High-profile investments into the industry include eBay leading a US$50 million injection in the Indian online marketplace website Snapdeal in June. Flipkart, another popular Indian shopping website, in October raised $160m from investors including Morgan Stanley Investment Management. Just a few months earlier it secured $200m from investors including Naspers, a South African e-commerce company.
"If you look at it from an Indian perspective as a whole, we haven't seen VC [venture capital] flowing into other sectors as it has in e-commerce in the last year even though the economy has been bad and foreign investment has dried up," says Sandip Shah, the co-founder and managing director of Shopyourworld, a shopping portal headquartered in Singapore and targeted at the Indian consumer. "There has been significant investment in e-commerce which only goes to show that they recognise the potential in India. They've seen the Chinese market and there are companies which are even larger than Amazon in China, so they see potential."
The consensus is that while there is enormous scope for growth in India, it will take time for most players to achieve profitability and dozens of online retail companies have set up shop and then failed over the past couple of years, analysts say.
While the Chinese online retail market has boomed in recent years, India is lagging behind because of factors including slow internet speeds and high prices for web access, which is playing a role in restricting the number of internet users, Mr Shah says. India, which has a population of more than 1.2 billion, is the third largest in the world with 137 million internet users, but it has only 25 million online buyers, according to a report by the Internet and Mobile Association of India and KPMG. By contrast in the US, there are 245 million internet users and 156 million online shoppers, while China has 538 million internet users and 270 million online buyers, the report stated.
"I think that everybody sees a very high potential as far as India is concerned," says Mr Shah. "It's going to take maybe three to five years before we see a huge jump." The limited number of credit card users in India means that online retail websites in India generally need to offer cash on delivery, he says. This sometimes leads to customers not fulfilling payments on order and a delay in receiving payments compared to a credit or debit card transaction, and that is another major challenge for the online sector in India, he adds.
Although there are funds from overseas coming into the Indian e-commerce sector, there are major restrictions which are holding back further investment. Foreign direct investment (FDI) into websites where products are directly sold to the customer by the company is banned in India. FDI is, however, allowed into retail websites which operate through a marketplace model - where the site is essentially a platform to sell other retailers' products.
"The reason why online has investor interest is because it is still in a very nascent stage with very high potential to grow," says Pragya Singh, the associate vice president of retail at Technopak, a consultancy based in India. "A lot of players will look to capture part of this growth opportunity and India is the place to invest in because this is where the rapid growth in the sector will come in the online sector."
India's FDI rules mean that companies are already using or have converted to the marketplace model to raise investment, or they have structured their business as two separate entities – one of which operates on the marketplace model – to comply with the regulations.
Ms Singh explains that if India were to relax these rules, the floodgates would be opened.
"If it opens up, the whole process will become more transparent," she says. "If FDI was allowed, it would simplify the way businesses operate. It would help to raise funds and attract international companies into India."
India is definitely a long-term investment, however. Profitability is a major challenge for online retail companies in India, given high levels of competition, Ms Singh says.
"No one is really making money and if you're growing very fast you end up burning cash that fast so you need investors who have full faith in your business model and are able to see it through over the next few years."
She explains that now there is "more sanity that has come into investment" into online retail in India as the market is evolving and investors are able to be more selective.
Pepperfry.com, an online marketplace website in India that specialises in selling furniture, this year managed to raise $8 million from Norwest Venture Partners after raising $5m last year from the Silicon-Valley based firm which has an Indian division.
"At this time profitability is definitely not around the corner for most Indian online firms," says Kashyap Vadapalli, the chief marketing officer and head of new business at Pepperfry.com. "At Pepperfry, our focus has been on verticals where there are high margins and therefore we are at a transactional level and even after shipping items out we are profitable. We may not be covering all our fixed costs, but we are significantly profitable at a variable cost level."
He explains that the operating environment is not easy.
"Because of competition, I think the costs of operations have gone up," says Mr Vadapalli. "I'm not just talking about discounting in terms of price wars – that's just one aspect of it. There's competition for talent, the competition for advertising.
"Given that most players advertise using the various search engine platforms and when everybody is bidding for the same types of categories or same types of keywords, the prices of those keywords tends to escalate, so even those prices have gone up. The cost of driving traffic, the ability to charge high margins – all of them are compromised because of the high degree of competition. At this stage, because the market has not fully reached their potential but there a whole lot of active players, there is a whole lot of competition going on and it has definitely impacted the cost of operations."
business@thenational.ae
Faith shown in Indian online retail
The sector is laden with challenges, yet eBay is among investors looking at growth over the long-term.
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