1. Alibaba lessons for Indian e-tail

Alibaba lessons for Indian e-tail

Instead of looking at e-tail as a backdoor entry for FDI in retail, the need is to create an enabling framework so that it grows fast...

Updated: November 21, 2014 3:40 PM

A sudden surge in e-commerce has created a new wave, especially in the retail sector. Driven by technology and new institutions, e-tail ropes in thousands of producers and delivers goods at consumers’ doorsteps. These institutions are very cost-effective, compressing value chains and expanding overall business. In the process, they offer stiff competition to the old institutions that are inefficient and costly. Unless the old institutions reform and break out of their current mold, it is likely that they will gradually erode. Such reformation would be the process which Schumpeter called ‘creative destruction’, and which Galbraith envisioned to be kick-started with new technologies.

The wave of e-commerce
Globally, e-commerce sales in 2014 are estimated to be around $1.5 trillion (Nielsen 2014). Over the last five years, online retail has grown at a 17% compound annual growth rate (CAGR) with a strong growth of 25% in Asia Pacific itself (AT Kearney 2013).

In 2013, the Indian retail sector was estimated at $520 billion and was among the largest employers in the country. By 2018, the Indian retail sector is likely to grow at a CAGR of 13% to reach $950 billion (IBEF). Organised retail, which constituted 7% of total retail in 2011-12, is estimated to grow at a CAGR of 24% and attain a 10.2% share of the total retail sector by 2016-17 (IBEF). A growing part of organised retail market in India is online retail. India has about 1 million online retailers—small and large—that sell their products through various e-commerce portals (IBEF).India’s e-commerce was estimated to be worth $3.8 billion in 2009, which grew to $12.6 billion in 2013 and is expected to grow to $20 billion by 2017.(DIPP Discussion Paper, PwC report). This is still a minuscule part (around 2%) of the total retail market in India but has good potential to grow over the next decade, as technology penetrates the hinterlands.

graph-ecommrrce

Globally, China is the most attractive e-commerce destination, while India does not appear even in the top-30 in the AT Kearney Global Retail e-Commerce Index, 2013. If India wants to compete and catch up with China, it must understand the business models of its e-tail companies, especially that of Alibaba, the largest online retailer in the world.

Alibaba.com, an e-commerce company registered by the Chinese entrepreneur, Jack Ma, in the US, has a unique business model. The company started in 1999 as a business-to-business (b2b) electronic markets place. In 2002, the company expanded to business-to-consumer (b2c) transactions. The company has a revenue of around $8.5 billion and a market value of $231 billion (2014). Alibaba went public in the second half of 2014 and is already close to being a $300-billion company, making Jack Ma, richer than Mark Zuckerberg of Facebook. It is interesting to see how Alibaba has gotten to where it is.

Alibaba’s most distinguishing feature is its payment system, called ‘Payment Bao’. In case of an online purchase, there is a lag between the actual purchase and the delivery at the buyer’s doorstep. This lag period is ‘uncomfort zone’. Payment Bao becomes a cushion here. When a buyer buys a product from Alibaba, the payment is kept in the custody of Payment Bao till the time the product is delivered to the customer.

Only when the buyer receives and accepts the product, the payment is credited to the seller. In case there is a problem with the product, the money charged is returned to the customer and the goods to the seller. Interestingly, given the volume of daily transactions, the money held by the Payment Bao, parked in banks, also earns million of dollars in interest!

On November 11, Alibaba announced a promotional discount for ‘singles day’, a concept that the company came up with some years back (the date being 11/11, all single digits, is referred to as singles day to attract people whose relationship status is ‘single’ to spend on themselves). The promotions attracted sales volumes of over $9 billion on a single day!

Can e-tailers provide the Indian buyer new excuses to pamper herself, be it on Diwali, Eid, Christmas or New Year, or any regular day, to jack up sales?

Flipkart created e-tail history in India on its Big Billion Day sale, on October 6. But it was still much lower than the Alibaba’s singles-day sales. However, one hopes we will catch up fast, may be in the next 5 years, if not earlier.

One big advantage of e-tail is that it can provide a platform to several small and medium enterprises (SMEs) to sell their products at a pan-India level, providing them a large market that they cannot achieve on their own. This expands the overall demand, creates competition, and makes the market much more efficient while delivering higher value to consumers and producers both.

No wonder, many private and public sector organisations want to reap the benefits of this. The West Bengal Circle of India Post wants to enter this sector in collaboration with the local traders, bringing the country one step closer to inclusive growth. The Tata Group and Aditya Birla Group also have similar plans, exploring possibilities of working with SMEs and small traders to ensure all-encompassing growth. Kishore Biyani’s Future Group, which owns India’s largest brick-and-mortar retail chain, is also joining hands with e-tailers like Amazon India to create a synergy between e-tail and corporate brick-and-mortar retail. The future of e-tail seems promising!

However, to unlock e-tail’s potential, one needs a conducive policy and business environment. For example, policy-makers taking the view that e-commerce is a backdoor entry for FDI in retail does not bode well. It is worth keeping in mind that societies that try to stop change emerging from better technologies and more efficient institutions ultimately stagnate and hold back the prosperity of their own people. If India wants to prosper, it must give all the freedom and impetus to such new emerging models of business. Given the prowess and prosperity that the IT boom has given to India, it is but natural for the country to embrace and excel in e-commerce. The only regulation that is needed is to ensure safety of transaction (including cyber security), quality of product, and timely delivery.

By Ashok Gulati & Tanu M Goyal
Gulati is Infosys Chair Professor and Goyal, a consultant, ICRIER

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