360 million in its own investment round. Deals tracker VCCEdge reported that e-commerce deals amounted to US$602 million in 2013, while there have already been US$288 million in deals this year spread out across 10 transactions.
As an increasing number of large deals are made in India’s e-commerce industry, foreign investors have signaled an eagerness to get in on the action regardless of government restrictions on FDI.
Despite permitting 100 percent FDI in business-to-business (B2B) e-commerce, FDI in business-to-consumer (B2C) e-commerce remains strictly prohibited and bound by FDI restrictions on the retail sector more generally. Because the travel and tourism industry is not subject to stringent restrictions on FDI in retail, however, travel-related e-commerce has remained relatively uninhibited by FDI regulations.
Many foreign investors have worked around India’s retail FDI restrictions by adopting the increasingly popular “marketplace model,” whereby local independent merchants sell goods directly to consumers, and the platform earns commissions from those merchants.
In addition to not being subject to FDI restrictions, the marketplace model enables retail platforms to operate without holding inventory or dealing with India’s underdeveloped logistical and transportation infrastructure.
Both eBay and Amazon, along with local operators Snapdeal and FlipKart, have already adopted this marketplace model, and Walmart – which is also reportedly preparing to enter into the country – has announced it will soon be following suit.
While international companies have been pushing hard for liberalization of India’s retail FDI policies, traditional brick-and-mortar retailers have lobbied for a ban on FDI in e-commerce, fearing they won’t be able to compete with the likes of Amazon and eBay.
Fashion brands in particular are acutely aware of the problems that accompany “showrooming,” where customers look at and try on products in a retail store, and later purchase the same item online at a discounted price. This problem is not unique to India, but India is rather unique in restricting FDI in the retail sector in response to retailers’ concerns.
Despite this, India’s retail sector may indeed open up to FDI in the near future and potentially bring the traditional inventory model back into the game while clearing the path for hybrid inventory/marketplace models to simultaneously thrive.
Earlier in January, India’s Department of Industrial Policy and Promotion (DIPP) released a discussion paper soliciting feedback on whether FDI restrictions in online retail should be relaxed. A senior official at the DIPP indicated the Department was in favor of allowing 100 percent FDI in the sector, and Commerce and Industry Minister Anand Sharma came out last week in support of the move.
A decision on whether or not the sector will be liberalized may be announced soon by the Electoral Commission, as the current caretaker government is prohibited from taking policy decisions that may give it an unfair advantage ahead of general elections next month.
The opposition BJP party’s views on the liberalization of e-commerce have not yet been made clear, however, which throws significant uncertainty in the mix.
For now it is clear that India’s e-commerce landscape will experience tremendous changes over the next several years and, despite predictions, legal reforms may not play as large a role as demographic changes, technological advances and market forces.
No matter how e-commerce in India advances, businesses will need to react to developments in the country’s ever-changing e-commerce landscape to ensure they are well-positioned to capitalize on any opportunities arising in this growing sector.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as as well as liaison offices in Italy and the United States.
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