The Union government has so far restricted foreign companies from selling their products in India through the online medium. Few global e-commerce players have been lobbying with the Indian government, in order to capture a slice of this growing pie.
In this context, it is imperative to examine how the Indian e-commerce market has shaped up so far, the issues faced by practitioners and what the new regulation implies for various stakeholders.
The Indian e-commerce market grew at a CAGR of about 35% between 2009 and 2012 to $9.5 billion. The market was estimated to reach $12.6 billion in 2013 and is poised for further growth, given the ever-increasing internet user base, change in urban lifestyle focusing on greater convenience and increasing access to a wide product assortment.
One of the reasons for the rapid growth witnessed in the Indian e-commerce space has been the huge infusion of capital from venture capitalists (VCs). There was a spurt in VC investments during 2011 and 2012. Indian online retailers are yet to turn profit-making but hope to turn the tide as they achieve scale.
However, of late, Indian e-commerce players have faced challenges in raising funds for expansion, due to regulatory restrictions. Specifically, e-commerce companies have faced issues in raising follow-on investments. More than 70% of the funds raised by Indian e-commerce companies have been concentrated among few of the category leaders. More than 136 e-commerce start-ups were reported to have shut operations between November 2012 and April 2013.
Besides funding issues, Indian online retailers have also faced infrastructure bottlenecks, which are affecting product delivery and customer satisfaction.
Stakeholders opinion on the governments decision to allow FDI in B2C e-commerce retail has been mixed. Some of the e-commerce companies have been in favour of foreign investments in financial form, but not of strategic nature. Another body of traders have opposed FDI, as they believe that FDI could monopolise manufacturing, logistics and retail sector and lead to large-scale unemployment.
Few stakeholders believe that the entry of global players will impact domestic players, who are still in a nascent stage.
One of the arguments against allowing FDI in B2C e-commerce has been that FDI increases competition and can hurt Indian companies. However, a look at international markets such as China, Brazil and Russia reveals that global online retailers have had difficulty competing against local players in these markets.
In China, for instance, the market share of leading US online retailers has been less than 1% of the overall e-tailing market, compared to local players, who have a double-digit market share (the leading domestic players market share exceeds 50%). Similarly, in Brazil, the largest domestic online retailer had a market share of 16.5% in 2013, while US online retailers had a market share of less than 1%.
Russias online retail market is fragmented and the leading e-tailers do not have market shares exceeding 3% and that of the US e-tailers in Russia was less than 2% in 2012.
Cultural and language barriers are major challenges that international e-commerce players have to contend with in these markets. In order to compete effectively against domestic players, online retailers need to understand the consumer behaviour within each market and tailor operations accordingly.
A body of traders contends that allowing FDI in e-commerce will hurt small brick-and-mortar stores and lead to large scale unemployment, as kirana stores are one of the largest employment sources. But, it must be noted that organised retail contributes a minuscule part (approximately 6%-7%) of the overall retail trade in India. Online retail is even smaller, accounting for 1.6% of organised retail (and 0.1% of total retail sales) in India.
Online shopping across BRIC economies has mainly found favour among the internet population and among upper-middle- and high-income groups. Considering the current internet and online retail penetration levels and income levels of the Indian population, majority of the Indian consumers are likely to continue to rely on small, neighbourhood shop-keepers for their daily shopping needs and will take time to adopt online shopping.
Indian online retailers have faced infrastructure bottlenecks, which is preventing last-mile delivery and is also increasing costs for these players. Logistic challenges such as these are common to online retailers in Brazil, Russia and China.
The government of Brazil has invested in developing air and shipping ports to address these infrastructure issues. Online retailers in Brazil are investing in building warehouses to ensure faster product delivery to customers. Similarly, Russian online retailers are investing in developing their own distribution network. Chinas leading e-tailer is investing $16 billion to improve logistics and deliver shipments to any Chinese city within 24 hours.
Developing distribution network and back-end logistics is capital intensive.
E-tailers in China, with in-house warehouses, typically spend more than 10% of revenues in setting up these warehouses. The high costs of setting up warehouse operations, the current financial position of Indian e-tailers and the lack of funding options makes it tough for Indian online retail players to scale up their operations.
Allowing FDI in e-commerce will enable Indian companies to invest in building back-end infrastructure. These investments will, in turn, create multiple job opportunities through innovation in supply chain management, warehousing, and logistic services.
Therefore, policy measures by the government are needed to boost the fledgling e-commerce ecosystem in India.
While China has taken a liberal stance to promote e-commerce, Russia has been more conservative. Chinas Ministry of Commerce permits foreign investors to engage in retail distribution. It announced in November 2013, that it would provide financial and policy support for manufacturers and foreign enterprises conducting cross-border e-commerce.
Chinas 12th Five-Year Plan identified e-commerce as an important part of its newly emerging strategic industry list and aims at doubling the contribution of the e-commerce market to Chinas economy by 2015. Russia, meanwhile, had proposed a Bill in June 2012, which requires explicit government approval for foreign investments in Russian internet companies with more than 20 million users.
Online retail in India has the potential to boost incremental consumption, instead of merely acting as an alternate channel for offline purchases. Organised retail in India is mainly restricted to metros and tier-I and tier-II cities. But, online retail will help increase the reach of organised retail in tier-III cities and beyond, and boost private consumption.
Allowing foreign investments in online retail has a significant upside, in terms of improving supply-chain infrastructure and empowering customers to access latest products without geographic limitations. However, it would be good to assess the impact and structure the regulation accordingly so that the industry gets benefited and at the same time, risk of any negative impact is also minimised.
The author is Partner and National LeaderRetail and Consumer Products, EY India. Views are personal